Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Please read the following discussion in conjunction with Item 1A. (“Risk Factors”) and our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Some of the statements in the following discussion are forward-looking statements. See the discussion about forward-looking statements on page 1 of this Annual Report on Form 10-K.
This section of this Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 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, 2021, filed with the SEC on March 15, 2022.
Executive Overview
ANI Pharmaceuticals, Inc. 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 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. On June 2, 2022, we announced that we intend to cease operations at our Oakville, Ontario, Canada manufacturing plant by first quarter 2023. This action is part of ongoing initiatives to capture operational synergies following our acquisition of Novitium Pharma LLC (“Novitium”) in November 2021. We have transitioned the majority of products manufactured or packaged in Oakville to one of our three U.S.-based manufacturing sites.
Strategy
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 growth drivers:
Building a successful Rare Disease platform
We have spent significant time, effort and resources in establishing our Rare Disease platform. 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 and 2022, 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. During 2021 and throughout 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 our foundational Rare Disease asset. As a result of the build out of our Rare Disease team, our expenditures in support of these efforts were significantly higher in 2022 as compared to 2021.
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We plan to continue to invest behind Cortrophin Gel and our Rare Disease platform in 2023 and beyond.
Strengthening our Generics, Established Brands, and Other segment through continued investment in our generic 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. Our most recent business acquisition was Novitium, including its portfolio of commercial and pipeline generic products, manufacturing and development facilities and expert workforce. The Novitium acquisition significantly increased our generic pharmaceutical research and development and manufacturing capabilities. 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. On July 21, 2022, we completed an asset acquisition of four ANDAs from Oakrum Pharma, including two that were commercial at the time of acquisition.
We have grown our established brand product offerings through acquisition. We have acquired the 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 go-to-market strategy through creative partnerships.
Our overall strategy is enabled by an empowered, collaborative, and purposeful team with a high performance-orientation.
Generic 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
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means of entering niche markets, such as hormone therapies, in which fewer generic companies are able to compete.
Fiscal 2022 Developments
Restructuring Update
On June 2, 2022, we announced that we intend to cease operations at our Oakville, Ontario, Canada manufacturing plant by the first quarter of 2023. This action is part of ongoing initiatives to capture operational synergies following our acquisition of Novitium in November 2021. We have transitioned the majority of products manufactured or packaged in Oakville to one of our three U.S.-based manufacturing sites and are on track to cease operations by the end of the first quarter 2023. We are seeking to find potential buyers for the Oakville site, though there can be no assurance as to when or if that will occur or the amount of any net proceeds that may be received.
Operating Segment Update
Prior to 2022, we had concluded that we had one operating segment. Effective in the first quarter of 2022 and prospectively, in conjunction with the principal completion of our buildout of infrastructure in the areas of commercialization of rare disease therapies and the launch of Cortrophin Gel, we determined that we now have two operating segments as follows:
● Generics, Established Brands, and Other – Consists of operations related to the development, manufacturing, and marketing of generic and established brand pharmaceuticals, including those sold through traditional channels, contract manufactured products, product development services, royalties, and other.
● Rare Disease – Consists of operations related to the development, manufacturing and marketing of pharmaceuticals used in the treatment of patients with rare conditions. The rare disease segment currently consists of operations related to Cortrophin Gel.
Asset Acquisitions
On July 21, 2022, we acquired four ANDAs from Oakrum Pharma, LLC for a purchase price of $8.0 million plus an immaterial amount for the purchase of API and finished goods inventory. The transaction was funded from cash on hand.
Product Launches
Refer to our website at www.anipharmaceuticals.com for information on the products, including indications/treatments.
Purified Cortrophin Gel Approval and Launch
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.
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. While total market generic and brand prescriptions were depressed in earlier parts of 2021 as subsequent waves and variants of the virus impacted patient and customer behavior, prescriptions returned to pre-pandemic levels in late 2021 and into 2022. We continued to see disruptions to our supply chain from the
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COVID-19 pandemic during 2022, including significant lead times for purchases of materials. The pandemic has not impacted our access to capital and has not significantly impacted our use of funds.
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.
General
Impacts to our 2022 and 2021 results of operations, including to net revenues, operating expenses, interest and other expense, net, and income taxes are described below. Our results of operations for the year ended December 31, 2022 were impacted by the November 19, 2021 acquisition of Novitium and related activity subsequent to that date. The acquisition provides additional revenues and the incurrence of 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 year ended December 31, 2022, Novitium operations generated $90.3 million in net revenues.
