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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2021-03-11 compared with 2020-02-27 · 18 added, 2703 removed, 3 unchanged (100% of the section changed)

Quantitative and Qualitative Disclosures About Market

Market risks include interest rate risk,

equity risk, foreign currency exchange rate risk, commodity price risk, and other relevant market rate or price risks.

risks, interest rate risk, equity risk, and foreign currency exchange rate risk could have a significant impact on our results

of operations.

December 27, 2018, we refinanced our $125.0 million Credit Agreement by entering into an amended and restated Senior Secured

Credit Facility (the “Credit Facility”) for up to $265.2 million.

The principal new feature of the Credit Facility

was a $118.0 million Delayed Draw Term Loan (the “DDTL”), which could only be drawn on in order to pay down the Company’s

remaining 3.0% Convertible Senior Notes, which matured in December 2019.

The Credit Facility also extended the maturity of

the $72.2 million secured Term Loan (the “Term Loan”) to December 2023.

In addition, the Credit Facility increased

the previous $50.0 million line of credit (the “Revolver”) to $75.0 million.

On November 29, 2019, we exercised

our option to borrow $118.0 million pursuant to the DDTL feature under the existing Credit Facility and the proceeds were used

to repay the outstanding 3% Convertible Senior Notes, which matured on December 1, 2019.

Amounts drawn on the Term

Loan and DDTL bear an interest rate equal to, at our option, either a LIBOR rate plus 1.50% to 2.75% per annum, depending on our

total leverage ratio or an alternative base rate plus an applicable base rate margin, which varies within a range of 0.50% to 1.75%,

depending our total leverage ratio.

On the Revolver, we incur a commitment fee at a rate per annum that varies within a range of

0.25% to 0.50%, depending on our leverage ratio.

As of December 31, 2019, we had a $187.5 million outstanding balance on the

Credit Facility.

As of December 31, 2019, we had not drawn on the Revolver.

On December 27, 2018, we entered into

an interest rate swap to manage our exposure to the variable interest rate on our refinanced secured Term Loan.

The interest rate

swap hedges the variable cash flows associated with the secured Term Loan borrowings under the secured Term Loan, effectively providing

a fixed rate of interest throughout the life of the secured Term Loan.

As a result of the interest rate swap, our exposure to interest

rate volatility is minimized.

On February 7, 2019, we entered into

an interest rate swap to manage our exposure to the variable interest rate on our DDTL.

The interest rate swap hedges the variable

cash flows associated with borrowings under the DDTL, effectively providing a fixed rate of interest throughout the life of the

Quantitative and Qualitative Disclosures About Market Risk

Market risks include interest rate risk, equity risk, foreign currency exchange rate risk, commodity price risk, and other relevant market rate or price risks.

Of these risks, interest rate risk, equity risk, and foreign currency exchange rate risk could have a significant impact on our results of operations.

In December 2018, we refinanced our previous $125.0 million Credit Agreement by entering into an amended and restated Senior Secured Credit Facility (the “Credit Facility”) for up to $265.2 million.

The five-year Credit Facility is comprised of a $72.2 million term loan (the “Term Loan”), a $118.0 million delayed draw term loan (the “DDTL”) and a $75.0 million revolving credit facility (the “Revolver”), all of which mature in December 2023.

The Credit Facility has a subjective acceleration clause in case of a material adverse event.

In March 2020, we drew $15.0 million under the Revolver, of which $7.5 million was repaid during the nine months ended September 30, 2020.

As of December 31, 2020, $67.5 million remained available for borrowing under the Revolver.

Amounts drawn on the Term Loan, DDTL, and Revolver bear an interest rate equal to, at our option, either a LIBOR rate plus 1.50% to 2.75% per annum, depending on our total leverage ratio or an alternative base rate plus an applicable base rate margin, which varies within a range of 0.50% to 1.75%, depending on our total leverage ratio.

On the Revolver, we incur a commitment fee at a rate per annum that varies within a range of 0.25% to 0.50%, depending on our leverage ratio.

As of December 31, 2020, we had a $186.9 million outstanding balance on the Credit Facility.

In April 2020, we entered into an interest rate swap to manage our exposure to the variable interest rate on our Term Loan and DDTL borrowings.

The interest rate swap hedges the variable cash flows associated with interest payments on borrowings under the Term Loan and DDTL, effectively providing a fixed rate of interest throughout the life of these borrowings.

As a result of the interest rate swap, our exposure to interest rate volatility is minimized.

We are exposed to risks associated with

changes in interest rates.

We are exposed to risks associated with changes in interest rates.

The returns from certain of our cash and cash equivalents will vary as short-term interest rates change.

A 100 basis-point adverse movement (decrease) in short-term interest rates would decrease the interest income earned on our cash

balance in the year ended December 31, 2019 by approximately $50 thousand.

We are exposed to risks associated with

foreign currency exchange rate risks as we remeasure certain Canadian dollar-denominated transactions from our ANI Pharmaceuticals

A 100 basis-point adverse movement (decrease) in short-term interest rates would decrease the interest income earned on our cash balance in the year ended December 31, 2020 by approximately $3,000.

We are exposed to risks associated with foreign currency exchange rate risks as we remeasure certain Canadian dollar-denominated transactions from our ANI Pharmaceuticals Canada Inc.

subsidiary from the Canadian dollar to the U.S.

Changes in exchange rates can positively or negatively impact

our revenue, income, assets, liabilities, and equity.

Currency exchange rates did not have a material impact on our revenue, income,

assets, liabilities, or equity during the year ended December 31, 2019.

CONSOLIDATED FINANCIAL STATEMENTS

OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

the Board of Directors and Stockholders of

Pharmaceuticals, Inc.

and Subsidiaries

on the Financial Statements

have audited the accompanying consolidated balance sheets of ANI Pharmaceuticals, Inc.

and Subsidiaries (the "Company")

as of December 31, 2019 and 2018, and the related consolidated statements of operations, comprehensive income, stockholders'

equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively

referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material

respects, the consolidated financial position of the Company as of December 31, 2019 and 2018, and the consolidated results

of their operations and their cash flows for each of the years in the three-year period ended December 31, 2019, in conformity

with accounting principles generally accepted in the United States of America.

also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"),

the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal

Control - Integrated Framework ( 2013 ) issued by the Committee of Sponsoring Organizations of the Treadway Commission

("COSO"), and our report dated February 27, 2020 expressed an unqualified opinion.

financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's

financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent

with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations

of the Securities and Exchange Commission and the PCAOB.

conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit

to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error

Our audits included performing procedures to assess the risks of material misstatement of the financial statements,

whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a

test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the

accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the

financial statements.

We believe that our audits provide a reasonable basis for our opinion.

EisnerAmper LLP

have served as the Company's auditor since 2013.

REPORT OF INDEPENDENT REGISTERED PUBLIC

ACCOUNTING FIRM

the Board of Directors and Stockholders

ANI Pharmaceuticals, Inc.

and Subsidiaries

on Internal Control over Financial Reporting

have audited ANI Pharmaceuticals, Inc.

and Subsidiaries’

(the “Company") internal control over financial

reporting as of December 31, 2019, based on criteria established in the Internal Control - Integrated Framework (2013)

issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

In our opinion, the Company

maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based

on criteria established in the Internal Control - Integrated Framework ( 2013 ) issued by COSO.

also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"),

the consolidated balance sheets of ANI Pharmaceuticals, Inc.

and Subsidiaries as of December 31, 2019 and 2018, and

the related consolidated statements of operations, comprehensive income, stockholders’

equity, and cash flows for each of

the years in the three-year period ended December 31, 2019, and the related notes and our report dated February 27,

2020 expressed an unqualified opinion.

Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment

of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report

on Internal Control over Financial Reporting.

Our responsibility is to express an opinion on the Company’s internal control

over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be

independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and

regulations of the Securities and Exchange Commission and the PCAOB.

conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit

to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material

Our audit of internal control over financial reporting included obtaining an understanding of internal control over

financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness

of internal control based on the assessed risk.

Our audit also included performing such other procedures as we considered necessary

in the circumstances.

We believe that our audit provides a reasonable basis for our opinion.

and Limitations of Internal Control over Financial Reporting

entity’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability

of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted

accounting principles.

An entity’s internal control over financial reporting includes those policies and procedures that

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and

dispositions of the assets of the entity;

(ii) provide reasonable assurance that transactions are recorded as necessary to

permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and

expenditures of the entity are being made only in accordance with authorizations of management and directors of the entity;

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition

of the entity’s assets that could have a material effect on the financial statements.

of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections

of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes

in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ EisnerAmper LLP

Iselin, New Jersey

February 27, 2020

PHARMACEUTICALS, INC.

AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

Current Assets

Cash and cash equivalents

Accounts receivable, net of $59,946 and $47,705 of

adjustments for chargebacks and other allowances at December 31, 2019 and 2018, respectively

Inventories, net

Prepaid income taxes, net

Prepaid expenses and other current assets

Total Current Assets

Property and equipment, net

Restricted cash

Deferred tax assets, net of deferred tax liabilities and valuation allowance

Intangible assets, net

Other non-current assets

Liabilities and Stockholders' Equity

Current Liabilities

Current component of Term Loan and Delayed Draw Term Loan, net of deferred financing costs

Convertible Notes, net of discount and deferred financing costs

Accounts payable

Accrued expenses and other

Accrued royalties

Accrued compensation and related expenses

Current income taxes payable, net

Accrued government rebates

Returned goods reserve

Deferred revenue

Total Current Liabilities

Non-current Liabilities

Term Loan and Delayed Draw Term Loan, net of deferred financing costs and current component

Other non-current liabilities

Total Liabilities

Commitments and Contingencies (Note 12)

Stockholders' Equity

Common Stock, $0.0001 par value, 33,333,334 shares authorized;

12,104,875 shares issued and 12,089,565 outstanding at December 31, 2019;

11,862,508 shares issued and 11,851,329 shares

outstanding at December 31, 2018

Class C Special Stock, $0.0001 par value, 781,281

shares authorized;

10,864 shares issued and outstanding at December 31, 2019 and 2018, respectively

Preferred Stock, $0.0001 par value, 1,666,667 shares

0 shares issued and outstanding at December 31, 2019 and 2018, respectively

stock, 15,310 shares of common stock, at cost, at December 31, 2019 and 11,179 shares of common stock, at cost, at

December 31, 2018

Additional paid-in capital

Retained earnings

Accumulated other comprehensive loss, net of tax

Total Stockholders' Equity

Total Liabilities and Stockholders' Equity

The accompanying notes are an integral part of these consolidated financial statements.

PHARMACEUTICALS, INC.

AND SUBSIDIARIES

Consolidated Statements of Operations

(in thousands, except per share amounts)

Years Ended December 31,

Operating Expenses

Cost of sales (excluding depreciation and amortization)

Research and development

Selling, general, and administrative

Depreciation and amortization

Cortrophin pre-launch charges

Intangible asset impairment charge

Total Operating Expenses

Operating Income

Other Expense, net

Interest expense, net

Other (expense)/income, net

Income Before Benefit/(Provision) for Income Taxes

Benefit/(provision) for income taxes

Net Income/(Loss)

Basic and Diluted Earnings/(Loss) Per Share:

Basic Earnings/(Loss) Per Share

Diluted Earnings/(Loss) Per Share

Basic Weighted-Average Shares Outstanding

Diluted Weighted-Average Shares Outstanding

accompanying notes are an integral part of these consolidated financial statements.

PHARMACEUTICALS, INC.

AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(in thousands)

Years Ended December 31,

Net income/(loss)

Other comprehensive income/(loss), net of tax:

Change in fair value of interest rate swap, net of tax

Total other comprehensive loss, net of tax

Total comprehensive income/(loss), net of tax

accompanying notes are an integral part of these consolidated financial statements.

PHARMACEUTICALS, INC.

AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders' Equity

For the Years Ended December 31, 2019, 2018, and 2017

(in thousands)

Comprehensive

Balance, December 31, 2016

Effect of Change in Accounting Principle

net of Cumulative-effect Adjustment

Stock-based Compensation

Changes in Treasury Stock Related to

Stock-based Compensation Arrangements

Issuance of Common Shares upon Stock Option and ESPP

Issuance of Restricted

Balance, December 31,

Stock-based Compensation

Changes in Treasury Stock Related to Stock-based Compensation

Issuance of Common Shares upon Stock Option and ESPP

Issuance of Restricted

Change in Fair Value of

Interest Rate Swap, Net of Tax

Repurchase of Convertible Notes and Unwind of Call Option

Balance, December 31,

Cumulative Effect of Change

in Accounting Principle

Stock-based Compensation

Changes in Treasury Stock Related to Stock-based Compensation

Issuance of Common Shares upon Stock Option and ESPP

Issuance of Restricted

Change in Fair Value of

Interest Rate Swap, Net of Tax

Balance, December 31,

The accompanying notes are an integral part of these consolidated

financial statements.

PHARMACEUTICALS, INC.

AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(in thousands)

For the Years Ended December 31,

Cash Flows From Operating Activities

Net income/(loss)

Adjustments to reconcile net income/(loss) to net cash

and cash equivalents provided by operating activities:

Stock-based compensation

Deferred taxes

Depreciation and amortization

Acquired in-process research and development ("IPR&D")

Non-cash interest relating to convertible notes and loan cost amortization

Loss on repurchase of Convertible notes

Intangible asset impairment charge

Changes in operating assets and liabilities:

Accounts receivable, net

Inventories, net

Prepaid expenses and other current assets

Accounts payable

Accrued royalties

Current income taxes, net

Accrued government rebates

Returned goods reserve

Accrued expenses, accrued compensation, and other

Net Cash and Cash Equivalents Provided by Operating Activities

Cash Flows From Investing Activities

Acquisition of WellSpring Pharma Services Inc., net of cash acquired

Acquisition of product rights, IPR&D, and other related assets

Acquisition of property and equipment, net

Net Cash and Cash Equivalents Used in Investing Activities

Cash Flows From Financing Activities

Payment of debt issuance and convertible debt repurchase costs

Payments on Term Loan agreement

Borrowings under Term Loan agreement

Borrowings under Delayed Draw Term Loan agreement

Proceeds from stock option exercises and ESPP purchases

Repayment of Convertible Notes

Unwinding of portion of call option overlay, net

Treasury stock purchases for restricted stock vestings

Net Cash and Cash Equivalents Provided/(Used in) by Financing Activities

Net Change in Cash and Cash Equivalents

Cash and cash equivalents, beginning of period

Cash and cash equivalents, end of period

Reconciliation of cash, cash equivalents, and

restricted cash, beginning of period Cash and cash equivalents

Restricted cash

Cash, cash equivalents, and restricted cash, beginning of period

Reconciliation of cash, cash equivalents, and

restricted cash, end of period Cash and cash equivalents

Restricted cash

Cash, cash equivalents, and restricted cash, end of period

Supplemental disclosure for cash flow information:

Cash paid for interest, net of amounts capitalized

Cash paid for income taxes

Supplemental non-cash investing and financing activities:

Acquisition of marketing

and distribution rights included in accounts payable

Property and equipment purchased and included in accounts payable

The accompanying

notes are an integral part of these consolidated financial statements.

Pharmaceuticals, Inc.

and Subsidiaries

Notes to the Consolidated Financial Statements

For the years ended December 31, 2019, 2018, and 2017

DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING

Organization and Business

ANI Pharmaceuticals, Inc.

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.

ANI was organized as a Delaware corporation in April 2001.

At our three facilities, of which two are located in Baudette,

Minnesota and one is located in Oakville, Ontario, we manufacture 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.

We also perform

contract manufacturing for other pharmaceutical companies.

On June 19, 2013, BioSante Pharmaceuticals, Inc.

(“BioSante”) acquired ANIP Acquisition Company (“ANIP”) in an all-stock, tax-free reorganization (the “Merger”),

in which ANIP became a wholly-owned subsidiary of BioSante.

BioSante was renamed ANI Pharmaceuticals, Inc.

The Merger was

accounted for as a reverse acquisition pursuant to which ANIP was considered the acquiring entity for accounting purposes.

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.

Pursuant to these customary adjustments,

the total purchase consideration was $16.7 million.

The consideration was paid entirely from cash on hand.

In conjunction with

the transaction, we acquired WellSpring’s pharmaceutical manufacturing facility, laboratory, and offices, its current book

of commercial business, as well as an organized workforce.

Following the consummation of the transaction, WellSpring was merged

into ANI Canada with the resulting entity’s name being ANI Pharmaceuticals Canada Inc.

Our operations are subject to certain risks

and uncertainties including, among others, current and potential competitors with greater resources, dependence on significant

customers, and possible fluctuations in financial results.

The accompanying consolidated financial statements have been prepared

assuming that we will continue as a going concern, which contemplates continuity of operations, realization of assets, and satisfaction

of liabilities in the ordinary course of business.

The propriety of using the going-concern basis is dependent upon, among other

things, the achievement of future profitable operations, the ability to generate sufficient cash from operations, and potential

other funding sources, including cash on hand, to meet our obligations as they become due.

We believe the going-concern basis is

appropriate for the accompanying consolidated financial statements based on our current operating plan and business strategy for

the 12 months following the issuance of this report.

Basis of Presentation

The accompanying consolidated financial

statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.

GAAP”).

Certain prior period information has been reclassified to conform to the current period presentation.

Principles of Consolidation

The consolidated financial statements include

the accounts of ANI Pharmaceuticals, Inc.

and its subsidiaries.

All intercompany accounts and transactions are eliminated

in consolidation.

Foreign Currency

We have 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.

The results of any non-U.S.

dollar transactions are remeasured in U.S.

dollars at the applicable exchange rates during the period

and resulting foreign currency transaction gains and losses are included in the determination of net income.

Our gain or loss on

transactions denominated in foreign currencies was immaterial for the years ended December 31, 2019, 2018, and 2017.

otherwise noted, all references to “$”

or “dollar”

refer to the U.S.

Pharmaceuticals, Inc.

and Subsidiaries

to the Consolidated Financial Statements

the years ended December 31, 2019, 2018, and 2017

DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING

POLICIES (Continued)

Use of Estimates

The preparation of financial statements

in conformity with U.S.

GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities

and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues

and expenses during the reporting period.

In the accompanying consolidated financial statements, estimates are used for, but not

limited to, stock-based compensation, revenue recognition, allowance for doubtful accounts, variable consideration determined based

on accruals for chargebacks, administrative fees and rebates, government rebates, returns and other allowances, allowance for inventory

obsolescence, valuation of financial instruments and intangible assets, accruals for contingent liabilities, fair value of long-lived

assets, income tax provision, deferred taxes and valuation allowance, determination of right-of-use assets and lease liabilities,

purchase price allocations, and the depreciable lives of long-lived assets.

Because of the uncertainties inherent in such estimates,

actual results may differ from those estimates.

Management periodically evaluates estimates used in the preparation of the financial

statements for reasonableness.

At the inception of a contract we determine

if the arrangement is, or contains, a lease.

Right-of-use (“ROU”) assets represent our right to use an underlying asset

for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease.

Operating lease

ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.

Rent expense is recognized on a straight-line basis over the lease term.

We have made certain accounting policy

elections whereby we (i) do not recognize ROU assets or lease liabilities for short-term leases (those with original terms of 12-months

or less) and (ii) combine lease and non-lease elements of our operating leases.

Operating lease ROU assets are included in other

non-current assets and operating lease liabilities are included in accrued expenses and other and other non-current liabilities

in our consolidated balance sheets.

As of December 31, 2019, we did not have any finance leases.

Comprehensive Income

Comprehensive income, which is reported

in the statement of comprehensive income, consists of net income, changes in fair value of our interest rate swap, and other comprehensive

income, net of tax.

Credit Concentration

Our customers are primarily wholesale distributors,

chain drug stores, group purchasing organizations, and other pharmaceutical companies.

During the year ended December 31,

2019, three customers represented approximately 32%, 25%, and 23% of net revenues, respectively.

As of December 31, 2019,

accounts receivable from these customers totaled 88% of net accounts receivable.

During the year ended December 31, 2018,

three customers represented approximately 21%, 23%, and 33% of net revenues, respectively.

During the year ended December 31,

2017, three customers represented approximately 29%, 29%, and 20% of net revenues, respectively.

Vendor Concentration

We source the raw materials for 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 costs and time required to validate a second source of supply.

As a result, we are dependent upon our current vendors to supply reliably the API required for ongoing product manufacturing.

the year ended December 31, 2019, we purchased approximately 13% of our inventory from one supplier.

As of December 31,

2019, amounts payable to this supplier was $0.7 million.

During the year ended December 31, 2018, we purchased approximately

13% of our inventory from one supplier.

During the year ended December 31, 2017, we purchased approximately 23% of our inventory

from two suppliers.

Revenue Recognition

On 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.

We recognize revenue using the following

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;

Recognition of revenue when we satisfy a performance obligation.

Pharmaceuticals, Inc.

and Subsidiaries

to the Consolidated Financial Statements

the years ended December 31, 2019, 2018, and 2017

DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING

POLICIES (Continued)

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.

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.

All revenue recognized in our consolidated

statements of operations is considered to be revenue from contracts with customers.

The following table depicts the disaggregation

Products and Services

Years Ended December 31,

(in thousands)

Sales of generic pharmaceutical products

Sales of branded pharmaceutical products

Sales of contract manufactured products

Royalties from licensing agreements

Product development services

Total net revenues

(1) Primarily includes laboratory services and royalties on sales of contract manufactured products

Timing of Revenue Recognition

Years Ended December 31,

(in thousands)

Performance obligations transferred at a point in time

Performance obligations transferred over time

the year ended December 31, 2019, we did not incur, and therefore did not defer, any material incremental costs to

obtain contracts.

We recognized a decrease of $10.2 million of net revenue from performance obligations satisfied in prior

periods during the year ended December 31, 2019, consisting primarily of revised estimates for variable consideration,

including chargebacks, rebates, returns, and other allowances, related to prior period sales, partially offset by royalties

from licensing agreements .

provide technical transfer services to customers, for which services are transferred over time.

As a result, we had $0.1

million and $0.1 million of contract assets related to revenue recognized based on percentage of completion but not yet

billed and $0.5 million and $0.7 million of deferred revenue at December 31, 2019 and 2018, respectively.

contract assets or deferred revenue at December 31, 2017.

For the year ended December 31, 2019, we recognized $0.1

million of revenue that was included in deferred revenue as of December 31, 2018.

Pharmaceuticals, Inc.

and Subsidiaries

to the Consolidated Financial Statements

the years ended December 31, 2019, 2018, and 2017

DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING

POLICIES (Continued)

Revenue from Sales of Generic and Branded Pharmaceutical

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.

Revenue from Distribution Agreements

time to time, we enter into marketing and distribution agreements with third parties in which we sell products under Abbreviated

New Drug Applications (“ANDAs”) or New Drug Applications (“NDAs”) owned or licensed by these third

These products are sold under our own label.

We have assessed and determined that we control the products sold under these

marketing and distribution agreements and therefore are the principal for sales under each of these marketing and distribution

As a result, we recognize revenue on a gross basis when control has passed to the customer and we have satisfied our

performance obligation.

Under these agreements, we pay these third parties a specified percentage of the gross profit earned on

sales of the products.

These profit-sharing percentages are recognized in cost of sales in our consolidated statements of operations

and are accrued in accrued royalties in our consolidated balance sheets until payment has occurred.

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, 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

Changes in WAC

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.

Pharmaceuticals, Inc.

and Subsidiaries

to the Consolidated Financial Statements

the years ended December 31, 2019, 2018, and 2017

DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING

POLICIES (Continued)

Government Rebates

Our government rebates reserve consists

of estimated payments due to governmental agencies for purchases made by third parties under various governmental programs.

two largest government programs that impact our net revenue and our government rebates reserve are federal and state Medicaid rebate

programs and Medicare.

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

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

We, like all pharmaceutical companies, must provide a discount for any products sold under 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.

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.

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.

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.

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.

Pharmaceuticals, Inc.

and Subsidiaries

to the Consolidated Financial Statements

the years ended December 31, 2019, 2018, and 2017

DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING

POLICIES (Continued)

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 years ended December 31, 2019, 2018, and 2017:

Accruals for Chargebacks, Returns, and Other Allowances

Administrative

Fees and Other

(in thousands)

Balance at December 31, 2016

Accruals/Adjustments

Credits Taken Against Reserve

Balance at December 31, 2017

Accruals/Adjustments

Credits Taken Against Reserve

Balance at December 31, 2018

Accruals/Adjustments

Credits Taken Against Reserve

Balance at December 31, 2019

Contract Manufacturing Product Sales Revenue

Contract manufacturing arrangements consists

of agreements in which we manufacture a pharmaceutical product on behalf of third party.

Our performance obligation is to manufacture

and provide pharmaceutical products to customers, typically pharmaceutical companies.

The contract manufactured products are sold

at pre-determined standalone selling prices and our performance obligations are considered to be satisfied when control of the

product is transferred to the customer.

Control is transferred to the customer when the product leaves our dock to be shipped to

the customer, as our pharmaceutical products are sold on an FOB shipping point basis and the inventory risk and risk of ownership

passes to the customer at that time.

Payment terms for these sales are generally less than two months.

We estimate returns based

on historical experience.

Historically, we have not had material returns for contract manufactured products.

As of December 31, 2019, the value

of our unsatisfied performance obligations (or backlog) was $8.1 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

Upon full transition of the products and upon launching the products under our own labels, we recognize revenue for

the products as sales of generic or branded pharmaceutical products, as described above.

We receive royalties from a license for

patent rights initially owned by Cell Genesys, Inc., which merged with BioSante in 2009.

The royalties are the results of

sales and milestones related to the Yescarta®

We recognize revenue for sales-based royalties when the underlying sales

We estimate variable consideration related to milestones, which requires significant judgment.

Pharmaceuticals, Inc.

and Subsidiaries

to the Consolidated Financial Statements

the years ended December 31, 2019, 2018, and 2017

DESCRIPTION OF BUSINESS AND SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Product Development Services Revenue

We provide product development services

to customers, which are performed over time.

These services primarily relate to the technical transfer of product development

to our facility in Oakville, Ontario.

The duration of these technical transfer projects can be up to three years.

Deposits received

from these customers are recorded as deferred revenue until revenue is recognized.

For contracts with no deposits and for the

remainder of contracts with deposits, we invoice customers as our performance obligations are satisfied.

We recognize revenue

on a percentage of completion basis, which results in contract assets on our balance sheet.

As of December 31, 2019, the

value of our unsatisfied performance obligations for product development services contracts was $1.3 million.

We expect to satisfy

these performance obligations in the next 6 to 15 months.

Cash, Cash Equivalents, and Restricted Cash

We consider all highly liquid instruments

with maturities of three months or less when purchased to be cash equivalents.

All interest bearing and non-interest bearing accounts

are guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) up to $250 thousand.

The majority of our cash

balances are in excess of FDIC coverage.

We consider this to be a normal business risk.

In April 2016, we purchased the rights,

title, and interest in the NDA for Inderal LA, as well as certain documentation, trademark rights, and finished goods from Cranford

Pharmaceuticals, LLC for $60.0 million in cash and milestone payments based on future gross profits from sales of products under

Additionally, we transferred $5.0 million to an escrow account as security for future milestone payments.

account balance is included in restricted cash in our accompanying consolidated balance sheet as of December 31, 2019.

