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Item 7. Management’s Discussion and Analysis

2022-03-15 compared with 2021-03-11 · 310 added, 271 removed, 293 unchanged (66% of the section changed)

1 unchanged sentence

Please read the following discussion in conjunction with Item 1A.

(“Risk Factors”) and our audited consolidated financial statements included elsewhere in this annual report.

(“Risk Factors”) and our audited consolidated financial statements included elsewhere in this Annual Report on Form 10K.

Some of the statements in the following discussion are forward-looking statements.

1 unchanged sentence

This section of this Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020.

Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 , filed with the SEC on February 27, 2020.

Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on March 11, 2021 .

Executive Overview

ANI Pharmaceuticals, Inc.

and its consolidated subsidiaries, ANIP Acquisition Company and ANI Pharmaceuticals Canada Inc.

(together, “ANI,” the “Company,” “we,” “us,” or “our”) is an integrated specialty pharmaceutical company focused on delivering value to our customers by developing, manufacturing, and marketing high quality branded and generic prescription pharmaceuticals.

We focus on niche and high barrier to entry opportunities, including controlled substances, oncology products (anti-cancer), hormones and steroids, and complex formulations.

Our three pharmaceutical manufacturing facilities, of which two are located in Baudette, Minnesota and one is located in Oakville, Ontario, are together capable of producing oral solid dose products, as well as semi-solids, liquids and topicals, controlled substances, and potent products that must be manufactured in a fully-contained environment.

Our strategy is to use our assets to develop, acquire, manufacture, and market branded and generic specialty prescription pharmaceuticals.

While generic products tend to have higher margins than branded products, margins decrease as the number of companies offering a generic form of a branded drug increases.

To address this downward pressure on prices of generic products, we actively seek to acquire new drug products.

By executing on this and other strategies, we believe we will be able to continue to grow our business, expand and diversify our product portfolio, and create long-term value for our investors.

In 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.

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.

In addition, we acquired the ANDAs for three previously-commercialized generic products, the approved ANDAs for two generic products that had yet to be commercialized at the time of the acquisition, the development package for one generic product, a license, supply, and distribution agreement for a generic product with an ANDA that is pending approval, and certain manufacturing equipment required to manufacture one of the products.

We also acquired the ANDAs for 23 previously-marketed generic products and API for four of the acquired products.

During the 2018 year, we launched 11 products.

In addition, in December 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.

In 2019, we entered into an agreement with Teva Pharmaceutical Industries Ltd.

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

We also acquired from Coeptis Pharmaceuticals, Inc.

seven development stage generic products.

During the 2019 year, we launched six products.

Additionally, 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.

In 2020, we acquired the U.S.

portfolio of 23 generic products, including 10 commercial products at the time of the acquisition, from Amerigen Pharmaceuticals, Ltd.

During the 2020 year, we launched ten products.

Recent Developments

On March 8, 2021, ANI Pharmaceuticals, Inc.

(“Parent”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among Parent, Nile Merger Sub LLC, a Delaware limited liability company and a wholly-owned subsidiary of Parent (“Merger Sub”), Novitium Pharma LLC, a Delaware limited liability company (“Novitium”), Esjay LLC, a Delaware limited liability company (“Esjay”), Chali Properties, LLC, a New Jersey limited liability company (“Chali”), Chad Gassert, Muthusamy Shanmugam, and Thorappadi Vijayaraj (collectively, the “Key Persons”, and Muthusamy Shanmugam and Thorappadi Vijayaraj, together with Esjay and Chali, the “Principal Members”) and Shareholder Representative Services LLC, a Colorado limited liability company, as the representative of the equity holders of Novitium.

Upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into Novitium, with Novitium surviving the merger as a wholly-owned subsidiary of Parent (the “Merger”).

The closing of the Merger (the “Closing”) will occur (a) within five business days after all of the conditions to the Closing set forth in the Merger Agreement are satisfied or waived or (b) at such other time, date and place as may be agreed by Parent and Novitium, subject to the completion of a minimum period.

The Merger consideration will consist of a combination of (i) an estimated cash amount of $89.5 million, subject to various adjustments and expected to be financed in part by a $25.0 million Private Investment in Public Equity (“PIPE Investment”) (as defined below) and in part by new debt financing, (ii) an aggregate of 2,466,667 shares of Parent common stock, and (iii) up to $46.5 million in contingent future earn-out payments.

We will finance the transaction with a new $340.0 million Senior Secured Credit Facility (the “Facility”), consisting of a $300.0 million term loan and a $40.0 million revolving credit facility, the issuance of approximately $74.0 million in equity to the sellers, and a $25.0 million PIPE Investment by Ampersand Capital Partners.

The new debt financing will be secured by substantially all the assets of ANI and its subsidiaries and used for the cash portion of the acquisition and to refinance ANI’s existing senior credit facilities.

Concurrently with the execution of the Merger Agreement, on March 8, 2021, Parent entered into an Equity Commitment and Investment Agreement (the “Investment Agreement”) with Ampersand 2020 Limited Partnership (the “PIPE Investor”), an affiliate of Ampersand Capital Partners, pursuant to which we agreed to issue and sell to the PIPE Investor, and the PIPE Investor agreed to purchase, 25,000 shares of our Series A Convertible Preferred Stock (the “PIPE Shares”), for a purchase price of $1,000 per share and an aggregate purchase price of $25.0 million, in a private placement (the “PIPE Investment”).

The completion of the Merger transaction is subject to various closing conditions, including approval by ANI stockholders of the issuance of ANI common stock in connection with the Merger.

For more information about the pending Merger transaction, please see the Form 8-K filed on March 9, 2021 by ANI Pharmaceuticals, Inc.

, which is incorporated by reference herein.

and its consolidated subsidiaries (together, “ANI,” the “Company,” “we,” “us,” or “our”) is a diversified bio-pharmaceutical company serving patients in need by developing, manufacturing, and marketing high quality branded and generic prescription pharmaceuticals, including for diseases with high unmet medical need.

Our team is focused on delivering sustainable growth by building a successful Purified Cortrophin Gel franchise, strengthening our generics business with enhanced development capability, innovation in established brands and leveraging our North American manufacturing capabilities.

Our four pharmaceutical manufacturing facilities, of which two are located in Baudette, Minnesota, one is located in East Windsor, New Jersey, and one is located in Oakville, Ontario, are together capable of producing oral solid dose products, as well as semi-solids, liquids and topicals, controlled substances, and potent products that must be manufactured in a fully-contained environment.

Our objective is to build a sustainable and growing biopharmaceutical company serving patients in need and creating long-term value for our investors.

Our growth strategy is driven by the following key pillars:

Building a successful Purified Cortrophin Gel franchise

We acquired the NDAs for Cortrophin gel and Cortrophin-Zinc in January 2016 and executed long-term supply agreements with a supplier of our primary raw material for corticotrophin active pharmaceutical ingredient (“API”), a supplier of corticotrophin API with whom we have advanced the manufacture of commercial scale batches of API, and a Cortrophin gel fill/finish contract manufacturer.

During the second quarter of 2021, we submitted a Supplemental New Drug Application (“sNDA”) to the FDA.

On October 29, 2021, the FDA approved the Company’s sNDA for Purified Cortrophin™ Gel (Repository Corticotropin Injection USP) for the treatment of certain chronic autoimmune disorders, including acute exacerbations of multiple sclerosis (“MS”) and rheumatoid arthritis (“RA”), in addition to excess urinary protein due to nephrotic syndrome.

Cortrophin Gel is an adrenocorticotropic hormone (“ACTH”), also known as purified corticotropin.

During 2021, we invested in leadership, expertise and infrastructure in the areas of commercialization of rare disease therapies and developed a launch strategy and commercial plan for this product.

In the fourth quarter of 2021 and first quarter of 2022, we hired a significant number of new employees and assembled and trained our rare disease field force.

On January 24, 2022, we announced the commercial launch of Cortrophin Gel in the U.S.

As a result of the build out of our rare disease team, our expenditures in support of these efforts will materially increase in 2022 as compared to 2021.

Strengthening our generics business with enhanced research and development capability and increased focus on niche opportunities

We have grown our generics business through a combination of market share gains on existing products and new product launches.

We have also successfully acquired numerous ANDAs through business and asset acquisitions, including, most recently, our acquisition of Novitium, including their portfolio of commercial and pipeline generic products, manufacturing and development facilities and expert workforce.

We have begun to increase our focus on niche lower competition opportunities such as injectables, Paragraph IV, and Competitive Generic Therapy designation filings.

Additionally, we will continue to seek opportunities to enhance our capabilities through strategic partnerships and acquisitions of assets and businesses.

Maximizing the value from our established brands through innovative “go-to-market” (“GTM”) strategies and continued programmatic acquisitions

We have acquired the New Drug Applications (“NDAs”) for and market Atacand, Atacand HCT, Arimidex, Casodex, Lithobid, Vancocin, Inderal LA, Inderal XL, InnoPran XL, Oxistat, Veregen, and Pandel.

We are innovating in our GTM strategy through creative partnerships.

In addition, we will continue to explore opportunities in acquiring new brands to grow our established brands portfolio.

Expansion of contract development and manufacturing organization (“CDMO”) business by leveraging our unique manufacturing capabilities

We built a CDMO business through our sites in Baudette and grew it through the acquisitions of Novitium and WellSpring Pharma Services Inc.

(“ANI Canada”).

Our North America based manufacturing and unique capabilities in high-potency, hormonal, steroid, and oncolytic products can be leveraged to expand our CDMO business.

