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TABLE OF CONTENTS
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One) | ||
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended March 31, 2013 | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to |
Commission File Number 333-169785
LANTHEUS MEDICAL IMAGING, INC.
(Exact name of registrant as specified in its charter)
Delaware (State of incorporation) | 51-0396366 (IRS Employer Identification No.) | |
331 Treble Cove Road, North Billerica, MA (Address of principal executive offices) | 01862 (Zip Code) |
(978) 671-8001
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:None
Securities registered pursuant to Section 12(g) of the Act:None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No ý
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filero | Accelerated filero | Non-accelerated filerý (Do not check if a smaller reporting company) | Smaller reporting companyo |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act) Yes o No ý
The registrant had 1,000 shares of common stock, $0.01 par value per share, issued and outstanding as of May 10, 2013.
The registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, during the preceding 12 months but is not subject to such filing requirements.
| | Page | ||||
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PART I. FINANCIAL INFORMATION | ||||||
Item 1. | Financial Statements (Unaudited) | 1 | ||||
Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended March 31, 2013 and 2012 | 1 | |||||
Condensed Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012 | 2 | |||||
Condensed Consolidated Statements of Stockholder's Deficit for the Three Months Ended March 31, 2013 and the Year Ended December 31, 2012 | 3 | |||||
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012 | 4 | |||||
Notes to Unaudited Condensed Consolidated Financial Statements | 5 | |||||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 26 | ||||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 39 | ||||
Item 4. | Controls and Procedures | 40 | ||||
PART II. OTHER INFORMATION | ||||||
Item 1. | Legal Proceedings | 41 | ||||
Item 1A. | Risk Factors | 41 | ||||
Item 5. | Other Information | 41 | ||||
Item 6. | Exhibits | 42 | ||||
Signatures | 43 | |||||
Exhibit Index | 44 |
Lantheus MI Intermediate, Inc. and subsidiaries
Condensed Consolidated Statements of Comprehensive (Loss) Income
(unaudited, in thousands)
| For the Three Months Ended March 31, | ||||||
---|---|---|---|---|---|---|---|
| 2013 | 2012 | |||||
Revenues | |||||||
Net product revenues | $ | 68,204 | $ | 82,631 | |||
License and other revenues | 2,814 | 2,720 | |||||
Total revenues | 71,018 | 85,351 | |||||
Cost of goods sold | 48,206 | 52,535 | |||||
Gross profit | 22,812 | 32,816 | |||||
Operating expenses | |||||||
General and administrative expenses | 10,253 | 9,199 | |||||
Sales and marketing expenses | 9,797 | 9,993 | |||||
Research and development expenses | 11,998 | 10,362 | |||||
Proceeds from manufacturer | — | (29,914 | ) | ||||
Total operating expenses | 32,048 | (360 | ) | ||||
Operating (loss) income | (9,236 | ) | 33,176 | ||||
Interest expense, net | (10,669 | ) | (10,346 | ) | |||
Other income, net | 721 | 305 | |||||
(Loss) Income before income taxes | (19,184 | ) | 23,135 | ||||
Provision for income taxes | 628 | 2,237 | |||||
Net (loss) income | (19,812 | ) | 20,898 | ||||
Foreign currency translation, net of taxes | (597 | ) | 867 | ||||
Total comprehensive (loss) income | $ | (20,409 | ) | $ | 21,765 | ||
See notes to unaudited condensed consolidated financial statements.
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Lantheus MI Intermediate, Inc. and subsidiaries
Condensed Consolidated Balance Sheets
(unaudited, in thousands except share data)
| March 31, 2013 | December 31, 2012 | |||||
---|---|---|---|---|---|---|---|
Assets | |||||||
Current assets | |||||||
Cash and cash equivalents | $ | 29,170 | $ | 31,595 | |||
Accounts receivable, net of allowance of $526 and $301 | 38,143 | 41,380 | |||||
Inventory | 17,603 | 18,048 | |||||
Income tax receivable | 733 | 736 | |||||
Deferred tax assets | 92 | 115 | |||||
Other current assets | 5,142 | 2,943 | |||||
Total current assets | 90,883 | 94,817 | |||||
Property, plant and equipment, net | 108,017 | 109,573 | |||||
Capitalized software development costs, net | 1,927 | 2,234 | |||||
Intangibles, net | 63,111 | 66,802 | |||||
Goodwill | 15,714 | 15,714 | |||||
Deferred financing costs | 10,746 | 11,372 | |||||
Other long-term assets | 22,439 | 22,414 | |||||
Total assets | $ | 312,837 | $ | 322,926 | |||
Liabilities and Stockholder's Deficit | |||||||
Current liabilities | |||||||
Note payable | $ | 875 | $ | — | |||
Accounts payable | 17,152 | 18,945 | |||||
Accrued expenses | 44,217 | 29,689 | |||||
Deferred revenue | 2,684 | 7,320 | |||||
Total current liabilities | 64,928 | 55,954 | |||||
Asset retirement obligation | 5,570 | 5,416 | |||||
Long-term debt, net | 398,876 | 398,822 | |||||
Deferred tax liability | 174 | 435 | |||||
Other long-term liabilities | 37,722 | 36,652 | |||||
Total liabilities | 507,270 | 497,279 | |||||
Commitments and contingencies (see Note 13) | |||||||
Stockholder's deficit | |||||||
Common stock ($0.001 par value, 10,000 shares authorized; 1 share issued and outstanding) | — | — | |||||
Due from parent | (1,242 | ) | (1,353 | ) | |||
Additional paid-in capital | 2,543 | 2,325 | |||||
Accumulated deficit | (196,472 | ) | (176,660 | ) | |||
Accumulated other comprehensive income | 738 | 1,335 | |||||
Total stockholder's deficit | (194,433 | ) | (174,353 | ) | |||
Total liabilities and stockholder's deficit | $ | 312,837 | $ | 322,926 | |||
See notes to unaudited condensed consolidated financial statements.
2
Lantheus MI Intermediate, Inc. and subsidiaries
Condensed Consolidated Statements of Stockholder's Deficit
(unaudited, in thousands except share data)
| Common Stock | | | | Accumulated Other Comprehensive Income (Loss) | | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Due from Parent | Additional Paid-in Capital | Accumulated Deficit | Total Stockholder's Deficit | ||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||
Balance at January 1, 2012 | 1 | $ | — | $ | — | $ | 1,085 | $ | (134,659 | ) | $ | 371 | $ | (133,203 | ) | |||||||
Net loss | — | — | — | — | (42,001 | ) | — | (42,001 | ) | |||||||||||||
Due from parent (See Note 14) | — | — | (1,353 | ) | — | — | — | (1,353 | ) | |||||||||||||
Foreign currency translation | — | — | — | — | — | 964 | 964 | |||||||||||||||
Stock-based compensation | — | — | — | 1,240 | — | — | 1,240 | |||||||||||||||
Balance at December 31, 2012 | 1 | — | (1,353 | ) | 2,325 | (176,660 | ) | 1,335 | (174,353 | ) | ||||||||||||
Net loss | — | — | — | — | (19,812 | ) | — | (19,812 | ) | |||||||||||||
Payments from parent | — | — | 111 | — | — | — | 111 | |||||||||||||||
Foreign currency translation | — | — | — | — | — | (597 | ) | (597 | ) | |||||||||||||
Stock-based compensation | — | — | — | 218 | — | — | 218 | |||||||||||||||
Balance at March 31, 2013 | 1 | $ | — | $ | (1,242 | ) | $ | 2,543 | $ | (196,472 | ) | $ | 738 | $ | (194,433 | ) | ||||||
See notes to unaudited condensed consolidated financial statements.
3
Lantheus MI Intermediate, Inc. and subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
| For the Three Months Ended March 31, | ||||||
---|---|---|---|---|---|---|---|
| 2013 | 2012 | |||||
Cash flow from operating activities | |||||||
Net (loss) income | $ | (19,812 | ) | $ | 20,898 | ||
Adjustments to reconcile net (loss) income to cash flow from operating activities | |||||||
Depreciation and amortization | 7,211 | 7,450 | |||||
Provision for excess and obsolete inventory | 1,123 | 546 | |||||
Stock-based compensation | 257 | 574 | |||||
Deferred income taxes | (227 | ) | 255 | ||||
Other | 666 | 85 | |||||
Increase (decrease) in cash from operating assets and liabilities | |||||||
Accounts receivable | 2,969 | (6,442 | ) | ||||
Prepaid expenses and other assets | (945 | ) | (845 | ) | |||
Inventory | (258 | ) | 1,891 | ||||
Income taxes | 3 | 1,154 | |||||
Due from parent | — | 44 | |||||
Deferred revenue | (4,272 | ) | 1,906 | ||||
Accounts payable | (1,236 | ) | (3,312 | ) | |||
Accrued expenses and other liabilities | 14,371 | 11,000 | |||||
Cash (used in) provided by operating activities | (150 | ) | 35,204 | ||||
Cash flows from investing activities | |||||||
Capital expenditures | (1,449 | ) | (2,044 | ) | |||
Purchase of certificate of deposit | — | (225 | ) | ||||
Cash used in investing activities | (1,449 | ) | (2,269 | ) | |||
Cash flows from financing activities | |||||||
Payments on note payable | (389 | ) | (457 | ) | |||
Deferred financing costs | (110 | ) | (198 | ) | |||
Payments from parent | 111 | — | |||||
Cash used in financing activities | (388 | ) | (655 | ) | |||
Effect of foreign exchange rate on cash | (438 | ) | 448 | ||||
(Decrease) Increase in cash and cash equivalents | (2,425 | ) | 32,728 | ||||
Cash and cash equivalents, beginning of period | 31,595 | 40,607 | |||||
Cash and cash equivalents, end of period | $ | 29,170 | $ | 73,335 | |||
Supplemental disclosure of cash flow information | |||||||
Interest paid | $ | 6 | $ | 8 | |||
Income taxes paid, net | $ | 178 | $ | 533 | |||
Noncash investing and financing activities | |||||||
Property, plant and equipment included in accounts payable and accrued expenses | $ | 513 | $ | 363 |
See notes to unaudited condensed consolidated financial statements.
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Lantheus MI Intermediate, Inc. and subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Unless the context requires otherwise, references to the "Company," "Lantheus," "our company," "we," "us" and "our" refer to Lantheus MI Intermediate, Inc. and its direct and indirect subsidiaries, references to "Lantheus Intermediate" refer to only Lantheus MI Intermediate, Inc., the parent of Lantheus Medical Imaging, Inc., references to "Holdings" refer to Lantheus MI Holdings, Inc., the parent of Lantheus Intermediate and references to "LMI" refer to Lantheus Medical Imaging, Inc., the subsidiary of Lantheus Intermediate. Solely for convenience, we refer to trademarks, service marks and trade names without the TM, SM and ® symbols. Such references are not intended to indicate, in any way, that we will not assert, to the fullest extent permitted under applicable law, our rights to our trademarks, service marks and trade names.
1. Business Overview
Overview
The Company manufactures, markets, sells and distributes medical imaging products globally with operations in the United States ("U.S."), Puerto Rico, Canada and Australia and distribution relationships in Europe, Asia Pacific and Latin America. The Company provides medical imaging products, primarily focused on cardiovascular diagnostic imaging, to nuclear physicians, cardiologists, radiologists, internal medicine physicians, independent delivery networks, group purchasing organizations and technologists/sonographers working in a variety of clinical settings.
The Company's principal products include:
- •
- DEFINITY—an ultrasound contrast agent;
- •
- TechneLite—a generator that provides the radioisotope used to radiolabel Cardiolite and other radiopharmaceuticals;
- •
- Cardiolite—a myocardial perfusion imaging agent; and
- •
- Xenon—a radiopharmaceutical inhaled gas to assess pulmonary function and evaluate blood flow, particularly in the lungs.
In the U.S., the Company's nuclear imaging products are primarily distributed through radiopharmacy chains, with a small portion of the sales of these products also made through the Company's direct sales force to hospitals and clinics that maintain their own in-house radiopharmacies. In the U.S., sales of the Company's contrast agents are made through a direct sales force. Outside of the U.S., the Company owns five radiopharmacies in Canada and two radiopharmacies in each of Puerto Rico and Australia. The Company also maintains a direct sales force in each of these countries. In the rest of the world, the Company relies on third-party distributors to sell both nuclear imaging and contrast agent products.
Basis of Consolidation and Presentation
The financial statements have been prepared in United States dollars, in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
In the opinion of the Company's management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the Company's financial statements for interim periods in
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Lantheus MI Intermediate, Inc. and subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
1. Business Overview (Continued)
accordance with U.S. GAAP. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company's consolidated financial statements and the accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012 ("2012 Form 10-K"). The Company's accounting policies are described in the "Notes to Consolidated Financial Statements" in the 2012 Form 10-K and updated, as necessary, in this Form 10-Q. There were no changes to the Company's accounting policies since December 31, 2012. The year-end condensed consolidated balance sheet data presented for comparative purposes was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. The results of operations for the three months ended March 31, 2013 are not necessarily indicative of the operating results for the full year or for any other subsequent interim period.