Accounts Receivable

We extend credit to customers on an unsecured

We use the allowance method to provide for doubtful accounts based on our evaluation of the collectability of accounts receivable,

whereby we provide an allowance for doubtful accounts equal to the estimated uncollectible amounts.

Our estimate is based on historical

collection experience and a review of the current status of trade accounts receivable.

We determine trade receivables to be delinquent

when greater than 30 days past due.

Receivables are written off when it is determined that amounts are uncollectible.

allowance for doubtful accounts was immaterial as of December 31, 2019 and 2018.

Inventories consist of raw materials,

packaging materials, work-in-progress, and finished goods.

Inventories are stated at the lower of standard cost or net

realizable value.

We periodically review and adjust standard costs, which generally approximate weighted average cost.

fourth quarter of 2019, we recognized inventory reserve charges of $4.6 million, primarily related to our exiting from the market

of Methylphenidate Extended Release.

Property and Equipment

Property and equipment are recorded at

Expenditures for repairs and maintenance are charged to expense as incurred.

Depreciation is recorded on a straight-line

basis over estimated useful lives as follows:

Buildings and improvements

20 - 40 years

Machinery, furniture, and equipment

in progress consists of multiple projects, primarily related to new equipment to expand our manufacturing capability as our product

lines continue to grow.

Construction in progress includes the cost of construction and other direct costs attributable to

the construction, along with capitalized interest.

Depreciation is not recorded on construction in progress until such time as

the assets are placed in service.

We review property and equipment for impairment

whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Recoverability

of the long-lived asset is measured by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected

to be generated by the asset.

If such assets are considered to be impaired, the impairment to be recognized is measured by the

amount by which the carrying amount of the assets exceeds the estimated fair value of the assets.

No impairment loss related to

property and equipment was recognized during the years ended December 31, 2019, 2018, and 2017.

Assets held for disposal are

reportable at the lower of the carrying amount or fair value, less costs to sell.

No assets were held for disposal as of December 31,

2019 and 2018.

Pharmaceuticals, Inc.

and Subsidiaries

to the Consolidated Financial Statements

the years ended December 31, 2019, 2018, and 2017

DESCRIPTION OF BUSINESS AND SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Intangible Assets

Intangible assets other than goodwill consist

of acquired ANDAs for previously commercialized and marketed drug products, acquired approved ANDAs for generic products yet to

be commercialized, an acquired development package for a generic drug product, a license, supply and distribution agreement for

a generic drug product, acquired product rights for generic products, acquired NDAs and product rights for branded products, acquired

marketing and distribution rights, and a non-compete agreement.

The ANDAs, NDAs and product rights, marketing

and distribution rights, and non-compete agreement are amortized over their remaining estimated useful lives, ranging from four

to 10 years, based on the straight-line method.

Management reviews definite-lived intangible assets for impairment whenever

events or changes in circumstances indicate that the carrying amount may not be recoverable, in a manner similar to that for property

and equipment.

During the year ended December 31, 2019, we recognized an impairment charge of $75 thousand relating to our

Ranitidine product right asset (Note 7).

No impairment losses related to intangible assets were recognized in the year ended

December 31, 2018.

During the year ended December 31, 2017, we recognized impairment charges of $0.9 million in relation

to our testosterone gel NDA asset (Note 7).

Goodwill relates to the Merger and the

acquisition of WellSpring and represents the excess of the total purchase consideration over the fair value of acquired assets

and assumed liabilities, using the purchase method of accounting.

Goodwill is not amortized, but is subject to periodic review

for impairment.

Goodwill is reviewed for impairment annually, as of October 31, and whenever events or changes in circumstances

indicate that the carrying amount of the goodwill might not be recoverable.

We perform our review of goodwill on our one reporting

Before employing detailed impairment testing

methodologies, we first evaluate the likelihood of impairment by considering qualitative factors relevant to our reporting unit.

When performing the qualitative assessment, we evaluate events and circumstances that would affect the significant inputs used

to determine the fair value of the goodwill.

Events and circumstances evaluated include:

macroeconomic conditions that could affect

us, industry and market considerations for the generic pharmaceutical industry that could affect us, cost factors that could affect

our performance, our financial performance (including share price), and consideration of any company-specific events that could

negatively affect us, our business, or the fair value of our business.

If we determine that it is more likely than not that goodwill

is impaired, we will then apply detailed testing methodologies.

Otherwise, we will conclude that no impairment has occurred.

Detailed impairment testing involves comparing

the fair value of our one reporting unit to its carrying value, including goodwill.

Fair value reflects the price a market participant

would be willing to pay in a potential sale of ANI.

If the fair value exceeds carrying value, then it is concluded that no goodwill

impairment has occurred.

If the carrying value of the reporting unit were to exceed its fair value, we would recognize an impairment

charge for the amount by which the carrying amount exceeded the reporting unit’s fair value.

The loss recognized would not

exceed the total amount of goodwill allocated to that reporting unit.

No impairment loss related to goodwill was recognized in

the years ended December 31, 2019, 2018, and 2017.

Collaborative Arrangements

At times, we have entered into arrangements

with various commercial partners to further business opportunities.

In collaborative arrangements such as these, when we are actively

involved and exposed to the risks and rewards of the activities and are determined to be the principal participant in the collaboration,

we classify third party costs incurred and revenues in the consolidated statements of operations on a gross basis.

Otherwise, third

party revenues and costs generated by collaborative arrangements are presented on a net basis.

Payments between us and the other

participants are recorded and classified based on the nature of the payments.

Pharmaceuticals, Inc.

and Subsidiaries

to the Consolidated Financial Statements

the years ended December 31, 2019, 2018, and 2017

DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING

POLICIES (Continued)

We have entered profit-sharing arrangements

with third parties in which we sell products under ANDAs or NDAs owned or licensed by these third parties.

Under these agreements,

we pay these third parties a specified percentage of the gross profit earned on sales of the products.

These profit-sharing percentages

are recorded in cost of sales in our consolidated statements of operations when the associated revenue is recognized and are recorded

in accrued royalties in our consolidated balance sheets when the associated revenue is recognized and until payment has occurred.

Research and Development Expenses

Research and development costs are expensed

as incurred and primarily consist of expenses relating to product development.

Research and development costs totaled $19.8 million,

$15.4 million, and $9.1 million for the years ended December 31, 2019, 2018, and 2017, respectively.

Stock-Based Compensation

We have a stock-based compensation plan

that includes stock options and restricted stock, which are awarded in exchange for employee and non-employee director services.

Stock-based compensation cost for stock options is determined at the grant date using an option pricing model and stock-based compensation

cost for restricted stock is based on the closing market price of the stock at the grant date.

The value of the award is recognized

as expense on a straight-line basis over the employee’s requisite service period and classified where the underlying salaries

are classified.

We also account for forfeitures as they occur rather than using an estimated forfeiture rate.

We recognize excess

tax benefits or tax deficiencies as a component of our current period provision for income taxes.

In addition, in July 2016, we commenced

administration of our Employee Stock Purchase Plan (“ESPP”).

We recognize the estimated fair value of stock-based compensation

awards and classify the expense where the underlying salaries are classified.

We incurred $9.1 million, $6.7 million, and $6.1

million of non-cash, stock-based compensation cost for the years ended December 31, 2019, 2018, and 2017, respectively, and

$147 thousand, $102 thousand, and $68 thousand of the 2019, 2018, and 2017 expense related to the ESPP, respectively.

Valuation of stock awards requires us to

make assumptions and to apply judgment to determine the fair value of the awards.

These assumptions and judgments include estimating

the future volatility of our stock price and dividend yields.

Changes in these assumptions can affect the fair value estimate.

We use the asset and liability method of

accounting for income taxes.

Deferred tax assets and liabilities are determined based on differences between the financial reporting

and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect

when the differences are expected to reverse.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized

in the period that such tax rate changes are enacted.

During the second quarter of 2019, we adopted

an intercompany transfer pricing policy that uses the “comparable profits method”

for pricing intercompany services

between ANI Pharmaceuticals, Inc.

and ANI Canada.

and Canadian tax purposes, the policy was adopted in conjunction

with the acquisition date of August 6, 2018.

The measurement of a deferred tax asset

is reduced, if necessary, by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset

will not be realized.

We have provided a valuation allowance against certain of our state net operating loss (“NOL”)

carryforwards that are not expected to be used during the carryforward periods.

As of December 31, 2018, we had provided a valuation

allowance against ANI Canada’s net deferred tax assets of $1.9 million and against certain of our state net operating loss

(“NOL”) carryforwards that are not expected to be used during the carryforward periods of $0.3 million.

of the newly adopted transfer pricing policy, our assessment of the amount of ANI Canada’s deferred tax assets that are more

likely than not to be realized changed.

As a result, during the second quarter 2019, we released ANI Canada’s valuation allowance

and, as a result, our valuation allowance at December 31, 2019 of $0.4 million relates solely to our state NOL carryforwards.

We have not provided for deferred taxes

related to any difference between the tax basis in the shares of ANI Canada and the financial reporting basis in those shares since

it has the intent and ability to indefinitely reinvest ANI Canada’s earnings and not repatriate those earnings.

Pharmaceuticals, Inc.

and Subsidiaries

to the Consolidated Financial Statements

the years ended December 31, 2019, 2018, and 2017

DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING

POLICIES (Continued)

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;

have any such amounts accrued as of December 31, 2019, 2018, and 2017.

We are subject to taxation in various U.S.

jurisdictions

and Canada and all of our income tax returns remain subject to examination by tax authorities due to the availability of NOL carryforwards.

We consider potential tax effects resulting

from discontinued operations and for gains and losses in other comprehensive income and record intra-period tax allocations, when

those effects are deemed material.

In 2019 and 2018, we entered in an interest rate swap agreements (Note 4) that we designated

as cash flow hedges designed to manage exposure to changes in LIBOR-based interest rate underlying our secured Term Loan (the “Term

Loan”) and Delayed Draw Term Loan (“DDTL”) with Citizen’s Bank., N.A.

Due to the effective nature of the

hedge, the initial fair value of the hedge and subsequent changes in the fair value of the hedge are recognized in accumulated

other comprehensive loss, net of tax in the accompanying consolidated balance sheets.

Income taxes are allocated to the hedge component

of accumulated other comprehensive income based on appropriate intra-period tax allocations when those effects are deemed material.

Earnings (Loss) per Share

Basic earnings (loss) per share is computed

by dividing net income available to common shareholders by the weighted-average number of shares of common stock outstanding during

For periods of net income, and when the

effects are not anti-dilutive, we calculate diluted earnings (loss) 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 ESPP, unvested restricted stock awards, stock purchase warrants, and

any conversion gain on the Notes, using the treasury stock method.

For periods of net loss, diluted loss per share is calculated

similarly to basic loss per share because the impact of all dilutive potential common shares is anti-dilutive.

Our unvested restricted shares and certain

of our outstanding warrants 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 (loss) per share excludes from the numerator net income

(but not net loss) attributable to the unvested restricted shares and to the participating warrants, and excludes the impact of

those shares from the denominator.

For purposes of determining

diluted earnings (loss) per share, we elected a policy that the principal portion of our 3.0% Convertible Senior Notes that matured

on December 1, 2019 (the “Notes,”

Note 3) was settled in cash.

As such, the principal portion of the Notes had

no effect on either the numerator or denominator when determining diluted earnings (loss) per share.

Any conversion gain was assumed

to be settled in shares and was incorporated in diluted earnings (loss) per share using the treasury method.

This policy was consistent

with our election for settlement of the Notes under the First Supplemental Indenture to the Notes.

The warrants issued in conjunction

with the issuance of the Notes were considered to be dilutive when they were in-the-money relative to our average stock price during

the bond hedge purchased in conjunction with the issuance of the Notes was always considered to be anti-dilutive.

Pharmaceuticals, Inc.

and Subsidiaries

to the Consolidated Financial Statements

the years ended December 31, 2019, 2018, and 2017

DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING

POLICIES (Continued)

The numerator for earnings per share for

the years ended December 31, 2019, 2018, and 2017 are calculated for basic and diluted earnings (loss) per share as follows:

Years Ended December 31,

(in thousands, except per share amounts)

Net income/(loss)

Net income allocated to restricted stock

Net income/(loss) allocated to common shares

Basic Weighted-Average Shares Outstanding

Dilutive effect of stock options and ESPP

Dilutive effect of Notes

Diluted Weighted-Average Shares Outstanding

Earnings/(Loss) per share

number of anti-dilutive shares, which have been excluded from the computation of diluted earnings (loss) per share, including the

shares underlying the Notes, were 3.0 million, 4.4 million, and 4.8 million for the years ended December 31, 2019, 2018, and

2017, respectively.

Due to the net loss in the year ended December 31, 2017, all dilutive potential common shares were

also excluded from the diluted loss per share calculation, as the impact of those potential common shares is anti-dilutive in the

case of a net loss.

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.

Hedge Accounting

On January 1, 2018, we adopted

guidance 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 simplified the application of hedge accounting guidance

in certain situations.

The adoption of this guidance did not have a material impact on our consolidated financial statements.

the adoption of this guidance did impact how we accounted for the interest rate swaps we entered into in April 2018, December 2018,

and February 2019.

See Note 4 for further details regarding the interest rate swap.

At times we use derivative financial instruments

to hedge our exposure to interest rate risks.

All derivative financial instruments are recognized as either assets or liabilities

at fair value on the consolidated balance sheet and are classified as current or non-current based on the scheduled maturity of

the instrument.

When we enter into a hedge arrangement

and intend to apply hedge accounting, we formally document the hedge relationship and designate the instrument for financial reporting

purposes as a fair value hedge, a cash flow hedge, or a net investment hedge.