The pillars of our strategy are enabled by an empowered, collaborative, and purposeful team with a high performance-orientation.

Product Development Considerations

We consider a variety of criteria in determining which products to develop, all of which influence the level of competition upon product launch.

These criteria include:

● Formulation Complexity.

Our development and manufacturing capabilities enable us to manufacture pharmaceuticals that are difficult to produce, including highly potent, extended release, combination, and low dosage products.

This ability to manufacture a variety of complex products is a competitive strength that we intend to leverage in selecting products to develop or manufacture.

● Patent Status.

We seek to develop products whose branded bioequivalents do not have long-term patent protection or existing patent challenges.

● Market Size.

When determining whether to develop or acquire an individual product, we review the current and expected market size for that product at launch, as well as forecasted price erosion upon conversion from branded to generic pricing.

We endeavor to manufacture products with sufficient market size to enable us to enter the market with a strong likelihood of being able to price our products both competitively and at a profit.

● Profit Potential.

We research the availability and cost of active pharmaceutical ingredients in determining which products to develop or acquire.

In determining the potential profit of a product, we forecast our anticipated market share, pricing, including the expected price erosion caused by competition from other generic manufacturers, and the estimated cost to manufacture the products.

● Manufacturing.

We generally seek to develop and manufacture products at our own manufacturing plants in order to optimize the utilization of our facilities, ensure quality control in our products, and to more closely control the economic inputs and outputs of our products.

● Competition.

When determining whether to develop or acquire a product, we research existing and expected competition.

We seek to develop products for which we can obtain sufficient market share and may decline to develop a product if we anticipate significant competition.

Our specialized manufacturing facilities provide a means of entering niche markets, such as hormone therapies, in which fewer generic companies are able to compete.

Fiscal 2021 Developments

Business Acquisition and Financing Activity

On November 19, 2021, we completed our previously announced acquisition of Novitium pursuant to the Merger Agreement for cash consideration of $89.5 million in cash (subject to various adjustments pursuant to the merger agreement), 2,466,654 restricted shares of ANI common stock, and up to $46.5 million in contingent future earn-out payments.

The contingent consideration is based on the achievement of certain milestones, including milestones on gross profit of Novitium portfolio products over a 24-month period, regulatory filings completed during this 24-month period, and a percentage of net profits on certain products that are launched in the future.

The cash consideration was financed via proceeds from the Credit Facility (as defined below) and proceeds from the PIPE Investment (as defined below).

This acquisition is being accounted for as a business combination.

We acquired Novitium due to its proven track record of being a research and development growth engine capable of fueling sustainable growth, to expand our research and development pipeline via niche opportunities, to enhance our contract development and manufacturing organization (“CDMO”) business and U.S.

based manufacturing capacity, and to diversify our revenue base.

In connection with our acquisition of Novitium, we entered into employment agreements with the two executives and founders of Novitium, Muthusamy Shanmugam and Chad Gassert.

Both will serve as executive officers of the Company and Mr.

Shanmugam was also appointed to the board of directors.

Shanmugam holds interests in Scitus Pharma Services (“Scitus”), which provides clinical research services to Novitium, SS Pharma LLC (“SS Pharma”), which acquires and supplies API to Novitium, Esjay Pharma LLC (“Esjay”), which provides research and development and facilities consulting services, and Nuray Chemical Private Limited (“Nuray”), which manufactures and supplies API to Novitium.

Gassert holds an interest in Scitus.

See Note 14, Related Parties, in the notes to the consolidated financial statements in Part II, Item 8.

of this Annual Report on Form 10-K for additional discussion.

Also on November 19, 2021, we, as borrower, entered into a credit agreement (the “Credit Agreement”) with Truist Bank, as Administrative Agent, and the other parties thereto, which provides for credit facilities consisting of (i) a senior secured term loan facility in an aggregate principal amount of $300.0 million (the “Term Facility”) and (ii) a senior secured revolving credit facility in an aggregate commitment amount of $40.0 million, which may be used for revolving credit loans, swingline loans and letters of credit (the “Revolving Facility,” and together with the Term Facility, the “Credit Facility”).

The Term Facility proceeds were used to finance the cash portion of the consideration under the merger agreement between ANI and Novitium, fully repay and terminate our existing Amended and Restated Credit Agreement (“Prior Credit Facility”), and pay fees, costs and expenses incurred in connection with the merger.

The Credit Facility is secured by substantially all of the personal property and certain material real property owned by us and our wholly-owned domestic subsidiaries, and obligations under the Credit Facility are guaranteed by certain of our wholly-owned domestic subsidiaries.

Concurrently with the execution of the Merger Agreement on March 8, 2021, we entered into an Equity Commitment and Investment Agreement with Ampersand 2020 Limited Partnership, an affiliate of Ampersand Capital Partners (the “PIPE Investor”), pursuant to which, on November 19, 2021, we issued and sold to the PIPE Investor, and the PIPE Investor purchased, 25,000 PIPE Shares, for a purchase price of $1,000 per share and an aggregate purchase price of $25.0 million, in a private placement (the “PIPE Investment”) issued in reliance on the exemption from registration provided by Section (4(a)(2) of the Securities Act of 1933, as amended and/or Regulation D promulgated thereunder.

Our Chairman of the Board of Directors is an operating partner of Ampersand Capital Partners, an affiliate of Ampersand 2020 Limited Partnership.

As part of the Federal Trade Commission (“FTC”) conditions on the closing of the acquisition of Novitium, we agreed to divest a currently marketed product and rights to another product under development to an unrelated third party.

The disposition of these products is immaterial to our results of operations.

For more information about the Novitium acquisition transaction, please see our Form 8-K filed with the SEC on November 26, 2021.

Asset Acquisitions

In July 2020, we acquired an ANDA and certain related inventories from a private company for total consideration of $4.3 million.

The transaction was funded using cash on hand.

In May 2020, we entered into an agreement with a private company to purchase an ANDA and API for one currently marketed generic drug product and certain API for $0.2 million.

The transaction was funded using cash on hand.

In January 2020, we completed the acquisition of the U.S.

portfolio of 23 generic products and API and finished goods related to certain of those products from Amerigen Pharmaceuticals, Ltd.

("Amerigen") for a purchase consideration of $56.8 million and up to $25.0 million in contingent payments over the next three years.

The product portfolio at the time of the acquisition included ten commercial products, three approved products with launches pending, four filed products and four in-development products as well as a license to commercialize two approved products.

The transaction was funded using cash on hand and $15.0 million in borrowings under our $75.0 million Revolver.

On April 1, 2021, we acquired the NDAs for Oxistat ® , Veregen ® , and Pandel ® and the ANDA for Apexicon ® from Sandoz Inc.

for total consideration of $20.7 million.

The acquisition was funded through a $24.0 million borrowing under the revolving facility portion (the “Revolver”) of our Prior Credit Facility.

Product Launches

During 2020, we launched the following products.

Refer to our website at www.anipharmaceuticals.com for further information on the products, including indications/treatments.

Aminocaproic Acid Tablets USP 500mg

December 2020

Mexiletine Hydrochloride Capsules USP, 150mg, 200mg, and 250mg

Omega-3-Acid Ethyl Esters Capsules, 1 gram

Polyethylene Glycol 3350, 17g/Packet (PEG-3350)

Dextroamphetamine Saccharate, Amphetamine Aspartate Monohydrate, Dextroamphetamine Sulfate and Amphetamine Sulfate Extended-Release Capsules 5 mg, 10 mg, 15 mg, 20 mg, 25 mg, and 30 mg

Memantine Hydrochloride Extended-Release Capsules 7 mg, 14 mg, 21 mg, and 28 mg

Sulfamethoxazole and Trimethoprim Oral Suspension USP 200 mg/40 mg per 5 mL

February 2020

Tolterodine Extended-Release Capsules, 2mg and 4 mg

February 2020

Potassium Citrate Extended-Release Tablets USP 10m Eq and 15 mEq

Paliperidone Extended-Release Tablets, 1.5 mg, 3 mg, 6 mg, and 9 mg

Cortrophin Gel Re-commercialization Update

In April 2020, the Food and Drug Administration (“FDA”) issued a Refusal to File (“RTF”) letter for our Supplemental New Drug Application (“sNDA”) for Cortrophin Gel.

Since this time, our efforts have been focused on the preparation of a complete resubmission of the sNDA.

We immediately retained a prominent regulatory consulting firm to support our efforts and augment the capabilities of our internal Cortrophin development team.

In addition, we restructured the composition of the internal team.

We have performed a comprehensive review of the original sNDA filing and prepared an internal gap assessment.

The resultant remediation activities are currently in-progress and we currently anticipate re-submitting the sNDA in the second quarter of 2021.

In addition, in the third quarter of 2019, we began purchasing materials that are intended to be used commercially in anticipation of FDA approval of Cortrophin Gel and the resultant product launch.

GAAP, we cannot capitalize these pre-launch purchases of materials as inventory prior to FDA approval, and accordingly, they are charged to expense in the period in which they are incurred.

We expect these pre-launch purchases of material to increase significantly in the future as we build raw materials, API and finished goods for the expected launch of this product.

Management Transition

On May 10, 2020, our former President and Chief Executive Officer, Arthur S.

Przybyl, departed the Company.

Our Board of Directors retained an executive search firm to lead the search for a new President and Chief Executive Officer.

In August 2020, we announced that Nikhil Lalwani was named our President and Chief Executive Officer and his employment was effective September 8, 2020, at which time he also joined our Board of Directors.