Recent Events
The Company generated a net loss of $19.8 million during the three months ended March 31, 2013 and had an accumulated deficit of $196.5 million at March 31, 2013. The Company currently relies on Ben Venue Laboratories ("BVL") as one of two manufacturers of DEFINITY and Cardiolite products and its sole source manufacturer of Neurolite. In July 2010, BVL temporarily shut down the facility in which it manufactures products for a number of customers, including the Company, in order to upgrade the facility to meet certain regulatory requirements. BVL resumed manufacturing DEFINITY in the second quarter of 2012 and released product to the Company at the end of the second quarter of 2012. BVL has also resumed manufacturing Cardiolite products. The Company currently believes that Neurolite will again become available from BVL in the latter half of 2013.
The Company continues to expedite a number of its technology transfer programs to secure and qualify production of its BVL-manufactured products with alternate contract manufacturer sites. In February 2013, the FDA informed the Company that the Jubilant HollisterStier ("JHS") facility was approved to manufacture DEFINITY, and the Company is now shipping JHS-manufactured DEFINITY to customers. The Company also has on-going technology transfer activities at JHS for its Cardiolite product supply and Neurolite but is not certain as to when that technology transfer will be completed and when the Company will actually receive supply of Cardiolite products and Neurolite from JHS. In the meantime, the Company also has an alternate manufacturer for a portion of its Cardiolite sales demand. The Company is also pursuing new manufacturing relationships to establish and secure additional long-term or alternative suppliers of its key products but is uncertain of the timing as to when any other supply arrangements would provide meaningful quantities of products to the Company.
During the first quarter of 2012, the Company received $30.0 million from BVL to compensate the Company for its business losses associated with the lack of product supply during the outage pursuant to a Transition Services Agreement. This payment is included within operating income as proceeds from manufacturer. The net proceeds totaled $29.9 million in the statement of comprehensive (loss) income for the three months ended March 31, 2012.
The Company continues to experience losses as a result of the prolonged supply interruption from BVL. The Company was able to amend its revolving credit facility (the "Facility") covenants on
6
Lantheus MI Intermediate, Inc. and subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
1. Business Overview (Continued)
March 25, 2013 as further described in Note 10 of the 2012 Annual Report on Form 10-K, which allowed the Company to maintain compliance with such covenants by a narrow margin at March 31, 2013. If the Company is not successful in achieving its forecasted results, which include assumptions that BVL and JHS will manufacture and release adequate product supply on a timely and consistent basis, the Company is successful with the remainder of the JHS technology transfer programs for Cardiolite product and Neurolite and the Company is able to continue to grow DEFINITY sales, the Company could be in non-compliance with one or more of the financial ratio covenants in the Facility in the next twelve months. If this were to occur, the Company would either seek an additional amendment to the Facility or a waiver or consent in connection with the appropriate financial covenants to eliminate such potential default or seek to secure an alternative financing arrangement. There can be no assurance that the Company would be able to obtain an amendment, waiver or consent from its lenders.
The Company has taken actions during March 2013 to substantially reduce its discretionary spending. In particular, the Company began to implement a strategic shift in how it will fund its research and development ("R&D") programs. The Company will reduce during 2013 its internal R&D resources, while at the same time seeking to engage one or more strategic partners to assist in the further development and commercialization of its development candidates, including flurpiridaz F 18, 18F LMI 1195 and LMI 1174. The Company will complete its 301 trial for flurpiridaz F 18 with internal funding while seeking to engage strategic partners to assist with the further development and possible commercialization of the agent. For the other two development candidates, 18F LMI 1195 and LMI 1174, the Company will also seek to engage strategic partners to assist with the on-going development activities relating to these agents.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. The more significant estimates reflected in the Company's condensed consolidated financial statements include certain judgments regarding revenue recognition, goodwill and intangible asset valuation, inventory valuation and potential losses on purchase commitments, asset retirement obligations, income tax liabilities, deferred tax assets and liabilities, accrued expenses and stock-based compensation. Actual results could materially differ from those estimates or assumptions.
2. Summary of Significant Accounting Policies
Revenue Recognition
The Company recognizes revenue when evidence of an arrangement exists, title has passed, the risks and rewards of ownership have transferred to the customer, the selling price is fixed or determinable, and collectability is reasonably assured. For transactions for which revenue recognition criteria have not yet been met, the respective amounts are recorded as deferred revenue until such point in time the criteria are met and revenue can be recognized. Revenue is recognized net of reserves, which consist of allowances for returns and rebates.
7
Lantheus MI Intermediate, Inc. and subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (Continued)
Revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer. Supply or service transactions may involve the charge of a nonrefundable initial fee with subsequent periodic payments for future products or services. The up-front fees, even if nonrefundable, are earned (and revenue is recognized) as the products and/or services are delivered and performed over the term of the arrangement.
Goodwill
Goodwill is not amortized, but is instead tested for impairment at least annually and whenever events or circumstances indicate that it is more likely than not that it may be impaired. The Company has elected to perform the annual test for indications of goodwill impairment as of October 31 of each year. All goodwill has been allocated to the U.S. operating segment.
The strategic shift in how the Company will fund its R&D programs significantly altered the expected future costs and revenues associated with the Company's development candidates. Accordingly, this action was deemed to be a triggering event for an evaluation of the recoverability of the Company's goodwill as of March 31, 2013. The Company performed an interim impairment test and determined that there was no goodwill impairment as of March 31, 2013. There were no events as of December 31, 2012 that triggered an interim impairment test.
The Company calculated the fair value of its reporting units using the income approach which utilizes discounted forecasted future cash flows and the market approach which utilizes fair value multiples of comparable publicly traded companies. The discounted cash flows are based on the Company's most recent long-term financial projections and are discounted using a risk adjusted rate of return which is determined using estimates of market participant risk-adjusted weighted-average costs of capital and reflects the risks associated with achieving future cash flows. The market approach is calculated using the guideline company method, where the Company uses market multiples derived from stock prices of companies engaged in the same or similar lines of business. A combination of the two methods is utilized to derive the fair value of the business in order to decrease the inherent risk associated with each model if used independently.
3. Fair Value of Financial Instruments
The tables below present information about the Company's assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012, and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points from active markets that are observable, such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs utilize unobservable data points for the asset or liability.
8
Lantheus MI Intermediate, Inc. and subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
3. Fair Value of Financial Instruments (Continued)
March 31, 2013
(in thousands) | Total fair value | Quoted prices in active markets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Money market | $ | 1,508 | $ | 1,508 | $ | — | $ | — | |||||
Certificates of deposit—restricted | 325 | — | 325 | — | |||||||||
$ | 1,833 | $ | 1,508 | $ | 325 | $ | — | ||||||
December 31, 2012
(in thousands) | Total fair value | Quoted prices in active markets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Money market | $ | 2,004 | $ | 2,004 | $ | — | $ | — | |||||
Certificates of deposit—restricted | 328 | — | 328 | — | |||||||||
$ | 2,332 | $ | 2,004 | $ | 328 | $ | — | ||||||
At both March 31, 2013 and December 31, 2012, the Company has a $0.2 million certificate of deposit for which the Company's use of such cash is restricted and is included in the line item "Certificates of deposit—restricted" above. This investment is classified in other current assets on the consolidated balance sheet. The remaining $0.1 million represents a certificate of deposit that is collateral for a long-term lease and is included in other long-term assets on the condensed consolidated balance sheet. Certificates of deposit are classified within Level 2 of the fair value hierarchy as these are not traded on the open market.
At March 31, 2013, the Company had total cash and cash equivalents of $29.2 million, which included approximately $1.5 million of money market funds and $27.7 million of cash on-hand. At December 31, 2012, the Company had total cash and cash equivalents of $31.6 million, which included approximately $2.0 million of money market funds and $29.6 million of cash on-hand.
The estimated fair values of the Company's financial instruments, including its cash and cash equivalents, receivables, accounts payable and accrued expenses approximate the carrying values of these instruments due to their short term nature. The estimated fair value of the debt at March 31, 2013, based on Level 2 inputs of recent market activity available to the Company, was equal to the face value of $400.0 million. At December 31, 2012, the estimated fair value of the debt was $380.0 million compared to the face value of $400.0 million.
4. Income Taxes
The Company provides for income taxes at the end of each interim period based on the estimated effective tax rate for the full fiscal year in addition to discrete events which impact the interim period. The Company's effective tax rate differs from the U.S. statutory rate principally due to the rate impact of uncertain tax positions, valuation allowance changes and state taxes. Cumulative adjustments to the tax provision are recorded in the interim period in which a change in the estimated annual effective
9
Lantheus MI Intermediate, Inc. and subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
4. Income Taxes (Continued)
rate is determined. The Company's tax provision was $0.6 million and $2.2 million for the three months ended March 31, 2013 and 2012, respectively.
In connection with the Company's acquisition of the medical imaging business from Bristol-Myers Squibb Company ("BMS") in 2008, the Company obtained a tax indemnification agreement with BMS related to certain tax obligations arising prior to the acquisition of the Company, for which the Company has the primary legal obligation. The tax indemnification receivable is recognized within other long-term assets. The changes in the tax indemnification asset are recognized within other income, net in the condensed consolidated statement of comprehensive (loss) income. In accordance with the Company's accounting policy, the change in the tax liability and penalties and interest associated with these obligations (net of any offsetting federal or state benefit) is recognized within the tax provision. Accordingly, as these reserves change, adjustments are included in the tax provision while the offsetting adjustment is included in other income. Assuming that the receivable from BMS continues to be considered recoverable by the Company, there is no net effect on earnings related to these liabilities and no net cash outflows.
Within the next twelve months, approximately $2.6 million of unrecognized tax benefits primarily relating to state tax nexus and transfer pricing issues may be recognized due to the closing of statutes of limitation.
5. Inventory
The Company includes within current assets the amount of inventory that is estimated to be utilized within twelve months. Inventory that will be utilized after twelve months is classified within other long-term assets.
Inventory, classified in inventory or other long-term assets, consisted of the following:
(in thousands) | March 31, 2013 | December 31, 2012 | |||||
---|---|---|---|---|---|---|---|
Raw materials | $ | 8,246 | $ | 7,573 | |||
Work in process | 4,674 | 5,019 | |||||
Finished goods | 4,683 | 5,456 | |||||
Inventory | 17,603 | 18,048 | |||||
Other long-term assets | 1,683 | 2,090 | |||||
Total | $ | 19,286 | $ | 20,138 | |||
At March 31, 2013, inventories reported as other long-term assets included $1.5 million of raw materials and $0.2 million of finished goods. At December 31, 2012, inventories reported as other long-term assets included $1.5 million of raw materials and $0.6 million of finished goods.
The Company's Ablavar product was commercially launched in January 2010. The revenues for this product through March 31, 2013 have not been significant. At March 31, 2013 and December 31, 2012, the balances of inventory on-hand reflect approximately $2.5 million and $2.8 million, respectively, of finished products and raw materials related to Ablavar. LMI has an agreement with a supplier to provide Active Pharmaceutical Ingredient ("API") and finished products for Ablavar under which LMI is required to purchase future minimum quantities through September 30, 2014. At March 31, 2013, the
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Lantheus MI Intermediate, Inc. and subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
5. Inventory (Continued)
remaining purchase commitment under the agreement was approximately $9.4 million. The Company has a contract loss of $7.5 million associated with this future purchase commitment at both March 31, 2013 and December 31, 2012. The Company records the inventory when it takes delivery, at which time the Company assumes title and risk of loss.
In 2013, the Company transitioned the sales and marketing efforts for Ablavar from its direct sales force to the Company's customer service team in order to allow the direct sales force to drive DEFINITY growth following the Company's recent supply challenges. In the event that the Company does not meet its revised sales expectations for Ablavar or cannot sell the product it has committed to purchase prior to its expiration, the Company could incur additional inventory write-downs and/or losses on its purchase commitments.
6. Property, Plant and Equipment, net
Property, plant and equipment consisted of the following:
(in thousands) | March 31, 2013 | December 31, 2012 | |||||
---|---|---|---|---|---|---|---|
Land | $ | 22,450 | $ | 22,450 | |||
Buildings | 64,944 | 64,649 | |||||
Machinery, equipment and fixtures | 64,233 | 63,503 | |||||
Construction in progress | 6,979 | 7,331 | |||||
Accumulated depreciation | (50,589 | ) | (48,360 | ) | |||
Property, plant and equipment, net | $ | 108,017 | $ | 109,573 | |||
For each of the three month periods ended March 31, 2013 and 2012, depreciation expense related to property, plant and equipment was $2.4 million.
Included within machinery, equipment and fixtures are spare parts of approximately $2.7 million at both March 31, 2013 and December 31, 2012. Spare parts include replacement parts relating to plant and equipment and are either recognized as an expense when consumed or re-classified and capitalized as part of the related plant and equipment and depreciated over a time period not exceeding the useful life of the related asset.
Fixed assets dedicated to R&D activities, which were impacted by the recent R&D strategic shift, have a net book value of $5.2 million as of March 31, 2013. The Company believes these fixed assets may be utilized for either internally funded ongoing R&D activities or R&D activities funded by a strategic partner.
11
Lantheus MI Intermediate, Inc. and subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
7. Asset Retirement Obligations
The Company considers the legal obligation to remediate its facilities upon a decommissioning of its radioactive related operations as an asset retirement obligation. The operations of the Company have radioactive production facilities at its North Billerica, Massachusetts and San Juan, Puerto Rico sites.