When we determine that a derivative financial instrument

qualifies as a cash flow hedge and is effective, the changes in fair value of the instrument are recorded in accumulated other

comprehensive income/(loss), net of tax in our consolidated balance sheets and will be reclassified to earnings when the hedged

item affects earnings.

Pharmaceuticals, Inc.

and Subsidiaries

to the Consolidated Financial Statements

the years ended December 31, 2019, 2018, and 2017

DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING

POLICIES (Continued)

Fair Value of Financial Instruments

Our consolidated balance sheets include

various financial instruments (primarily cash and cash equivalents, prepaid expenses, accounts receivable, accounts payable, accrued

expenses, and other current liabilities) that are carried at cost and that approximate fair value.

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.

GAAP establishes a hierarchical disclosure framework which prioritizes and ranks the

level of observability of inputs used in measuring fair value.

These tiers include:

Level 1—Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities.

The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2—Observable market-based inputs other than quoted prices in active markets for identical assets or liabilities.

Level 3—Unobservable inputs are used when little or no market data is available.

The fair value hierarchy gives the lowest priority to Level 3 inputs.

See Note 8 for additional information

regarding fair value.

Geographic Information

Based on the distinct nature of our operations,

our internal management structure, and the financial information that is evaluated regularly by our Chief

Operating Decision Maker , we determined that we operate in one reportable segment.

Our operations are located in the United

States and Canada.

The majority of the assets of the Company are located in the United States.

The following table depicts the Company’s

revenue by geographic operations during the following periods:

(in thousands)

Years Ended December 31,

Location of Operations

United States

Total Revenue

The following table depicts the Company’s

property and equipment, net according to geographic location as of:

(in thousands)

United States

Total property and equipment, net

Pharmaceuticals, Inc.

and Subsidiaries

to the Consolidated Financial Statements

the years ended December 31, 2019, 2018, and 2017

DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING

POLICIES (Continued)

Recent Accounting Pronouncements

Recent Accounting Pronouncements Not Yet Adopted

November 2019, the Financial Accounting Standards Board (“FASB”) issued guidance simplifying the accounting

for income taxes by removing the following exceptions:

1) exception to the incremental approach for intraperiod tax

allocation when there is a loss from continuing operations and income or a gain from other items, 2) exception requirement to

recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes and equity method

investment, 3) exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign

equity method investment becomes a subsidiary, and 4) exception to the general methodology for calculating income taxes in an

interim period when a year-to-date loss exceeds the anticipated loss the year.

The amendments also simplify accounting for

income taxes by doing the following:

1) r equiring that an entity recognize a franchise tax or similar tax that is

partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax,

2) requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business

combination in which the book goodwill was originally recognized and when it should be considered a separate transaction, 3)

specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal

entity that is not subject to tax in its separate financial statements, 4) requiring that an entity reflect the effect of an

enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the

enactment date, and 5) making minor Codification improvements for income taxes related to employee stock ownership plans and

investments in qualified affordable housing projects accounted for using the equity method.

The guidance is effective for

reporting periods beginning after December 15, 2020, 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.

November 2018, the FASB issued guidance clarifying that certain transactions between collaborative arrangement participants

should be accounted for as revenue under Accounting Standards Codification Topic 606 when the collaborative arrangement participant

is a customer in the context of a unit of account.

The guidance is effective for reporting periods beginning after December 15,

2019, including interim periods within that fiscal year.

Early adoption is permitted, including adoption in an interim period.

We will adopt this guidance as of January 1, 2020.

The adoption of this guidance is not expected to have a material impact

on our consolidated financial statements.

August 2018, the FASB issued guidance amending the disclosure requirements on fair value measurements.

The amendments add,

modify, and eliminate certain disclosure requirements on fair value measurements.

The guidance is effective for reporting

periods beginning after December 15, 2019, including interim periods within that fiscal year.

Early adoption is permitted,

including adoption in an interim period.

We will adopt this guidance as of January 1, 2020.

adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

June 2016, the FASB issued guidance with respect to measuring credit losses on financial instruments, including trade receivables.

The guidance eliminates the probable initial recognition threshold that was previously required prior to recognizing a credit loss

on financial instruments.

The credit loss estimate can now reflect an entity's current estimate of all future expected credit losses.

Under the previous guidance, an entity only considered past events and current conditions.

In April 2019, the FASB

further clarified the scope of the credit losses standard and addressed issues related to accrued interest receivable balances,

recoveries, variable interest rates, and prepayment.

In May 2019, the FASB issued further guidance to provide entities with

an option to irrevocably elect the fair value option applied on an instrument-by-instrument basis for eligible financial instruments.

In November 2019, the FASB issued further guidance on expected recoveries for purchased financial assets with credit deterioration,

and transition refiled for troubled debt restructurings, disclosures related to accrued interest receivables, financial assets

secured by collateral maintenance provisions.

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.

expect that the adoption of this guidance may change the way we assess the collectability of our receivables and recoverability

of other financial instruments.

We will adopt this guidance as of January 1, 2020.

The adoption of this guidance is not expected

to have a material impact on our consolidated financial statements.

Pharmaceuticals, Inc.

and Subsidiaries

to the Consolidated Financial Statements

the years ended December 31, 2019, 2018, and 2017

DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING

POLICIES (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 consolidated

statements of operations, comprehensive income, balance sheets, or cash flows.

Recently Adopted Accounting Pronouncements

October 2018, the FASB issued guidance for accounting for derivatives and hedging.

The guidance provides for the inclusion

of the Secured Overnight Financing Rate (“SOFR”) Overnight Index swap rate as a benchmark interest rate for hedge accounting

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

Amounts drawn under our five-year senior secured credit facility bear interest rates in relation to LIBOR, and our

interest rate swaps are designated in LIBOR.

The guidance was effective for reporting periods beginning after December 15,

We adopted this guidance as of January 1, 2019 on a prospective basis.

The adoption of this guidance did not have a

material impact on our consolidated financial statements.

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

The rule was effective on November 5, 2018 and was effective for the quarter that began after the effective

The adoption of this guidance resulted in the inclusion of the statement of changes stockholder’s equity in our interim

financial statement filings.

In June 2018, the FASB issued guidance

simplifying the accounting for nonemployee stock-based compensation awards.

The guidance aligns the measurement and classification

for employee stock-based compensation awards to nonemployee stock-based compensation awards.

Under the guidance, nonemployee awards

are measured at their grant date fair value.

Upon transition, the existing nonemployee awards are measured at fair value as of

the adoption date.

The guidance was effective for reporting periods beginning after December 15, 2018, including interim periods

within that fiscal year.

We adopted this guidance as of January 1, 2019.

The adoption of this guidance did not have a material

impact on our consolidated financial statements.

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.

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

The guidance was effective for reporting periods beginning after December 15, 2018.

We adopted this

guidance on a modified retrospective basis effective January 1, 2019, using the following allowable practical expedients:

We did not reassess if any expired or existing contracts

are or contain leases;

We did not reassess the classification of any expired

or existing leases.

Additionally,

we made ongoing accounting policy elections whereby we (i) do not recognize right-of-use assets or lease liabilities for short-term

leases (those with original terms of 12-months or less) and (ii) combine lease and non-lease elements of our operating leases.

Upon adoption

of the new guidance on January 1, 2019, we recognized a right-of-use asset of approximately $0.5 million, which was reduced

by approximately $10 thousand of net prepaid rents at the date of adoption, along with a lease liability of approximately $0.5

We also recognized total deferred tax assets of approximately $0.1 million and deferred tax liabilities of approximately

$0.1 million related to book-tax basis differences.

The net effect of the adoption resulted in a cumulative effect adjustment

to retained earnings on January 1, 2019 of approximately $2 thousand.

ANI Pharmaceuticals, Inc.

and Subsidiaries

Notes to the Consolidated

Financial Statements

For the years

ended December 31, 2019, 2018, and 2017

BUSINESS COMBINATION

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.

to these customary adjustments, the total purchase consideration was $16.7 million.

The consideration was paid entirely from cash

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 $1.1 million in transaction costs, all of which were expensed in 2018.

Purchase Consideration and Net Assets Acquired

The business combination was accounted

for using the acquisition method of accounting, with ANI as the accounting acquirer of WellSpring.

The acquisition method requires

that acquired assets and assumed liabilities be recorded at their fair values as of the acquisition date.

The following presents the final allocation

of the purchase price to the assets acquired and liabilities assumed on August 6, 2018:

(in thousands)

Total Purchase Consideration

Cash and cash equivalents

Accounts receivable

Prepaid expenses and other current assets

Property and equipment

Total assets acquired

Accounts payable and other current liabilities

Deferred revenue

Total liabilties assumed

Net assets acquired

The net assets were recorded at their estimated

In valuing acquired assets and liabilities, fair value estimates were based primarily on future expected cash flows,

market rate assumptions for contractual obligations, and appropriate discount rates.

ANI Pharmaceuticals, Inc.

and Subsidiaries

Notes to the Consolidated

Financial Statements

For the years

ended December 31, 2019, 2018, and 2017

BUSINESS COMBINATION (Continued)

Goodwill is considered an indefinite-lived

asset and relates primarily to intangible assets that do not qualify for separate recognition, such as the assembled workforce

and synergies between the entities.

Goodwill established as a result of the acquisition is not tax deductible in any taxing jurisdiction.

There was no value ascribed to any separately identifiable intangible assets.

Legacy WellSpring operations generated

$6.9 million of revenue and recorded a net loss of $5.2 million for the year ended December 31, 2019.

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.

Years Ended December 31,

(in thousands)

Net income/(loss)

(1) Net loss for the year ended December 31, 2017 includes the impact to WellSpring of $4.4 million of related party debt forgiveness.

ANI Pharmaceuticals, Inc.

and Subsidiaries

Notes to the Consolidated

Financial Statements

For the years

ended December 31, 2019, 2018, and 2017

Credit Facility

On December 27, 2018, we

refinanced our $125.0 million Credit Agreement by entering into an amended and restated Senior Secured Credit Facility (the

“Credit Facility”) for up to $265.2 million.

The principal new feature of the Credit Facility was a $118.0

million DDTL, which could only be drawn on in order to pay down the Company’s remaining 3.0% Convertible Senior Notes,

which matured on December 1, 2019.

The Credit Facility (and specifically the DDTL) has a subjective acceleration clause

in case of a material adverse event.

The Credit Facility also extended the maturity of the $72.2 million Term Loan to

December 2023.

In addition, the Credit Facility increased the previous $50.0 million line of credit (the

“Revolver”) to $75.0 million.

Also on December 27, 2018, we entered into an interest rate swap arrangement

to manage our exposure to changes in LIBOR-based interest rates underlying our refinanced Term Loan (Note 4).

The Term Loan

includes a repayment schedule, pursuant to which $4.5 million of the loan will be paid in quarterly installments during 2020.

December 31, 2019, $4.5 million of the loan is recorded as current borrowings in the accompanying

consolidated balance sheets.

In February 2019, we entered into an interest rate swap arrangement to manage our exposure

to changes in LIBOR-based interest rates underlying the DDTL once drawn upon (Note 4).

On November 29, 2019, we

exercised our option to borrow $118.0 million pursuant to the DDTL feature and the proceeds were used to repay the

outstanding 3% Convertible Senior Notes, which matured on December 1, 2019.

The DDTL matures in December 2023 and

includes a repayment schedule, pursuant to which $5.9 million will be paid in quarterly installments during 2020.

December 31, 2019, $5.9 million of the loan is recorded as current borrowings in the accompanying

consolidated balance sheets.

Amounts drawn on the Term Loan and the DDTL bear an interest rate equal to, at our option,

either a LIBOR rate plus 1.50% to 2.75% per annum, depending on our total leverage ratio or an alternative base rate plus an

applicable base rate margin, which varies within a range of 0.50% to 1.75%, depending our total leverage ratio.

Revolver, we incur a commitment fee at a rate per annum that varies within a range of 0.25% to 0.50%, depending on our

leverage ratio.

The Credit Facility is secured by a

lien on substantially all of ANI Pharmaceuticals, Inc.’s and its principal domestic subsidiary’s assets and

any future domestic subsidiary guarantors’

The Credit Facility imposes financial covenants consisting of a

maximum total leverage ratio, which is, as of December 31, 2019 no greater than 3.50 to 1.00 and a minimum fixed charge

coverage ratio, which shall be greater than or equal to 1.25 to 1.00.

The primary non-financial covenants under the Credit

Facility limit, subject to various exceptions, our ability to incur future indebtedness, to place liens on assets, to pay

dividends or make other distributions on our capital stock, to repurchase our capital stock, to conduct acquisitions, to

alter our capital structure, and to dispose of assets.

The carrying value of the current and non-current

components of the Term Loan and DDTL as of December 31, 2019 and 2018 are:

(in thousands)

Current borrowing on secured Term Loan and Delayed Draw Term Loan

Deferred financing costs

Current component of Term Loan and Delayed Draw Term Loan, net of deferred financing costs

(in thousands)

Non-current borrowing on secured Term Loan and Delayed Draw Term Loan

Deferred financing costs

Term Loan and Delayed Draw Term Loan, net of deferred financing costs and current component

ANI Pharmaceuticals, Inc.

and Subsidiaries

Notes to the Consolidated

Financial Statements

For the years

ended December 31, 2019, 2018, and 2017

INDEBTEDNESS (Continued)

The refinancing of the Term Loan was accounted

for as a modification of our previous term loan and consequently, the remaining balance of the deferred issuance costs related

to the previous term loan are included with the lenders fees associated with the refinance of the Term Loan and amortized as interest

expense over the life of the Term Loan using the effective interest method.

Fees to third parties associated with the refinance

of the Term Loan were recognized as other (expense)/income, net in the accompanying consolidated statements of operations.

refinancing of the Revolver was accounted for as a modification of our previous revolving credit facility and consequently, the

remaining balance of the deferred issuance costs related to the previous revolving credit facility are included with the lenders

fees and fees to third parties associated with the refinance of the Revolver and amortized as interest expense on a straight-line

basis over the life of the Revolver.