Refer to our website at www.anipharmaceuticals.com for information on the products, including indications/treatments.

Purified Cortrophin Gel Approval and Launch

Cortrophin Gel is an adrenocorticotropic hormone (“ACTH”), also known as purified corticotropin.

During 2021, we invested in leadership, expertise and infrastructure in the areas of commercialization of rare disease therapies and developed a launch strategy and commercial plan for this product.

In the fourth quarter of 2021 and first quarter of 2022, we hired a significant number of new employees and assembled and trained our rare disease field force.

As a result of the build out of our rare disease team, our expenditures in support of these efforts will materially increase in 2022 as compared to 2021.

Purified Cortrophin Gel became available to our customers in late 2021, and we recognized an immaterial amount of revenues during the year ended December 31, 2021.

On January 24, 2022, we announced the full-scale U.S.

commercial availability and launch of Purified Cortrophin Gel.

Equity Financing

In November 2021, through a public offering, we completed the issuance and sale of 1,500,000 shares of ANI common stock, resulting in net proceeds after issuance costs of $69.7 million.

The proceeds will be used to fund our Purified Cortrophin Gel commercialization efforts, including sales and marketing and consulting expenses related thereto, and for general corporate purposes.

COVID-19 Impact

We continue to closely monitor the impact of the novel coronavirus (“COVID-19”) pandemic on our business and the geographic regions where we operate.

During the three months ended June 30, 2020, per IQVIA/IMS data, total market generic and brand prescriptions in the United States declined when compared to each of the previous calendar quarters during the trailing 12 months.

The decline was in part attributable to the COVID-19 pandemic, including but not limited to negative impacts from “shelter-in-place” and quarantine orders in certain states, restrictions on travel, the prohibition of elective medical procedures, and the related downstream impact of the global economic activity during this period.

The decline in prescriptions due to the COVID-19 pandemic negatively impacted our generic and brand net revenues during the three months ended June 30, 2020.

During the three month periods ending September 30, 2020 and December 31, 2020, IQVIA/IMS data indicates both brand and generic total market prescription volume increased when compared to the three month period ended June 30, 2020, in part due to the easing of COVID-19 related restrictions.

However, total market prescription volume did not increase to pre-pandemic levels during this period.

Per IQVIA/IMS data, total market generic and brand prescriptions continued to be depressed during 2021.

During this period, and most significantly in the first quarter of 2021, our revenues were negatively impacted by the pandemic, as subsequent waves and variants of the virus impacted patient and customer behavior.

IQVIA/IMS data indicates that total market generic and brand prescriptions increased sequentially during each of the second, third, and fourth quarterly periods of 2021 and increased against the comparable 2020 quarterly periods, and prescription levels appear to be nearing or have returned to pre-pandemic levels by the end of 2021.

We have not experienced a significant impact to our manufacturing operations;

however, we have seen minor disruptions to our supply chain from the COVID-19 pandemic during 2020.

Our manufacturing facilities in Baudette, Minnesota and Oakville, Ontario have remained open throughout the pandemic and have operated in accordance with local, state and national safety guidelines.

however, we continued to see disruptions to our supply chain from the COVID-19 pandemic during 2021, including significant lead times for purchases of materials.

manufacturing facilities have remained open throughout the pandemic and have operated in accordance with local, state and national safety guidelines.

The pandemic has not impacted our access to capital and has not significantly impacted our use of funds, including but not limited to capital expenditures, spend on research and development activities and business development opportunities.

We are unable to predict the impact that the COVID-19 pandemic will have on our future financial condition, results of operations and cash flows due to numerous uncertainties.

These uncertainties include the scope, severity and duration of the pandemic, the level of success of continued actions taken to contain the pandemic or mitigate its impact, including the availability of vaccines, and the direct and indirect economic effects of the pandemic and containment measures, among others.

The outbreak of COVID-19 in many countries, including the United States and Canada, has had a significant adverse impact on global economic activity and has contributed to significant volatility and negative pressure in financial markets.

As a result, the COVID-19 pandemic has negatively impacted almost every industry, either directly or indirectly.

Further, the impacts of a potential worsening of global economic conditions and the continued disruptions to, and volatility in, the credit and financial markets, pharmaceutical supply chains, patient access to healthcare as well as other unanticipated consequences remain unknown.

We are unable to predict the impact that the COVID-19 pandemic will continue to have on our future financial condition, results of operations and cash flows due to numerous uncertainties, including the continued duration of the pandemic, the appearance of additional variants of the virus, the level of success of continued actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others.

Impacts to our 2021 results of operations, including to net revenues, operating expenses, interest and other expense, net, and income taxes are described below.

Our 2021 results of operations were impacted by the November 19, 2021 acquisition of Novitium and related activity subsequent to that date.

The acquisition will provide additional revenues and we will incur increased costs, including but not limited to the amortization of intangible assets acquired, other operating costs, and increased interest costs on borrowings used to finance the transaction.

During the period between the acquisition date and December 31, 2021, Novitium operations generated $7.7 million in net revenues.

The following table summarizes our results of operations for the periods indicated:

(in thousands)

4 unchanged sentences

Depreciation and amortization

Cortrophin pre-launch charges

Contingent consideration fair value adjustment

Legal settlement expense

Purified Cortrophin Gel pre-launch charges

Intangible asset impairment charge

Operating (loss)/income

Operating loss

Interest expense, net

Other expense, net

(Loss)/income before benefit for income taxes

Loss before benefit for income taxes

Benefit for income taxes

Net (loss)/income

The following table sets forth, for the periods indicated, items in our consolidated statements of operations as a percentage of net revenues.

4 unchanged sentences

Depreciation and amortization

Cortrophin pre-launch charges

Contingent consideration fair value adjustment

Legal settlement expense

Purified Cortrophin Gel pre-launch charges

Intangible asset impairment charge

Operating (loss)/income

Operating loss

Interest expense, net

Other expense, net

(Loss)/income before benefit for income taxes

Loss before benefit for income taxes

Benefit for income taxes

Net (loss)/income

Results of Operations for the Years Ended December 31, 2021 and 2020

7 unchanged sentences

We derive substantially all of our revenues from sales of generic and branded pharmaceutical products, contract manufacturing, and contract services, which include product development services, laboratory services, and royalties on net sales of certain products.

Many of our branded products face competition from generic products and we expect them to continue to face competition from generic products in the future.

Our generic products face competition from other generic products and we expect them to continue to face competition in the future.

The primary means of competition among generic manufacturers are pricing, contract terms, service levels, and reliability.

Increased competition generally results in decreased average selling prices of generic and brand products over time.

In addition, due to strategic partnerships between wholesalers and pharmacy chains, we have experienced, and expect to continue to experience, increases in net sales to the wholesalers, with corresponding decreases in net sales to the pharmacy chains.

Net revenues for the year ended December 31, 2021 were $216.1 million compared to $208.5 million for the same period in 2020, an increase of $7.7 million, or 3.7%, primarily as a result of the following factors:

● Net revenues for generic pharmaceutical products were $147.3 million during the year ended December 31, 2020, an increase of 14.4% compared to $128.7 million for the same period in 2019.

The primary reasons for the increase are the January 2020 launches of Miglustat, Paliperidone, Penicillamine, Mixed Amphetamine Salts, Tolterodine, Bexarotene and other products acquired from Amerigen, the September 2019 launch of Vancomycin Oral Solution, the January 2020 launch of Potassium Citrate ER, and increased revenues of Candesartan.

These increases were tempered by decreases in revenues of Ezetimibe Simvastatin, Erythromycin Ethylsuccinate (“EES”) , Esterified Estrogen with Methyltestosterone (“EEMT”) , Vancomycin Capsules, and Methazolamide.

During the year ended December 31, 2020, and primarily during the second quarter ended June 30, 2020, the overall generic pharmaceutical product market and our generic revenue results were negatively impacted by the COVID-19 pandemic, including but not limited to effects from “shelter-in-place” orders and the prohibition of elective medical procedures.

These actions resulted in a decline in generic prescriptions during the year ended December 31, 2020, primarily during the second quarter ended June 30, 2020, when compared to the year ended December 31, 2019.

● Net revenues for generic pharmaceutical products were $143.6 million during the year ended December 31, 2021, a decrease of 2.5% compared to $147.3 million for the same period in 2020.

From a product perspective, the net decrease was driven by declines in sales of Vancomycin, Methazolamide, Ery thromycin Ethylsuccinate (“EES”) , Miglustat, Penicillamine, and Tolterodine, and tempered by increased revenues from sales of Flecainide, the second quarter 2021 launch of Nicardipine, and the third quarter 2021 launches of Nebivolol and Tranexamic Acid, and the sales of generic products acquired in the Novitium acquisition from November 19, 2021 through the year ended December 31, 2021 .

The decrease in net generic revenues was principally due to

lower average selling prices among generic products, which was tempered by an increase in volumes of generic products other than those mentioned above.

During the year ended December 31, 2020, the overall market for and sales of our generic products were negatively impacted by the COVID-19 pandemic, as mitigation measures and other related actions suppressed prescription levels during the year.

During the year ended December 31, 2021, generic prescription levels continued to be suppressed when compared to pre-pandemic levels, most significantly during the three months ended March 31, 2021, and the revenues for many of our generic pharmaceutical products continued to be negatively impacted .

Per IQVIA/IMS data, total generic market prescriptions increased sequentially during the second, third, and fourth quarterly periods in 2021 and appear to be nearing pre-pandemic levels.