The fair value of a liability for asset retirement obligations is recognized in the period in which the liability is incurred. The liability is measured at the present value of the obligation when incurred and is adjusted in subsequent periods as accretion expense is recorded. The corresponding asset retirement costs are capitalized as part of the carrying value of the related long-lived assets and depreciated over the asset's useful life.
The following is a reconciliation of the Company's asset retirement obligations for the three months ended March 31, 2013:
(in thousands) | | |||
---|---|---|---|---|
Balance at January 1, 2013 | $ | 5,416 | ||
Accretion expense | 154 | |||
Balance at March 31, 2013 | $ | 5,570 | ||
8. Intangibles, net
Intangibles, net consisted of the following:
| March 31, 2013 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | Cost | Accumulated amortization | Net | Weighted Average Useful Life | Amortization Method | |||||||||
Trademarks | $ | 53,390 | $ | 22,485 | $ | 30,905 | 8 years | Straight-line | ||||||
Customer relationships | 113,754 | 84,936 | 28,818 | 19 years | Accelerated | |||||||||
Other patents | 42,780 | 39,392 | 3,388 | 2 years | Straight-line | |||||||||
$ | 209,924 | $ | 146,813 | $ | 63,111 | |||||||||
| December 31, 2012 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | Cost | Accumulated amortization | Net | Weighted Average Useful Life | Amortization Method | |||||||||
Trademarks | $ | 53,390 | $ | 20,743 | $ | 32,647 | 8 years | Straight-line | ||||||
Customer relationships | 114,000 | 83,385 | 30,615 | 19 years | Accelerated | |||||||||
Other patents | 42,780 | 39,240 | 3,540 | 2 years | Straight-line | |||||||||
$ | 210,170 | $ | 143,368 | $ | 66,802 | |||||||||
For the three months ended March 31, 2013 and 2012, the Company recorded amortization expense for its intangible assets of $3.6 million and $4.1 million, respectively.
12
Lantheus MI Intermediate, Inc. and subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
8. Intangibles, net (Continued)
Expected future amortization expense related to the intangible assets is as follows:
(in thousands) | | |||
---|---|---|---|---|
Remainder of 2013 | $ | 10,839 | ||
2014 | 13,170 | |||
2015 | 11,495 | |||
2016 | 10,741 | |||
2017 | 3,724 | |||
2018 and thereafter | 13,142 | |||
$ | 63,111 | |||
9. Accrued Expenses
Accrued expenses are comprised of the following:
(in thousands) | March 31, 2013 | December 31, 2012 | |||||
---|---|---|---|---|---|---|---|
Compensation and benefits | $ | 6,813 | $ | 5,351 | |||
Accrued interest | 14,787 | 5,040 | |||||
Accrued professional fees | 1,730 | 1,628 | |||||
Research and development services | 2,862 | 3,205 | |||||
Freight, distribution and operations | 2,796 | 3,633 | |||||
Accrued loss on firm purchase commitment | 7,469 | 7,469 | |||||
Marketing expense | 1,226 | 1,168 | |||||
Accrued rebates, discounts and chargebacks | 1,636 | 1,542 | |||||
Accrued severance | 3,101 | — | |||||
Other | 1,797 | 653 | |||||
$ | 44,217 | $ | 29,689 | ||||
As of March 31, 2013 and December 31, 2012, the Company had accrued a contract loss of $7.5 million associated with the portion of the committed purchases of Ablavar product from the Company's supplier that the Company did not believe it would sell prior to expiry.
During the first quarter of 2013, the Company took additional actions to reduce its workforce, which resulted in a $2.7 million charge to the condensed consolidated statement of comprehensive (loss) for severance expense. At March 31, 2013, $2.4 million associated with these actions is included in accrued severance.
10. Financing Arrangements
Restricted Senior Notes
LMI has $400.0 million in aggregate principal amount of Notes outstanding. The Notes bear interest at a rate of 9.750% per year, payable on May 15 and November 15 of each year. The Notes mature on May 15, 2017.
13
Lantheus MI Intermediate, Inc. and subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
10. Financing Arrangements (Continued)
Revolving Line of Credit
LMI also has outstanding the Facility that had an original borrowing capacity of $42.5 million. On March 25, 2013, the Company executed an additional amendment to the Facility which, (i) reduced the committed availability for total borrowings under the Facility from $42.5 million to $35 million, (ii) set the interest rate at LIBOR plus 4.75% or the Reference Rate (as defined in the agreement) plus 3.75%, and (iii) further modified the financial covenants and certain definitions used to calculate compliance with those covenants. The revised financial covenants, as amended, are set forth in the table below.
Revolving Credit Facility Financial Covenants
Period | Total Leverage Ratio | Interest Coverage Ratio | |||||
---|---|---|---|---|---|---|---|
Q1 2013 | 8.80 to 1.00 | 1.10 to 1.00 | |||||
Q2 2013 | 10.0 to 1.00 | 1.00 to 1.00 | |||||
Q3 2013 | 8.20 to 1.00 | 1.25 to 1.00 | |||||
Q4 2013 | 7.50 to 1.00 | 1.40 to 1.00 | |||||
Q1 2014 | 7.00 to 1.00 | 1.45 to 1.00 | |||||
Thereafter | 7.00 to 1.00 | 1.45 to 1.00 |
In connection with the March 25, 2013 amendment, LMI incurred approximately $0.1 million in fees and expenses and wrote off $0.1 million of the existing unamortized deferred financing costs. The new and remaining portion of the existing unamortized deferred financing fees are being amortized over the remaining life of the Facility using the straight-line method and are included in interest expense in the accompanying consolidated statements of comprehensive (loss) income. The Facility expires on May 10, 2014, at which time all outstanding borrowings are due and payable.
At March 31, 2013, there was no outstanding balance drawn under the Facility, other than an $8.8 million unfunded Standby Letter of Credit, which reduces the aggregate borrowing capacity to $26.2 million. The unfunded Standby Letter of Credit will expire on February 2, 2014.
11. Stock-Based Compensation
The Company's employees are eligible to receive awards from Holdings' 2008 Equity Incentive Plan (the "2008 Plan"). The 2008 Plan is administered by the Holdings Board of Directors. The 2008 Plan permits the granting of nonqualified stock options, stock appreciation rights (or SARs), restricted stock and restricted stock units to employees, officers, directors and consultants of Holdings or any subsidiary of Holdings (including Intermediate and LMI). The maximum number of shares that may be issued pursuant to awards under the 2008 Plan at March 31, 2013 is 4,498,637. Option awards are granted with an exercise price equal to the fair value of Holdings' stock at the date of grant, as determined by the Board of Directors of Holdings. Time based option awards vest based on time, either four or five years, and performance based option awards vest based on the performance criteria specified in the grant. All option awards have a ten year contractual term. The Company recognizes compensation costs for its time based awards on a straight-line basis equal to the vesting period. The compensation cost for performance based awards is recognized on a graded vesting basis, based on the probability of achieving the performance targets over the requisite service period for the entire award.
14
Lantheus MI Intermediate, Inc. and subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
11. Stock-Based Compensation (Continued)
The fair value of each option award is estimated on the date of grant using a Black-Scholes valuation model that uses the assumptions noted in the following table. Expected volatilities are based on the historic volatility of a selected peer group. Expected dividends represent the dividends expected to be issued at the date of grant. The expected term of options represents the period of time that options granted are expected to be outstanding. The risk-free interest rate assumption is the seven-year U.S. Treasury rate at the date of the grant which most closely resembles the expected life of the options.
The Company uses the following Black-Scholes inputs to determine the fair value of new stock option grants.
| Three Months Ended March 31, | |||||
---|---|---|---|---|---|---|
| 2013 | 2012 | ||||
Expected volatility | 36% | 41 | % | |||
Expected dividends | — | — | ||||
Expected life (in years) | 5.5 - 6.3 | 6.5 | ||||
Risk-free interest rate | 0.8 - 1.0% | 1.4 | % |
A summary of option activity for 2013 is presented below:
| Time Based | Performance Based | Total | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Outstanding at January 1, 2013 | 2,326,350 | 1,002,948 | 3,329,298 | $ | 3.11 | 5.6 | $ | 15,336,000 | |||||||||||
Options granted | 564,096 | 537,500 | 1,101,596 | 7.52 | |||||||||||||||
Options cancelled | (170,200 | ) | (241,636 | ) | (411,836 | ) | 2.08 | ||||||||||||
Options exercised | (471,250 | ) | (4,343 | ) | (475,593 | ) | 2.00 | ||||||||||||
Options forfeited or expired | (55,040 | ) | (39,301 | ) | (94,341 | ) | 8.41 | ||||||||||||
Outstanding at March 31, 2013 | 2,193,956 | 1,255,168 | 3,449,124 | 4.65 | 6.9 | $ | 9,048,000 | ||||||||||||
Vested and expected to vest at March 31, 2013 | 2,183,767 | 1,245,879 | 3,429,646 | 4.62 | 6.8 | $ | 9,045,000 | ||||||||||||
Exercisable at March 31, 2013 | 1,447,626 | 569,470 | 2,017,096 | $ | 2.42 | 5.0 | $ | 9,007,000 | |||||||||||
The weighted average grant-date fair value of options granted during the three months ended March 31, 2013 and 2012 was $2.78 and $3.99, respectively.
During the three months ended March 31, 2013, 475,593 stock options were exercised on a cashless basis for which 349,106 shares of Holdings common stock were issued. The intrinsic value for the options exercised during the three months ended March 31, 2013 was approximately $2.6 million.
15
Lantheus MI Intermediate, Inc. and subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
11. Stock-Based Compensation (Continued)
Stock-based compensation expense for both time based and performance based awards was recognized in the condensed consolidated statements of comprehensive (loss) income as follows:
| Three Months Ended March 31, | ||||||
---|---|---|---|---|---|---|---|
(in thousands) | 2013 | 2012 | |||||
Cost of goods sold | $ | 27 | $ | 17 | |||
General and administrative | 196 | 471 | |||||
Sales and marketing | 14 | 47 | |||||
Research and development | 20 | 39 | |||||
Total stock-based compensation expense | $ | 257 | $ | 574 | |||
Stock-based compensation expense recognized in the condensed consolidated statement of comprehensive (loss) income for the three months ended March 31, 2013 and 2012 are based on awards ultimately expected to vest as well as any changes in the probability of achieving certain performance features as required. During the three months ended March 31, 2013, the Company recognized approximately $12,000 of stock-based compensation expense associated with the modification of an option agreement. A new option award was granted to replace the cancellation of a portion of an existing option award. In the first quarter of 2012, the Company recognized approximately $0.4 million of stock-based compensation expense associated with the modification of two option agreements. The 2012 modifications of both awards affected the vesting ability of the awards, allowing vesting to continue beyond the last day of employment, so long as the option holder continues to provide service as a consultant to the Company.
The Company used the following Black-Scholes inputs to determine the fair value of stock options that were modified during the quarters ended March 31, 2013 and 2012.
| Three Months Ended March 31, 2013 | Three Months Ended March 31, 2012 | ||
---|---|---|---|---|
Expected volatility | 36 - 37% | 30 - 36% | ||
Expected dividends | — | — | ||
Expected term (in years) | 4.8 - 5.5 | 0.3 - 3.5 | ||
Risk-free interest rate | 0.8% | 0.3 - 0.8% |
Upon termination of employee services, the Company has the right to call shares held by employees that were purchased or acquired through option exercise. As a result of this right, upon termination of service, vested stock-based awards are reclassified to liability based awards when it is probable the employee will exercise the option and the Company will exercise its call until the period of exercise or call option has lapsed. As of March 31, 2013, the Company had recorded a liability and compensation expense of approximately $39,000 representing 7,123 options relating to liability awards that could be settled in part or in whole, in cash in the following period. There were no stock-based liabilities as of December 31, 2012. There were no liability awards paid out during the three months ended March 31, 2013 and 2012.
16
Lantheus MI Intermediate, Inc. and subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
11. Stock-Based Compensation (Continued)
The Company did not recognize an income tax benefit for the three months ended March 31, 2013 and 2012. As of March 31, 2013, there was approximately $3.8 million of total unrecognized compensation costs related to non-vested stock options granted under the 2008 Plan. These costs are expected to be recognized over a weighted-average remaining period of 1.6 years. In addition, performance based awards contain certain contingent features, such as change in control provisions, which allow for the vesting of previously forfeited and unvested awards. As of March 31, 2013, there was approximately $0.8 million of unrecognized compensation expense relating to these features, which could be recognized through 2018 or longer.
12. Other Income, net
Other income, net consisted of the following:
| Three Months Ended March 31, | ||||||
---|---|---|---|---|---|---|---|
(in thousands) | 2013 | 2012 | |||||
Foreign currency losses | $ | (85 | ) | $ | (157 | ) | |
Tax indemnification income | 439 | 415 | |||||
Other income | 367 | 47 | |||||
Total other income, net | $ | 721 | $ | 305 | |||
13. Legal Proceedings and Contingencies
From time to time, the Company is a party to various legal proceedings arising in the ordinary course of business. In addition, the Company has in the past been, and may in the future be, subject to investigations by regulatory authorities which expose it to greater risks associated with litigation, regulatory or other proceedings, as a result of which the Company could be required to pay significant fines or penalties. The outcome of litigation, regulatory or other proceedings cannot be predicted with certainty, and some lawsuits, claims, actions or proceedings may be disposed of unfavorably to the Company. In addition, intellectual property disputes often have a risk of injunctive relief which, if imposed against the Company, could materially and adversely affect its financial condition or results of operations. As of March 31, 2013, the Company had no material on-going litigation in which the Company was a defendant or any material on-going regulatory or other proceedings and had no knowledge of any investigations by government or regulatory authorities in which the Company is a target that could have a material adverse effect on its current business.