All issuance costs allocated to the DDTL were deferred and will be amortized as interest expense

on a straight-line basis over the five-year term of the DDTL.

As of December 31, 2019, we had a

$69.5 million balance on the Term Loan and $118.0 million balance on the DDTL.

As of December 31, 2019, we had not drawn on

the Revolving Credit Facility.

Of the $1.0 million of deferred debt issuance costs allocated to the Revolving Credit Facility,

$0.8 million is included in other non-current assets in the accompanying consolidated balance sheets and $0.2 million is included

in prepaid expenses and other current assets in the accompanying consolidated balance sheets.

Of the 0.5 million of deferred debt

issuance costs allocated to the DDTL, $0.1 million is classified as a direct deduction to the current portion of the DDTL in the

accompanying consolidated balance sheets and $0.4 million is classified as a direct reduction to the non-current portion of the

DDTL in the accompanying consolidated balance sheets.

Of the $1.3 million of deferred debt issuance costs allocated to the Term

Loan, $0.4 million is classified as a direct deduction to the current portion of the Term Loan in the accompanying consolidated

balance sheets and $0.9 million is classified as a direct deduction to the non-current portion of the Term Loan in the accompanying

consolidated balance sheets.

The contractual maturity of our Term Loan

and DDTL is as follows for the years ending December 31:

(in thousands)

Convertible Senior Notes

In December 2014, we issued $143.8

million of our Notes in a registered public offering.

After deducting the underwriting discounts and commissions and other expenses

(including the net cost of the bond hedge and warrant, discussed below), the net proceeds from the offering were approximately

$122.6 million.

The Notes paid 3.0% interest semi-annually in arrears on June 1 and December 1 of each year, starting

on June 1, 2015, and matured on December 1, 2019.

In December 2018, we entered

into separate, privately negotiated agreements with certain holders of our Notes and repurchased $25.0 million of our outstanding

We accounted for the repurchase as an extinguishment of the portion of the Notes and recognized a loss on extinguishment

of $0.5 million, which was recorded in other (expense)/income, net in the accompanying consolidated statements of operations.

the same time, we unwound a corresponding portion of the bond hedge and warrant, which are described in further detail below.

a result of unwinding this portion of the bond hedge and warrant, we received a net amount of $0.4 million.

The repurchase of the

Notes and the unwinding of the bond hedge and warrant resulted in a $1.7 million net reduction to additional paid-in capital (“APIC”)

in the accompanying consolidated balance sheets.

The remaining Notes were convertible into 1,709,002 shares of common stock, based

on an initial conversion price of $69.48 per share.

The Notes were convertible at the option

of the holder (i) during any calendar quarter beginning after March 31, 2015, if the last reported sale price of the

common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on

the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on

each applicable trading day, (ii) during the five business days after any five consecutive trading day period in which the

trading price per $1,000 principal amount of the Notes for each trading day of such period was less than 98% of the product of

the last reported sale price of our common stock and the conversion rate on each such trading day;

and (iii) on or after June 1,

2019 until the second scheduled trading day immediately preceding the maturity date.

ANI Pharmaceuticals, Inc.

and Subsidiaries

Notes to the Consolidated

Financial Statements

For the years

ended December 31, 2019, 2018, and 2017

INDEBTEDNESS (Continued)

Upon conversion by the holders, we had

the option 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 APIC) of

$33.6 million.

The value of the embedded conversion option was determined based on the estimated fair value of the debt without

the conversion feature, which was determined using market comparables to estimate the fair value of similar non-convertible debt

the debt discount was amortized as additional non-cash interest expense using the effective interest method over the

term of the Notes.

Offering costs of $5.5 million were allocated

to the debt and equity components in proportion to the allocation of proceeds to the components, as deferred financing costs and

equity issuance costs, respectively.

The deferred financing costs of $4.2 million were amortized as additional non-cash interest

expense using the straight-line method over the term of the debt, since this method was not significantly different from the effective

interest method.

Pursuant to guidance issued by the FASB, we classified the deferred financing costs as a direct

deduction to the net carrying value of our Convertible Debt.

The $1.3 million portion allocated to equity issuance costs was charged

A portion of the offering proceeds was

used to simultaneously enter into a “bond hedge”

(or purchased call) and “warrant”

(or written call) transactions

with an affiliate of one of the offering underwriters (collectively, the “Call Option Overlay”).

We entered into the

Call Option Overlay to synthetically raise the initial conversion price of the Notes to $96.21 per share and reduce the potential

common stock dilution that may arise from the conversion of the Notes.

The exercise price of the bond hedge is $69.48 per share

and the exercise price of the warrant is $96.21 per share of our common stock.

Because the bond hedge and warrant are both indexed

to our common stock and otherwise would be classified as equity, we recorded both elements as equity, resulting in a net reduction

to APIC of $15.6 million.

After the repurchase of $25.0 million of our outstanding Notes and the unwinding of the corresponding

portion of the bond hedge and warrant, our remaining bond hedge had an underlying 1,709,002 common shares and the remaining warrant

had an underlying 1,709,002 common shares.

On December 2, 2019 (December 1,

2019 was not a business day), we used the proceeds of the DDTL and operating cash on hand to repay the outstanding Notes.

of $50,000 of the Notes elected for conversion, which pursuant to the First Supplemental Indenture to the Notes, resulted in the

holders’

receipt of cash for the principal portion of the Notes and 33 shares of our common stock.

These shares were provided

by our counterparty pursuant to the Call Option Overlay.

As of December 31, 2019, the remaining warrant had an underlying

1,709,002 common shares.

The carrying value

of the Notes is as follows as of December 31:

(in thousands)

Principal amount

Unamortized debt discount

Deferred financing costs

Net carrying value

The effective interest

rate on the Notes was 7.4% and 8.5%, on an annualized basis, as of December 31, 2019 and 2018, respectively.

The following table

sets forth the components of total interest expense related to the Notes, Term Loan, and DDTL recognized in our consolidated statements

of operations for the year ended December 31:

(in thousands)

Contractual coupon

Amortization of debt discount

Amortization of finance fees

Capitalized interest

ANI Pharmaceuticals, Inc.

and Subsidiaries

Notes to the Consolidated

Financial Statements

For the years

ended December 31, 2019, 2018, and 2017

DERIVATIVE FINANCIAL INSTRUMENT AND HEDGING ACTIVITY

In April 2018, we entered into an

interest rate swap arrangement, which was considered a derivative financial instrument, with Citizens Bank, N.A.

to manage our

exposure to changes in LIBOR-based interest rates underlying our previous Term Loan.

The interest rate swap hedged the variable

cash flows associated with the borrowings under our previous Term Loan (Note 3), effectively providing a fixed rate of interest

throughout the life of the previous Term Loan.

December 2018, we refinanced our previous Credit Agreement and, as part of that refinancing, extended the maturity of our

$72.2 million secured Term Loan to December 2023.

At the same time, we closed out the original interest rate swap and entered

into a new interest rate swap arrangement, which is also considered a derivative financial instrument, with Citizens Bank, N.A.

to manage our exposure to changes in LIBOR-based interest rates underlying our Term Loan.

We accounted for the close-out of the

original interest rate swap as a termination of the interest rate swap and wrote the interest rate swap liability and accumulated

other comprehensive loss balance off as of the date of termination.

As there were no excluded components, there was no net impact

to the consolidated statement of operations.

The interest rate swap hedges the variable cash flows associated with the borrowings

under our Term Loan (Note 3), effectively providing a fixed rate of interest throughout the life of our Term Loan.

The interest rate swap arrangement

with Citizens Bank, N.A became effective on December 27, 2018, with a maturity date of December 27, 2023.

notional amount of the swap agreement at inception was $72.2 million and decreases in line with our Term Loan.

December 31, 2019, the notional amount of the interest rate swap was $69.5 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 December 31, 2019, the fair value of the interest rate swap liability was valued at $2.4 million

and was recorded in other non-current liabilities in the accompanying consolidated balance sheets.

As of December 31,

2019, $1.9 million, the fair value of the interest rate swap net of tax, was recorded in accumulated other comprehensive

loss, net of tax in the accompanying consolidated balance sheets.

During the year ended December 31, 2019, changes in

the fair value of the interest rate swap of $1.5 million, net of tax, was recorded in accumulated other comprehensive (loss),

net of tax in our consolidated statements of comprehensive income.

Differences between the hedged LIBOR rate and the fixed

rate are recorded as interest expense in the same period that the related interest is recorded for the Term Loan based on the

In the year ended December 31, 2019, $0.2 million of interest expense was recognized in relation to the

interest rate swap.

February 2019, we entered into an interest rate swap with Citizens Bank, N.A.

to manage our exposure to changes in LIBOR-based

interest rates underlying our DDTL.

As of December 31, 2019, the notional amount of the interest rate swap was $118.0 million

and decreases in line with our DDTL.

The interest rate swap provides an effective fixed rate of 2.47% and has been designated

as an effective cash flow hedge and therefore qualifies for hedge accounting.

The interest rate swap hedges the variable cash flows

associated with the borrowings under our DDTL (Note 3), effectively providing a fixed rate of interest throughout the life of our

As of December 31, 2019, the fair value of the interest rate swap liability was valued at $3.8 million and was recorded

in other non-current liabilities in the accompanying consolidated balance sheets.

As of December 31, 2019, $3.0 million, the

fair value of the interest rate swap net of tax, was recorded in accumulated other comprehensive loss, net of tax in the accompanying

consolidated balance sheets.

During the year ended December 31, 2019, changes in the fair value of the interest rate swap

of $3.0 million, net of tax, were recorded in accumulated other comprehensive loss, net of tax in our consolidated statements of

comprehensive income.

Differences between the hedged LIBOR rate and the fixed rate are recorded as interest expense in the same

period that the related interest is recorded for the DDTL based on the LIBOR rate.

In the year ended December 31, 2019, $0.1

million of interest expense was recognized in relation to the February 2019 interest rate swap.

ANI Pharmaceuticals, Inc.

and Subsidiaries

Notes to the Consolidated

Financial Statements

For the years

ended December 31, 2019, 2018, and 2017

Inventories consist of the following as

of December 31:

(in thousands)

Raw materials

Packaging materials

Work-in-progress

Finished goods

Reserve for excess/obsolete inventories

Inventories, net

(1) Includes inventory acquired in acquisition of WellSpring (Note 2).

During the fourth quarter 2019, we recognized

a $4.6 million inventory reserve charge, primarily related to our exit from the market of Methylphenidate Extended Release.

PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment consist

of the following as of December 31:

(in thousands)

Machinery, furniture, and equipment

Construction in progress

accumulated depreciation

Property and equipment, net

property and equipment acquired in acquisition of WellSpring (Note 2).

Depreciation expense for the years ended

December 31, 2019, 2018, and 2017 totaled $4.4 million, $2.1 million, and $1.2 million, respectively.

During the years ended

December 31, 2019 and 2018, there was $0.2 million and $0.7 million of interest capitalized into construction in progress,

respectively.

ANI Pharmaceuticals, Inc.

and Subsidiaries

Notes to the Consolidated

Financial Statements

For the years

ended December 31, 2019, 2018, and 2017

INTANGIBLE ASSETS

As a result of the Merger we recorded goodwill

of $1.8 million.

As a result of our acquisition of WellSpring, we recorded additional goodwill of $1.7 million in 2018.

the recoverability of the carrying value of goodwill on an annual basis as of October 31 of each year, and whenever events

occur or circumstances changes that would, more likely than not, reduce the fair value of our reporting unit below its carrying

Changes in the carrying amount of goodwill

as of December 31 are as follows:

(in thousands)

Balance at beginning of year

Acquisition of WellSpring (Note 2)

Balance at end of year

For the goodwill impairment analyses performed

at October 31, 2019 and 2018, we performed qualitative assessments to determine whether it was more likely than not that our

goodwill asset was impaired in order to determine the necessity of performing a quantitative impairment test, under which management

would calculate the asset’s fair value.

When performing the qualitative assessments, we evaluated events and circumstances

that would affect the significant inputs used to determine the fair value of the goodwill.

Events and circumstances evaluated include:

macroeconomic conditions that could affect us, industry and market considerations for the pharmaceutical industry that could affect

us, cost factors that could affect our performance, our financial performance (including share price), and consideration of any

company-specific events that could negatively affect us, our business, or our fair value.

Based on our assessments of the aforementioned

factors, it was determined that it was more likely than not that the fair value of our one reporting unit is greater than its carrying

amount as of October 31, 2019 and 2018, and therefore no quantitative testing for impairment was required.

In addition to the qualitative impairment

analysis performed at October 31, 2019, there were no events or changes in circumstances that could have reduced the fair

value of our reporting unit below its carrying value from October 31, 2019 to December 31, 2019.

No impairment loss was

recognized during the years ended December 31, 2019, 2018, and 2017, and the balance of goodwill was $3.6 million as of December 31,

2019 and 2018.

Definite-lived Intangible Assets

Acquisition of Abbreviated New Drug Applications

In March 2019, we entered into an

agreement with Teva Pharmaceutical Industries Ltd.

to purchase a basket of ANDAs for 35 previously-marketed generic drug products

for $2.5 million in cash.

also capitalized $10 thousand of costs directly related to the transaction.

We accounted for this transaction as an asset purchase.

The $2.5 million of ANDAs are being amortized in full over their estimated useful lives of 10 years.

Please see Note 8 for further

details regarding the transaction.

In January 2019, we entered into an

amendment to three asset purchase agreements (the “Asset Purchase Agreement Amendment”) with Teva Pharmaceuticals USA, Inc.

(“Teva”).