The following table summarizes our results of operations for the periods indicated:
Year Ended
December 31,
(in thousands)
2022
2021
Net revenues
$
316,385
$
216,136
Operating expenses
Cost of sales (exclusive of depreciation and amortization)
138,785
100,610
Research and development
22,318
11,369
Selling, general, and administrative
124,044
84,294
Depreciation and amortization
56,972
47,252
Contingent consideration fair value adjustment
3,758
500
Legal settlement expense
—
8,750
Purified Cortrophin Gel pre-launch charges
—
780
Restructuring activities
5,679
—
Intangible asset impairment charge
112
2,374
Operating loss
(35,283)
(39,793)
Interest expense, net
(28,052)
(11,922)
Other income/(expense), net
670
(4,343)
Loss before benefit for income taxes
(62,665)
(56,058)
Benefit for income taxes
14,769
13,455
Net loss
$
(47,896)
$
(42,603)
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The following table sets forth, for the periods indicated, items in our consolidated statements of operations as a percentage of net revenues.
Year Ended
December 31,
2022
2021
Net revenues
100.0
%
100.0
%
Operating expenses
Cost of sales (exclusive of depreciation and amortization)
43.9
%
46.5
%
Research and development
7.1
%
5.3
%
Selling, general, and administrative
39.2
%
39.0
%
Depreciation and amortization
18.0
%
21.9
%
Contingent consideration fair value adjustment
1.2
%
0.2
%
Legal settlement expense
—
%
4.0
%
Purified Cortrophin Gel pre-launch charges
—
%
0.4
%
Restructuring activities
1.8
%
—
%
Intangible asset impairment charge
—
%
1.1
%
Operating loss
(11.2)
%
(18.4)
%
Interest expense, net
(8.9)
%
(5.5)
%
Other income/(expense), net
0.2
%
(2.0)
%
Loss before benefit for income taxes
(19.9)
%
(25.9)
%
Benefit for income taxes
4.7
%
6.2
%
Net loss
(15.2)
%
(19.7)
%
Results of Operations for the Years Ended December 31, 2022 and 2021
Net Revenues
Year Ended December 31,
(in thousands)
2022
2021
Change
% Change
Generics, Established Brands, and Other Segment
Generic pharmaceutical products
$
210,121
$
143,571
$
66,550
46.4
%
Established brand pharmaceutical products
39,463
47,561
(8,098)
(17.0)
%
Contract manufacturing
16,106
10,042
6,064
60.4
%
Royalty and other
9,009
14,962
(5,953)
(39.8)
%
Generics, established brands, and other segment total net revenues
$
274,699
$
216,136
$
58,563
27.1
%
Rare Disease Segment
Rare disease pharmaceutical products
$
41,686
$
—
$
41,686
NM
(1)
Total net revenues
$
316,385
$
216,136
$
100,249
46.4
%
We derive substantially all of our revenues from sales of generic, established brand, and rare disease pharmaceutical products, contract manufacturing, royalties on net sales of certain products, and other services, including development services, and laboratory services. Many of our established brand products as well as our generic products face competition from generic products and we expect them to continue to face competition from generic products 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.
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Net revenues for the year ended December 31, 2022 were $316.4 million compared to $216.1 million for the same period in 2021, an increase of $100.2 million, or 46.4%, primarily as a result of the following factors:
● Net revenues for generic pharmaceutical products were $210.1 million during the year ended December 31, 2022, an increase of 46.4% compared to $143.6 million for the same period in 2021. From a product perspective, the increase was principally driven by revenues from products acquired in our acquisition of Novitium, which increased $70.1 million, including Prazosin, Famotidine, Oxybutynin Chloride, Dapsone, Prednisone Rifabutin, and various other products. The increase was also due to increased revenues of Nebivolol, which ANI launched in September 2021. Increases were tempered by a decrease in revenues of Penicillamine, EEMT, Propranolol Extended Release, and Bexarotene. The increase in net generic revenues was principally due to the acquisition of Novitium, which drove an increase in volumes, and was tempered by a decrease in average selling prices.
During the year ended December 31, 2022, generic prescriptions have returned to essentially pre-pandemic levels. 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 periods in 2021 and approached pre-pandemic levels near the end of the year.