On December 16, 2010, LMI filed suit against one of its insurance carriers seeking to recover business interruption losses associated with the NRU reactor shutdown and the ensuing global Moly supply shortage. The claim is the result of the shutdown of the NRU reactor in Chalk River, Ontario. The NRU reactor was off-line from May 2009 until August 2010 due to a "heavy water" leak in the reactor vessel. The defendant answered the complaint on January 21, 2011, denying substantially all of the allegations, presenting certain defenses and requesting dismissal of the case with costs and disbursements. On April 4, 2011, the parties had their first pre-trial conference in United States District Court for the Southern District of New York, and discovery has commenced and is continuing.
17
Lantheus MI Intermediate, Inc. and subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
13. Legal Proceedings and Contingencies (Continued)
The Company cannot be certain what amount, if any, or when, if ever, it will be able to recover for business interruption losses related to this matter.
14. Related Party Transactions
At March 31, 2013 and December 31, 2012, LMI had outstanding receivables from Holdings in the amount of $1.2 million and $1.3 million, respectively, which was included in due from parent.
In the third quarter of 2012, the Company entered into a Master Contract Research Organization Services Agreement with INC Research, LLC ("INC") to provide clinical development services in connection with the flurpiridaz F 18 Phase III program. The agreement has a term of five years, and the Company incurred costs associated with this agreement totaling $0.4 million in the three months ended March 31, 2013. Avista Capital Partners and its affiliate are principal owners of both INC and the Company. At both March 31, 2013 and December 31, 2012, $0.5 million was included in accounts payable and accrued expenses.
Avista, the majority shareholder of LMI Holdings, provides certain advisory services to the Company pursuant to an advisory services and monitoring agreement. The Company is required to pay an annual fee of $1.0 million and other reasonable and customary advisory fees, as applicable, paid on a quarterly basis. The initial term of the agreement is seven years. Upon termination, all remaining amounts owed under the agreement shall become due immediately. During each of the three months ended March 31, 2013 and 2012, the Company incurred costs associated with this agreement totaling $0.3 million. At March 31, 2013 and December 31, 2012, $27,000 and $20,000, respectively, was included in accounts payable and accrued expenses.
The Company purchases inventory supplies from VWR Scientific ("VWR"). Avista Capital Partners and certain affiliates are principal owners of both VWR and the Company. The Company made purchases of $38,000 and $65,000 during each of the three months ended March 31, 2013 and 2012, respectively. At March 31, 2013 and December 31, 2012, $2,000 and $19,000, respectively, was included in accounts payable and accrued expenses.
At both March 31, 2013 and December 31, 2012, the Company had $0.1 million due from an officer of the Company included in accounts receivable, net. These amounts represent federal and state tax withholdings paid by the Company on behalf of the officer.
15. Segment Information
The Company reports two operating segments, U.S. and International, based on geographic customer base. The results of these operating segments are regularly reviewed by our chief operating decision maker, the President and Chief Executive Officer. The Company's segments derive revenues through the manufacturing, marketing, selling and distribution of medical imaging products, focused primarily on cardiovascular diagnostic imaging. The U.S. segment comprised 76.4% and 73.8% of consolidated revenues for the three months ended March 31, 2013 and 2012, respectively, and 88.3% and 86.7% of consolidated assets at March 31, 2013 and December 31, 2012, respectively. All goodwill has been allocated to the U.S. operating segment.
18
Lantheus MI Intermediate, Inc. and subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
15. Segment Information (Continued)
Selected information for each business segment are as follows (in thousands):
| Three Months Ended March 31, | ||||||
---|---|---|---|---|---|---|---|
| 2013 | 2012 | |||||
Revenues | |||||||
U.S. | $ | 58,934 | $ | 68,338 | |||
International | 16,763 | 22,371 | |||||
Total revenue, including inter-segment | 75,697 | 90,709 | |||||
Less inter-segment revenue | (4,679 | ) | (5,358 | ) | |||
$ | 71,018 | $ | 85,351 | ||||
Revenues from external customers | |||||||
U.S. | $ | 54,255 | $ | 62,980 | |||
International | 16,763 | 22,371 | |||||
$ | 71,018 | $ | 85,351 | ||||
Operating (loss) income | |||||||
U.S. | $ | (9,024 | ) | $ | 27,872 | ||
International | (231 | ) | 4,998 | ||||
Total operating (loss) income, including inter-segment | (9,255 | ) | 32,870 | ||||
Inter-segment operating income | 19 | 306 | |||||
Operating (loss) income | (9,236 | ) | 33,176 | ||||
Interest expense, net | (10,669 | ) | (10,346 | ) | |||
Other income, net | 721 | 305 | |||||
(Loss) income before income taxes | $ | (19,184 | ) | $ | 23,135 | ||
| March 31, 2013 | December 31, 2012 | |||||
---|---|---|---|---|---|---|---|
Total assets | |||||||
U.S. | $ | 276,139 | $ | 279,808 | |||
International | 36,698 | 43,118 | |||||
$ | 312,837 | $ | 322,926 | ||||
16. Guarantor Financial Information
The Notes are guaranteed by Lantheus Intermediate and Lantheus MI Real Estate, LLC, one of Lantheus Intermediate's consolidated subsidiaries (the "Guarantor Subsidiary"). The guarantees are full and unconditional and joint and several. The following supplemental financial information sets forth, on a condensed consolidating basis, balance sheet information as of March 31, 2013 and December 31, 2012, comprehensive (loss) income information for the three months ended March 31, 2013 and 2012 and cash flow information for the three months ended March 31, 2013 and 2012 for Lantheus Intermediate, LMI, the Guarantor Subsidiary and Lantheus Intermediate's other subsidiaries (the "Non-Guarantor Subsidiaries"). The supplemental financial information reflects the investments of
19
Lantheus MI Intermediate, Inc. and subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
16. Guarantor Financial Information (Continued)
Lantheus Intermediate in LMI and Lantheus Intermediate's investment in the Guarantor Subsidiary and Non-Guarantor Subsidiaries using the equity method of accounting.
Consolidating Balance Sheet Information
March 31, 2013
(in thousands) | Lantheus Intermediate | LMI | Guarantor Subsidiary | Non-Guarantor Subsidiaries | Eliminations | Total | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Assets | |||||||||||||||||||
Current assets | |||||||||||||||||||
Cash and cash equivalents | $ | — | $ | 19,138 | $ | — | $ | 10,032 | $ | — | $ | 29,170 | |||||||
Accounts receivable, net | — | 27,033 | — | 11,110 | — | 38,143 | |||||||||||||
Intercompany accounts receivable | — | 410 | — | — | (410 | ) | — | ||||||||||||
Inventory | — | 15,670 | — | 1,933 | — | 17,603 | |||||||||||||
Income tax receivable | — | 453 | — | 280 | — | 733 | |||||||||||||
Deferred tax assets | — | — | — | 92 | — | 92 | |||||||||||||
Other current assets | — | 4,685 | — | 457 | — | 5,142 | |||||||||||||
Total current assets | — | 67,389 | — | 23,904 | (410 | ) | 90,883 | ||||||||||||
Property, plant and equipment, net | — | 77,564 | 23,175 | 7,278 | — | 108,017 | |||||||||||||
Capitalized software development costs, net | — | 1,923 | — | 4 | — | 1,927 | |||||||||||||
Intangibles, net | — | 57,096 | — | 6,015 | — | 63,111 | |||||||||||||
Goodwill | — | 15,714 | — | — | — | 15,714 | |||||||||||||
Deferred financing costs | — | 10,746 | — | — | — | 10,746 | |||||||||||||
Investment in subsidiaries | (194,433 | ) | 54,598 | — | — | 139,835 | — | ||||||||||||
Other long-term assets | — | 22,224 | — | 215 | — | 22,439 | |||||||||||||
Total assets | $ | (194,433 | ) | $ | 307,254 | $ | 23,175 | $ | 37,416 | $ | 139,425 | $ | 312,837 | ||||||
Liabilities and (deficit) equity | |||||||||||||||||||
Current liabilities | |||||||||||||||||||
Note payable | $ | — | $ | 875 | $ | — | $ | — | $ | — | $ | 875 | |||||||
Accounts payable | — | 15,456 | — | 1,696 | — | 17,152 | |||||||||||||
Intercompany accounts payable | — | — | — | 410 | (410 | ) | — | ||||||||||||
Accrued expenses | — | 40,981 | — | 3,236 | — | 44,217 | |||||||||||||
Deferred revenue | — | 2,627 | — | 57 | — | 2,684 | |||||||||||||
�� | |||||||||||||||||||
Total current liabilities | — | 59,939 | — | 5,399 | (410 | ) | 64,928 | ||||||||||||
Asset retirement obligation | — | 5,416 | — | 154 | — | 5,570 | |||||||||||||
Long-term debt, net | — | 398,876 | — | — | — | 398,876 | |||||||||||||
Deferred tax liability | — | — | — | 174 | — | 174 | |||||||||||||
Other long-term liabilities | — | 37,456 | — | 266 | — | 37,722 | |||||||||||||
Total liabilities | — | 501,687 | — | 5,993 | (410 | ) | 507,270 | ||||||||||||
(Deficit) equity | (194,433 | ) | (194,433 | ) | 23,175 | 31,423 | 139,835 | (194,433 | ) | ||||||||||
Total liabilities and (deficit) equity | $ | (194,433 | ) | $ | 307,254 | $ | 23,175 | $ | 37,416 | $ | 139,425 | $ | 312,837 | ||||||
20
Lantheus MI Intermediate, Inc. and subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
16. Guarantor Financial Information (Continued)
Consolidating Balance Sheet Information
December 31, 2012
(in thousands) | Lantheus Intermediate | LMI | Guarantor Subsidiary | Non-Guarantor Subsidiaries | Eliminations | Total | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Assets: | |||||||||||||||||||
Current assets | |||||||||||||||||||
Cash and cash equivalents | $ | — | $ | 17,635 | $ | — | $ | 13,960 | $ | — | $ | 31,595 | |||||||
Accounts receivable, net | — | 30,218 | — | 11,162 | — | 41,380 | |||||||||||||
Intercompany accounts receivable | — | 1,992 | — | — | (1,992 | ) | — | ||||||||||||
Inventory | — | 15,417 | — | 2,631 | — | 18,048 | |||||||||||||
Income tax receivable | — | 291 | — | 445 | — | 736 | |||||||||||||
Deferred tax assets | — | — | — | 115 | — | 115 | |||||||||||||
Other current assets | — | 2,596 | — | 347 | — | 2,943 | |||||||||||||
Total current assets | — | 68,149 | — | 28,660 | (1,992 | ) | 94,817 | ||||||||||||
Property, plant and equipment, net | — | 78,578 | 23,195 | 7,800 | — | 109,573 | |||||||||||||
Capitalized software development costs, net | — | 2,230 | — | 4 | — | 2,234 | |||||||||||||
Intangibles, net | — | 60,370 | — | 6,432 | — | 66,802 | |||||||||||||
Goodwill | — | 15,714 | — | — | — | 15,714 | |||||||||||||
Deferred financing costs | — | 11,372 | — | — | — | 11,372 | |||||||||||||
Investment in subsidiaries | (174,353 | ) | 58,166 | — | — | 116,187 | — | ||||||||||||
Other long-term assets | — | 22,192 | — | 222 | — | 22,414 | |||||||||||||
Total assets | $ | (174,353 | ) | $ | 316,771 | $ | 23,195 | $ | 43,118 | $ | 114,195 | $ | 322,926 | ||||||
Liabilities and (deficit) equity: | |||||||||||||||||||
Current liabilities | |||||||||||||||||||
Accounts payable | $ | — | $ | 16,835 | $ | — | $ | 2,110 | $ | — | $ | 18,945 | |||||||
Intercompany accounts payable | — | — | — | 1,992 | (1,992 | ) | — | ||||||||||||
Accrued expenses | — | 26,592 | — | 3,097 | — | 29,689 | |||||||||||||
Deferred revenue | — | 7,229 | — | 91 | — | 7,320 | |||||||||||||
Total current liabilities | — | 50,656 | — | 7,290 | (1,992 | ) | 55,954 | ||||||||||||
Asset retirement obligations | — | 5,268 | — | 148 | — | 5,416 | |||||||||||||
Long-term debt, net | — | 398,822 | — | — | — | 398,822 | |||||||||||||
Deferred tax liability | — | — | — | 435 | — | 435 | |||||||||||||
Other long-term liabilities | — | 36,378 | — | 274 | — | 36,652 | |||||||||||||
Total liabilities | — | 491,124 | — | 8,147 | (1,992 | ) | 497,279 | ||||||||||||
(Deficit) equity | (174,353 | ) | (174,353 | ) | 23,195 | 34,971 | 116,187 | (174,353 | ) | ||||||||||
Total liabilities and (deficit) equity | $ | (174,353 | ) | $ | 316,771 | $ | 23,195 | $ | 43,118 | $ | 114,195 | $ | 322,926 | ||||||
21
Lantheus MI Intermediate, Inc. and subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
16. Guarantor Financial Information (Continued)
Condensed Consolidating Statement of Comprehensive (Loss) Income
Three Months Ended March 31, 2013
(in thousands) | Lantheus Intermediate | LMI | Guarantor Subsidiary | Non-Guarantor Subsidiaries | Eliminations | Total | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net product revenues | $ | — | $ | 57,337 | $ | — | $ | 15,546 | $ | (4,679 | ) | $ | 68,204 | ||||||
License and other revenues | — | 2,814 | — | — | — | 2,814 | |||||||||||||
Total revenues | — | 60,151 | — | 15,546 | (4,679 | ) | 71,018 | ||||||||||||
Cost of goods sold | — | 38,350 | — | 14,535 | (4,679 | ) | 48,206 | ||||||||||||
Gross profit | — | 21,801 | — | 1,011 | — | 22,812 | |||||||||||||
Operating expenses | |||||||||||||||||||
General and administrative expenses | — | 9,678 | 20 | 555 | — | 10,253 | |||||||||||||
Sales and marketing expenses | — | 8,862 | — | 935 | — | 9,797 | |||||||||||||
Research and development expenses | — | 11,950 | — | 48 | — | 11,998 | |||||||||||||