Under the terms of the Asset Purchase Agreement Amendment, all royalty obligations of the Company owed to

Teva with respect to products associated with ten ANDAs under the original asset purchase agreements ceased being effective as

of December 31, 2018.

As consideration for the termination of such future royalty obligations, we paid Teva a sum of $16.0

Upon the payment of $16.0 million, the purchase price of each basket of ANDAs was increased as if the

payment had been made on the initial acquisition date.

As a result, we recognized cumulative amortization expense of $6.8 million

upon recording the transaction.

Please see Note 8 for further details regarding the transaction.

ANI Pharmaceuticals, Inc.

and Subsidiaries

Notes to the Consolidated Financial

For the years ended December 31,

2019, 2018, and 2017

INTANGIBLE ASSETS (Continued)

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.

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 8 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

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 8 for further details regarding the transaction.

Acquisition of New Drug Applications and Product Rights

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.

entered into a license agreement for use of these trademarks in the U.S.

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 8 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 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.

see Note 8 for further details regarding the transaction.

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 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.

Note 8 for further details regarding the transaction.

ANI Pharmaceuticals, Inc.

and Subsidiaries

Notes to the Consolidated Financial

For the years ended December 31,

2019, 2018, and 2017

INTANGIBLE ASSETS (Continued)

conjunction with our 2013 merger with BioSante (the “Merger”), we acquired a testosterone gel product that was licensed

to Teva (the “Testosterone Gel NDA”) and this product was assigned an intangible asset value of $10.9 million in accounting

for the Merger.

In May 2015, Teva transferred the rights of the product back to ANI.

In exchange, we will pay Teva a

royalty of up to $5.0 million, at a rate of 5% of the consideration we receive as a result of commercial sale of the product.

assessed the value of the Testosterone Gel NDA under the new arrangement and determined that the net asset value was recoverable

as of the May 2015 transfer date and subsequent balance sheet dates.

We began the commercialization process for the product

during the second half of 2015 and it continued throughout 2016.

In late 2016, we determined that the development and manufacturing

costs required to commercialize the product had increased and would pose a significant barrier to commercializing the product ourselves.

Generic competition in the testosterone replacement market had increased substantially by the end of 2016, leading to significant

decreases in pricing for the product.

In the fourth quarter, management began putting forth efforts to sell the Testosterone Gel

NDA rather than commercialize it ourselves.

As a result of all these factors, in the fourth quarter of 2016, we determined that

the facts and circumstances indicated that the asset could be impaired.

We performed an impairment assessment, which indicated

that the fair value of the asset was lower than the carrying value.

We determined the fair value of the Testosterone Gel NDA by

using a discounted cash flows model.

As a result of this assessment, we recorded an impairment of $6.7 million in the year ended

December 31, 2016.

In addition, the remaining $0.9 million asset was recorded as a short-term asset held for sale as

of December 31, 2016 in the prepaid expenses and other assets caption in the accompanying consolidated balance sheets.

Throughout 2017, we continued to attempt to sell the Testosterone Gel NDA and were unable to complete a sale.

As a result, in the

fourth quarter of 2017, we determined that the asset could be impaired.

After performing an impairment assessment, which indicated

that the fair value of the asset was lower than the carrying value, we recorded an additional impairment of $0.9 million in the

year ended December 31, 2017, writing off the asset in its entirety.

Marketing and Distribution Rights

In April 2019, we entered into an

agreement with Pharmaceutics International, Inc.

(“PII”) and BAS ANDA LLC (“BAS”), under which a previously-commercialized

product will be developed and marketed.

Per the agreement, we may pay PII a series of licensing fees in conjunction with the achievement

of certain development and commercial milestones.

In the fourth quarter of 2019, the product was launched, triggering a $0.5 million

payment due to PII.

The payment due as of December 31, 2019 was capitalized as an intangible asset and will be amortized in

full over its useful life of 10 years.

In March 2018, we entered into

an agreement with Appco Pharma, LLC (“Appco”), in which a potential generic product, Ranitidine, was to be

developed and marketed.

Per the agreement, we paid Appco a series of licensing fees in conjunction with certain development

Ranitidine was launched in the third quarter of 2019, resulting in the final milestone payment of $80 thousand.

The $80 thousand milestone payment was capitalized as an intangible asset and determined to have an estimated useful life of

In September 2019, the Food and Drug Administration (“FDA”) issued a public statement that some

ranitidine medicines contain a nitrosamine impurity called N-nitrosdimethylamine (“NDMA”) at low levels.

classified as a probable human carcinogen (a substance that could cause cancer) based on results from laboratory tests and

the cause of the presence of this impurity in the ranitidine products is not yet fully understood at this time.

fourth quarter 2019, testing of the API used in our ranitidine drug product, as well as testing of the drug product itself,

indicated a level of NDMA above acceptable thresholds and Appco initiated a voluntary recall.

The Company has elected to exit

the market for Ranitidine and determined that the carrying value of the asset has been impaired.

During the fourth quarter

2019, the Company recognized a full impairment of the remaining $75 thousand carrying value of the asset.

ANI Pharmaceuticals, Inc.

and Subsidiaries

Notes to the Consolidated Financial

For the years ended December 31,

2019, 2018, and 2017

INTANGIBLE ASSETS (Continued)

The components of net definite-lived intangible assets

are as follows:

December 31, 2019

December 31, 2018

Weighted Average

(in thousands)

Gross Carrying

Acquired ANDA intangible assets

NDAs and product rights

Marketing and distribution rights

Non-compete agreement

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 $40.2 million, $31.7 million, and $26.7 million for the years ended December 31,

2019, 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

We recognized an impairment of $75 thousand in the year ended December 31, 2019, in relation to the

Ranitidine product right asset.

No impairment losses related to intangible assets were recognized in the year ended

December 31, 2018.

We recognized an impairment of $0.9 million in the year ended December 31, 2017, in relation to

the Testosterone Gel NDA.

No events or circumstances arose in 2019, 2018, or 2017 that indicated that the carrying value of

any of our other definite-lived intangible assets may not be recoverable.

Expected future amortization expense is

as follows for the years ending December 31:

(in thousands)

2025 and thereafter

ANI Pharmaceuticals, Inc.

and Subsidiaries

Notes to the Consolidated Financial

For the years ended December 31,

2019, 2018, and 2017

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.

GAAP establishes a hierarchical disclosure framework which 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.

fair market values are based on period-end statements supplied by the various banks and brokers that held the majority of our

The fair value of short-term financial instruments (primarily accounts receivable, prepaid expenses, accounts payable,

accrued expenses, and other current liabilities) approximate their carrying values because of their short-term nature.

Loan and DDTL bear an interest rate that fluctuates with the changes in LIBOR and, because the variable interest rates approximate

market borrowing rates available to us, we believe the $69.5 million and $118.0 million carrying value of the Term Loan and DDTL

approximated their fair values at December 31, 2019.

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 to be 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 management’s 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 December 31, 2019 and 2018.

We also determined that the changes in such fair value

were immaterial for the years ended December 31, 2019, 2018, and 2017.

April 2018, we entered into an interest rate swap arrangement (Note 4), with Citizens Bank, N.A.

to manage our exposure to

the variable interest rate on our previous Term Loan.

The notional amount of this interest rate swap was set to match the balance

of our previous Term Loan.

The fair value of our interest rate swap was estimated based on the present value of projected future

cash flows using the LIBOR forward rate curve.

The model used to value the interest rate swap included inputs of readily observable

market data, a Level 2 input.

In December 2018, we refinanced our

previous Credit Agreement and, as part of that refinancing, extended the maturity of our $72.2 million secured Term Loan to December 2023.

At the same time, we closed out the original interest rate swap and entered into a new interest rate swap arrangement (Note 4)

to manage our exposure to the variable interest rate on our Term Loan (Note 3).

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 $69.5 million as of December 31, 2019.

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 4, the fair value of the interest rate swap

was a $2.4 million liability at December 31, 2019.

February 2019, we entered into an interest rate swap arrangement (Note 4), with Citizens Bank, N.A.

to manage our exposure

to changes in LIBOR-based interest rates underlying our DDTL (Note 3).

The notional amount of our interest rate swap is

set to match the balance of our DDTL.

Both the notional amount of the interest rate swap and the balance of our DDTL were $118.0

million as of December 31, 2019.

The fair value of our interest rate swap was estimated based on the present value of projected

future cash flows using the LIBOR forward rate curve.

The model used to value the interest rate swap included inputs of readily

observable market data, a Level 2 input.

As described in detail in Note 4, the fair value of the interest rate swap was a $3.8

million liability at December 31, 2019.

ANI Pharmaceuticals, Inc.

and Subsidiaries

Notes to the Consolidated Financial

For the years ended December 31,

2019, 2018, and 2017

FAIR VALUE DISCLOSURES (Continued)

The following table presents our financial

assets and liabilities accounted for at fair value on a recurring basis as of December 31, 2019 and December 31, 2018,

by level within the fair value hierarchy:

(in thousands)

December 31, 2019

Interest rate swaps

December 31, 2018

Interest rate swaps

Financial Assets and Liabilities Measured at Fair Value

on a Non-Recurring Basis

We have no non-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 have no 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.

During the year ended December 31, 2019, we recognized

a $75 thousand impairment charge related to our Ranitidine product right asset (Note 7).

There were no other fair value impairments

recognized in the year ended December 31, 2019.

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.

Pursuant to these customary adjustments, the total purchase consideration was $16.7 million.

The consideration was paid entirely

from cash on hand.

In conjunction with the transaction, we acquired WellSpring’s pharmaceutical manufacturing facility,

laboratory, and offices, its current book of commercial business, as well as an organized workforce.

Following the consummation

of the transaction, WellSpring was merged into ANI Canada with the resulting entity’s name being ANI Pharmaceuticals Canada

See Note 2, Business Combination.

ANI Pharmaceuticals, Inc.

and Subsidiaries

Notes to the Consolidated Financial

For the years ended December 31,

2019, 2018, and 2017

FAIR VALUE DISCLOSURES (Continued)

Acquired Non-Financial Assets Measured at Fair Value

In June 2019, we acquired from Coeptis

Pharmaceuticals, Inc.

seven development stage generic products, as well as API and reference-listed drug inventory related

to certain of the products for a payment of $2.3 million.

The entire payment, and $24 thousand of transaction costs directly

related to the acquisition, was recorded as research and development expense because the potential generic products have significant

remaining work required in order to commercialize the products and do not have an alternative future use.

In addition, we could

make up to $12.0 million in payments for certain development and commercial milestones.

These milestones were determined to be

contingent liabilities and will be accrued when they are both estimable and probable.

In April 2019, we entered into an

agreement with PII and BAS, under which a previously-commercialized product will be developed and marketed.

Per the agreement,

we may pay PII a series of licensing fees in conjunction with the achievement of certain development and commercial milestones.

In the fourth quarter of 2019, the product was launched, triggering a $0.5 million payment due to PII.

The payment due as of December 31,

2019 was capitalized as an intangible asset and will be amortized in full over its useful life of 10 years.

In March 2019, we entered into an

agreement with Teva Pharmaceutical Industries Ltd.

to purchase a basket of ANDAs for 35 previously-marketed generic drug products

for $2.5 million in cash (Note 7).

We also capitalized $10 thousand of costs

directly related to the asset purchase.

We accounted for this transaction as an asset purchase.

The $2.5 million of ANDAs were

recorded at their relative fair value, determined using Level 3 unobservable inputs.

In order to determine the fair value of the

product rights intangible assets, we used the present value of the estimated cash flows related to the product rights, using a

discount rate of 15%.

The ANDAs will be amortized in full over their 10-year useful lives and will be tested for impairment when

events or circumstances indicate that the carrying value of the asset may not be recoverable.

No such triggering events were identified

during the period from the date of acquisition to December 31, 2019 and therefore no impairment loss was recognized for the

year ended 2019.

In January 2019, we entered into

an amendment to asset purchase agreements with Teva related to three purchases of baskets of ANDAs.

Under the terms of the Asset

Purchase Agreement Amendment, all royalty obligations of the Company owed to Teva with respect to products associated with ten

ANDAs under the original asset purchase agreements ceased being effective as of December 31, 2018.

As consideration for the

termination of such future royalty obligations, we paid Teva a sum of $16.0 million in cash (Note 7).

Upon payment of $16.0 million,

the purchase price of each basket of ANDAs was increased to reflect the subsequent payment as if that payment had been made on

the initial acquisition date.

As a result, in addition to increasing the carrying value of the acquired ANDA intangible assets

by $9.2 million, we recognized cumulative amortization expense of $6.8 million.

The payment was allocated to the three ANDA baskets

based on the relative fair value of the ANDA baskets, which were determined using Level 3 unobservable inputs.

In order to determine

the fair value of the acquired ANDA intangible assets, we used the present value of the estimated cash flows related to the ANDAs,

using a discount rate of 12%.

The additional carrying value will be amortized over the remaining useful lives of the three ANDA

baskets and will be tested for impairment when events or circumstances indicate that the carrying value of the asset may not be

No such triggering events were identified during the period from the date of acquisition to December 31, 2019

and therefore no impairment loss was recognized for the year ended 2019.

ANI Pharmaceuticals, Inc.

and Subsidiaries

Notes to the Consolidated Financial

For the years ended December 31,

2019, 2018, and 2017

FAIR VALUE DISCLOSURES (Continued)

In April 2018, we entered into an

agreement with Impax Laboratories, Inc.

(now Amneal) to purchase the approved ANDAs for three previously-commercialized generic

drug products, the approved ANDAs for two generic drug products that have not yet been commercialized, the development package

for one generic drug product, a license, supply, and distribution agreement for a generic drug product with an ANDA that is pending

approval, and certain manufacturing equipment required to manufacture one of the products, for $2.3 million in cash (Note 7).

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 USA, Inc.

(“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.

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 also 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 December 31, 2019 and therefore no impairment loss was recognized for the

years ended December 31, 2018 and 2019.