● Net revenues for branded pharmaceutical products were $39.5 million during the year ended December 31, 2022, a decrease of 17.0% compared to $47.6 million for the same period in 2021. From a product perspective, the net decrease was driven primarily by a decrease in sales of Casodex, InnoPran XL, Inderal XL and Veregen. These decreases were tempered primarily by an increase in sales of Lipofen, Atacand, and Vancocin. The decrease in branded pharmaceutical product revenues for the year ended December 31, 2022 was principally due to lower unit volume sales on key branded products in addition to higher levels of returns and rebates.
As of the end of the 2021 fiscal year, brand prescription levels returned to pre-pandemic levels.
● Contract manufacturing revenues were $16.1 million during the year ended December 31, 2022, an increase of 60.4% compared to $10.0 million for the same period in 2021, due to an increase in the volume of orders, primarily related to Novitium contract manufacturing revenues in 2022.
● Royalty and other were $9.0 million during the year ended December 31, 2022, a decrease of $6.0 million from $15.0 million for the same period in 2021, primarily due to the one-time recognition of the final royalty of $11.2 million under the Kite Pharma, Inc. license agreement (Yescarta®) pursuant to the Tripartite Agreement in the year ended December 31, 2021. Royalty revenue for the year ended December 31, 2022 includes $5.2 million related to Novitium arrangements.
● Net revenues of rare disease pharmaceutical products, which consists entirely of sales of Purified Cortrophin Gel, were $41.7 million during the year ended December 31, 2022, as the product was launched in late January 2022. There were no sales of rare disease pharmaceutical products during 2021.
Cost of Sales (Excluding Depreciation and Amortization)
Year Ended December 31,
(in thousands)
2022
2021
Change
% Change
Cost of sales (excl. depreciation and amortization)
$
138,785
$
100,610
$
38,175
37.9
%
Cost of sales consists of direct labor, including manufacturing and packaging, active and inactive pharmaceutical ingredients, freight costs, packaging components, and royalties related to profit-sharing arrangements. Cost of sales does not include depreciation and amortization expense, which is reported as a separate component of operating expenses on our consolidated statements of operations.
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For the year ended December 31, 2022, cost of sales increased to $138.8 million from $100.6 million for the same period in 2021, an increase of $38.2 million or 37.9%. The increase is primarily due to increased volumes of generic products, including $34.7 million of costs related to activities of Novitium during the year ended December 31, 2022, compared to $4.0 million in the prior year period, and $5.3 million in costs representing the excess of fair value over cost for inventory acquired in an asset acquisition and a business combination, of which $3.2 million relates to inventory acquired from Novitium. Charges for the excess of fair value over cost for inventory acquired in an asset acquisition were $5.4 million for the comparable period in 2021. Sales of products subject to profit sharing arrangements also accounted for a $3.0 million increase in the current year period.
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 42.2% during the year ended December 31, 2022, from 43.1% during the same period in 2021, primarily as a result of increased volumes in a period of declining average selling prices across generic and brand products, $11.2 million in royalty revenue during the comparable 2021 period with no associated cost of goods sold, and higher costs related to sales of products subject to profit sharing arrangements.
During the year ended December 31, 2022, we purchased 19% of our inventory from one supplier. As of December 31, 2022, the amount payable to this supplier was $10.9 million. During the year ended December 31, 2021, no single vendor represented at least 10% of inventory purchases.
Other Operating Expenses
Year Ended December 31,
(in thousands)
2022
2021
Change
% Change
Research and development
$
22,318
$
11,369
$
10,949
96.3
%
Selling, general, and administrative
124,044
84,294
39,750
47.2
%
Depreciation and amortization
56,972
47,252
9,720
20.6
%
Contingent consideration fair value adjustment
3,758
500
3,258
NM
(1)
Legal settlement expense
—
8,750
(8,750)
(100.0)
%
Purified Cortrophin Gel pre-launch charges
—
780
(780)
(100.0)
%
Restructuring activities
5,679
—
5,679
NM
(1)
Intangible asset impairment charge
112
2,374
(2,262)
NM
(1)
Total other operating expenses
$
212,883
$
155,319
$
57,564
37.1
%
(1) Not meaningful
For the year ended December 31, 2022, other operating expenses increased to $212.9 million from $155.3 million for the same period in 2021, an increase of $57.6 million, or 37.1%, primarily as a result of the following factors:
● Research and development expenses increased from $11.4 million to $22.3 million, an increase of 96.3%, primarily due to expenses related to Novitium activities during the year ended December 31, 2022, in-process research and development charges of $1.2 million recognized in the current year, tempered by a $1.5 million decrease in expense associated with our Cortrophin development efforts due to approval of the launch of the product.