Operating loss | — | (8,689 | ) | (20 | ) | (527 | ) | — | (9,236 | ) | |||||||||
Interest expense, net | — | (10,710 | ) | — | 41 | — | (10,669 | ) | |||||||||||
Other income (expense), net | — | 783 | — | (62 | ) | — | 721 | ||||||||||||
Equity in earnings (losses) of affiliates | (19,812 | ) | (449 | ) | — | — | 20,261 | — | |||||||||||
Income (loss) before income taxes | (19,812 | ) | (19,065 | ) | (20 | ) | (548 | ) | 20,261 | (19,184 | ) | ||||||||
Provision (benefit) for income taxes | — | 747 | — | (119 | ) | — | 628 | ||||||||||||
Net income (loss) | (19,812 | ) | (19,812 | ) | (20 | ) | (429 | ) | 20,261 | (19,812 | ) | ||||||||
Foreign currency translation, net of taxes | — | — | — | (597 | ) | — | (597 | ) | |||||||||||
Equity in other comprehensive income (loss) of subsidiaries | (597 | ) | (597 | ) | — | — | 1,194 | — | |||||||||||
Total comprehensive (loss) income | $ | (20,409 | ) | $ | (20,409 | ) | $ | (20 | ) | $ | (1,026 | ) | $ | 21,455 | $ | (20,409 | ) | ||
22
Lantheus MI Intermediate, Inc. and subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
16. Guarantor Financial Information (Continued)
Consolidating Statement of Comprehensive Income (Loss)
Three Months Ended March 31, 2012
(in thousands) | Lantheus Intermediate | LMI | Guarantor Subsidiary | Non-Guarantor Subsidiaries | Eliminations | Total | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net product revenues | $ | — | $ | 71,049 | $ | — | $ | 16,940 | $ | (5,358 | ) | $ | 82,631 | ||||||
License and other revenues | — | 2,720 | — | — | — | 2,720 | |||||||||||||
Total revenues | — | 73,769 | — | 16,940 | (5,358 | ) | 85,351 | ||||||||||||
Cost of goods sold | — | 42,960 | — | 14,933 | (5,358 | ) | 52,535 | ||||||||||||
Gross profit | — | 30,809 | — | 2,007 | — | 32,816 | |||||||||||||
Operating expenses | |||||||||||||||||||
General and administrative expenses | — | 8,545 | 20 | 634 | — | 9,199 | |||||||||||||
Sales and marketing expenses | — | 9,013 | — | 980 | — | 9,993 | |||||||||||||
Research and development expenses | — | 10,319 | — | 43 | — | 10,362 | |||||||||||||
Proceeds from manufacturer | — | (29,914 | ) | — | — | — | (29,914 | ) | |||||||||||
Operating income (loss) | — | 32,846 | (20 | ) | 350 | — | 33,176 | ||||||||||||
Interest expense, net | — | (10,447 | ) | — | 101 | — | (10,346 | ) | |||||||||||
Other income, net | — | 263 | — | 42 | — | 305 | |||||||||||||
Equity in earnings (losses) of affiliates | 20,898 | 220 | — | — | (21,118 | ) | — | ||||||||||||
Income (loss) before income taxes | 20,898 | 22,882 | (20 | ) | 493 | (21,118 | ) | 23,135 | |||||||||||
Provision (benefit) for income taxes | — | 1,984 | (7 | ) | 260 | — | 2,237 | ||||||||||||
Net income (loss) | 20,898 | 20,898 | (13 | ) | 233 | (21,118 | ) | 20,898 | |||||||||||
Foreign currency translation, net of taxes | — | 200 | — | 667 | — | 867 | |||||||||||||
Total comprehensive (loss) income | $ | 20,898 | $ | 21,098 | $ | (13 | ) | $ | 900 | $ | (21,118 | ) | $ | 21,765 | |||||
23
Lantheus MI Intermediate, Inc. and subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
16. Guarantor Financial Information (Continued)
Condensed Consolidating Cash Flow Information
Three Months Ended March 31, 2013
| Lantheus Intermediate | LMI | Guarantor Subsidiary | Non-Guarantor Subsidiaries | Eliminations | Total | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cash provided by operating activities | $ | — | $ | 2,546 | $ | — | $ | (958 | ) | $ | (1,738 | ) | $ | (150 | ) | ||||
Cash flows from investing activities | |||||||||||||||||||
Capital expenditures | — | (1,439 | ) | — | (10 | ) | — | (1,449 | ) | ||||||||||
Proceeds from dividend | — | 784 | — | — | (784 | ) | — | ||||||||||||
Cash used in investing activities | — | (655 | ) | — | (10 | ) | (784 | ) | (1,449 | ) | |||||||||
Cash flows from financing activities | |||||||||||||||||||
Payments on note payable | — | (389 | ) | — | — | — | (389 | ) | |||||||||||
Payments of deferred financing costs | — | (110 | ) | — | — | — | (110 | ) | |||||||||||
Payments from parent | — | 111 | — | — | — | 111 | |||||||||||||
Payment of dividend | — | — | — | (2,522 | ) | 2,522 | — | ||||||||||||
Cash used in financing activities | — | (388 | ) | — | (2,522 | ) | 2,522 | (388 | ) | ||||||||||
Effect of foreign exchange rate on cash | — | — | — | (438 | ) | — | (438 | ) | |||||||||||
Increase (decrease) in cash and cash equivalents | — | 1,503 | — | (3,928 | ) | — | (2,425 | ) | |||||||||||
Cash and cash equivalents, beginning of period | — | 17,635 | — | 13,960 | — | 31,595 | |||||||||||||
Cash and cash equivalents, end of period | $ | — | $ | 19,138 | $ | — | $ | 10,032 | $ | — | $ | 29,170 | |||||||
24
Lantheus MI Intermediate, Inc. and subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
16. Guarantor Financial Information (Continued)
Condensed Consolidating Cash Flow Information
Three Months Ended March 31, 2012
| Lantheus Intermediate | LMI | Guarantor Subsidiary | Non-Guarantor Subsidiaries | Eliminations | Total | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cash provided by operating activities | $ | — | $ | 37,569 | $ | — | $ | 2,358 | $ | (4,723 | ) | $ | 35,204 | ||||||
Cash flows from investing activities | |||||||||||||||||||
Purchase of certificate of deposit | — | (225 | ) | — | — | — | (225 | ) | |||||||||||
Capital expenditures | — | (2,004 | ) | — | (40 | ) | — | (2,044 | ) | ||||||||||
Cash provided by (used in) investing activities | — | (2,229 | ) | — | (40 | ) | — | (2,269 | ) | ||||||||||
Cash flows from financing activities | |||||||||||||||||||
Payments on note payable | — | (457 | ) | — | — | — | (457 | ) | |||||||||||
Payments of deferred financing costs | — | (198 | ) | — | — | — | (198 | ) | |||||||||||
Payment of dividend | — | — | — | (4,723 | ) | 4,723 | — | ||||||||||||
Cash used in financing activities | — | (655 | ) | — | (4,723 | ) | 4,723 | (655 | ) | ||||||||||
Effect of foreign exchange rate on cash | — | — | — | 448 | — | 448 | |||||||||||||
Increase in cash and cash equivalents | — | 34,685 | — | (1,957 | ) | — | 32,728 | ||||||||||||
Cash and cash equivalents, beginning of period | — | 20,474 | — | 20,133 | — | 40,607 | |||||||||||||
Cash and cash equivalents, end of period | $ | — | $ | 55,159 | $ | — | $ | 18,176 | $ | — | $ | 73,335 | |||||||
17. Subsequent Events
Effective April 30, 2013, the Boards of Directors of LMI and Holdings adopted the Lantheus MI Holdings, Inc. 2013 Equity Incentive Plan (the "2013 Plan"). The 2013 Plan authorizes the grant of equity-based incentive awards to employees, directors (including, non-employee directors) and consultants of Holdings or any subsidiary of Holdings, including LMI. The 2013 Plan provides that 1,500,000 shares of Holdings' common stock are reserved for issuance, subject to adjustment in case of certain events described in the 2013 Plan. Unless earlier terminated by the Compensation Committee, the 2013 Plan will remain in effect until April 30, 2023.
On May 8, 2013, the Company entered into an employment agreement with Jeffrey Bailey, as the Company's new President and Chief Executive Officer, effective January 23, 2013. Mr. Bailey will receive an annual salary, be eligible to receive an annual discretionary cash bonus of up to 100% of his base salary amount, be granted stock options and receive the right to purchase shares of Holdings' common stock.
25
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note Regarding Forward-Looking Statements
Some of the statements contained in this quarterly report are forward-looking statements. Such forward-looking statements are subject to risks and uncertainties, including, in particular, statements about our plans, strategies, prospects and industry estimates. These statements identify prospective information and include words such as "anticipates," "intends," "plans," "seeks," "believes," "estimates," "expects," "should," "predicts," "hopes" and similar expressions. Examples of forward-looking statements include, but are not limited to, statements we make regarding: (i) our liquidity, including our belief that our existing cash, cash equivalents and anticipated revenues are sufficient to fund our existing operating expenses, capital expenditures and liquidity requirements for at least the next twelve months; (ii) our outlook and expectations including, without limitation, in connection with continued market expansion and penetration for our commercial products, particularly DEFINITY; (iii) expected new product launch dates and market exclusivity periods; and (iv) outlook and expectations related to product manufactured at Ben Venue Laboratories, Inc., or BVL and Jubilant HollisterStier, or JHS. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. The matters referred to in the forward-looking statements contained in this quarterly report may not in fact occur. We caution you therefore against relying on any of these forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include regional, national or global political, economic, business, competitive, market and regulatory conditions and the following:
- •
- our dependence upon third parties for the manufacture and supply of a substantial portion of our products, including our current dependence on BVL, as one of our two manufacturers of DEFINITY and Cardiolite products and our sole source manufacturer for Neurolite until JHS becomes our primary supplier of DEFINITY, Cardiolite products and Neurolite;
- •
- risks associated with the manufacturing and distribution of our products and the regulatory requirements related thereto, including the risk that BVL will not be able to manufacture and distribute our products in a timely manner and in sufficient quantities to allow us to avoid stock-outs or shortfalls as we transition from BVL to JHS as our primary manufacturer during 2013;
- •
- risks associated with the technology transfer programs to secure production of our products, at alternate contract manufacturer sites;
- •
- our dependence on a limited number of third-party suppliers and the instability of the global molybdenum-99, or Moly, supply;
- •
- a sustained decrease in TechneLite generator demand following the end of the global Moly shortage in 2010;
- •
- our dependence on key customers, primarily Cardinal Health, Inc., or Cardinal, United Pharmacy Partners, Inc., or UPPI, and GE Healthcare, for our nuclear imaging products, and our ability to maintain and profitably renew our contracts and relationships with those key customers;
- •
- our ability to continue to increase segment penetration for DEFINITY in suboptimal echocardiograms;
- •
- our ability to compete effectively;
26
- •
- ongoing generic competition to Cardiolite products and continued loss of market share;
- •
- the dependence of certain of our customers upon third-party healthcare payors and the uncertainty of third-party coverage and reimbursement rates;
- •
- uncertainties regarding the impact of U.S. healthcare reform on our business, including related reimbursements for our current and potential future products;
- •
- our being subject to extensive government regulation and our potential inability to comply with such regulations;
- •
- risks associated with being able to negotiate in a timely manner relationships with potential strategic partners to advance our clinical development programs on acceptable terms, or at all;
- •
- the extensive costs, time and uncertainty associated with new product development, including further product development relying on external development partners;
- •
- our ability to complete our Phase 3 clinical program for our lead clinical candidate, flurpiridaz F 18, relying on strategic partners together with our ability to obtain FDA approval and gain post-approval market acceptance and adequate reimbursement;
- •
- potential liability associated with our marketing and sales practices;
- •
- the occurrence of any side effects with our products;
- •
- our inability to introduce new products and adapt to an evolving technology and diagnostic landscape;
- •
- our exposure to potential product liability claims and environmental liability;
- •
- our inability to protect our intellectual property and the risk of claims that we have infringed on the intellectual property of others;
- •
- risks related to our outstanding indebtedness and our ability to satisfy such obligations;
- •
- risks associated with the current economic environment, including the U.S. credit markets;
- •
- risks associated with our international operations;
- •
- our inability to adequately protect our facilities, equipment and technology infrastructure;
- •
- our inability to hire or retain skilled employees and the loss of any of our key personnel; and
- •
- costs and other risks associated with the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
Factors that could cause or contribute to such differences include, but are not limited to, those that are discussed in other documents we file with the Securities and Exchange Commission, including our Annual Report on Form 10-K. Any forward-looking statement made by us in this quarterly report speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.
The following discussion and analysis of our financial condition and results of operations should be read together with the consolidated financial statements and the related notes included in Item 1 of this Quarterly Report on Form 10-Q as well as the other factors described in "Risk Factors" under Part II—Item 1A of this report and the information provided in our Annual Report on Form 10-K.
27
Overview
We are a global leader in developing, manufacturing and distributing innovative diagnostic medical imaging agents and products that assist clinicians in the diagnosis of cardiovascular diseases such as coronary artery disease, congestive heart failure and stroke, peripheral vascular disease and other diseases.
Our current marketed products are used by nuclear physicians, cardiologists, radiologists, internal medicine physicians, technologists and sonographers working in a variety of clinical settings. We sell our products to radiopharmacies, hospitals, clinics, group practices, integrated delivery networks, group purchasing organizations and, in certain circumstances, wholesalers. In addition to our marketed products, we have three candidates in clinical and pre-clinical development.
We market our products globally and have operations in the United States, Puerto Rico, Canada and Australia and distribution relationships in Europe, Asia Pacific and Latin America.
Our Products
Our principal products include DEFINITY, an ultrasound contrast agent, TechneLite, a generator used to provide the radioisotope to radiolabel Cardiolite and other radiopharmaceuticals, Cardiolite, a myocardial perfusion imaging agent and Xenon, a radiopharmaceutical inhaled gas used to assess pulmonary function and evaluate blood flow, particularly in the brain. We launched DEFINITY in 2001 and it is currently patent protected in the United States until 2021 and in numerous foreign jurisdictions with protection until 2019. Cardiolite was approved by the FDA in 1990, and its market exclusivity expired in July 2008.
In the United States, our nuclear imaging products, including Cardiolite and TechneLite, are primarily distributed through over 350 radiopharmacies that are controlled by or associated with Cardinal, UPPI, GE Healthcare and Triad. A small portion of our nuclear imaging product sales in the United States are made through our direct sales force to hospitals and clinics that maintain their own in-house radiopharmaceutical capabilities. Sales of our contrast agent, DEFINITY, are made through our direct sales force. At March 31, 2013, we had approximately 78 sales people in the United States. Outside the United States, we own five radiopharmacies in Canada and two radiopharmacies in each of Puerto Rico and Australia. We also maintain a direct sales force in each of these countries. In the rest of the world, we rely on third-party distributors to market, distribute and sell our nuclear imaging and contrast agent products, either on a country-by-country basis or on a multi-country regional basis.
The following table sets forth our revenue derived from our principal products:
| Three Months Ended March 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(dollars in thousands) | 2013 | % | 2012 | % | |||||||||
DEFINITY | $ | 17,030 | 24.0 | $ | 20,169 | 23.6 | |||||||
TechneLite | 22,426 | 31.5 | 31,373 | 36.8 | |||||||||
Cardiolite | 10,910 | 15.4 | 9,810 | 11.5 | |||||||||
Xenon | 8,321 | 11.7 | 7,987 | 9.3 | |||||||||
Other | 9,517 | 13.4 | 13,292 | 15.6 | |||||||||
Net product revenues | 68,204 | 96.0 | 82,631 | 96.8 | |||||||||
License and other revenues | 2,814 | 4.0 | 2,720 | 3.2 | |||||||||
Total revenues | $ | 71,018 | 100.0 | $ | 85,351 | 100.0 | |||||||
Included in Cardiolite is branded Cardiolite and generic sestamibi, some of which we produce and some of which we procure from third parties.
28
Executive Overview
The following have been included in our results in the three months ended March 31, 2013:
- •
- limited supply of Neurolite product inventory as a result of the BVL outage and a higher cost of goods sold for Cardiolite because of more expensive sourcing from our current alternate manufacturer of Cardiolite and from our third party manufacturers of generic sestamibi;
- •
- continued generic competition to Cardiolite;
- •
- underabsorption of manufacturing overhead due to the BVL outage, and;
- •
- the impact of actions taken in March 2013 as we began to implement a strategic shift in how we will fund our R&D programs.
Results of Operations
| For the Three Months Ended March 31, | ||||||
---|---|---|---|---|---|---|---|
| 2013 | 2012 | |||||
Revenues | |||||||
Net product revenues | $ | 68,204 | $ | 82,631 | |||
License and other revenues | 2,814 | 2,720 | |||||
Total revenues | 71,018 | 85,351 | |||||
Cost of goods sold | 48,206 | 52,535 | |||||
Gross profit | 22,812 | 32,816 | |||||
Operating expenses | |||||||
General and administrative expenses | 10,253 | 9,199 | |||||
Sales and marketing expenses | 9,797 | 9,993 | |||||
Research and development expenses | 11,998 | 10,362 | |||||
Proceeds from manufacturer | — | (29,914 | ) | ||||
Total operating expenses | 32,048 | (360 | ) | ||||
Operating (loss) income | (9,236 | ) | 33,176 | ||||
Interest expense, net | (10,669 | ) | (10,346 | ) | |||
Other income, net | 721 | 305 | |||||
(Loss) income before income taxes | (19,184 | ) | 23,135 | ||||
Provision for income taxes | 628 | 2,237 | |||||
Net (loss) income | (19,812 | ) | 20,898 | ||||
Foreign currency translation, net of taxes | (597 | ) | 867 | ||||
Total comprehensive (loss) income | $ | (20,409 | ) | $ | 21,765 | ||
29
Revenues
Revenues are summarized as follows:
| Three Months Ended March 31, | ||||||
---|---|---|---|---|---|---|---|
(dollars in thousands) | 2013 | 2012 | |||||
United States | |||||||
DEFINITY | $ | 16,746 | $ | 19,765 | |||
TechneLite | 19,572 | 27,937 | |||||
Cardiolite | 6,430 | 3,980 | |||||
Xenon | 8,306 | 7,978 | |||||
Other currently marketed products | 387 | 600 | |||||
Total U.S. product revenue | 51,441 | 60,260 | |||||
License and other revenues | 2,814 | 2,720 | |||||
Total U.S. revenues | $ | 54,255 | $ | 62,980 | |||
International | |||||||
DEFINITY | $ | 284 | $ | 404 | |||
TechneLite | 2,854 | 3,436 | |||||
Cardiolite | 4,480 | 5,830 | |||||
Xenon | 15 | 9 | |||||
Other currently marketed products | 9,130 | 12,692 | |||||
Total International product revenue | 16,763 | 22,371 | |||||
License and other revenues | — | — | |||||
Total International revenues | $ | 16,763 | $ | 22,371 | |||
Product revenue | 68,204 | 82,631 | |||||
License and other revenue | 2,814 | 2,720 | |||||
Total revenue | $ | 71,018 | $ | 85,351 | |||
Total revenues decreased $14.4 million, or 16.8%, to $71.0 million in the three months ended March 31, 2013, as compared to $85.4 million in the three months ended March 31, 2012. U.S. segment revenue decreased $8.7 million, or 13.9%, to $54.3 million in the same period, as compared to $63.0 million in the prior year. The decrease in the U.S. segment over the prior year is primarily due to TechneLite revenues as a result of the following: (i) a contract that took effect at the beginning of 2013 with a significant customer, which reduced unit price, resulting in lower revenues of $5.2 million as compared to the prior year, (ii) the loss of a significant customer, during the second quarter of 2012, resulting in lower revenues of $1.8 million and (iii) a decline in a significant customer's market share resulted in lower revenues of $1.3 million. DEFINITY revenues were $3.0 million lower in the current period as a result of customers building inventory before our second quarter of 2012 inventory shortage. Through the end of the first quarter of 2013, our market share has not returned to pre-outage levels. Offsetting these decreases were increases in revenue for the U.S. segment of Cardiolite due to increases in unit volumes with a significant customer in the first quarter of 2013 as compared with the prior year period.
The International segment revenues decreased $5.6 million, or 25.1%, to $16.8 million in the three months ended March 31, 2013, as compared to $22.4 million in the three months ended March 31, 2012. The decrease in the International segment over the prior year period is primarily due to a $3.4 million decrease in Neurolite ligand sales, which were affected by a new contract which altered the timing of shipments and revenue recognition. Compared with the prior period, Cardiolite sales
30
decreased $1.4 million primarily due to reduced selling price given competitive pressures. Additionally, TechneLite sales decreased by $0.6 million over the prior year period due to lower selling price.
Rebates, Discounts and Allowances
Estimates for rebates and allowances represent our estimated obligations under contractual arrangements with third parties. Rebate accruals and allowances are recorded in the same period the related revenue is recognized, resulting in a reduction to product revenue and the establishment of a liability which is included in accrued expenses. These rebates result from performance-based offers that are primarily based on attaining contractually specified sales volumes and growth, Medicaid rebate programs for certain products, administration fees of group purchasing organizations, and certain distributor related commissions. The calculation of the accrual for these rebates and allowances is based on an estimate of the third party's buying patterns and the resulting applicable contractual rebate or commission rate(s) to be earned over a contractual period.
Revenue reserves are categorized as rebates or allowances. An analysis of the amount of, and change in, reserves is summarized as follows:
(dollars in thousands) | Rebates | Allowances | Total | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Balance, as of January 1, 2012 | $ | 1,356 | $ | 33 | $ | 1,389 | ||||
Current provisions relating to revenues in current year | 3,224 | 291 | 3,515 | |||||||
Adjustments relating to prior years' estimate | (145 | ) | — | (145 | ) | |||||
Payments/credits relating to revenues in current year | (2,232 | ) | (223 | ) | (2,455 | ) | ||||
Payments/credits relating to revenues in prior years | (661 | ) | (35 | ) | (696 | ) | ||||
Balance, as of December 31, 2012 | 1,542 | 66 | 1,608 | |||||||
Current provisions relating to revenues in current year | 998 | 76 | 1,074 | |||||||
Adjustments relating to prior years' estimate | 56 | — | 56 | |||||||
Payments/credits relating to revenues in current year | (379 | ) | (38 | ) | (417 | ) | ||||
Payments/credits relating to revenues in prior years | (581 | ) | (69 | ) | (650 | ) | ||||
Balance, as of March 31, 2013 | $ | 1,636 | $ | 35 | $ | 1,671 | ||||
Sales rebates and other accruals were approximately $1.6 million and $1.5 million at March 31, 2013 and December 31, 2012, respectively. The increase in the accrual resulted principally from the timing of payments.
Costs of Goods Sold
Cost of goods sold consists of manufacturing, distribution, definite lived intangible asset amortization and other costs related to our commercial products. In addition, it includes the write off of excess and obsolete inventory.
Cost of goods sold is summarized as follows:
| Three Months Ended March 31, | ||||||
---|---|---|---|---|---|---|---|
(dollars in thousands) | 2013 | 2012 | |||||
United States | $ | 34,063 | $ | 38,650 | |||
International | 14,143 | 13,885 | |||||
Total Cost of Goods Sold | $ | 48,206 | $ | 52,535 | |||
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Total cost of goods sold decreased $4.3 million, or 8.2%, to $48.2 million in the three months ended March 31, 2013, as compared to $52.5 million in the three months ended March 31, 2012. U.S. segment cost of goods sold decreased approximately $4.6 million, or 11.9%, to $34.1 million in the three months ended March 31, 2013, as compared to $38.7 million in the prior year period. The decrease in the U.S. segment cost of goods sold was due to lower Technelite unit volumes of $2.5 million, lower Technelite material cost of $2.1 million, and a decrease in amortization expense of $0.4 million. These decreases were partially offset by higher technology transfer costs of $0.3 million.
For the three months ended March 31, 2013, the International segment cost of goods sold increased $0.2 million, or 1.9%, to $14.1 million, as compared to $13.9 million in the prior year period. Cost of goods sold in our International segment increased primarily due to higher freight expenses.
Gross Profit
| Three Months Ended March 31, | ||||||
---|---|---|---|---|---|---|---|
(dollars in thousands) | 2013 | 2012 | |||||
United States | $ | 20,192 | $ | 24,330 | |||
International | 2,620 | 8,486 | |||||
Total Gross Profit | $ | 22,812 | $ | 32,816 | |||
Total gross profit decreased $10.0 million, or 30.5%, to $22.8 million in the three months ended March 31, 2013, as compared to $32.8 million in the three months ended March 31, 2012. U.S. segment gross profit decreased $4.1 million, or 17.1%, to $20.2 million, as compared to $24.3 million in the prior year period. Gross profit in the U.S. segment decreased primarily due to $3.6 million from Technelite, which was primarily driven by a lower selling price of $4.1 million and a lower volume of $1.7 million and offset by a lower material cost of $2.1 million. Additionally, DEFINITY gross profit decreased by $3.1 million primarily due to a lower volume of $2.2 million and a lower selling price of $0.8 million. Offsetting these decreases was a Cardiolite gross profit increase of $2.7 million primarily due to higher volume.
For the three months ended March 31, 2013, the International segment gross profit decreased $5.9 million, or 69.1%, to $2.6 million, as compared to $8.5 million in the prior year period. Gross profit in our International segment decreased primarily due to lower revenues from Neurolite ligand pursuant to the new contract with a distributor that altered the timing of shipments and revenue recognized resulting in a gross profit decrease of $3.4 million. In addition, we experienced lower Cardiolite revenues due to demand not coming back following product shortages in 2012 and lower selling prices given competitive pressures in certain markets.
General and Administrative
| Three Months Ended March 31, | ||||||
---|---|---|---|---|---|---|---|
(dollars in thousands) | 2013 | 2012 | |||||
United States | $ | 9,698 | $ | 8,564 | |||
International | 555 | 635 | |||||
Total General and Administrative | $ | 10,253 | $ | 9,199 | |||
General and administrative expenses consist of salaries and other related costs for personnel in executive, finance, legal, information technology and human resource functions. Other costs included in general and administrative expenses are professional fees for information technology services, external legal fees, consulting and accounting services as well as bad debt expense, certain facility and insurance costs, including director and officer liability insurance.
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Total general and administrative expenses increased approximately $1.1 million, or 11.5%, to $10.3 million in the three months ended March 31, 2013, as compared to $9.2 million in the three months ended March 31, 2012. In the U.S. segment, general and administrative expenses increased $1.1 million, or 13.2%, to $9.7 million, as compared to $8.6 million in the prior year period. The increase was primarily due to the increase in severance expense of approximately $0.8 million associated with the first quarter of 2013 reduction in force and the increase in variable compensation of $0.4 million. Bad debt expense increased $0.2 million over the prior year period due to additional reserves being recorded in the current period whereas a recovery was recognized in the prior period.
For the three months ended March 31, 2013, general and administrative expenses in the International segment decreased $0.1 million or 12.5%, to $0.5 million as compared to $0.6 million in the prior year period. This decrease was primarily due to decreased headcount in the current period.
Sales and Marketing
| Three Months Ended March 31, | ||||||
---|---|---|---|---|---|---|---|
(dollars in thousands) | 2013 | 2012 | |||||
United States | $ | 8,711 | $ | 8,908 | |||
International | 1,086 | 1,085 | |||||
Total Sales and Marketing | $ | 9,797 | $ | 9,993 | |||
Sales and marketing expenses consist primarily of salaries and other related costs for personnel in field sales, marketing, business development, and customer service functions. Other costs in sales and marketing expenses include the development and printing of advertising and promotional material, professional services, market research, and sales meetings.
Total sales and marketing expenses decreased $0.2 million, or 2.0%, to $9.8 million in the three months ended March 31, 2013, as compared to $10.0 million in the three months ended March 31, 2012. In the U.S. segment, sales and marketing expense decreased $0.2 million, or 2.2%, to $8.7 million in the same period, as compared to $8.9 million in the prior year. The decrease was primarily due to lower salaries, benefits, travel, and other personnel costs including contractors of $0.8 million in 2013 driven by the workforce reductions during October 2012 and January 2013. These decreases were offset by an increase of $0.6 million related to variable compensation.
For the three months ended March 31, 2013, the International segment sales and marketing expense was consistent with the prior year period at $1.1 million.
Research and Development
| Three Months Ended March 31, | ||||||
---|---|---|---|---|---|---|---|
(dollars in thousands) | 2013 | 2012 | |||||
United States | $ | 11,950 | $ | 10,320 | |||
International | 48 | 42 | |||||
Total Research and Development | $ | 11,998 | $ | 10,362 | |||
Research and development expenses relate primarily to the development of new products to add to the Company's portfolio and costs related to its medical affairs and medical information functions.
Total research and development expense increased $1.6 million, or 15.8%, to $12.0 million for the three months ended March 31, 2013, as compared to $10.4 million in the three months ended March 31, 2012. In the U.S. segment, research and development expense increased approximately $1.6 million, or 15.8%, to $12.0 million, as compared to $10.3 million in the prior year period.
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Research and development expense increased in the U.S. segment driven by severance expense of $2.0 million resulting from a strategic shift to using fewer internal resources in the future as we expect to seek one or more strategic partners to assist in the future development and commercialization of our development candidates. Additionally, variable compensation increased R&D expense over the prior period. Offsetting some of these increases was a decrease in employee related cost given lower full time equivalents in the current period due to reductions in force and attrition.
Consistent with the prior period, in the first quarter of 2013 we continued to actively enroll patients in our flurpiridaz F 18 Phase 3 program and expect to complete the first of two Phase 3 clinical trials with internal resources later this year. We are seeking to engage a strategic partner to advance the second of our two Phase 3 clinical trials.
For the three months ended March 31, 2013, the International segment research and development expense was consistent with the prior year period.
Proceeds from Manufacturer
For the three months ended March 31, 2013 compared to the same period in 2012, proceeds from manufacturer decreased by $29.9 million as a result of the receipt of the $30.0 million from BVL in 2012 to compensate us for business losses. During the first quarter of 2012, BVL and LMI terminated their original manufacturing agreement and entered into the Settlement Agreement, the Transition Services Agreement and the Manufacturing and Services Contract.
Other (Expense) Income, Net
| Three Months Ended March 31, | ||||||
---|---|---|---|---|---|---|---|
(dollars in thousands) | 2013 | 2012 | |||||
Interest expense | $ | (10,711 | ) | $ | (10,447 | ) | |
Interest income | 42 | 101 | |||||
Other income, net | 721 | 305 | |||||
Total other (expense) income, net | $ | (9,948 | ) | $ | (10,041 | ) | |
Interest Expense
For the three months ended March 31, 2013 compared to the same period in 2012, interest expense increased by $0.2 million as a result of increased amortization related to the capitalization of additional deferred financing costs in connection with our line of credit amendments.
Interest Income
For the three months ended March 31, 2013, compared to the same period in 2012, interest income decreased by $59,000 as a result of the change in balances in interest bearing accounts.
Other Income, net
For the three months ended March 31, 2013 compared to the same period in 2012, other income increased by $0.4 million primarily due to the receipt of $0.4 million in consideration from the extinguishment of our membership interests in a mutual insurance company.
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Provision for Income Taxes
| Three Months Ended March 31, | ||||||
---|---|---|---|---|---|---|---|
(dollars in thousands) | 2013 | 2012 | |||||
Provision for income taxes | $ | 628 | $ | 2,237 |
For the three months ended March 31, 2013 and 2012, our effective tax rate was (3.27)% and 9.67%, respectively. The $1.6 million decrease in the tax provision was impacted primarily by the reduction in pre-tax income. Our tax rate is affected by recurring items, such as discrete items relating to interest and penalties on uncertain tax positions. The tax rate is also affected since the Company is not able to benefit the losses from the certain foreign and domestic entities. To the extent the Company is in a full valuation allowance, a deferred tax provision is not recorded. The following items had the most significant impact on the differences between our statutory U.S. federal income tax rate of 35% and our effective tax rate during the three months ended:
March 31, 2013
- •
- A $6.6 million increase to our valuation allowance against net domestic deferred tax assets.
- •
- A $0.7 million increase in our uncertain tax positions relating to state tax nexus and transfer pricing matters.
March 31, 2012
- •
- A $6.9 million decrease to our valuation allowance against net domestic deferred tax assets.
- •
- A $0.8 million increase in state tax based on year to date profit before tax.
- •
- A $0.5 million increase in our tax provision relating to the closing of two tax audits.
Liquidity and Capital Resources
Cash Flows
The following table provides information regarding our cash flows:
| Three Months Ended March 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
(dollars in thousands) | 2013 | 2012 | $ Change | |||||||
Cash provided by (used in): | ||||||||||
Operating activities | $ | (150 | ) | $ | 35,204 | $ | (35,354 | ) | ||
Investing activities | $ | (1,449 | ) | $ | (2,269 | ) | $ | 820 | ||
Financing activities | $ | (388 | ) | $ | (655 | ) | $ | 267 |
Net Cash Provided by Operating Activities
Cash provided by operating activities is primarily driven by our earnings and changes in working capital. The decrease in cash provided by operating activities for the three months ended March 31, 2013 as compared to 2012 was primarily driven by the receipt of $30.0 million from the BVL settlement in the first quarter of 2012.
Net Cash Used in Investing Activities
The decrease in net cash used in investing activities in the three months ended March 31, 2013 as compared to 2012 primarily reflects less spending on the purchase of property and equipment.
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Net Cash Used in Financing Activities
Our primary historical uses of cash in financing activities are principal payments on our term loan and financing costs.
Internal Sources of Liquidity
Our internal sources of liquidity are derived from cash and cash equivalents of $29.2 million as of March 31, 2013, as well as revenues primarily from the sale of DEFINITY, TechneLite, Cardiolite and Xenon.
External Sources of Liquidity
Since 2010, in addition to revenues provided by the sales of our products, our primary source of external liquidity has been the proceeds from the issuance of the $400.0 million 9.750% Senior Notes due in May of 2017. We also have outstanding a revolving credit facility (the "Facility") that had an original borrowing capacity of $42.5 million. On March 25, 2013, we executed an additional amendment to the Facility which, (i) reduced the committed availability for total borrowings under the Facility from $42.5 million to $35 million, (ii) set the interest rate at LIBOR plus 4.75% or the Reference Rate (as defined in the agreement) plus 3.75%, and (iii) further modified the financial covenants and certain definitions used to calculate compliance with those covenants. The revised financial covenants, as amended, are set forth in the table below.
Revolving Credit Facility Financial Covenants
Period | Total Leverage Ratio | Interest Coverage Ratio | |||||
---|---|---|---|---|---|---|---|
Q1 2013 | 8.80 to 1.00 | 1.10 to 1.00 | |||||
Q2 2013 | 10.0 to 1.00 | 1.00 to 1.00 | |||||
Q3 2013 | 8.20 to 1.00 | 1.25 to 1.00 | |||||
Q4 2013 | 7.50 to 1.00 | 1.40 to 1.00 | |||||
Q1 2014 | 7.00 to 1.00 | 1.45 to 1.00 | |||||
Thereafter | 7.00 to 1.00 | 1.45 to 1.00 |
The Facility expires on May 10, 2014, at which time all outstanding borrowings are due and payable.
As of March 31, 2013, we were in compliance with all applicable financial covenants. As of March 31, 2013 and the date hereof, there were no amounts outstanding under the Facility, other than an $8.8 million unfunded Standby Letter of Credit, and the aggregate borrowing capacity was $26.2 million.
We may from time to time repurchase or otherwise retire our debt and take other steps to reduce our debt or otherwise improve our balance sheet. These actions may include open market repurchases of any notes outstanding, prepayments of our term loans or other retirements or refinancing of outstanding debt. The amount of debt that may be repurchased or otherwise retired, if any, would be decided upon at the sole discretion of our Board of Directors and will depend on market conditions, trading levels of our debt from time to time, our cash position and other considerations.
Funding Requirements
Our future capital requirements will depend on many factors, including:
- •
- our ability to have product manufactured and released from JHS, BVL and other manufacturing sites in the future;
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- •
- the level of product sales of our currently marketed products, particularly DEFINITY, and any additional products that we may market in the future;
- •
- the scope, progress, results and costs of development activities for our current development candidates and whether we obtain partners to help share such development costs;
- •
- the costs, timing and outcome of regulatory review of our development candidates;
- •
- the number of, and development requirements for, additional development candidates that we pursue;
- •
- the costs of commercialization activities, including product marketing, sales and distribution and whether we obtain partners to help share such commercialization costs;
- •
- the costs and timing of establishing manufacturing and supply arrangements for clinical and commercial supplies of our development candidates and products;
- •
- the extent to which we acquire or invest in products, businesses and technologies;
- •
- the extent to which we choose to establish collaboration, co-promotion, distribution or other similar arrangements for our marketed products and development candidates;
- •
- the legal costs relating to maintaining, expanding and enforcing our intellectual property portfolio, pursuing insurance or other claims and defending against product liability, regulatory compliance or other claims; and
- •
- the cost of interest on any additional borrowings which we may incur under our financing arrangements.
If our capital resources become insufficient to meet our future capital requirements, we would need to finance our cash needs through public or private equity offerings, assets securitizations, debt financings, sale-leasebacks or other financing or strategic alternatives, to the extent such transactions are permissible under the covenants of the Facility and the Indenture. Additional equity or debt financing, or other transactions, may not be available on acceptable terms, if at all. If any of these transactions require an amendment or waiver under the covenants in the Facility and under the Indenture, which could result in additional expenses associated with obtaining the amendment or waiver, we will seek to obtain such a waiver to remain in compliance with the covenants of the Facility and the Indenture. However, we cannot be assured that such an amendment or waiver would be granted, or that additional capital will be available on acceptable terms, if at all.