The $1.3 million of in-process research and development related to products with

significant further work required in order to commercialize the products, and for which there is no alternative future use.

in-process research and development was recorded at its relative fair value, determined using Level 3 unobservable inputs.

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.

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.

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 7).

We also 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

No such triggering events were identified during the period from the date of acquisition to December 31, 2019

and therefore no impairment loss was recognized for the years ended December 31, 2018 and 2019.

We also recorded $0.2 million

of raw materials inventory, measured at fair value.

The fair value of the raw materials inventory was determined based

on the estimated replacement cost.

ANI Pharmaceuticals, Inc.

and Subsidiaries

Notes to the Consolidated Financial

For the years ended December 31,

2019, 2018, and 2017

FAIR VALUE DISCLOSURES (Continued)

March 2018, we entered into an agreement with Appco, in which a potential generic product, Ranitidine, was to be

developed and marketed.

Per the agreement, we paid Appco a series of licensing fees in conjunction with certain development

Ranitidine was launched in the third quarter of 2019, resulting in the final milestone payment of $80 thousand.

The $80 thousand milestone payment was capitalized as an intangible asset and determined to have estimated useful life of

In September 2019, the FDA issued a public statement that some ranitidine medicines contain a nitrosamine

impurity referred to as NDMA at low levels.

NDMA is classified as a probable human carcinogen (a substance that could cause

cancer) based on results from laboratory tests and the cause of the presence of this impurity in the ranitidine products is

not yet fully understood at this time.

During the fourth quarter of 2019, testing of the API used in our ranitidine

drug product, as well as testing of the drug product itself, indicated a level of NDMA above acceptable thresholds and Appco

initiated a voluntary recall.

The Company has elected to exit the market for Ranitidine and determined that the carrying

value of the asset has been impaired.

During the fourth quarter of 2019, the Company recognized a full impairment of the

remaining $75 thousand carrying value of the asset.

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

We also licensed these trademarks for use in the U.S.

We also 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 December 31, 2019 and therefore no impairment loss was recognized for the years ended December 31, 2017, 2018, and

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 7).

We also 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.

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 December 31, 2019 and therefore

no impairment loss was recognized for the years ended December 31, 2019, 2018, and 2017.

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 7).

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 December 31, 2019 and therefore no impairment loss

was recognized for the years ended December 31, 2017, 2018, and 2019.

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.

ANI Pharmaceuticals, Inc.

and Subsidiaries

Notes to the Consolidated Financial

For the years ended December 31,

2019, 2018, and 2017

STOCKHOLDERS’

Authorized shares

We are authorized to issue up to 33.3

million shares of common stock with a par value of $0.0001 per share, 0.8 million shares of class C special stock with a

par value of $0.0001 per share, and 1.7 million shares of undesignated preferred stock with a par value of $0.0001 per share at

December 31, 2019.

There were 12.1 million and 11.9 million

shares of common stock issued and outstanding as of December 31, 2019 and 2018, respectively.

There were 11 thousand shares of class C

special stock issued and outstanding as of December 31, 2019 and 2018.

Each share of class C special stock entitles

its holder to one vote per share.

Each share of class C special stock is exchangeable, at the option of the holder, for one

share of our common stock, at an exchange price of $90.00 per share, subject to adjustment upon certain capitalization events.

Holders of class C special stock are not entitled to receive dividends or to participate in the distribution of our assets

if we were to liquidate, dissolve, or wind-up the company.

The holders of class C special stock have no cumulative voting,

preemptive, subscription, redemption, or sinking fund rights.

There were no shares of undesignated preferred

stock outstanding as of December 31, 2019 and 2018.

Warrants to purchase an aggregate of 1.7

million shares of our common stock were outstanding and exercisable as of December 31, 2019:

Underlying Shares

of Common Stock

(in thousands)

Exercise Price

Expiration Date

March 1, 2020

December 5, 2014

March 1, 2020

All outstanding warrants are classified

No warrants were granted, exercised, or expired unexercised during the years ended December 31, 2019, 2018 and

The warrants expire ratably over a 60 business day period beginning on March 1, 2020 and finishing on May 25, 2020.

ANI Pharmaceuticals, Inc.

and Subsidiaries

Notes to the Consolidated Financial

For the years ended December 31,

2019, 2018, and 2017

STOCK-BASED COMPENSATION

Employee Stock Purchase Plan

In July 2016, we commenced administration

of the ANI Pharmaceuticals, Inc.

2016 Employee Stock Purchase Plan, which was approved by shareholders in our May 25,

2016 annual shareholder meeting.

The Board of Directors and shareholders approved a maximum of 0.2 million shares of common stock,

which were reserved and made available for issuance under the ESPP.

Under the ESPP, participants can purchase shares of our stock

at a 15% discount.

We issued six thousand, five thousand, and four thousand shares in the years ended December 31, 2019,

2018, and 2017, respectively.

The following table summarizes ESPP expense

incurred under the 2016 Employee Stock Purchase Plan and included in our accompanying consolidated statements of operations:

Ended December 31,

(in thousands)

Cost of sales

Research and development

Selling, general, and administrative

Stock Incentive Plan

All equity-based service awards are granted

under the ANI Pharmaceuticals, Inc.

Amended and Restated 2008 Stock Incentive Plan (the “2008 Plan”).

As of December 31,

2019, 0.4 million shares of our common stock remained available for issuance under the 2008 Plan.

We measure the cost of equity-based service

awards based on the grant-date fair value of the award.

The cost is recognized ratably over the period during which an employee

is required to provide service in exchange for the award or the requisite service period.

We recognize stock-based compensation

expense ratably over the vesting periods of the awards.

The following table summarizes stock-based

compensation expense incurred under the 2008 Plan and included in our consolidated statements of operations:

Ended December 31,

(in thousands)

Cost of sales

Research and development

Selling, general, and administrative

We recognized income tax benefits of $1.4

million, $1.2 million, and $0.6 million for stock-based compensation-related tax deductions in our 2019, 2018, and 2017 consolidated

statements of operations, respectively.

ANI Pharmaceuticals, Inc.

and Subsidiaries

Notes to the Consolidated Financial

For the years ended December 31,

2019, 2018, and 2017

STOCK-BASED COMPENSATION (Continued)

Stock Options

Outstanding stock options granted to employees

and consultants generally vest over a period of four years and have 10-year contractual terms.

Outstanding stock options

granted to non-employee directors generally vest over a period of one to four years and have 10-year contractual terms.

Upon exercise

of an option, we issue new shares of our common stock or issue shares from treasury stock.

For 2019, 2018, and 2017, the fair value

of each option grant was estimated using the Black-Scholes option-pricing model, using the following assumptions:

Ended December 31,

Expected option life (years)

Risk-free interest rate

Expected stock price volatility

Dividend yield

We use the simplified method to estimate

the life of options.

The risk-free interest rate used is the yield on a U.S.

Treasury note as of the grant date with a maturity

equal to the estimated life of the option.

We calculated an estimated volatility rate based on the closing prices of several

competitors that manufacture similar products.

We have not issued a cash dividend in the past nor do we have any current

plans to do so in the future;

therefore, an expected dividend yield of zero was used.

2017, we granted options to two consultants.

We used the Black-Scholes option-pricing model to determine the fair value of the

option grants and the valuation of the grants were marked to market through December 31, 2018.

In June 2018, the FASB

issued guidance simplifying the accounting for nonemployee stock-based compensation awards (Note 1).

We adopted this guidance

as of January 1, 2019, therefore the nonemployee awards are measured at fair value as of the adoption date, and no longer

marked to market.

ANI Pharmaceuticals, Inc.

and Subsidiaries

Notes to the Consolidated Financial

For the years ended December 31,

2019, 2018, and 2017

STOCK-BASED COMPENSATION (Continued)

A summary of stock option activity under

the 2008 Plan during the years ended December 31, 2019, 2018, and 2017 is presented below:

(in thousands, except per share and

remaining term data)

Exercise Price

Intrinsic Value

Outstanding December 31, 2016

Outstanding December 31, 2017

Outstanding at December 31, 2018

Outstanding at December 31, 2019

Exercisable at December 31, 2019

As of December 31, 2019, there was

$8.9 million of total unrecognized compensation cost related to non-vested stock options granted under the 2008 Plan.

is expected to be recognized over a weighted-average period of 2.5 years.

During the year ended December 31, 2019, we received

$5.5 million in cash from the exercise of stock options and recorded a $0.7 million tax benefit related to these exercises.

the year ended December 31, 2018, we received $2.8 million in cash from the exercise of stock options and recorded a $0.6

million tax benefit related to these exercises.

During the year ended December 31, 2017, we received $0.2 million in cash

from the exercise of stock options and recorded a $0.2 million tax benefit related to these exercises.

ANI Pharmaceuticals, Inc.

and Subsidiaries

Notes to the Consolidated Financial

For the years ended December 31,

2019, 2018, and 2017

STOCK-BASED COMPENSATION (Continued)

Restricted Stock Awards

Restricted stock awards (“RSAs”)

granted to employees generally vest over a period of four years.

RSAs granted to non-officer directors generally vest over

a period of one year.

Shares of our common stock delivered to

employees and directors will be unrestricted upon vesting.

During the vesting period, the recipient of the restricted stock has

full voting rights as a stockholder and would receive dividends, if declared, even though the restricted stock remains subject

to transfer restrictions and will generally be forfeited upon termination of the officer prior to vesting.

The fair value of each

RSA is based on the market value of our stock on the date of grant.

A summary of RSA activity under the Plan

during the years ended December 31, 2019, 2018, and 2017 is presented below:

(in thousands, except per share and

remaining term data)

Average Grant

Remaining Term

Unvested at December 31, 2016

Unvested at December 31, 2017

Unvested at December 31, 2018

Unvested at December 31, 2019

As of December 31, 2019, there was

$8.6 million of total unrecognized compensation cost related to non-vested RSAs granted under the Plan, which is expected to be

recognized over a weighted-average period of 2.6 years.

ANI Pharmaceuticals, Inc.

and Subsidiaries

Notes to the Consolidated Financial

For the years ended December 31,

2019, 2018, and 2017

On August 6, 2018, ANI Canada acquired

all the issued and outstanding equity interests of WellSpring in a non-taxable transaction (Note 2).

Following the consummation

of the transaction, WellSpring was merged into ANI Canada.

Federal and state income tax purposes, ANI Canada is not part

of ANI’s consolidated group;

rather, ANI Canada is subject to income taxes only in Canada and solely based on its stand-alone

The foreign current and foreign deferred provisions (benefits) below represent ANI Canada’s tax provision (benefit)

from the Canadian taxing jurisdictions.

We are required to establish a valuation allowance for deferred

tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax

assets will not be realized.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable

income during the periods in which those temporary differences become deductible.

We consider the projected future taxable income

and tax planning strategies in making this assessment.

As of December 31, 2018, we had provided a valuation allowance against our

consolidated net deferred tax assets of $2.2 million.

As part of purchase accounting, as of

the August 6, 2018 acquisition date the Company established net deferred tax assets relating to differences in the book bases

(determined based on fair value purchase accounting) and tax bases (determined based on the carryover nature of the nontaxable

transaction) of ANI Canada’s assets and liabilities of approximately $1.9 million, offset by a full valuation allowance

due to our determination that it was more likely than not that all of the deferred tax assets will not be realized.

the second quarter 2019, we adopted an intercompany transfer pricing policy that uses the “comparable profits method”

for pricing intercompany services between ANI Pharmaceuticals, Inc.

and ANI Canada.

and Canadian tax purposes, the policy

was adopted in conjunction with the acquisition date of August 6, 2018.

As a result of the newly adopted transfer pricing policy,

our assessment of the amount of ANI Canada’s deferred tax assets that are more likely than not to be realized changed and,

as a result, during the second quarter 2019, we released the remaining net valuation allowance related to ANI Canada’s deferred

As of December 31, 2019, our consolidated

valuation allowance was $0.4 million, related solely to deferred tax assets for net operating loss carryforwards in certain U.S.

state jurisdictions.

Our total provision for income taxes consists

of the following for the years ended December 31, 2019, 2018, and 2017:

(in thousands)

Current income tax provision:

Deferred income tax (benefit)/provision:

Change in valuation allowance

Total (benefit)/provision for income taxes

ANI Pharmaceuticals, Inc.

and Subsidiaries

Notes to the Consolidated Financial

For the years ended December 31,

2019, 2018, and 2017

INCOME TAXES (Continued)

The difference between our expected income

tax provision from applying U.S.

Federal statutory tax rates to the pre-tax income and actual income tax provision relates primarily

to the effect of the following:

As of December 31,

US Federal statutory rate

State taxes, net of Federal benefit

Foreign taxes

Impact of Tax Cuts and Jobs Act

Domestic production activities deduction

Change in valuation allowance

Stock-based compensation

Non-deductible costs

Change in state apportionment factors, state and foreign rates

Research and experimentation and charitable credits

Transfer pricing and other

Total income tax (benefit)/provision

In 2017 our effective tax rate was impacted

by the revaluation of our deferred tax assets and liabilities at the lower 21% U.S.

corporate tax rate, as proscribed by the Tax

Cuts and Jobs Act, which was enacted on December 22, 2017 and lowered the U.S.

corporate tax rate from 35% to 21%, which began

We measure our deferred tax assets and liabilities using the tax rates that we believe will apply in the years in which

the temporary differences are expected to be recovered or paid.

As a result, we remeasured our deferred tax assets and deferred

tax liabilities to reflect the reduction in the enacted U.S.

corporate income tax rate, resulting in a net $13.4 million increase

in income tax expense for the year ended December 31, 2017.