● Selling, general, and administrative expenses increased from $84.3 million to $124.0 million, an increase of 47.2%, primarily due to a $37.6 million increase in sales and marketing expenses related to our launch of Purified Cortrophin Gel, increases related to the addition of Novitium headcount and activities during the year ended December 31, 2022, tempered by a $8.1 million decrease in transaction expenses related to the Novitium acquisition.
● Depreciation and amortization expense was $57.0 million for the year ended December 31, 2022, compared to $47.3 million for the year ended December 31, 2021. The increase is primarily due to the amortization of intangible assets acquired in the Novitium acquisition.
● As described in Note 9, 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
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adjustment related to the Novitium acquisition of $3.8 million and $0.5 million in the year ended December 31, 2022 and 2021, respectively. The expense is principally due to the passage of time (i.e. moving closer to the ultimate payment date of the consideration, rather than the change in any other variables).
● As described in Note 13, 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, 2022.
● As described in Note 14, 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. No Cortrophin pre-launch charges related to purchases of materials were recognized in the year ended December 31, 2022.
● We recognized restructuring activities of $5.7 million of expense in the year ended December 31, 2022, in relation to the anticipated closure of our Oakville, Ontario, Canada facility. Costs included $2.1 million in termination benefits, $3.1 million in fixed asset impairments and accelerated depreciation, and $0.4 million of other costs. No restructuring activities were recognized in the year ended December 31, 2021.
● We recognized an impairment of $0.1 million in the year ended December 31, 2022, in relation to an ANDA asset. We recognized an impairment of $2.4 million in the year ended December 31, 2021, in relation to an ANDA asset.
Other Expense, net
Year Ended December 31,
(in thousands)
2022
2021
Change
% Change
Interest expense, net
$
(28,052)
$
(11,922)
$
(16,130)
135.3
%
Other income/(expense), net
670
(4,343)
5,013
(115.4)
%
Total other expense, net
$
(27,382)
$
(16,265)
$
(11,117)
68.3
%
For the year ended December 31, 2022, we recognized other expense, net of $27.4 million versus other expense, net of $16.3 million for the same period in 2021, an increase of $11.1 million. Interest expense, net for 2022 consisted primarily of interest expense on our Term Facility. Interest expense, net for 2021 consisted 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 is due to an increase in the debt outstanding during the year ended December 31, 2022, coupled with an increased borrowing rate on the $300.0 million Term Facility, as compared to the borrowing rate on the Prior Credit Agreement borrowings and an increase in amortization of finance fees. The $5.0 million change in other income/(expense), net is primarily related to the $0.8 million gain on the sale of an ANDA in the year ended December 31, 2022 and the non-recurrence 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 in the year ended December 31, 2021. For the year ended December 31, 2022 and 2021, there was $0.1 million of interest capitalized into construction in progress.
Benefit for Income Taxes
Year Ended December 31,
(in thousands)
2022
2021
Change
% Change
Benefit for income taxes
$
14,769
$
13,455
$
1,314
9.8
%
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Our benefit for income taxes consists of current and deferred components, which include changes in our deferred tax assets, our deferred tax liabilities, and our valuation allowance. We measure our deferred tax assets and liabilities using the tax rates that we believe will apply in the years in which the temporary differences are expected to be recovered or paid. See Note 12. Income Taxes, in the notes to the consolidated financial statements in Part II, Item 8. of this Annual Report on Form 10-K for further information.
For the year ended December 31, 2022, we recognized an income tax benefit of $14.8 million, an effective benefit rate of 23.6% of consolidated pre-tax losses reported in the period, as well as the net effects of certain discrete items occurring in 2022 which impact our income tax provision in the period in which they occur. There were no material discrete items occurring during the year ended December 31, 2022.
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.
Liquidity and Capital Resources
The following table highlights selected liquidity and working capital information from our consolidated balance sheets.