● Net revenues for branded pharmaceutical products were $47.6 million during the year ended December 31, 2021, a decrease of 0.8% compared to $48.0 million for the same period in 2020.

The primary reasons for the decrease were lower unit sales of Inderal LA, Inderal XL and InnoPran XL, as well as a decrease in sales of

Arimidex and Atacand.

During the year ended December 31, 2020, and primarily during the second quarter ended June 30, 2020, the overall brand pharmaceutical product market and our brand revenue results were negatively impacted by the COVID-19 pandemic, including but not limited to effects from “shelter-in-place” orders and the prohibition of elective medical procedures.

These actions resulted in a decline in brand prescriptions during the year ended December 31, 2020, primarily during the second quarter ended June 30, 2020, when compared to the year ended December 31, 2019.

● Contract manufacturing revenues were $9.2 million during the year ended December 31, 2020, a decrease of 17.2% compared to $11.1 million for the same period in 2019, due to a decreased volume of orders from contract manufacturing customers in the period.

● Royalty and other were $4.0 million during the year ended December 31, 2020, an increase of $1.1 million from $2.9 million for the same period in 2019, primarily due to an increase in product development revenues earned by ANI Canada and an increase in royalty revenues.

From a product perspective, the net decrease was driven by lower unit sales of Inderal XL and Arimidex and decreased units and revenues of Atacand.

These decreases were tempered by the launch of the products acquired in the Sandoz, Inc.

asset acquisition on April 1, 2021 and increased unit sales and revenues of Casodex.

Net brand revenues in 2021 were negatively impacted by a shift in mix towards products with lower average selling prices, tempered by an increase in overall volumes.

During the year ended December 31, 2020, the overall market for, and sales of our brand products were negatively impacted by the COVID-19 pandemic, as mitigation measures and other related actions suppressed prescription levels throughout the year.

These actions resulted in suppressed brand prescriptions during the year ended December 31, 2020.

As of the end of the 2021 fiscal year, brand prescription levels appeared to have returned to pre-pandemic levels.

● Contract manufacturing revenues were $10.0 million during the year ended December 31, 2021, an increase of 8.9% compared to $9.2 million for the same period in 2020, due to an increase in the volume of orders, including the impact of Novitium contract manufacturing orders during the period from November 19, 2021 and December 31, 2021.

● Royalty and other were $15.0 million during the year ended December 31, 2021, an increase of $10.9 million from $4.0 million for the same period in 2020, primarily due to the recognition of the final royalty of $11.2 million under the Kite Pharma, Inc.

license agreement (Yescarta®) pursuant to the Tripartite Agreement in the first quarter 2021.

Cost of Sales (Excluding Depreciation and Amortization)

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Cost of sales does not include depreciation and amortization expense, which is reported as a separate component of operating expenses on our consolidated statements of operations.

For the year ended December 31, 2020, cost of sales increased to $87.2 million from $63.2 million for the same period in 2019, an increase of $24.0 million or 38.0%, primarily as a result of increased volumes during 2020, including a shift in product mix toward generic products, a $4.3 million increase in cost of sales representing the excess of fair value over cost for inventory acquired in the Amerigen acquisition and subsequently sold during the period, a $4.6 million increase related to increased sales of products subject to profit-sharing arrangements, and 2020 inventory reserve charges of $5.6 million related to excess inventory on hand, expired product and discontinued projects.

The increases were partially offset by the non-recurrence of the January 2019 royalty buy out from the Asset Purchase Agreement Amendment with Teva Pharmaceuticals USA, Inc.

and the non-recurrence of the fourth quarter 2019 $4.6 million inventory reserve charge primarily related to the exit from the market of Methylphenidate Extended Release.

Cost of sales, exclusive of the $4.3 million net impact related to excess of fair value over the cost of inventory sold during the period, as a percentage of net revenues increased to 39.7% during the year ended December 31, 2020, from 30.6% during same period in 2019, primarily as a result of the same factors previously discussed.

During the year ended December 31, 2020, we purchased 10% of our inventory from one supplier.

For the year ended December 31, 2021, cost of sales increased to $100.6 million from $87.2 million for the same period in 2020, an increase of $13.5 million or 15.4%.

The increase is primarily due to increased volumes of generic products, including increases related to activity of Novitium subsequent to our acquisition, a $3.2 million increase in costs representing the excess of fair value over cost for inventory acquired in asset acquisitions and a business combination, $1.9 million in a non-recurring royalty settlement, and $1.5 million of increased freight charges during the year ended December 31, 2021.

The increase was tempered by $3.5 million of lower costs related to a current period decrease in sales of products subject to profit sharing arrangements.

During the year ended December 31, 2021, we

incurred $7.5 million in cost of sales representing the excess of fair value over cost for inventory acquired in the Sandoz, Inc.

asset acquisition and Novitium business combination and subsequently sold during the period, compared to $4.3 million during the year ended December 31, 2020, related to the Amerigen asset acquisition .

Cost of sales as a percentage of net revenues, exclusive of the impacts related to excess of fair value over the cost of inventory sold during the period, increased to 43.1% during the year ended December 31, 2021, from 39.7% during the same period in 2020, primarily as a result of increased volumes in a period of declining average selling prices across generic products and a shift in mix towards brand products with lower average selling prices, as well as a $1.9 million non-recurring royalty settlement and a $1.5 million increase in freight expenses.

The negative impacts were significantly tempered by $11.2 million of royalty revenue in the first quarter 2021 with no associated cost of sales.

During the year ended December 31, 2021, no single vendor represented at least 10% of inventory purchases.

In the year ended December 31, 2020, we purchased 10% of our inventory from one supplier.

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Depreciation and amortization

Cortrophin pre-launch charges

Contingent consideration fair value adjustment

Legal settlement expense

Purified Cortrophin Gel pre-launch charges

Intangible asset impairment charge

Total other operating expenses

Other operating expenses consist of research and development costs, selling, general, and administrative expenses, depreciation and amortization, impairment charges, and Cortrophin pre-launch charges.

(1) Not meaningful

Other operating expenses consist of research and development costs, selling, general, and administrative expenses, depreciation and amortization, contingent consideration fair value adjustment, legal settlement expense, Purified Cortrophin Gel pre-launch charges, and intangible asset impairment charges.

For the year ended December 31, 2021, other operating expenses increased to $155.3 million from $137.3 million for the same period in 2020, an increase of $18.0 million, or 13.1%, primarily as a result of the following factors:

● Research and development expenses decreased from $19.8 million to $16.0 million, a decrease of 19.2%, primarily due to a decrease in expense related to the Cortrophin re-commercialization project, the non-recurrence of the $2.3 million of expense related to in-process research and development acquired from Coeptis during the year ended December 31, 2019 and the non-recurrence of 2019 expenses related to Bretylium Tosylate and Methylphenidate Extended Release projects.

These decreases were tempered by the $3.8 million in-process research and development expense from the Amerigen acquisition in January 2020.

● Selling, general, and administrative expenses increased from $55.8 million to $65.0 million, an increase of 16.4%, primarily due to $6.5 million of termination benefit expenses related to the departure of our former President and CEO, comprised of $3.4 million of stock-based compensation expense and $3.1 million of expense for salary continuation, bonus, and fringe benefits, increased quality assurance and outside testing expenses, and increased headcount.

We also incurred $0.8 million in recruitment and related legal charges associated with our CEO search.

The increases were tempered by a decrease in legal fees.

● Depreciation and amortization expense was $44.6 million for the years ended December 31, 2020 and 2019.

In 2020, the non-recurrence of amortization expense related to the January 2019 royalty buy out decreased amortization expense, and this decrease was offset by the amortization of the ANDAs and marketing and distribution rights acquired in January 2020 from Amerigen and the ANDA acquired in July 2020.

● As described in Note 13, Cortrophin Pre-Launch Charges , in the notes to the consolidated financial statements in Part II, Item 8.

of this Annual Report on Form 10-K, we recognized Cortrophin pre-launch charges of $11.3 million in the year ended December 31, 2020.

We recognized Cortrophin pre-launch charges of $6.7 million in the year ended December 31, 2019.

We currently expect to incur total expense related to this activity of approximately $15.0-$20.0 million for 2021.

● Research and development expenses decreased from $16.0 million to $11.4 million, a decrease of 28.9%, primarily due to the non-recurrence of the $3.8 million in-process research and development expense from the Amerigen Pharmaceuticals, Ltd.

acquisition in the first quarter 2020.

The decrease was tempered by increases related to the Novitium activities subsequent to our acquisition.

● Selling, general, and administrative expenses increased from $65.0 million to $84.3 million, an increase of 29.7%, primarily due to the $9.4 million of transaction expenses related to the Novitium acquisition and $14.0 million in pre-launch sales and marketing expenses related to Cortrophin commercialization activities incurred in the year ended December 31, 2021.

In 2020, there were no comparable costs.

Increased costs were also incurred related to employee compensation, legal, insurance, and other professional fees, in part related to Novitium activities subsequent to the acquisition.

These increases were offset by the non-recurrence of $6.5 million of termination benefit expenses related to the departure of our former President and CEO and non-recurrence of other recruitment and related legal charges associated with our CEO search in the second quarter of 2020.

● Depreciation and amortization expense was $47.3 million for the year ended December 31, 2021, compared to $44.6 million for the year ended December 31, 2020.

The increase is primarily due to the amortization of intangible assets acquired in the Novitium acquisition.