Deferred income taxes reflect the net tax

effects of differences between the bases of assets and liabilities for financial reporting and income tax purposes.

income tax assets and liabilities consisted of the following:

As of December 31,

(in thousands)

Deferred tax assets:

Accruals and advances

Stock-based compensation

Accruals for chargebacks and returns

Intangible asset

Net operating loss carryforwards

Total deferred tax assets

Deferred tax liabilities:

Debt discount

Intangible assets

Total deferred tax liabilities

Valuation allowance

Deferred tax assets, net of deferred tax liabilities and valuation allowance

ANI Pharmaceuticals, Inc.

and Subsidiaries

Notes to the Consolidated Financial

For the years ended December 31,

2019, 2018, and 2017

INCOME TAXES (Continued)

As of December 31, 2019, we had

federal net operating loss carryforwards of approximately $11.3 million, all of which arose as a result of the Merger

and, if not used, expire in annual increments through 2033.

The utilization of the net operating loss carryforwards are

limited in future years as prescribed by Section 382 of the U.S.

Internal Revenue Code;

our current annual limitation of

the federal net operating loss is approximately $0.8 million per year.

Additionally, as of December 31, 2019 we have

total net operating losses in Canada of $7.9 million that begin expiring in 2035.

We are subject to income taxes in numerous

jurisdictions in the U.S.

and in Canada.

Significant judgment is required in evaluating our tax positions and determining our provision

for income taxes.

We establish liabilities for tax-related uncertainties based on estimates of whether, and the extent to which,

additional taxes will be due.

These liabilities are established when we believe that certain positions might be challenged despite

our belief that our tax return positions are fully supportable.

We adjust these liabilities in light of changing facts and circumstances,

such as the outcome of a tax audit.

The provision for income taxes includes the impact of changes to the liability that is considered

We identified no material uncertain tax positions as of December 31, 2019 and 2018.

We are subject to income tax audits in

all jurisdictions for which we file tax returns.

Tax audits by their nature are often complex and can require several years to

Neither ANI Pharmaceuticals, Inc.

nor any of its subsidiaries is currently under audit in any jurisdiction.

of our income tax returns remain subject to examination by tax authorities due to the availability of net operating loss carryforwards.

ANI Pharmaceuticals, Inc.

and Subsidiaries

Notes to the Consolidated Financial

For the years ended December 31,

2019, 2018, and 2017

COMMITMENTS AND CONTINGENCIES

Operating Leases

All our existing leases as of December

31, 2019 are classified as operating leases.

As of December 31, 2019, we have twelve material operating leases for facilities and

office equipment with remaining terms expiring from 2021 through 2024 and a weighted average remaining lease term of 2.4 years.

Many of our existing leases have fair value renewal options, none of which are considered certain of being exercised or included

in the minimum lease term.

Discount rates used in the calculation of our lease liability ranged between 4.02% and 8.95%.

Rent expense for the year ended December

31, 2019 consisted of the following:

(in thousands)

Operating lease costs

Variable lease costs

Total lease costs

A maturity analysis of our operating leases follows:

(in thousands)

Future payments:

Lease liability

Current lease liability

Non-current lease liability

Future minimum lease payments under non-cancelable operating

leases as of December 31, 2018 were approximately $0.1 million per year from 2019 through 2022.

Vendor Purchase Minimums

We have supply agreements with four

vendors that include purchase minimums.

Pursuant to these agreements, we will be required to purchase a total of $15.2

million of API from these four vendors during the year ended December 31, 2020.

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 considered controlled substances.

Unapproved Products

Two of our products, Esterified Estrogen

with Methyltestosterone (“EEMT”) and Opium Tincture, are marketed without approved NDAs or ANDAs.

During the years

ended December 31, 2019, 2018, and 2017, net revenues for these products totaled $20.7 million, $24.9 million, and $27.6

million, respectively.

The FDA's policy with respect to the continued

marketing of unapproved products is stated in the FDA's September 2011 Compliance Policy Guide Sec.

440.100 titled “Marketed

New Drugs without Approved NDAs or ANDAs.”

Under this policy, the FDA has stated that it will follow a risk-based approach

with regard to enforcement against such unapproved products.

The FDA evaluates whether to initiate enforcement action on a case-by-case

basis, but gives higher priority to enforcement action against products in certain categories, such as those marketed as unapproved

drugs with potential safety risks or that lack evidence of effectiveness.

We believe that, so long as we comply with applicable

manufacturing standards, the FDA will not take action against us under the current enforcement policy.

There can be no assurance,

however, that the FDA will continue this policy or not take a contrary position with any individual product or group of products.

If the FDA were to take a contrary position, we may be required to seek FDA approval for these products or withdraw such products

from the market.

If we decide to withdraw the products from the market, our net revenues for generic pharmaceutical products would

decline materially, and if we decide to seek FDA approval, we would face increased expenses and might need to suspend sales of

the products until such approval was obtained, and there are no assurances that we would receive such approval.

In addition, one group of products that

we manufacture on behalf of a contract customer is marketed by that customer without an approved NDA.

If the FDA took enforcement

action against such customer, the customer may be required to seek FDA approval for the group of products or withdraw them from

Our contract manufacturing revenues for the group of unapproved products for the years ended December 31, 2019,

2018, and 2017 were $3.1 million, $2.0 million, and $2.0 million, respectively.

ANI Pharmaceuticals, Inc.

and Subsidiaries

Notes to the Consolidated

Financial Statements

For the years ended December 31,

2019, 2018, and 2017

COMMITMENTS AND CONTINGENCIES (Continued)

Legal proceedings

We are involved,

and from time to time may become involved, in various disputes, governmental and/or regulatory inquiries, investigations, and litigation

matters, some of which could result in losses, including damages, fines, and/or civil or criminal penalties against us.

These matters

are often complex and have outcomes that we are unable to predict.

We intend to vigorously

defend ourselves in these matters and believe that we have strong defenses regarding the claims currently asserted against us.

However, from time to time, we may settle or otherwise resolve these matters on terms and conditions that we believe are in our

best interests.

Resolution of any or all claims, investigations, and legal proceedings, individually or in the aggregate, could

have a material adverse effect on our results of operations and/or cash flows in any given accounting period or on our overall

financial condition.

Some of these

matters with which we are involved are described below, and unless otherwise disclosed, we are unable to predict the outcome of

the matter or to provide an estimate of the range of reasonably possible material losses.

We record accruals for loss contingencies

to the extent we conclude it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.

From time to time, we are also involved in other pending proceedings for which, in our opinion based upon facts and circumstances

known at the time, either the likelihood of loss is remote or any reasonably possible loss associated with the resolution of such

proceedings is not expected to be material to our results.

If and when any reasonably possible losses associated with the resolution

of such other pending proceedings, in our opinion, become material, we will disclose such matters.

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

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.

In November of 2017, we were served with

a complaint filed by Arbor Pharmaceuticals, LLC, in the United States District Court, District of Minnesota.

The complaint alleges

false advertising and unfair competition in violation of Section 43(a) of the Lanham Act, Section 1125(a) of Title 15 of the United

States Code, and Minnesota State law, and seeks injunctive relief and damages.

Discovery in this action closed on March 31,

Trial is expected to be scheduled for October 2020.

We continue to defend this action vigorously.

Commitments and Contingencies

All manufacturers of the drug Reglan and

its generic equivalent metoclopramide, including ANI, have faced allegations from plaintiffs in various states claiming bodily

injuries as a result of ingestion of metoclopramide or its brand name, Reglan, prior to the FDA's February 2009 Black Box

warning requirement (“legacy claims”).

All these original legacy claims were settled or closed out, including

a series of claims in California that were resolved by coordinated proceeding and settlement.

At the end of March 2019, we

were served with a lawsuit in the Superior Court of California, County of Riverside, adding us as a defendant in a complaint filed

in July 2017 that is alleged not to have been part of the original settled legacy claims.

This new claim as well as

the impact of the prior settlements on this claim is currently being evaluated by the Company, its insurers, and its legal counsel.

At the present time, we are unable to

assess the likely outcome of the case.

Our insurance company had assumed the defense of the legacy claims and paid all losses

in settlement of the California cases.

We cannot provide assurances that the outcome of this new matter will not have an adverse

effect on our business, financial condition, and operating results.

Furthermore, like all pharmaceutical manufacturers, we may

be exposed to other product liability claims in the future, which could limit our coverage under future insurance policies or

cause those policies to become more expensive, which could harm our business, financial condition, and operating results.

Our ANDA for Erythromycin Ethylsuccinate

(“EES”) was originally approved by the FDA on November 27 th , 1978.

We purchased the EES ANDA

from Teva on July 10, 2015.

In August 2016, we filed with the FDA to reintroduce this product under a Changes Being

Effected in 30 Days submission (a “CBE-30 submission”).

Under a CBE-30 submission, certain defined changes to an ANDA

can be made if the FDA does not object in writing within 30 days.

The FDA’s regulations, guidance documents, and our historic

actions support the filing of a CBE-30 for the types of changes that we proposed for our EES ANDA.

We received no formal written

letter from the FDA within 30 days of the CBE-30 submission date, and as such, launched the product in accordance with FDA regulations

on September 27, 2016.

On December 16, 2016, and nearly four months after our CBE-30 submission, the FDA sent us a formal

written notice that a Prior Approval Supplement (“PAS”) was required for this ANDA.

Under a PAS, proposed changes

to an ANDA cannot be implemented without prior review and approval by the FDA.

Because we did not receive this notice in the timeframe

prescribed by the FDA’s regulations, we reserved our legal right to an internal Agency appeal.

We believe that our supplemental

ANDA is valid, and as such continued to market the product.

In addition, we filed a PAS which was approved by the FDA on November 2,

2018 with no FDA objection to our prior actions.

On or about September 20, 2017, the

Company and certain of its employees were served with search warrants and/or grand jury subpoenas to produce documents and possibly

testify relating to a federal investigation of the generic pharmaceutical industry.

The Company has been cooperating and

intends to continue cooperating with the investigation.

However, no assurance can be given as to the timing or outcome of the

investigation.

ANI Pharmaceuticals, Inc.

and Subsidiaries

Notes to the Consolidated

Financial Statements

For the years

ended December 31, 2019, 2018, and 2017

CORTROPHIN PRE-LAUNCH CHARGES

In January 2016, we acquired the right,

title and interest in the NDAs for Cortrophin Gel and Cortrophin-Zinc.

Subsequently, we have assembled a Cortrophin re-commercialization

team of scientists, executed a long-term supply agreement with a supplier of pig pituitary glands, our primary raw material for

corticotrophin API, executed a long-term supply agreement with an API manufacturer, with whom we have advanced the manufacture

of corticotropin API via manufacture of commercial-scale batches, and executed a long-term commercial supply agreement with a current

good manufacturing practice (“cGMP”) aseptic fill contract manufacturer.

Prior to the third and fourth quarter

2019, all purchases of material, including pig pituitary glands and API, related to the re-commercialization efforts have

been consumed in research and development activities and recognized as research and development expense in the period in

which they were incurred.

In the 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.

GAAP, we cannot

capitalize these pre-launch purchases of materials as inventory prior to FDA approval, and accordingly, they are charged to

expense in the period in which they are incurred.

We expect these pre-launch purchases of material to increase significantly

in the future as we build raw materials, API and finished goods for the expected launch of this product.

During the year

ended December 31, 2019, we incurred related charges for the purchase of materials of $6.7 million.

We currently project

expense related to this activity to be approximately $11.0-$12.0 million for 2020.

In the future, we also expect to incur

other charges directly related to the Cortrophin pre-launch commercialization efforts, including, but not limited to, sales

and marketing and consulting expenses, which will vary in frequency and impact on our results of operations.

SUBSEQUENT EVENTS

January 8, 2020 we acquired the U.S.

portfolio of 23 generic products from Amerigen Pharmaceuticals, Ltd.

for $52.5 million

in cash at close and up to $25.0 million in contingent profit share payments over the next four years.

The contingent payments

will be earned when annual gross profit exceeds a minimum threshold and will be earned on a subset of the acquired products.

acquired portfolio includes 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.

We also made a $4.0 million cash payment to

Amerigen to acquire certain commercial and development inventory and materials.

The transaction was funded from cash on hand.

On January 17, 2020, ANI Pharmaceuticals, Inc.

(the “Company”) entered into employment agreements with its (i) President and Chief Executive Officer, Arthur S.

(ii) Vice President of Finance and Chief Financial Officer, Stephen P.

Carey, (iii) Senior Vice President of Business

Development and Specialty Sales, Robert Schrepfer and (iv) Senior Vice President of Operations and Product Development, James

ANI Pharmaceuticals, Inc.

and Subsidiaries

Notes to the Consolidated

Financial Statements

For the years

ended December 31, 2019, 2018, and 2017

QUARTERLY FINANCIAL DATA (unaudited)

The following table presents unaudited

quarterly consolidated operating results for each of our last eight fiscal quarters.

The information below has been prepared on

a basis consistent with our audited consolidated financial statements.

2019 Quarters (unaudited)

(in thousands, except per share data)

Total operating expenses

Operating income/(expense)

(Provision)/benefit for income taxes

Net income/(loss)

Basic and diluted earnings/(loss) per share:

Basic earnings/(loss) per share

Diluted earnings/(loss) per share

(1) During the fourth quarter 2019, we recognized a $4.6 million inventory reserve charge, primarily related to our exit from the market of Methylphenidate Extended Release.

We also recognized Cortrophin pre-launch charges of $6.5 million.

2018 Quarters (unaudited)

(in thousands, except per share data)

Total operating expenses

Operating income

Provision for income taxes

Basic and diluted earnings per share:

Basic earnings per share

Diluted earnings per share

Changes in and Disagreements with Accountants on

Accounting and Financial Disclosure

Changes in exchange rates can positively or negatively impact our revenue, income, assets, liabilities, and equity.

Currency exchange rates did not have a material impact on our revenue, income, assets, liabilities, or equity during the year ended December 31, 2020.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk