ANI Pharmaceuticals Inc: Form 10-Q for the period ended Sep 30, 2023

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited interim condensed consolidated financial statements and the accompanying notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, the audited consolidated financial statements and the accompanying notes thereto in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “2022 Annual Report”), as well as the information contained under Management’s Discussion and Analysis of Financial Condition and Results of Operations and “Risk Factors” contained in the 2022 Annual Report, and Part II, Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q , and other information provided from time to time in our other filings with the SEC. This discussion contains forward-looking statements, based on current expectations and related to future events and our future financial performance, that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many important factors, including those set forth under “Risk Factors” in our 2022 Annual Report and this Quarterly Report on Form 10-Q.

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 scaling up our Rare Disease business through the successful launch of our lead asset, Cortrophin Gel, strengthening our generics business with enhanced development capability, innovation in established brands and leveraging our North American manufacturing capabilities. Our three pharmaceutical manufacturing facilities, of which two are located in Baudette, Minnesota, and one is located in East Windsor, New Jersey, 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. We ceased operations at our subsidiary in Oakville, Ontario, Canada as of March 31, 2023. This action was part of ongoing initiatives to capture operational synergies following our acquisition of Novitium Pharma LLC (“Novitium”) in November 2021. We previously completed the transition of the products manufactured or packaged in Oakville to one of our three U.S.-based manufacturing sites.

On November 6, 2023, ANI Pharmaceuticals Canada Inc., a wholly owned subsidiary of the Company, entered into an agreement with Mastercom Inc. ("Buyer") for the purchase and sale of the Oakville, Ontario manufacturing facility (the "Property") at a total purchase price of $17,850,000 Canadian dollars, or approximately $13,000,000 US Dollars based on the current exchange rate, subject to certain market adjustments.

Under the terms and conditions of the purchase and sale agreement, Buyer paid a deposit upon signing of the Agreement of $500,000 Canadian dollars, or approximately $365,000 US Dollars based on the current exchange rate, and Buyer’s obligations under the agreement are subject to a twenty (20) business day due diligence period (the "Initial Due Diligence Period") that can be extended for an additional twenty (20) business days if an independent assessor recommends conducting a phase II environmental assessment (the “Due Diligence Condition”). In addition, Buyer’s obligations under the Agreement are subject to Buyer’s obtaining financing on terms satisfactory to Buyer prior to expiration of the Initial Due Diligence Period (the “Financing Condition”). Upon waiver or satisfaction of the Due Diligence Condition, Buyer is required to pay an additional deposit of $750,000 Canadian dollars, or approximately $550,000 US Dollars based on the current exchange rate, with the remaining balance of the purchase price (minus the deposited amounts) to be paid upon closing of the transaction. The closing of the transaction is subject to customary termination conditions, including the Buyer’s right to terminate the agreement if the Property is materially damaged prior to the closing. If the transaction does not close as a result of the Due Diligence Condition or the Financing Condition or as a result of ANI’s default under the agreement, the deposited amounts will be returned to the Buyer in full. ANI will retain the deposited amounts if the transaction does not close as a result of the Buyer’s default under the agreement.

The purchase of the Property is being made on an “as is” basis and the Agreement provides for customary closing conditions and indemnification obligations, as well as limited representations and warranties. The sale of the Property is expected to close in the first quarter of 2024.

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 significantly 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 this timeframe, 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. On October 2, 2023, we announced FDA approval and commercial availability of a 1-mLvial of Cortrophin Gel, appropriate for adjunctive treatment of certain patients with acute gouty arthritis flares. 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 the prior year, and we plan to continue to invest behind Cortrophin Gel and our Rare Disease platform in 2023 and beyond.

We plan to continue to expand our rare disease business, through a combination of organic growth, as described above, and acquisition. While we continue to execute against our strategic initiatives that we believe will result in the long-term, sustainable growth and value to our stockholders, we continue to evaluate potential acquisitions and other strategic transactions of businesses that we believe complement our existing portfolio, infrastructure and capabilities or provide us with the opportunity to expand our existing capabilities.