● As described in Note 8, Fair Value Disclosures , in the notes to the consolidated financial statements included in Part II, Item 8.

of this Annual Report on Form 10-K, we recognized a contingent consideration fair value adjustment of $0.5 million in the year ended December 31, 2021.

No contingent consideration fair value adjustment was recognized in the year ended December 31, 2020.

● As described in Note 12, Commitments and Contingencies , in the notes to the consolidated financial statements included in Part II, Item 8.

of this Annual Report on Form 10-K, we recognized legal settlement expense of $8.8 million in the year ended December 31, 2021, principally related to settlement of the Arbor matter.

No legal settlement expenses were recognized in the year ended December 31, 2020.

● As described in Note 13, Purified Cortrophin Gel Pre-Launch Charges , in the notes to the consolidated financial statements in Part II, Item 8.

of this Annual Report on Form 10-K, we recognized Cortrophin pre-launch charges related to purchases of materials of $0.8 million in the year ended December 31, 2021.

We recognized Cortrophin pre-launch charges related to purchases of materials of $11.3 million in the year ended December 31, 2020.

The decrease is due to sufficient levels of materials acquired in prior periods.

● We recognized an impairment of $2.4 million in the year ended December 31, 2021, in relation to an ANDA asset.

We recognized an impairment charge of $0.4 million in relation to a marketing and distribution right intangible asset during the year ended December 31, 2020.

We recognized an impairment charge of $75 thousand in relation to our Ranitidine product right intangible asset during the year ended December 31, 2019.

Other Expense, net

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Total other expense, net

For the year ended December 31, 2020, we recognized other expense, net of $9.9 million versus other expense, net of $13.2 million for the same period in 2019, a decrease of $3.2 million.

Interest expense, net for 2020 consists primarily of interest expense on our Term Loan, DDTL, and Revolver.

Interest expense, net for 2019 consists primarily of interest expense on our convertible debt, including amortization of related debt discount, and interest expense on borrowings under our Term Loan and DDTL.

For the year ended December 31, 2021, we recognized other expense, net of $16.3 million versus other expense, net of $9.9 million for the same period in 2020, an increase of $6.3 million.

Interest expense, net for 2021 and 2020 consists primarily of interest expense on our Term Loan, DDTL, and Revolver under our Prior Credit Facility, and interest expense on our new Term Facility subsequent to the termination of our Prior Credit Facility and entry into new Credit Facility on November 19, 2021.

The increase in interest expense in the year ended December 31, 2021 is due to $24.0 million of additional borrowings under our Revolver of the Prior Credit Facility in April 2021 and the increased borrowings and borrowing rate on our new $300.0 million Term Facility draw on November 19, 2021.

For the year ended December 31, 2021, other expense, net primarily consisted of $4.2 million ticking fee expense related to our Credit Facility that was syndicated on May 24, 2021, a $1.5 million loss on the extinguishment of debt related to our Prior Credit Facility, and $1.8 million in net gains on the sale of ANDAs.

None of these items occurred in the comparable period of 2020.

For the year ended December 31, 2021 and 2020, there was $0.1 million of interest capitalized into construction in progress.

The decrease in expense in 2020 is due primarily to the non-recurrence of amortization of the debt discount related to the convertible debt, which matured and was repaid in November 2019.

The decrease was tempered by increased borrowing rates on the Term Loan and DDTL and new borrowings under the Revolver.

Benefit for Income Taxes

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For the year ended December 31, 2021, we recognized an income tax benefit of $13.5 million, an effective benefit rate of 24.0% of consolidated pre-tax losses reported in the period.

Our effective tax rate for 2021 was impacted by changes in state tax rates due to our increased presence in certain states, certain non-deductible expenses, and the impact of current period stock-based compensation, among other items.

For the year ended December 31, 2020, we recognized an income tax benefit of $3.4 million, an effective benefit rate of 13.1% of consolidated pre-tax losses reported in the period.

Our effective tax rate for 2020 was impacted by changes in state tax rates due to our changing presence in certain states, certain non-deductible expenses, and the impact of current period stock-based compensation, among other items.

For the year ended December 31, 2019, we recognized an income tax benefit of $2.9 million, an effective benefit rate of 93.0% of consolidated pre-tax income reported in the period.

Our effective tax rate for 2019 was impacted by the use of the research and experimental tax credit in the U.S., changes in state tax rates due to our changing presence in certain states, the release of ANI Canada’s net valuation allowance, application of our newly adopted transfer pricing policy to 2019 and to 2018, and the impact of current period awards of stock-based compensation, stock option exercises, disqualifying dispositions of incentive stock options, among other items.

Liquidity and Capital Resources

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On December 31, 2020, we had $7.9 million in unrestricted cash and cash equivalents.

We generated $15.3 million of cash from operations in the year ended December 31, 2020.

During 2021, we began investing in leadership, expertise, and infrastructure in the areas of commercialization of rare disease therapies and have developed a commercial plan for our Cortrophin Gel product.

We anticipate that our expenditures in support of these efforts will materially increase in 2022 as we increase headcount and incur other costs associated with the launch.

We financed the acquisition of Novitium in part with borrowings under the Credit Facility described below under “Sources and Uses of Cash – Debt Financing,” and by a $25.0 million PIPE Investment by Ampersand 2020 Limited Partnership (“Ampersand”).

In January 2020, we acquired the U.S.

portfolio of 23 generic products and certain commercial and development inventory and materials from Amerigen Pharmaceuticals, Ltd., for which we have used $57.4 million in cash and could make future payments of up to $25.0 million in contingent profit share payments over

the next three years.

The contingent payments are earned if annual gross profit exceeds a minimum threshold and are earned on a subset of the acquired products.

No payment was due to Amerigen for the fiscal year ended December 31, 2020.

At the time of the acquisition, the acquired portfolio included 10 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.

No payment was due to Amerigen for the fiscal years ended December 31, 2021 or 2020.

The transaction was funded from cash on hand and $15.0 million of borrowings from our Revolver, of which $7.5 million was repaid in the second quarter 2020.

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The transaction was funded using cash on hand.

During 2020, we incurred expenses of $11.3 million related to purchases of Cortrophin pre-launch inventory and expect to continue to incur related costs in 2021.

We generated $45.6 million of cash from operations in the year ended December 31, 2019.

In June 2019, we acquired from Coeptis Pharmaceuticals, Inc.

seven development stage generic products, as well as active pharmaceutical ingredient API and reference-listed drug inventory related to certain of the products for a payment of $2.3 million using cash on hand.

In addition, we could make up to $12.0 million in payments for certain development and commercial milestones.

In March 2019, we purchased from Teva Pharmaceutical Industries Ltd.

a basket of ANDAs for 35 previously-marketed generic drug products for $2.5 million using cash on hand.

In January 2019, we entered into the Asset Purchase Agreement Amendment, under which all royalty obligations 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 $16.0 million using cash on hand.

During 2020, we incurred expenses of $11.3 million related to purchases of Cortrophin pre-launch inventory.

We are focused on expanding our business and product pipeline through collaborations, and also through acquisitions of products and companies.

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Our working capital ratio, defined as total current assets divided by total current liabilities, is 3.7 as of December 31, 2021.

We believe that our financial resources, consisting of current working capital, anticipated future operating cash flows, and $67.5 million of available borrowings under our Revolver as of December 31, 2020, will be sufficient to enable us to meet our working capital requirements and debt obligations for at least the next 12 months.

We believe that our financial resources, consisting of current working capital, anticipated future operating revenue and corresponding collections from customers, and our Credit Facility, under which $40.0 million remains available for borrowing as of December 31, 2021, will be sufficient to enable us to meet our working capital requirements and debt obligations for at least the next 12 months.

If our assumptions underlying estimated revenue and expenses are wrong, or if our cash requirements change materially as a result of shifts in our business or strategy, we could require additional financing.

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Debt Financing

Our amended and restated Senior Secured Credit Facility for up to $265.2 million consists of a $72.2 million Term Loan, a $118.0 million DDTL, and a $75.0 million Revolver.

The Company had previously fully drawn on the Term Loan and DDTL, and i n March 2020, drew $15.0 million under the Revolver, of which $7.5 million was repaid during the year ended December 31, 2020.

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

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

We may at any time repay borrowings under the term loans, including the initial Term Loan and DDTL, and the Revolver without any premium or penalty, and we must repay all borrowings thereunder by December 27, 2023.

We may use the proceeds of the Revolver for working capital and other general corporate purposes.

Amounts drawn under the Revolver, 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 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.

We must comply with various customary financial and non-financial covenants under the Credit Facility.

The primary financial covenants under the Credit Facility consist of a maximum total leverage ratio, which, as of December 31, 2020, is 3.25 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 Agreement limit, subject to various exceptions, the Company’s ability to incur future indebtedness, to place liens on assets, to pay dividends or make other distributions on the Company’s capital stock, to repurchase the Company’s capital stock, to conduct acquisitions, to alter its capital structure and to dispose of assets.

On November 19, 2021, the Company, as borrower, entered into a credit agreement (the “Credit Agreement”) with Truist Bank and other lenders, which provides for credit facilities consisting of (i) a senior secured term loan facility in an aggregate principal amount of $300.0 million (the “Term Facility”) and (ii) a senior secured revolving credit facility in an aggregate commitment amount of $40.0 million, which may be used for revolving credit loans, swingline loans and letters of credit (the “Revolving Facility,” and together with the Term Facility, the “Credit Facility”).

The Credit Facility is secured by substantially all our assets and the assets of our domestic subsidiaries.