December 31,
December 31,
(in thousands)
2022
2021
Cash and cash equivalents
$
48,228
$
100,300
Current restricted cash
5,006
—
Accounts receivable, net
165,438
128,526
Inventories, net
105,355
81,693
Prepaid income taxes
3,827
3,667
Assets held for sale
8,020
—
Prepaid expenses and other current assets
8,387
7,589
Total current assets
$
344,261
$
321,775
Current debt, net of deferred financing costs
$
850
$
850
Accounts payable
29,305
22,967
Accrued expenses and other
5,394
7,563
Accrued royalties
9,307
6,225
Accrued compensation and related expenses
10,312
8,522
Accrued government rebates
10,872
5,492
Returned goods reserve
33,399
35,831
Deferred revenue
—
87
Total current liabilities
$
99,439
$
87,537
On December 31, 2022, we had $48.2 million in unrestricted cash and cash equivalents. On December 31, 2021, we had $100.3 million in unrestricted cash and cash equivalents. In 2022 and 2021, we invested in leadership, expertise, and infrastructure in the areas of commercialization of rare disease therapies and in 2022 commercialized our Cortrophin Gel product.
In 2021, 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”).
We are focused on expanding our business and product pipeline through collaborations, and also through acquisitions of products and companies. We are continually evaluating potential asset acquisitions and business combinations. To finance such acquisitions, we might raise additional equity capital, incur additional debt, or both.
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Our working capital ratio, defined as total current assets divided by total current liabilities, is 3.5 as of December 31, 2022. Despite a use of cash of $31.2 million by operating activities, we believe that our financial resources, consisting of net current working capital of approximately $244.8 million, 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, 2022, 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. If we are not profitable or do not generate cash from operations as anticipated and additional capital is needed to support operations, we may be unable to obtain such financing, or obtain it on favorable terms, in which case we may be required to curtail development of new products, limit expansion of operations, or accept financing terms that are not as attractive as desired.
Consolidation among wholesale distributors, chain drug stores, and group purchasing organizations has resulted in a smaller number of companies each controlling a larger share of pharmaceutical distribution channels. Our net revenues were concentrated among three customers representing 26%, 18%, and 15% of net revenues during the year ended December 31, 2022. As of December 31, 2022 accounts receivable from these three customers totaled approximately 82% of accounts receivable, net. Our net revenues were concentrated among three customers representing 29%, 23%, and 16% of net revenues during the year ended December 31, 2021. As a result, negotiated payment terms with these customers have a material impact on our liquidity and working capital.
Our Cortrophin Gel product accounted for approximately 13% of our net revenues in 2022. None of our products accounted for 10% or more of our net revenues in 2021.
Sources and Uses of Cash
Debt Financing
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 for the Novitium acquisition, repay borrowings under our Prior Credit Agreement, and pay fees, costs and expenses incurred in connection with the acquisition of Novitium. Proceeds from 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 (or alternate benchmark 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 Agreement) 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 ending December 31, 2023. As of December 31, 2022, $3.0 million of principal of the loan was recorded as current borrowings, net of deferred financing costs, in the consolidated balance sheet. As of December 31, 2022, we had not drawn on the Revolving Facility and $40.0 million remained available for borrowing subject to certain conditions.
Equity Financing
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Concurrently with the execution of the merger agreement related to the Novitium acquisition, on March 8, 2021, we entered into that certain Equity Commitment and Investment Agreement with Ampersand 2020 Limited Partnership (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 shares of our Series A Convertible Preferred Stock, for a purchase price of $1,000 per share and an aggregate purchase price of $25.0 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 are being 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 2022, 2021, and 2020 and were our primary source of cash in 2022 and 2021.
Uses of Cash
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. Our future capital requirements will depend on many factors, including, but not limited to:
● product mix and pricing for product sales and contract manufacturing;
● pricing and payment terms with customers;
● costs of raw materials and payment terms with suppliers;
● capital expenditures and equipment purchases to support product launches; and
● business and product acquisitions.
On November 19, 2021, we completed our previously announced acquisition of all of the interests of Novitium pursuant to the terms of the Agreement and Plan of Merger (the “Merger Agreement”), dated as of March 8, 2021, for cash consideration, 2,466,654 restricted shares of our common stock valued at $91.2 million based on our closing stock price of $43.54 on the date of closing and discounted for lack of marketability due to restrictions on shares, and up to $46.5 million in additional contingent consideration. Additionally, we agreed to pay certain debts of Novitium in the amount of $8.5 million, which we deemed to be paid in consummation of the transaction closing, and not assumed liabilities, and thus were included as additional cash consideration. This acquisition was accounted for as a business combination. 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. As of the closing of the acquisition, the contingent consideration had a fair value of $30.8 million. Refer to Note 9 for changes in contingent consideration and changes in fair value. Total consideration including cash, restricted shares and contingent consideration was valued at $206.5 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
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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.
Discussion of Cash Flows
The following table summarizes the net cash and cash equivalents provided by/(used in) operating activities, investing activities and financing activities for the periods indicated:
Year Ended December 31,
(in thousands)
2022
2021
Operating Activities
$
(31,203)
$
3,322
Investing Activities
$
(15,738)
$
(105,483)
Financing Activities
$
(5,126)
$
194,595
Net Cash (Used in) / Provided by Operating Activities
Net cash used in operating activities was $31.2 million for the year ended December 31, 2022, compared to $3.3 million provided by operating activities during the same period in 2021, a change of $34.5 million. The use of cash was driven by our net loss and changes in working capital, including increases to accounts receivable and inventory of $31.4 million and $26.9 million, respectively, since December 31, 2021, due in part to a number of new product launches during the year ended December 31, 2022.
Net Cash Used in Investing Activities
Net cash used in investing activities for the year ended December 31, 2022 was $15.7 million, principally due to the acquisition of four ANDAs from Oakrum Pharma LLC for $8.0 million consisting of $7.2 million of cash and $0.8 million of other consideration, and $8.9 million of capital expenditures partially offset by $0.8 million proceeds from sale of long-lived assets during the period.
Net Cash (Used in) / Provided by Financing Activities
Net cash used in financing activities was $5.1 million for the year ended December 31, 2022 compared to $194.6 million in cash provided by financing activities for the year ended December 31, 2021, principally due to the $3.0 million maturity payments on the Term Facility, $2.0 million of treasury stock purchased in relation to restricted stock vests, and $1.6 million convertible stock dividends paid.
Contractual Obligations
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, 2022 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, 2022, the principal amount of our Term Facility was $297.0 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, 2022 is 6.75%. See Note 4, 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
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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, 2022, the notional value of the interest rate swap was $151.5 million. See Note 5, 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 13, 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 a supply agreement with one vendor that includes purchase minimums. Pursuant to this agreement, we will be required to purchase a total of $0.1 million of API from this vendor during the year ended December 31, 2023. 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 10, 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. 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. 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
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. 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. 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. On an ongoing basis, we evaluate these estimates and assumptions, including those described below. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets
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and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. Due to the estimation processes involved, the following summarized accounting policies and their application are considered to be critical to understanding our business operations, financial condition, and operating results.
Revenue Recognition
We recognize revenue using the following steps:
● Identification of the contract, or contracts, with a customer;
● Identification of the performance obligations in the contract;
● Determination of the transaction price, including the identification and estimation of variable consideration;
● Allocation of the transaction price to the performance obligations in the contract; and
● Recognition of revenue when we satisfy a performance obligation.
We derive our revenues primarily from sales of generic and branded pharmaceutical products. Revenue is recognized when our obligations under the terms of our contracts with customers are satisfied, which generally occurs when control of the products we sell is transferred to the customer. We estimate variable consideration after considering applicable information that is reasonably available. We generally do not have incremental costs to obtain contracts that would otherwise not have been incurred. We do not adjust revenue for the promised amount of consideration for the effects of a significant financing component because our customers generally pay us within 100 days.
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. We make these estimates based on historical experience. In addition, for our product development services revenue, we recognize revenue on a percentage of completion basis, which requires judgments related to how much work has been completed on various components our projects.
Revenue from Sales of Generic and Branded Pharmaceutical Products
Product sales consists of sales of our generic and brand pharmaceutical products. Our sole performance obligation in our contracts is to provide pharmaceutical products to customers. Our products are sold at pre-determined standalone selling prices and our performance obligation is considered to be satisfied when control of the product is transferred to the customer. Control is generally transferred to the customer upon delivery of the product to the customer, as our pharmaceutical products are generally sold on an FOB destination basis and because inventory risk and risk of ownership passes to the customer upon delivery. Payment terms for these sales are generally fewer than 100 days. We recognized $249.6 million and $191.1 million of revenue related to sales of generic and branded pharmaceutical products in 2022 and 2021, respectively.
Revenue from Distribution Agreements
From time to time, we enter into marketing and distribution agreements with third parties in which we sell products under ANDAs or NDAs owned or licensed by these third parties. These products are sold under our own label. We have assessed and determined that we control the products sold under these marketing and distribution agreements and therefore are the principal for sales under each of these marketing and distribution 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. Under these agreements, we pay these third parties a specified percentage of the gross profit earned on sales of the products. These profit-sharing percentages are recognized in cost of sales in our consolidated statements of operations and are accrued in accrued royalties in our consolidated balance sheets until payment has occurred.
Chargebacks
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, we estimate the amount of
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chargebacks based our actual historical experience. A number of factors influence current period chargebacks by impacting the average selling price (“ASP”) of products, including customer mix, negotiated terms, volume of off-contract purchases, and wholesale acquisition cost (“WAC”).
If actual results were not consistent with our estimates, we could be exposed to losses or gains that could be material, as changes to chargeback estimates could cause an increase or decrease in revenue recognized during the year and increase or decrease accounts receivable. If there were a 10% change in the chargeback estimates throughout the year, our net revenues would be affected by $64.2 million for the year ended December 31, 2022.
Government Rebates
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 estimates for government rebates are based upon several factors. Our estimates for Medicaid rebates are based upon our average manufacturer price, best price, product mix, levels of inventory in the distribution channel that we expect to be subject to Medicaid rebates, and historical experience, which are invoiced in arrears by state Medicaid programs. 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.
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. If there were a 10% change in the government rebate estimates throughout the year, our net revenues would be affected by $2.1 million for the year ended December 31, 2022.
Returns
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 estimate for returns is based upon our historical experience with actual returns. While such experience has allowed for reasonable estimation in the past, history may not always be an accurate indicator of future returns.
If actual results were not consistent with our estimates, we could be exposed to losses or gains that could be material, as changes to returns estimates could cause an increase or decrease in revenue recognized during the year and decrease or increase the returned goods reserve. If there were a 10% change in the returns estimates throughout the year, our net revenues would be affected by $2.3 million for the year ended December 31, 2022.
Administrative Fees and Other Rebates
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, we accrue for fees and rebates by product by wholesaler, at the time of sale based on contracted rates, ASPs, and on-hand inventory counts obtained from wholesalers.
If actual results were not consistent with our estimates, we could be exposed to losses or gains that could be material, as changes to these estimates could cause an increase or decrease in revenue recognized during the year and increase or decrease accounts receivable. If there were a 10% change in the administrative fees estimates throughout the year, our net revenues would be affected by $4.2 million for the year ended December 31, 2022.
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Prompt Payment Discounts
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, we reserve for sales discounts based on invoices outstanding, assuming, based on past experience, that 100% of available discounts will be taken.
If customers do not take 100% of available discounts as we estimate, we could need to re-adjust our methodology for calculating the prompt payment discount reserve. If there were a 10% decrease in the prompt payment discounts estimates throughout the year, our net revenues would increase by $2.1 million for the year ended December 31, 2022.
Contract Manufacturing Product Sales Revenue
Contract manufacturing arrangements consist of agreements in which we manufacture a pharmaceutical product on behalf of third party. Our performance obligation is to manufacture and provide pharmaceutical products to customers, typically pharmaceutical companies. The contract manufactured products are sold at pre-determined standalone selling prices and our performance obligations are considered to be satisfied when control of the product is transferred to the customer. Control is transferred to the customer when the product leaves our dock to be shipped to the customer, as our contract manufacturing products are sold on an FOB shipping point basis and the inventory risk and risk of ownership passes to the customer at that time. Payment terms for these sales are generally fewer than two months. We estimate returns based on historical experience. Historically, we have not had material returns for contract manufactured products. We recognized $16.1 million and $10.0 million of revenue related to sales of contract manufactured products in 2022 and 2021, respectively.
Royalties from Licensing Agreements
From time to time, we enter into transition agreements with the sellers of products we acquire, under which we license to the seller the right to sell the acquired products. Therefore, we recognize the revenue associated with sales of the underlying products as royalties. Because these royalties are sales-based, we recognize the revenue when the underlying sales occur, based on sales and gross profit information received from the sellers. Upon full transition of the products and upon launching the products under our own labels, we recognize revenue for the products as sales of generic or branded pharmaceutical products, as described above. 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 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. Under such license agreement, Kite licensed from Dr. 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 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
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licensing agreements in our net revenues during the three month period ended March 31, 2021. In addition, during the three month period ended March 31, 2021, we agreed to reimburse Cabaret $0.4 million, which has been recorded as other expense, net in the accompanying unaudited interim condensed 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, we do 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 was dismissed.