Our only current committed external source of funds is borrowing availability under the Facility. We generated a net loss of $19.8 million during the three months ended March 31, 2013 and had $29.2 million of cash and cash equivalents at March 31, 2013. We were able to amend our Facility covenants on March 25, 2013 as further described above, which allowed us to maintain our compliance with such covenants by a narrow margin at March 31, 2013. If we are not successful in achieving our forecasted results, which include assumptions that BVL and JHS will manufacture and release adequate product supply on a timely and consistent basis and that we are successful with the remainder of our JHS technology transfer programs for Cardiolite product and Neurolite and that we are able to continue to grow DEFINITY sales, we could be in non-compliance with one or more of the financial ratio covenants in the Facility in the next twelve months. If this were to occur, we would either seek an additional amendment to the Facility or a waiver or consent in connection with the appropriate financial covenants to eliminate such potential default or seek to secure an alternative financing arrangement. Any financial covenant default under the Facility will not result in a cross-default under the Indenture that governs the Notes unless the amount outstanding under the Facility is greater than $10.0 million and the lenders accelerate the repayment of such debt. Currently there is $8.8 million outstanding under the Facility in the form of an issued but undrawn letter of credit. Consequently, based on amounts outstanding as of the date of this report, a financial ratio covenant default under the
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Facility would currently only impact our ability to borrow under the Facility. There can be no assurance that we would be able to obtain an amendment, waiver or consent from our lenders.
We have taken actions during March 2013 to substantially reduce our discretionary spending in order to reposition the Company to focus our resources on our higher growth products. In particular, the Company began to implement a strategic shift in how we will fund our important R&D programs. We will reduce during 2013 our internal R&D resources while at the same time seek to engage one or more strategic partners to assist us in the further development and commercialization of our important development candidates, including flurpiridaz F 18, 18F LMI 1195 and LMI 1174. Based on our current operating plans, we believe that our existing cash and cash equivalents, results of operations and availability under the Facility will be sufficient to continue to fund our liquidity requirements for at least the next twelve months.
Critical Accounting Estimates
The discussion and analysis of our financial position and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and judgments that may affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition and related allowances, inventory, impairments of long-lived assets including intangible assets, impairments of goodwill, income taxes including the valuation allowance for deferred tax assets, valuation of investments, research and development expenses, contingencies and litigation, and share-based payments.
Goodwill is not amortized, but is instead tested for impairment at least annually and whenever events or circumstances indicate that it is more likely than not that it may be impaired. We have elected to perform the annual test for indications of goodwill impairment as of October 31 of each year. All goodwill has been allocated to our U.S. operating segment.
The strategic shift in how we will fund our R&D programs significantly altered the expected future costs and revenues associated with our development candidates. Accordingly, this action was deemed to be a triggering event for an evaluation of the recoverability of our goodwill as of March 31, 2013. The Company performed an interim impairment test and determined that there was no impairment of goodwill as of March 31, 2013. There were no events as of December 31, 2012 that triggered an interim impairment test. In each year, the fair value of our reporting unit, which includes goodwill, was substantially in excess of our carrying value.
We calculated the fair value of our reporting units using the income approach, which utilizes discounted forecasted future cash flows and the market approach which utilizes fair value multiples of comparable publicly traded companies. The discounted cash flows are based on our most recent long-term financial projections and are discounted using a risk adjusted rate of return, which is determined using estimates of market participant risk-adjusted weighted average costs of capital and reflects the risks associated with achieving future cash flows. The market approach is calculated using the guideline company method, where we use market multiples derived from stock prices of companies engaged in the same or similar lines of business. There is not a quoted market price for our reporting units or the company as a whole, therefore, a combination of the two methods is utilized to derive the fair value of the business. We evaluate and weigh the results of these approaches as well as ensure we understand the basis of the results of these two methodologies. We believe the use of these two methodologies ensures a consistent and supportable method of determining our fair value that is consistent with the objective of measuring fair value. If the fair value were to decline, then we may be required to incur material charges relating to the impairment of those assets.
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Please read Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2012, for a discussion of our critical accounting estimates. There have been no material changes to our critical accounting policies in the three months ended March 31, 2013.
Off-Balance Sheet Arrangements
Since inception, we have not engaged in any off-balance sheet arrangements, including structured finance, special purpose entities or variable interest entities.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from changes in interest rates and foreign currency exchange rates. We do not hold or issue financial instruments to reduce these risks or for trading purposes.
Interest Rate Risk
We are subject to interest rate risk in connection with the Facility, which is variable rate indebtedness. Interest rate changes could increase the amount of our interest payments and thus negatively impact our future earnings and cash flows. As of March 31, 2013, there was no amount outstanding under the Facility, other than an $8.8 million unfunded Standby Letter of Credit, which reduces availability to $26.2 million. Any increase in the interest rate under the Facility may have a negative impact on our future earnings to the extent we have outstanding borrowings under the Facility.
Foreign Currency Risk
We face exposure to movements in foreign currency exchange rates whenever we, or any of our subsidiaries, enter into transactions with third parties that are denominated in currencies other than our, or its, functional currency. Intercompany transactions between entities that use different functional currencies also expose us to foreign currency risk. During the three months ended March 31, 2013 and 2012, the net impact of foreign currency changes on transactions was a loss of $0.1 million and $0.2 million, respectively. Historically, we have not used derivative financial instruments or other financial instruments to hedge such economic exposures.
Gross margins of products we manufacture at our U.S. plants and sell in currencies other than the U.S. Dollar are also affected by foreign currency exchange rate movements. Our gross margin on total revenue for the three month periods ended March 31, 2013 and 2012 was 32.1% and 38.4%, respectively. If the U.S. Dollar had been stronger by 1%, 5% or 10%, compared to the actual rates during the three months ended March 31, 2013, we estimate our gross margin on total sales would have been 32.2%, 32.3% and 32.6%, respectively. If the U.S. Dollar had been stronger by 1%, 5% or 10%, compared to the actual rates during the three months ended March 31, 2012, we estimate our gross margin on total net product sales would have been 38.5%, 38.7% and 38.9%, respectively.
In addition, a portion of our earnings is generated by our foreign subsidiaries, whose functional currencies are other than the U.S. Dollar (in which we report our consolidated financial results); our earnings could be materially impacted by movements in foreign currency exchange rates upon the translation of the earnings of such subsidiaries into the U.S. Dollar.
If the U.S. Dollar had been uniformly stronger by 1%, 5% or 10%, compared to the actual average exchange rates used to translate the financial results of our foreign subsidiaries, our net
39
product sales and net income for the three months ended March 31, 2013 would have been impacted by approximately the following amounts:
| Approximate Decrease in Net Revenue | Approximate Decrease in Net Loss | |||||
---|---|---|---|---|---|---|---|
| (dollars in thousands) | ||||||
1% | $ | (122 | ) | $ | (5 | ) | |
5% | (609 | ) | (24 | ) | |||
10% | (1,218 | ) | (48 | ) |
If the U.S. Dollar had been uniformly stronger by 1%, 5% or 10%, compared to the actual average exchange rates used to translate the financial results of our foreign subsidiaries, our net product sales and net income for the three months ended March 31, 2012 would have been impacted by approximately the following amounts:
| Approximate Decrease in Net Revenue | Approximate Decrease in Net Income | |||||
---|---|---|---|---|---|---|---|
| (dollars in thousands) | ||||||
1% | $ | (133 | ) | $ | — | ||
5% | (665 | ) | 1 | ||||
10% | (1,329 | ) | 3 |
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) or 15d-15(e) promulgated under the Exchange Act. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control Over Financial Reporting
There have been no changes during the quarter ended March 31, 2013 in our internal control over financial reporting (as defined in Rule 13a-15(f) promulgated under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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From time to time, we are a party to various legal proceedings arising in the ordinary course of business. In addition, we have in the past been, and may in the future be, subject to investigations by regulatory authorities which expose it to greater risks associated with litigation, regulatory or other proceedings, as a result of which we could be required to pay significant fines or penalties. The outcome of litigation, regulatory or other proceedings cannot be predicted with certainty, and some lawsuits, claims, actions or proceedings may be disposed of unfavorably to us. In addition, intellectual property disputes often have a risk of injunctive relief which, if imposed against us, could materially and adversely affect its financial condition or results of operations.
On December 16, 2010, we filed suit against one of our insurance carriers seeking to recover business interruption losses associated with the NRU reactor shutdown and the ensuing global Moly supply shortage (Lantheus Medical Imaging, Inc., Plaintiff v. Zurich American Insurance Company, Defendant, United States District Court, Southern District of New York, Case No. 10 Civ 9371). The claim is the result of the shutdown of the NRU reactor in Chalk River, Ontario. The NRU reactor was off-line from May 2009 until August 2010 due to a "heavy water" leak in the reactor vessel. The defendant answered the complaint on January 21, 2011, denying substantially all of the allegations, presenting certain defenses and requesting dismissal of the case with costs and disbursements. On April 4, 2011, the parties had their first pre-trial conference in United States District Court for the Southern District of New York, and discovery has commenced and is continuing. We cannot be certain what amount, if any, or when, if ever, we will be able to recover for business interruption losses related to this matter.
Except as noted above, as of March 31, 2013, we had no material ongoing litigation, regulatory or other proceeding and had no knowledge of any investigations by governmental or regulatory authorities in which we are a target that could have a material adverse effect on our current business.
There have been no changes in the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. For further information, refer to Part I—Item IA. "Risk Factors," in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
On May 8, 2013, we entered into an employment agreement with Jeffrey Bailey, as our new President and Chief Executive Officer, effective January 23, 2013. As previously disclosed, Jeffrey Bailey was appointed as our new President and Chief Executive Officer, effective January 23, 2013. Also effective as of that date, Mr. Bailey was elected director of the Company, Lantheus MI Intermediate, Inc. ("Intermediate"), the immediate parent of the Company, and Lantheus MI Holdings, Inc. ("Holdings"), the immediate parent of Intermediate.
Mr. Bailey will receive an annual salary of $450,000 and is eligible to receive an annual, discretionary cash bonus of up to 100% of his base salary amount. He was granted an option to purchase 1,000,000 shares of common stock of Holdings, subject to both time and performance vesting criteria. He also purchased 58,823 shares of common stock of Holdings at a purchase price of $6.80 per share. If Mr. Bailey is terminated without cause or resigns with good reason, he will be entitled to receive the continued payment of his then-current base salary for twelve months and his target bonus for the year of termination. If Mr. Bailey is terminated without cause or resigns with good reason within 12 months of the occurrence of a change of control, Mr. Bailey will be entitled to receive two times his then current base salary and target annual bonus.
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10.1 | *† | Fission Mo-99 Supply Agreement, effective January 1, 2013, by and between Lantheus Medical Imaging, Inc. and the Institut National des Radioelements. | |
31.1 | Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), pursuant to section 302 of the Sarbanes-Oxley Act of 2002. | ||
31.2 | Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), pursuant to section 302 of the Sarbanes-Oxley Act of 2002. | ||
32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. | ||
101.INS | * | XBRL Instance Document | |
101.SCH | * | XBRL Taxonomy Extension Schema Document | |
101.CAL | * | XBRL Taxonomy Calculation Linkbase Document | |
101.LAB | * | XBRL Taxonomy Extension Labels Linkbase Document | |
101.PRE | * | XBRL Taxonomy Extension Presentation Linkbase Document | |
101.DEF | * | XBRL Taxonomy Extension Definition Linkbase Document |
- *
- Furnished herewith.
- †
- Confidential treatment requested as to certain portions, which portions have been filed separately with the Securities and Exchange Commission.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LANTHEUS MEDICAL IMAGING, INC. | ||||||
By: | /s/ JEFFREY BAILEY | |||||
Name: | Jeffrey Bailey | |||||
Title: | President and Chief Executive Officer | |||||
Date: | May 10, 2013 | |||||
LANTHEUS MEDICAL IMAGING, INC. | ||||||
By: | /s/ JEFFREY E. YOUNG | |||||
Name: | Jeffrey E. Young | |||||
Title: | Chief Financial Officer | |||||
Date: | May 10, 2013 |
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Exhibit Number | Description | ||
---|---|---|---|
10.1 | *† | Fission Mo-99 Supply Agreement, effective January 1, 2013, by and between Lantheus Medical Imaging, Inc. and the Institut National des Radioelements. | |
31.1 | Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), pursuant to section 302 of the Sarbanes-Oxley Act of 2002. | ||
31.2 | Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), pursuant to section 302 of the Sarbanes-Oxley Act of 2002. | ||
32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. | ||
101.INS | * | XBRL Instance Document | |
101.SCH | * | XBRL Taxonomy Extension Schema Document | |
101.CAL | * | XBRL Taxonomy Calculation Linkbase Document | |
101.LAB | * | XBRL Taxonomy Extension Labels Linkbase Document | |
101.PRE | * | XBRL Taxonomy Extension Presentation Linkbase Document | |
101.DEF | * | XBRL Taxonomy Extension Definition Linkbase Document |
- *
- Furnished herewith.
- †
- Confidential treatment requested as to certain portions, which portions have been filed separately with the Securities and Exchange Commission.
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