The Term Facility proceeds were used to finance the cash portion of the consideration under the merger agreement between ANI and Novitium, repay our existing credit facility, and pay fees, costs and expenses incurred in connection with the merger.

Proceeds of the Revolving Facility are expected to be used, subject to certain limitations, for working capital and other general corporate purposes.

The Term Facility matures in November 2027 and the Revolving Facility in November 2026.

Each permits both base rate borrowings (“ABR Loans”) and Eurodollar rate borrowings (“Eurodollar Loans”), plus a spread of (a) 5.00% above the base rate in the case of ABR Loans under the Term Facility and 6.00% above the LIBOR Rate (as defined in the Credit Agreement, which includes a floor of 0.75%) in the case of loans under the Term Facility and (b) 3.75% above the base rate in the case of ABR Loans under the Revolving Facility and 4.75% above the LIBOR Rate (as defined in the Credit Facility) in the case of loans under the Revolving Facility.

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

The Term Facility includes a repayment schedule, pursuant to which $750 thousand of the loan will be paid in quarterly installments during the 12 months ended December 31, 2022.

As of December 31, 2021, $3.0 million of principal of the loan was recorded as current borrowings in the consolidated balance sheet.

As of December 31, 2021, we had not drawn on the Revolving Facility and $40.0 million remained available for borrowing.

Equity Financing

Concurrently with the execution of the Merger Agreement, on March 8, 2021, we entered into the Investment Agreement pursuant to which, on November 19, 2021, we issued and sold to the PIPE Investor, and the PIPE Investor purchased, 25,000 shares of our Series A Convertible Preferred Stock (the “PIPE Shares”), for a purchase price of $1,000 per share and an aggregate purchase price of $25 million, in a private placement issued in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, and/or Regulation D promulgated thereunder.

In November 2021, through a public offering, we completed the issuance and sale of 1,500,000 shares of ANI common stock, resulting in net proceeds after issuance costs of $69.7 million.

The proceeds will be used to fund our Purified Cortrophin Gel commercialization efforts, including sales and marketing and consulting expenses related thereto, and for general corporate purposes.

Customer Payments

In addition to the financings in prior years, payments from customers are a significant source of cash in 2021, 2020, and 2019 and were our primary source of cash in 2021 and 2020.

Our primary cash requirements are to fund operations, including research and development programs and collaborations, to support general and administrative activities, to purchase equipment and machinery to expand our manufacturing capabilities as our product lines grow, and to expand our business and product pipeline through acquisitions of products and companies.

Our primary cash requirements are to fund operations, including Purified Cortrophin Gel commercialization efforts, research and development programs and collaborations, to support general and administrative activities, to purchase equipment and machinery to expand our manufacturing capabilities as our product lines grow, and to expand our business and product pipeline through acquisitions of products and companies.

We are continually evaluating potential asset acquisitions and business combinations.

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● business and product acquisitions.

On November 19, 2021, we completed our previously announced acquisition of Novitium pursuant to the terms of the Merger Agreement, using $84.5 million in cash, net of $12.1 million cash acquired, 2,466,654 restricted shares of ANI common stock, and up to $46.5 million in additional contingent consideration.

As of the acquisition date, the contingent consideration had a fair value of $31.0 million.

In connection with entry into the Credit Facility, on November 19, 2021, we terminated our existing Amended and Restated Credit Agreement, dated as of December 27, 2018 (the “Prior Credit Agreement”), among the Company, as borrower, and Citizens Bank with other lenders.

In connection with the termination of the Prior Credit Agreement, on November 19, 2021, we used borrowings under the Credit Facility to prepay the full amount of indebtedness under the Prior Credit Agreement, and to pay related accrued and unpaid interest, legal fees, and expenses.

We made a reacquisition payment of $200.1 million, representing the remaining principal balance on the debt of $200.1 million plus certain legal fees.

In the second quarter 2021, we drew $24.0 million under the Revolver of our Prior Credit Agreement, of which $20.7 million was used to fund the acquisition of three NDAs and an ANDA and certain related inventories from Sandoz Inc.

In the third quarter 2021, we utilized $8.4 million of cash on hand to settle litigation with Arbor.

In the first quarter of 2020, we acquired the U.S.

The contingent payments are earned if annual gross profit exceeds a minimum threshold and are earned on a subset of the acquired products.

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In 2020, we had $6.1 million of capital expenditures.

In the first quarter of 2019, we entered into the Asset Purchase Agreement Amendment, under which all royalty obligations 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 $16.0 million using cash on hand.

Also in the first quarter of 2019, we purchased from Teva Pharmaceutical Industries Ltd.

a basket of ANDAs for 35 previously-marketed generic drug products for $2.5 million in cash using cash on hand.

In the second quarter or 2019, we acquired from Coeptis Pharmaceuticals, Inc.

In addition, we could pay up to $12.0 million in payments for certain development and commercial milestones.

In 2019, we had $6.6 million of capital expenditures.

Discussion of Cash Flows

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Net cash provided by operating activities was $3.3 million for the year ended December 31, 2021, compared to $15.3 million provided by operating activities during the same period in 2020, a decrease of $11.9 million.

The decrease was due to changes in working capital and the net loss during the year ended December 31, 2020, including payments made for Cortrophin pre-launch materials and increases to trade accounts receivable.

The decrease was due to net changes in working capital and the net loss, including the incurrence of significant cash outflows related to $9.4 million of transaction expenses from the Novitium acquisition, cash outflows of $10.5 million associated with sales and marketing expenses related to Purified Cortrophin Gel launch preparation, payment for litigation settlement of $8.4 million, and payments of income taxes of $10.4 million during the year ended December 31, 2021, as compared to payments of income taxes of $5.0 million during the year ended December 31, 2020.

Net Cash Used in Investing Activities

Net cash used in investing activities for the year ended December 31, 2020 was $68.3 million, principally due to the January 2020 acquisition of 23 generic products and inventory and materials from Amerigen Pharmaceuticals, Ltd.

for $57.4 million, cash payments for the July 2020 acquisition of an ANDA and certain inventories of $4.0 million, and $6.1 million of capital expenditures during the period.

Net Cash (Used In) / Provided by Financing Activities

Net cash used in financing activities was $1.4 million for the year ended December 31, 2020, principally due to net borrowings of $7.5 million on the Revolver and $0.6 million of proceeds from stock option exercises, offset by $8.0 million of maturity payments on the Term Loan and DDTL and $1.5 million of treasury stock purchased related to restricted stock vests.

Net cash used in investing activities for the year ended December 31, 2021 was $105.5 million, principally due to the acquisition of Novitium for $84.5 million in cash consideration, net of $12.1 million in cash acquired, the acquisition of three NDAs and an ANDA from Sandoz, Inc.

for $20.7 million in consideration, and $2.6 million of capital expenditures during the period.

Net Cash Provided by / (Used In) Financing Activities

Net cash provided by financing activities was $194.6 million for the year ended December 31, 2021 compared to $1.4 million in cash used in financing activities for the year ended December 31, 2021, principally due to net proceeds of $286.5 million related to borrowings under our Credit Facility, $69.7 million related to the issuance of common shares via a public offering, $24.9 million related to the issuance of PIPE Shares, and $24.0 million in borrowings under the Revolver of our Prior Credit Agreement.

These increases were tempered by the $200.1 million repayment related to all outstanding borrowings under our Prior Credit Agreement.

Contractual Obligations

The following table summarizes our long-term contractual obligations and commitments as of December 31, 2020.

Payments Due by Period

(in thousands)

Long-term debt obligations (1)

Interest on long-term debt obligations (2)

Operating lease obligations

Purchase obligations (3)

(1) Represents our $65.9 million Term Loan due December 27, 2023, our $113.6 million Delayed Draw Term Loan due December 2023, and our $7.5 million Revolver due December 2023.

(Note 3, Indebtedness, in the notes to the consolidated financial statements in Part II, Item 8.

of this Annual Report on Form 10-K.)

(2) Represents interest due on our Term Loan, Delayed Draw Term Loan and Revolver and commitment fee due on our Revolver.

Interest for the Term Loan and Delayed Draw Term Loan is calculated based on our payment schedule as prescribed in the Senior Secured Credit Facility (the “Credit Facility”) and using an estimated interest rate of 4.235%, which is the estimated interest rate on the Term Loan and Delayed Draw Term Loan as fixed by our interest rate swap.

Interest on the Revolver is based on the recent 1-month LIBOR rate plus applicable spread per the Credit Facility, which is based on our leverage ratio.

The commitment fee is estimated using the applicable rate per the Credit Facility, which is based on our leverage ratio.

(3) Purchase obligations primarily includes contractual obligations for inventory/material purchase minimums and service agreements.

We believe our available cash and cash equivalents along with our ability to generate operating cash flow and continued access to debt markets are sufficient to fund existing and planned cash requirements.

Our contractual

obligations and commitments as of December 31, 2021 are comprised of principal payments on debt, interest payments on debt, operating leases, purchase obligations, dividends, and contingent consideration.

Our largest contractual obligation relates to our principal payments on our interest payments on our debt.

As of December 31, 2021, the principal amount of our Term Facility was $300.0 million.

The interest rate on our Term Facility is currently 1-month LIBOR plus 6.00%, subject to a 0.75% floor.

The interest rate under the Term Facility as of December 31, 2021 is 6.75%.

See Note 3, Indebtedness, in the notes to the consolidated financial statements in Part II, Item 8.

of this Annual Report on Form 10-K for additional information and timing on our principal payments on debt.

We also have an interest rate swap used to manage changes in LIBOR-based interest rates underlying a portion of the borrowing under the Term Facility.

Under the swap agreement, ANI pays the counterparty a fixed rate of 2.26% and receives variable 1-month LIBOR, subject to a 0.75% floor, on the outstanding notional value.

As of December 31, 2021, the notional value of the interest rate swap was $168.6 million.

See Note 4, Derivative Financial Instruments and Hedging Activity, in the notes to the consolidated financial statements in Part II, Item 8.

of this Annual Report on Form 10-K for additional information.

Our operating leases are for facilities and office equipment.

As leases expire, we do not anticipate difficulty in negotiating renewals or finding other satisfactory space if the premise becomes unavailable.

See Note 12, Commitments and Contingencies, in the notes to the consolidated financial statements in Part II, Item 8.

of this Annual Report on Form 10-K for additional discussion and timing of payments related to these operating lease obligations.

Purchase obligations primarily includes contractual obligation for inventory/material purchase minimums and service agreements.

We have supply agreements with three vendors that include purchase minimums.

Pursuant to these agreements, we will be required to purchase a total of $12.6 million of API from these three vendors during the year ended December 31, 2022.

Most of our other purchase obligations are related to purchases of information technology services, marketing arrangements or other service contracts.

Our convertible preferred stock (PIPE Shares) also accrue dividends at 6.50% per year on a cumulative basis, payable in cash or in-kind.

Dividends are payable until the preferred stock is converted, either at the option of the PIPE investor, at any time, or the option of ANI, beginning two years after the November 19, 2021 issuance provided ANI’s stock price reaches a certain level.

See Note 9, Mezzanine and Stockholders’ Equity, in the notes to the consolidated financial statements in Part II, Item 8.

of this Annual Report on Form 10-K for additional discussion of dividends.

Consideration of the Novitium acquisition includes $46.5 million in contingent future earn-out payments.

Payments of $25.0 million would be due if gross profit and regulatory milestones are achieved by November 30, 2023, and up to $21.5 million of payments may be made for up to ten years based on a percentage of net profits on products launched in the future.

See Note 2, Business Combination, in the notes to the consolidated financial statements in Part II, Item 8.

of this Annual Report on Form 10-K for additional information on our contingent consideration.

We expect to continue to incur significant expenditures in support of our commercial launch of Cortrophin, including costs related to service contracts and increased headcount.

Critical Accounting Estimates

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GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period.

In our consolidated financial statements, estimates are used for, but not limited to, stock-based compensation, allowance for credit losses, accruals for chargebacks, government rebates, returns, and other allowances, allowance for inventory obsolescence, valuation of financial instruments and intangible assets, accruals for contingent liabilities, fair value of long-lived assets, deferred taxes and valuation allowance, and the depreciable lives of long-lived assets.

The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of the company’s financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the

need to make estimates of matters that are inherently uncertain.

Based on this definition, we have identified the critical accounting policies and judgments addressed below.

We also have other key accounting policies, which involve the use of estimates, judgments, and assumptions that are significant to understanding our results.

Our significant accounting policies are discussed in Note 1.

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We estimate variable consideration after considering applicable information that is reasonably available.

We generally do not have incremental costs to obtain or fulfill 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’ payment terms are generally fewer than 100 days.

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.

Our revenue recognition accounting methodologies contain uncertainties because they require management to make assumptions and to apply judgment to estimate the amount of discounts, rebates, promotional adjustments, price adjustments, returns, chargebacks, and other potential adjustments, which are accounted for as reductions to revenue.

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Revenue from Sales of Generic and Branded Pharmaceutical Products

Product sales consist of sales of our generic and brand pharmaceutical products.

Product sales consists of sales of our generic and brand pharmaceutical products.

Our sole performance obligation in our contracts is to provide pharmaceutical products to customers.

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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 agreements.

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

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.

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Our estimates for Medicare rebates are based on historical experience.

While such experience has allowed for reasonable estimation in the past,

history may not always be an accurate indicator of future rebate experience, and trends in Medicaid and Medicare enrollment and which products are covered by Medicaid and Medicare could change.

While such experience has allowed for reasonable estimation in the past, history may not always be an accurate indicator of future rebate experience, and trends in Medicaid and Medicare enrollment and which products are covered by Medicaid and Medicare could change.

If actual results were not consistent with our estimates, we could be exposed to losses or gains that could be material, as changes to government rebate estimates could cause an increase or decrease in revenue recognized during the year and decrease or increase the government rebate reserve.

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

recognized $9.2 million and $11.1 million of revenue related to sales of contract manufactured products in 2020 and 2019, respectively.

We recognized $10.0 million and $9.2 million of revenue related to sales of contract manufactured products in 2021 and 2020, respectively.

Royalties from Licensing Agreements

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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.

From time to time, we enter into supply and distribution agreements with contract manufacturing customers, under which we license to the contract manufacturing customer the right to sell our products, and we are entitled to a royalty on sales made by the contract manufacturing customer under these arrangements.

Therefore, we recognize the revenue associated with sales of the underlying products as royalties.

Because these royalties are sales-based, we recognize the revenue when the underlying sales occur, based on sales and gross profit information received from the contract manufacturing customers.

Pursuant to a 2012 Tripartite Agreement (the “Tripartite Agreement”) between the Company, The Regents of the University of California (“The Regents”), and Cabaret Biotech Ltd., an Israeli corporation (“Cabaret”) (as assignee of Dr.

Zelig Eshhar’s rights under the Tripartite Agreement), and subsequent amendments thereto and assignments thereof, we are entitled to receive a percentage of the milestone and sales royalty payments paid to Cabaret by Kite Pharma, Inc.

Zelig Eshhar’s rights under the Tripartite Agreement), and subsequent amendments thereto and assignments thereof, we were entitled to receive a percentage of the milestone and sales royalty payments paid to Cabaret by Kite Pharma, Inc.

(“Kite”), a subsidiary of Gilead Sciences, Inc., under a license agreement.

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Eshhar and Cabaret the patent rights covered by the Tripartite Agreement and agreed to make certain payments to Cabaret based on, among other things, Kite’s sales of Yescarta®.

Under the Tripartite Agreement, portions of these payments are to be distributed to The Regents and to us.

We record royalty income related to Yescarta® on an accrual basis utilizing our best estimate of royalties earned based upon information available in the public domain, our understanding of the various agreements governing the royalty, and other information received from time to time from the relevant parties.

Generally, cash is received directly from Cabaret once a year.

The agreements governing this royalty are subject to multiple litigations in multiple jurisdictions, including litigation between Cabaret and Kite, and separately, the Company and Cabaret.

We recently became aware that the litigation between Cabaret and Kite was dismissed and are working with our counsel to determine the potential impact the resolution of that matter may have on our rights under the agreements.

In addition, the Israeli Tax Authority has taken the position that any payments from Cabaret to us are subject to mandatory withholding tax.

The Company and its tax counsel have disputed this position and are actively seeking to resolve the issue.

The ultimate outcome of these matters, either individually or in the aggregate, may impact the amount of cash due to us, and may result in the termination of future payments or further claims that royalties received by us in the past be repaid.

Under the Tripartite Agreement, portions of these payments were to be distributed to The Regents and to us.

Historically, we recorded royalty income related to Yescarta® on an accrual basis utilizing our best estimate of royalties earned based upon information available in the public domain, our understanding of the various agreements governing the royalty, and other information received from time to time from the relevant parties.

Generally, cash was

received directly from Cabaret once a year.

The agreements governing this royalty were subject to multiple actions in multiple jurisdictions, including litigation between Cabaret and Kite, and separately, ANI and Cabaret.

In the first quarter of 2021, we became aware that the litigation between Cabaret and Kite was dismissed.

In April 2021, Cabaret and the Company settled all amounts due for amounts actually received by Cabaret or Eshhar for the licensing or use of the patent rights governed by the Kite license agreement.

As a result, we recognized $11.2 million as royalties from licensing agreements in our net revenues during the three month period ended March 31, 2021.

In addition, we agreed to reimburse Cabaret $0.4 million, which has been recorded as other expense, net in our consolidated statement of operations, related to certain legal expenditures incurred.

We received final payment from Cabaret in May 2021.

Based upon the events that led to the dismissal of the litigation between Cabaret and Kite, the Company does not expect to receive any future royalty income related to the Kite license agreement.

In conjunction with payment of amounts due to us, all outstanding litigation between the Company and Cabaret were dismissed.

Product Development Services Revenue

We provide product development services to customers, which are performed over time.

These services primarily relate to the technical transfer of products to our facility in Oakville, Ontario.

Technology transfer refers to the process required to move the manufacture of a product to a new manufacturing site and may include performance obligations such as formulation development, production of small-scale batches, process development, and analytical method development and validation.

The duration of these technical transfer projects is generally 18 months to three years.

Deposits received from these customers are recorded as deferred revenue until revenue is earned and recognized.

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.

We recognize revenue on a proportional basis, which results in contract assets on our balance sheet.

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of this Annual Report on Form 10-K, our definite-lived intangible assets have a carrying value of $247.2 million as of December 31, 2021.

These assets include ANDAs, NDAs and product rights, marketing and distribution rights, and a non-compete agreement.

These assets include ANDAs, NDAs and product rights, marketing and distribution rights, customer relationships, and a non-compete agreement.

These intangible assets were originally recorded at fair value for business combinations and at relative fair value based on the purchase price for asset acquisitions and are stated net of accumulated amortization.