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. During the second quarter of fiscal 2023, we acquired two ANDAs and one pipeline product from the Chapter 7 Trustee for the estates of Akorn Holding Company and certain of its affiliates. On August 14, 2023, we acquired one ANDA and registered patents and pending patent applications from Slayback Pharma Limited Liability Company.

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 means of entering niche markets, such as hormone therapies, in which fewer generic companies are able to compete.

Recent Developments

Election of Directors

On August 21, 2023, the Board of Directors of ANI (the “Board”), appointed Matthew Leonard to serve on the Board as a director with a term expiring at the Company’s 2024 annual meeting of stockholders. On August 22, 2023, Dr. David B. Nash, M.D. informed the Board of his decision not to seek reelection as a director on the Board at the Company’s 2024 Annual Meeting of Stockholders (the “2024 Annual Meeting”). Dr. Nash will continue to serve for the remainder of his term as a director until the 2024 Annual Meeting. Dr. Nash has served as a member of the Company’s Board since May 2018 and has served as Chair of the Nominating and Corporate Governance Committee and as a Member of the Audit and Finance Committee.

Public Offering

In May 2023, through a public offering, we completed the issuance and sale of 2,183,545 shares of ANI common stock, resulting in net proceeds after issuance costs of $80.6 million. The proceeds are being used to in-license, acquire or invest in additional businesses, technologies, products or assets, to fund our commercialization efforts, including, but not limited to, sales and marketing and consulting expenses related thereto, and for general corporate purposes.

Restructuring Update

We ceased operations at our subsidiary in Oakville, Ontario, Canada as of March 31, 2023. This action was part of ongoing initiatives to capture operational synergies following our acquisition of Novitium in November 2021. We previously completed the transition of the products manufactured or packaged in Oakville to one of our three U.S.-based manufacturing sites. On November 6, 2023, ANI Pharmaceuticals Canada Inc., a wholly owned subsidiary of the Company, entered into an agreement for the purchase and sale of the Oakville, Ontario manufacturing facility at a total purchase price of $17,850,000 Canadian dollars, or approximately $13,000,000 US Dollars based on the current exchange rate, subject to certain market adjustments. The sale of the Property is expected to close in the first quarter of 2024.

Product Launches

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

GENERAL

Impacts to our 2023 and 2022 results of operations, including to net revenues, operating expenses, interest and other expense, net, and income taxes are described below.

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

(in thousands)

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

41

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

Net Revenues

(in thousands)

We derive substantially all of our revenues from sales of generic, rare disease, and established brand pharmaceutical products, royalties on net sales of certain products, and other pharmaceutical 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.

Net revenues for the three months ended September 30, 2023 were $131.8 million compared to $83.8 million for the same period in 2022, an increase of 57.3%, primarily as a result of the following factors:

• Net revenues for generic pharmaceutical products were $70.6 million during the three months ended September 30, 2023, an increase of 32.9% compared to $53.1 million for the same period in 2022, driven by increased volumes on the base business and the inclusion of 2022 launches and new product launches in 2023. From a product perspective, the increase was principally driven by revenues from year over year increases in products such as Colestipol, Famotidine, Mixed Amphetamine Salts Extended Release, Nitrofurantoin, Thyroid and various other products tempered by a decrease in revenues of Fenofibrate, Nebivolol, and Prazosin, among others.
• Net revenues for established brand pharmaceutical products, royalties, and other pharmaceutical services were $31.5 million during the three months ended September 30, 2023, an increase of 74.2% compared to $18.1 million for the same period in 2022, driven by a net increase in volume.
• Net revenues of rare disease pharmaceutical products, which consist entirely of sales of Cortrophin Gel, were $29.7 million during the three months ended September 30, 2023 an increase of $17.1 million from $12.6 million for the same period in 2022. This increase was driven by increased volume in this second year of launch (product was launched in late January 2022).

In addition to the above, within our Generic, established brand, and other segment in the current year period, we were successful in supplying incremental volume in markets that were experiencing supply chain disruptions for competing products. Generally, when opportunities for volume and revenue upside related to our products arise in the marketplace, there is no assurance as to how long these favorable market conditions may persist. Recently, certain of these market conditions changed, and as a result, we expect fourth quarter 2023 demand and resultant revenues for certain generic and established brand products to be significantly lower as compared to the rate achieved during the first nine months of 2023.

Cost of Sales (Excluding Depreciation and Amortization)

(in thousands)

Cost of sales consists of direct labor, including manufacturing and packaging, active and inactive pharmaceutical ingredients, freight costs, packaging components, and royalties related to profit-sharing arrangements. Cost of sales does not include depreciation and amortization expense, which is reported as a separate component of operating expenses on our unaudited interim condensed consolidated statements of operations.

For the three months ended September 30, 2023, cost of sales increased to $48.1 million from $32.9 million for the same period in 2022, an increase of $15.2 million, or 46.2%. The increase is primarily due to a significant increase in sales volumes of generic and rare disease pharmaceutical products.

Cost of sales, as a percentage of net revenues, decreased from 39.2% to 36.5% for the three months ended September 30, 2023, compared to the same period in 2022, primarily due to a shift in product mix year over year.

During the three months ended September 30, 2023 and 2022, no single vendor represented more than 10% of inventory purchases.

Other Operating Expenses

(in thousands)

For the three months ended September 30, 2023, other operating expenses increased to $65.8 million from $55.9 million for the same period in 2022, an increase of $9.9 million, or 17.6%, primarily as a result of the following factors:

• Research and development expenses increased from $7.7 million to $11.1 million, an increase of $3.5 million or 45.2%, primarily due to expenses related to a 505(b)(2) filing for one product of approximately $1.6 million, and a higher level of activity associated with ongoing and new projects in the three months ended September 30, 2023.
• Selling, general, and administrative expenses increased from $30.1 million to $42.0 million, an increase of $11.9 million, or 39.6%, primarily due to increased employment related costs, legal expenses, as well as overall increase in activities required to support the growth in our business.
• Depreciation and amortization expense was $15.2 million for the three months ended September 30, 2023, compared to $14.2 million for the same period in 2022, an increase of $1.0 million. The increase is primarily due to the amortization of intangible assets acquired in the Slayback and Akorn asset acquisitions, and amortization of acquired in-process research and development ("IPR&D") which commenced in three months ended September 30, 2023.
• We recognized a gain of $(2.6) million and loss of $2.5 million in the three months ended September 30, 2023 and 2022, respectively, for the contingent consideration fair value adjustment. The change in the fair value adjustment is primarily related to a change in the anticipated cash flows, specifically extending the timeframe over which cash flows will be generated by the products, and the passage of time (i.e., moving closer to the anticipated payment date of the consideration), and an increase to the probability of payment for the product development-based milestone payments.
• We recognized restructuring activities expenses of $1.5 million in the three months ended September 30, 2022, in relation to the closure of our Oakville, Ontario, Canada facility. Costs included $0.3 million in termination benefits and $1.2 million in fixed asset impairments and accelerated depreciation. There were no restructuring expenses recognized in the three months ended September 30, 2023.

Other Expense, net

(in thousands)

For the three months ended September 30, 2023, we recognized total other expense, net of $6.4 million versus total other expense of $7.2 million for the same period in 2022, a decrease of $0.8 million. Interest expense, net for the three months ended September 30, 2023 and 2022 consists primarily of interest expense on borrowings under our Term Facility, amortization of deferred debt issuance costs, the interest income related to the interest rate swap, and interest earned on cash balances. The decrease in interest expense, net is primarily due to an increase in interest income from our interest rate swap and increased interest income earned on higher cash balances. For the three months ended September 30, 2023, there was $0.1 million of interest capitalized into construction in progress. For the three months ended September 30, 2022, there was less than $0.1 million of interest capitalized into construction in progress, representing an offset to interest expense.

Income Tax (Expense) Benefit

(in thousands)

Income tax (expense) benefit consists of current and deferred components, which include changes in our deferred tax assets, our deferred tax liabilities, and our valuation allowance.

For the three months ended September 30, 2023, we recognized an income tax expense of $1.6 million. The Company's effective tax rate was 13.6% after discrete items for the three months ended September 30, 2023. The effective tax rate differed from the federal statutory rate of 21% primarily due to the recognition of the U.S. federal research and development credit, permanent differences, and stock based compensation.

For the three months ended September 30, 2022, we recognized an income tax benefit of $3.6 million. The income tax benefit resulted from applying an estimated annual worldwide effective tax rate of 29.6% to pre-tax consolidated loss of $12.2 million reported during the period. There were no material discrete items occurring during the three months ended September 30, 2022.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

Net Revenues

(in thousands)

Net revenues for the nine months ended September 30, 2023 were $355.2 million compared to $222.2 million for the same period in 2022, an increase of 59.9%, primarily as a result of the following factors:

• Net revenues for generic pharmaceutical products were $197.6 million during the nine months ended September 30, 2023, an increase of 29.9% compared to $152.1 million for the same period in 2022, driven by increased volumes on the base business, increased volumes from the inclusion of 2022 launches in 2023 and 2023 new product launches. From a product perspective, the increase was principally driven by revenues from year over year increases in products such as Acebutolol, Colestipol, Digoxin, Famotidine, Fluoxetine, Glipizide, Mixed Amphetamine Salts Extended Release, Miglustat, Misoprostol, Nitrofurantoin, Prochlorperazine, Pyrazinamide, Thyroid, Tolterodine, Trimethorpim, and various other products tempered by a decrease in revenues of Cholestyramine, Fenofibrate, Mesalamine, Oxybutynin Chloride, and Prazosin, among others.
• Net revenues for established brand pharmaceutical products, royalties, and other pharmaceutical services were $87.2 million during the nine months ended September 30, 2023, an increase of 89.7% compared to $46.0 million for the same period in 2022, driven by a net increase in volume.
• Net revenues of rare disease pharmaceutical products, which consist entirely of sales of Cortrophin Gel, were $70.4 million during the nine months ended September 30, 2023 an increase of $46.3 million from $24.1 million for the same period in 2022. This increase was driven by increased volume in this second year of launch (product was launched in late January 2022).

In addition to the above, within our Generic, established brand, and other segment in the current year period, we were successful in supplying incremental volume in markets that were experiencing supply chain disruptions for competing products. Generally, when opportunities for volume and revenue upside related to our products arise in the marketplace, there is no assurance as to how long these favorable market conditions may persist. Recently, certain of these market conditions changed, and as a result, we expect fourth quarter 2023 demand and resultant revenues for certain generic and established brand products to be significantly lower as compared to the rate achieved during the first nine months of 2023.

Cost of Sales (Excluding Depreciation and Amortization)

(in thousands)

For the nine months ended September 30, 2023, cost of sales increased to $128.1 million from $102.5 million for the same period in 2022, an increase of $25.6 million, or 25.0%. The increase is primarily due to a significant increase in sales volumes of generic and rare disease pharmaceutical products. During the nine months ended September 30, 2022, we recognized $5.3 million in cost of sales representing the excess of fair value over cost for inventory acquired in acquisitions and subsequently sold during the nine months ended September 30, 2022. There are no comparable expenses in the nine months ended September 30, 2023.

Cost of sales, as a percentage of net revenues, decreased from 46.1% to 36.1% for the nine months ended September 30, 2023, compared to the same period in 2022. The decrease was primarily due to the non-recurrence of $5.3 million expense recognized in the nine months ended September 30, 2022, related to the excess of fair value over cost for inventory acquired in a business combination, as well as the increased sales of Established brand pharmaceutical products, royalties, and other pharmaceutical services products and Cortrophin Gel coupled with increased generic volumes with a mix shift in higher margin products.

During the nine months ended September 30, 2023, no single vendor represented more than 10% of inventory purchases. During the nine months ended September 30, 2022 we purchased 13% of our inventory from one supplier.

Other Operating Expenses

(in thousands)

(1) Not meaningful

For the nine months ended September 30, 2023, other operating expenses increased to $186.8 million from $156.8 million for the same period in 2022, an increase of $30.0 million, or 19.2%, primarily as a result of the following factors:

• Research and development expenses increased from $17.1 million to $24.4 million, an increase of $7.3 million or 42.8%, primarily due to expenses related to a 505(b)(2) filing for one product of approximately $1.6 million, and a higher level of activity associated with ongoing and new projects in the nine months ended September 30, 2023.
• Selling, general, and administrative expenses increased from $90.9 million to $117.2 million, an increase of $26.4 million, or 29.0%, primarily due to increased employment related costs, legal expenses, as well as an overall increase in activities required to support the growth of our business.
• Depreciation and amortization expense was $44.6 million for the nine months ended September 30, 2023, compared to $42.5 million for the same period in 2022, an increase of $2.1 million. The increase is primarily due to an increase in amortization expense related to intangible assets acquired in the Oakrum asset acquisition, and amortization of IPR&D which commenced during the nine months ended September 30, 2023.
• We recognized a gain of $(0.6) million and $2.1 million loss in the nine months ended September 30, 2023 and 2022, respectively, for the contingent consideration fair value adjustment. The change in the fair value adjustment is primarily related to a change in the anticipated cash flows, specifically extending the timeframe over which cash flows will be generated by the products, and the passage of time (i.e., moving closer to the anticipated payment date of the consideration), and an increase to the probability of payment for the product development-based milestone payments.
• We recognized restructuring activities of $1.1 million of expense in the nine months ended September 30, 2023, in relation to the closure of our Oakville, Ontario, Canada facility. Costs included severance and other employee benefits costs of $0.2 million, and $0.7 million of accelerated depreciation costs. We recognized restructuring activities of $4.1 million of expense in the nine months ended September 30, 2022, in relation to the closure of our Oakville, Ontario, Canada facility. Costs included $1.8 million in termination benefits, $2.1 million in fixed asset impairments and accelerated depreciation, and $0.3 million of other costs.
• We recognized an impairment of $0.1 million in the nine months ended September 30, 2022, in relation to an ANDA asset. No impairment charges were recognized in the nine months ended September 30, 2023.

Other Expense, net

(in thousands)

For the nine months ended September 30, 2023, we recognized total other expense, net of $21.3 million versus total other expense of $19.8 million for the same period in 2022, an increase of $1.5 million. Interest expense, net for the nine months ended September 30, 2023 and 2022 consisted primarily of interest expense on borrowings under our Term Facility, amortization of deferred debt issuance costs, the effects of the interest rate swap, and interest earned on cash balances. The increase in interest expense is due to an increased borrowing rate on the Term Facility and an increase in amortization of finance fees offset by income from our interest rate swap and increased interest income earned on higher cash balances. For the nine months ended September 30, 2023, there was $0.4 million of interest capitalized into construction in progress. For the nine months ended September 30, 2022, there was less than $0.1 million of interest capitalized into construction in progress, representing an offset to interest expense.

Income Tax (Expense) Benefit

(in thousands)

For the nine months ended September 30, 2023, we recognized an income tax expense of $1.3 million. The Company's effective tax rate was 6.9% after discrete items for the nine months ended September 30, 2023. The effective tax rate differed from the federal statutory rate of 21% primarily due to the recognition of the U.S. federal research and development credit, permanent differences, and stock based compensation.

For the nine months ended September 30, 2022, we recognized an income tax benefit of $13.3 million. The income tax benefit resulted from applying an estimated annual worldwide effective tax rate of 23.3% to pre-tax consolidated loss of $56.9 million reported during the period. There were no material discrete items occurring during the nine months ended September 30, 2022.

LIQUIDITY AND CAPITAL RESOURCES

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. As of September 30, 2023, $3.0 million of principal of the loan was recorded as current borrowings in the condensed consolidated balance sheet. As of September 30, 2023, we had not drawn on the Revolving Facility and $40.0 million remained available for borrowing subject to certain conditions.

Equity Financing

In May 2023, through a public offering, we completed the issuance and sale of 2,183,545 shares of ANI common stock, resulting in net proceeds after issuance costs of $80.6 million. The proceeds are intended to be used to in-license, acquire or invest in additional businesses, technologies, products or assets, to fund our commercialization efforts, including, but not limited to, sales and marketing and consulting expenses related thereto, and for general corporate purposes.

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 September 30, 2023, will be sufficient to enable us to meet our working capital requirements and debt obligations for at least the next 12 months.

Cash Flows

The following table summarizes the net cash and cash equivalents (used in) provided by operating activities, investing activities, and financing activities for the periods indicated:

(in thousands)

Net Cash Provided by (Used in) Operations

Net cash provided by operating activities was $74.2 million for the nine months ended September 30, 2023, compared to $26.8 million used in operating activities during the same period in 2022, a change of $101.0 million. The increase was driven by net income in the current year period due to increased sales and gross profit and the non-recurrence of significant utilization of cash during the initial launch period of Cortrophin Gel in 2022, as well as other net changes in our assets and liabilities.

Net Cash Used in Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2023 was $13.7 million, principally due to $6.6 million of capital expenditures and consideration paid for asset acquisitions of ANDAs from Akorn Holding Company and Slayback Pharma Limited Liability Company totaling $7.1 million. Net cash used in investing activities for the nine months ended September 30, 2022 was $12.6 million, principally due to $5.7 million of capital expenditures and the consideration paid for asset acquisitions of intangible assets totaling $7.6 million, partially offset by $0.8 million of proceeds from the sale of long-lived assets during the period.

Net Cash Provided by (Used in) Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2023 was $79.4 million, principally due to $80.6 million in proceeds from the May 2023 public offering and $7.0 million from proceeds from stock option exercises and ESPP purchases. This is offset by cash used in financing activities related to $2.3 million maturity payments on the Term Facility, $4.8 million of treasury stock purchased in relation to restricted stock vests, and $1.2 million convertible preferred stock dividends paid. Net cash used in financing activities for the nine months ended September 30, 2022 was $4.6 million, principally due to the $2.3 million maturity payments on the Term Facility, $1.8 million of treasury stock purchased in relation to restricted stock vests, and $1.2 million convertible preferred stock dividends paid.

CRITICAL ACCOUNTING ESTIMATES

A summary of our significant accounting policies is included in Part II, Item 8. Consolidated Financial Statements, Note 1, Description of Business and Summary of Significant Accounting Policies, in our Annual Report on Form 10-K for the year ended December 31, 2022. Certain of our accounting policies are considered critical, as these policies require significant, difficult or complex judgments by management, often requiring the use of estimates about the effects of matters that are inherently uncertain. There have been no material changes to our critical accounting estimates since the 2022 Form 10-K.

CONTRACTUAL OBLIGATIONS

As of September 30, 2023, our contractual obligations have not changed materially from the amounts reported in our 2022 Form 10-K.

Market risks include interest rate risk, equity risk, foreign currency exchange rate risk, commodity price risk, and other relevant market rate or price risks. Of these risks, interest rate risk, equity risk, and foreign currency exchange rate risk could have a significant impact on our results of operations. There have been no material changes in our exposure to market risks since the end of the most recent fiscal year as reported in our 2022 Form 10-K.

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management has carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of September 30, 2023. Due to the material weaknesses in internal control over financial reporting, our principal executive officer and principal financial officer concluded that, due to the on-going remediation associated with the material weakness identified in our 2022 Annual Report on Form 10-K (“2022 Form 10-K"), our disclosure controls and procedures were ineffective as of September 30, 2023 to provide reasonable assurance that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.

For a more comprehensive discussion of the material weaknesses in internal control over financial reporting previously identified by management as of December 31, 2022 and the remedial measures undertaken to address these material weaknesses, investors are encouraged to review Item 9A, Disclosure Controls and Procedures, of our 2022 Form 10-K.

Since March 8, 2023, the date of our 2022 Form 10-K, management has made progress with remediation efforts, including the following:

• Hired a qualified Vice President and Corporate Controller with significant accounting and control expertise.
• Added accounting resources at our Novitium location and in other areas of the overall ANI finance and accounting organization.
• Implemented our ERP system and consolidated our accounts payable process at Novitium into ANI company controls and procedures as of July 1, 2023.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting, other than the ongoing remediation effort discussed above, during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In addition to the other information set forth in this report, please carefully consider the factors described under the heading “Risk Factors” in our most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2022 in Part I, Item 1A and in our Form 8-K filed on May 11, 2023. The risks described are not the only risks facing us. Additional risks and uncertainties not currently known to us, or that our management currently deems to be immaterial, also may adversely affect our business, financial condition, and/or operating results.

The following risk factors are provided to update and supplement the risk factors of the Company previously disclosed under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 and the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023.

We are subject to United States federal and state laws related to healthcare fraud and abuse and health information privacy and security, and the failure to comply with such laws may adversely affect our business.

Many of our products are eligible for reimbursement under federal and state health care programs such as Medicaid, Medicare, TRICARE, and/or state pharmaceutical assistance programs, and as a result, certain U.S. federal and state healthcare laws and regulations pertaining to fraud and abuse and patients’ rights are, and will be, applicable to our business. We could be subject to healthcare fraud and abuse and patient privacy regulation by both the federal government and the states in which we conduct our business.

The domestic and foreign laws that may affect our ability to operate include, but are not limited to: (i) the U.S. Anti-Kickback Statute, which applies to our marketing and research practices, educational programs, pricing policies and relationships with healthcare providers or other entities, by prohibiting, among other things, soliciting, receiving, offering or paying remuneration, directly or indirectly, as a means of inducing, or in exchange for, either the referral of an individual or the purchase or recommendation of an item or service reimbursable under a federal healthcare program, such as the Medicare and Medicaid programs; (ii) U.S. federal civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment to Medicare, Medicaid or other federal healthcare program payers that are false or fraudulent; (iii) new federal criminal statutes that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters; (iv) the U.S. Physician Payments Sunshine Act, which among other things, requires certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program to report annually information related to certain “payments or other transfers of value” made to physicians, physician assistants, advanced practice nurses and teaching hospitals, and ownership and investment interests held by physicians and their immediate family members, and similar state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government and may require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; (v) the government pricing rules applicable to the Medicare and Medicaid programs, the 340B Drug Pricing Program, the U.S. Department of Veterans Affairs program, the TRICARE program, and state price transparency reporting laws; and (vi) state and foreign law equivalents of each of the above U.S. laws, such as anti-kickback and false claims laws which may apply to items or services. Defense of litigation claims and government investigations can be costly, time-consuming, and distract management, and it is possible that we could incur judgments, settlements, deferred or non-prosecution agreements, or corporate integrity agreements that would require us to change the way we operate our business. We are committed to conducting the sales and marketing of our products in compliance with the healthcare fraud and abuse laws, but certain applicable laws may impose liability even in the absence of specific intent to defraud. Furthermore, should there be ambiguity, a governmental authority may take a position contrary to a position we have taken, or should an employee violate these laws without our knowledge, a governmental authority may impose civil and/or criminal sanctions.

Any adverse outcome in these types of actions, or the imposition of penalties or sanctions for failing to comply with fraud and abuse laws, could adversely affect us and may have a material adverse effect on our business, results of operations, financial condition and cash flows. Some of the statutes and regulations that govern our activities, such as federal and state anti-kickback and false claims laws, are broad in scope, and while exemptions and safe harbors protecting certain common activities exist, they are often narrowly drawn and construed by the courts. While we manage our business activities to comply with these statutory provisions, due to their breadth, complexity and, in certain cases, uncertainty of application, it is possible that our activities could be subject to challenge by various government agencies. In particular, the FDA, the DOJ, the Office of Inspector General at the U.S. Department of Health and Human Services, and other agencies have increased their enforcement activities with respect to the manufacturing, sales, marketing, research and similar activities of pharmaceutical companies in recent years, and many pharmaceutical companies have been subject to government investigations related to these practices. A determination that we are in violation of these and/or other government regulations and legal requirements may result in civil damages and penalties, criminal fines and prosecution, administrative remedies, the recall of products, the total or partial suspension of manufacturing and/or distribution activities, seizure of products, injunctions, whistleblower lawsuits, failure to obtain approval of pending product applications, withdrawal of existing product approvals, exclusion from participation in government healthcare programs and other sanctions.

Any of these types of investigations or enforcement actions could affect our ability to commercially distribute our products and could materially and adversely affect our business, financial condition, results of operations and cash flows.”

We are subject to certain privacy laws, information security laws, regulations, policies and contractual obligations related to data privacy and security and changes in such laws, regulations, policies, contractual obligations and failure to comply with such requirements, as well as any breach of unsecured identifiable personal information protected by law, could subject us to significant costs, fines, penalties (civil and criminal), and civil litigation which may have a material adverse effect on our business, financial condition or results of operations.

As regulatory focus on privacy issues continues to increase, and laws and regulations concerning the protection of personal information expand and become more complex, these potential risks to our business could intensify. In addition, the interpretation and application of consumer, health-related, and data protection laws are often uncertain, contradictory, and in flux, which complicates compliance efforts.

Our operations in an international market subject us to additional regulatory oversight both in the international market and in the U.S., as well as, social, and political uncertainties, which could cause a material adverse effect on our business, financial position, and operating results.

We are subject to certain risks associated with having assets and operations located in a foreign jurisdiction, including our operations in India. Our operations in India may be adversely affected by general economic conditions and economic and fiscal policy, including changes in exchange rates and controls, interest rates and taxation policies, and increased government regulation, which could have a material adverse effect on our business, financial position, and operating results.

Additionally, involvement in a war or other military action or international acts of terrorism may cause significant disruption to commerce throughout the world. To the extent that such disruptions result in (i) delays or cancellations of customer orders, (ii) a general decrease in consumer spending on healthcare technology, (iii) our inability to effectively market and distribute our products globally (iv) our inability to timely engage with and collect payment from our customers or (v) our inability to access capital markets, our business and results of operations could be materially and adversely affected. For example, in response to the continued conflict between Russia and Ukraine, the United States has imposed and may further impose, and other countries may additionally impose, broad sanctions or other restrictive actions against governmental and other entities in Russia. Additionally, further escalation of geopolitical tensions, such as the conflict in Israel and Gaza and the surrounding areas, could have a broader impact that extends into other markets where we do business. We are unable to predict whether acts of international terrorism or the involvement in a war or other military actions by the United States and/or the countries in which we sell or distribute our products will result in any long-term commercial disruptions or if such involvement or responses will have any long-term material adverse effect on our business, results of operations, or financial condition.