Product Development Services Revenue
We provide product development services to customers, which are performed over time. These are services primarily performed at our facility in East Windsor, New Jersey. As we intend to cease operations at the Oakville, Ontario facility by the first quarter of 2023, we have transitioned the product development services at the facility to one of our three U.S.-based manufacturing sites.
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. We recognized $2.9 million and $1.3 million of revenue related to product development services in 2022 and 2021, respectively.
Intangible Assets
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 definite-lived intangible assets have a carrying value of $225.1 million as of December 31, 2022. 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. During the third quarter of 2022, we added $7.2 million in ANDA intangible assets related to the July 21, 2022 transaction with Oakrum Pharma, LLC. These assets will be amortized over a seven-year useful life.
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.
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. 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.
Our indefinite-lived intangible assets other than goodwill have a carrying value of $26.6 million as of December 31, 2022. 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. During the year ended December 31, 2022, $20.3 million was reclassified from IPR&D to ANDA intangible assets upon completion of projects and launch of related products.
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
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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 year ended December 31, 2022, we recognized a full impairment of a definite-lived ANDA asset with a remaining carrying value of $0.1 million. During the year ended December 31, 2021, we recognized a full impairment of a definite-lived ANDA asset with a remaining carrying value of $2.4 million.
Goodwill
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., 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.
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. We perform our review of goodwill on our one reporting unit. 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.
The carrying value of goodwill at December 31, 2022 was $28.2 million. As part of the Novitium acquisition on November 19, 2021, we acquired goodwill of $24.6 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.
Contingent Consideration
The fair value of our contingent consideration was $35.1 million and $31.0 million at December 31, 2022 and 2021, respectively. 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 charges of $3.8 million and $0.5 million during the years ended December 31, 2022 and 2021, respectively.
Stock-Based Compensation
Our Amended and Restated 2022 Stock Incentive Plan (the “2022 Plan”) includes stock options and restricted stock, which are awarded in exchange for employee and non-employee director services. In July 2016, we commenced administration of our Employee Stock Purchase Plan (“ESPP”). We recognize the estimated fair value of stock-based awards and classify the expense where the underlying salaries are classified.
From time to time, we may grant stock options to employees through an inducement grant outside of our 2022 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.
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The following table summarizes stock-based compensation expense incurred under the Stock Incentive Plan, Inducement Grant, and 2016 Employee Stock Purchase Plan and included in our consolidated statements of operations:
Years Ended December 31,
(in thousands)
2022
2021
2020
Cost of sales
$
532
$
20
$
137
Research and development
751
564
597
Selling, general, and administrative
13,316
9,905
12,202
$
14,599
$
10,489
$
12,936
Stock-based compensation cost for stock options is determined at the grant date using an option pricing model and stock-based compensation cost for restricted stock is based on the closing market price of the stock at the grant date. The value of the award is recognized as expense on a straight-line basis over the employee’s requisite service period.
Valuation of stock awards requires us to make assumptions and to apply judgment to determine the fair value of the awards. These assumptions and judgments include estimating the future volatility of our stock price and dividend yields. Changes in these assumptions can affect the fair value estimate.
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 Loss before Benefit for Income Taxes would be affected by $1.5 million for the year ended December 31, 2022.
Income Taxes
We use the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted.
We use a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. We have not identified any uncertain income tax positions that could have a material impact to the consolidated financial statements. We are subject to taxation in various U.S. 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. A favorable tax settlement may reduce our effective income tax rate and would be recognized in the period of resolution.
We consider potential tax effects resulting from discontinued operations and gains and losses included in other comprehensive income and record intra-period tax allocations, when those effects are deemed material. Our effective income tax rate is also affected by changes in tax law, our level of earnings, and the results of tax audits.
Although we believe that the judgments and estimates discussed herein are reasonable, actual results could differ, and we may be exposed to losses or gains that could be material .
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Recent Accounting Pronouncements
Recent Accounting Pronouncements Not Yet Adopted
In December 2022, the Financial Accounting Standards Board issued ASU 2022-06, which extended the sunset date of the reference rate reform in ASU 848 from December 31, 2022, to December 31, 2024. We have not adopted the guidance and are currently evaluating the impact, if any, that the adoption of this guidance will have on our
consolidated financial statements.
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.
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