The ANDAs, NDAs and product rights, marketing and distribution rights, and non-compete agreement are amortized over their remaining estimated useful lives, ranging from seven to 10 years, generally based on the straight-line method.

As part of the Novitium acquisition on November 19, 2021, we acquired definite-lived intangible assets with a fair value of $92.3 million.

The ANDAs, NDAs and product rights, marketing and distribution rights, customer relationships, and non-compete agreement are amortized over their remaining estimated useful lives, ranging from seven to 10 years, generally based on the straight-line method unless a pattern reflecting consumption of their economic benefits is readily available.

The estimated useful lives directly impact the amount of amortization expense recorded for these assets on a quarterly and annual basis.

In addition, we test for impairment of definite-lived intangible assets when events or circumstances indicate that the carrying value of the assets may not be recoverable.

We test for impairment of definite-lived intangible assets when events or circumstances indicate that the carrying value of the assets may not be recoverable.

Judgment is used in determining when these events and circumstances arise.

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If the fair value of an intangible asset is determined to be lower than its carrying value, we could be exposed to an impairment charge that could be material.

In March 2018, we entered into an agreement with Appco Pharma, LLC (“Appco”), in which a potential generic product, Ranitidine, was to be developed and marketed.

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

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

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

In September 2019, the FDA issued a public statement that some ranitidine medicines contain a nitrosamine impurity called N-nitrosdimethylamine (“NDMA”) at low levels.

NDMA is classified as a probable human carcinogen (a substance that could cause cancer) based on results from laboratory tests and the cause of the presence of this impurity in the ranitidine products is not yet fully understood at this time.

During the 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.

We elected to exit the market for Ranitidine and determined that the carrying value of the asset has been impaired.

During the fourth quarter 2019, we recognized a full impairment of the remaining $75 thousand carrying value of the asset.

In April 2019, we entered into an agreement with Pharmaceutics International, Inc.

(“PII”) and BAS ANDA LLC (“BAS”), under which a previously-commercialized product would 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 was capitalized as an intangible asset.

During the fourth quarter 2020, we recognized a full impairment of the remaining $0.4 million carrying value of the asset.

No events or circumstances arose in 2020 that indicated that the carrying value of any of our other definite-lived intangible assets may not be recoverable.

Our indefinite-lived intangible assets other than goodwill have a carrying value of $46.9 million as of December 31, 2021.

These assets include in-process research and development projects (“IPR&D”) acquired in the Novitium acquisition.

When an IPR&D project is completed (generally upon receipt of regulatory approval), the asset is then accounted for as a definite-lived intangible asset.

We test for impairment of indefinite-lived intangible assets at least annually, as of October 31, and whenever events or changes in circumstances indicate that the carrying amount of the asset might not be recoverable.

Judgment is used in determining when these events and circumstances arise.

If we determine that the carrying value of the assets may not be

recoverable, judgment and estimates are used to assess the fair value of the assets and to determine the amount of any impairment loss.

If the fair value of an intangible asset is determined to be lower than its carrying value, we could be exposed to an impairment charge that could be material.

During the fourth quarter, 2021, we recognized a full impairment of a definite-lived ANDA asset with a remaining carrying value of $2.4 million.

During the fourth quarter 2020, we recognized a full impairment of the remaining $0.4 million carrying value of a definite-lived marketing and distribution right asset.

As discussed in Note 1.

Description of Business and Summary of Significant Accounting Policies, in the notes to the consolidated financial statements in Part II, Item 8.

of this Annual Report on Form 10-K, our goodwill balance relates to our 2013 merger with BioSante Pharmaceuticals, Inc.

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.

of this Annual Report on Form 10-K, our goodwill balance relates to our 2013 merger with BioSante Pharmaceuticals, Inc., the acquisition of WellSpring, and the acquisition of Novitium 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.

As a result, the amount of goodwill is directly impacted by the estimates of the fair values of the assets acquired and liabilities assumed.

In addition, goodwill is reviewed annually, as of October 31, and whenever events or changes in circumstances indicate that the carrying amount of the goodwill might not be recoverable.

Goodwill is tested 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.

Judgment is used in determining when these events and circumstances arise.

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The carrying value of goodwill at December 31, 2021 was $27.9 million.

As part of the Novitium acquisition on November 19, 2021, we acquired goodwill of $24.3 million.

We believe it is unlikely that there will be a material change in the future estimates or assumptions used to test for impairment losses on goodwill.

However, if actual

results are not consistent with our estimates or assumptions, we could be exposed to an impairment charge that could be material.

However, if actual results are not consistent with our estimates or assumptions, we could be exposed to an impairment charge that could be material.

Contingent Consideration

The fair value of our contingent consideration was $31.0 million at December 31, 2021.

The fair value of contingent consideration is remeasured to the estimated fair value each reporting period with the change recognized as an operating expense in our consolidated statements of operations.

Changes in fair value can result from changes in assumptions such as discount rates, probabilities or estimates of revenue and profits, and probability of achieving regulatory milestones, as well as the passage of time.

These changes resulted in a charge of $0.5 million during the year ended December 31, 2021.

Stock-Based Compensation

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We recognize the estimated fair value of stock-based awards and classify the expense where the underlying salaries are classified.

On September 8, 2020, we granted stock options to our Chief Executive Officer, through an inducement grant outside of our 2008 Plan to induce him to accept employment with us (the “Inducement Grant”).

The grant was made pursuant to inducement grants outside of our shareholder approved equity plan as permitted under the Nasdaq Stock Market listing rules.

From time to time, we may grant stock options to employees through an inducement grant outside of our 2008 Plan to induce prospective employees to accept employment with us (the “Inducement Grants”).

The options are granted at an exercise price equal to the fair market value of a share of our common stock on the respective grant date and are generally exercisable in four equal annual installments beginning on the first anniversary of the respective grant date.

The grants are made pursuant to inducement grants outside of our stockholder approved equity plan as permitted under the Nasdaq Stock Market listing rules.

The following table summarizes stock-based compensation expense incurred under the 2008 Plan, Inducement Grant, and 2016 Employee Stock Purchase Plan and included in our consolidated statements of operations:

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Changes in estimates could affect compensation expense within individual periods.

If there were to be a 10% change in our stock-based compensation expense for the year, our Income before Benefit for Income Taxes would be affected by $1.3 million for the year ended December 31, 2020.

If there were to be a 10% change in our stock-based compensation expense for the year, our Loss before Benefit for Income Taxes would be affected by $1.0 million for the year ended December 31, 2021.

We use the asset and liability method of accounting for income taxes.

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We are subject to taxation in various U.S.

jurisdictions and Canada and remain subject to examination by taxing jurisdictions for the years 1998 and all subsequent periods due to the availability of net operating loss carryforwards.

jurisdictions, Canada, and India and remain subject to examination by taxing jurisdictions for the years 1998 and all subsequent periods due to the availability of net operating loss carryforwards.

To the extent we prevail in matters for which a liability has been established, or are required to pay amounts in excess of our established liability, our effective income tax rate in a given financial statement period could be materially affected.

An unfavorable tax settlement generally would require use of our cash and may result in an increase in our effective income tax rate in

the period of resolution.

An unfavorable tax settlement generally would require use of our cash and may result in an increase in our effective income tax rate in the period of resolution.

A favorable tax settlement may reduce our effective income tax rate and would be recognized in the period of resolution.

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Recent Accounting Pronouncements Not Yet Adopted

In November 2019, the Financial Accounting Standards Board (“FASB”) issued guidance simplifying the accounting for income taxes by removing the following exceptions:

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

In August 2020, the Financial Accounting Standards Board (“FASB”) issued guidance simplifying the accounting for certain financial instruments with characteristics of liabilities and equity, including certain convertible instruments and contracts on an entity’s own equity.

The new standard removes the separation models required for convertible debt with cash conversion features and convertible instruments with beneficial conversion features.

It also removes certain settlement conditions that are currently required for equity contracts to qualify for the derivative scope exception and simplifies the diluted earnings per share calculation for convertible instruments.

We early adopted this guidance as of January 1, 2021.

The adoption of this guidance removed the requirement for an evaluation of a beneficial conversion feature related to our issuance of convertible preferred stock in November 2021 (Note 2) and will impact the calculation of diluted earnings per share in periods of net earnings.

In November 2019, the 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 an 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 for the year.

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1) requiring 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 was permitted, including adoption in an interim period.

We will adopt this guidance as of January 1, 2021.

We expect that the adoption of this guidance will not have a material impact on our consolidated financial statements.

Recently Adopted Accounting Pronouncements

In 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 was effective for reporting periods beginning after December 15, 2019, including interim periods within that fiscal year.

We adopted this guidance as of January 1, 2020.

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

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

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

Most of the provisions of this guidance were to be adopted on a prospective basis.

Items 2) and 3) of the “removal” provisions were to be adopted on either a full or modified retrospective basis and item 4) of the “simplifying” provisions was to be adopted on a full retrospective basis.

The guidance was effective for reporting periods beginning after December 15, 2020, including interim periods within that fiscal year.

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

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

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

The credit loss estimate now reflects 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.

We adopted this guidance as of January 1, 2020 using the modified retrospective method for all financial assets measured at amortized cost.

Results for reporting periods beginning after January 1, 2020 are presented under the new guidance while prior period amounts continue to be reported in accordance with previously applicable GAAP.

We recognized an $8 thousand decrease to retained earnings as of January 1, 2020 for the cumulative effect of adopting the new guidance.

Off-Balance Sheet Arrangements

As of December 31, 2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC.

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 7. Management’s Discussion and Analysis