EXHIBIT 99.1
 |
VPI Holdings Corp. Consolidated Financial Statements Years Ended December 31, 2013 and 2012 |
| The report accompanying these financial statements was issued by BDO USA, LLP, a Delaware limited liability partnership and the U.S. member of BDO International Limited, a UK company limited by guarantee. |  |  |
VPI Holdings Corp. Consolidated Financial Statements Years Ended December 31, 2013 and 2012 |
VPI Holdings Corp.
Contents
| Independent Auditor’s Report | 2-3 | |
| Consolidated Financial Statements | ||
| Consolidated Balance Sheets | 4-5 | |
| Consolidated Statements of Operations | 6 | |
| Consolidated Statements of Stockholders’ Equity (Deficit) | 7 | |
| Consolidated Statements of Cash Flows | 8 | |
| Notes to Consolidated Financial Statements | 9-23 |
| Tel: 404-688-6841 Fax: 404-688-1075 www.bdo.com | 1100 Peachtree Street NE, Suite 700 Atlanta, GA 30309 |
Independent Auditor’s Report
Board of Directors
VPI Holdings Corp.
Marietta, Georgia
We have audited the accompanying consolidated financial statements of VPI Holdings Corp., which comprise the consolidated balance sheets as of December 31, 2013 and 2012, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the years then ended, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.
BDO is the brand name for the BDO network and for each of the BDO Member Firms.
2
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of VPI Holdings Corp. and its subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Atlanta, Georgia
March 31, 2014
3
VPI Holdings Corp.
Consolidated Balance Sheets
| December 31, | 2013 | 2012 | ||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 3,238,622 | $ | 1,305,792 | ||||
| Accounts receivable, net | 25,813,761 | 20,871,530 | ||||||
| Inventories, net | 8,685,262 | 5,953,788 | ||||||
| Prepaid and other current assets | 793,008 | 652,589 | ||||||
| Deferred income taxes (Note 9) | 3,849,013 | 3,881,920 | ||||||
| Total current assets | 42,379,666 | 32,665,619 | ||||||
| Other Assets | ||||||||
| Goodwill (Note 3) | 41,304,522 | 41,304,522 | ||||||
| Intangibles, net (Note 3) | 13,993,405 | 20,480,864 | ||||||
| Deferred debt cost, net | 2,070,659 | 1,740,005 | ||||||
| Property and equipment, net (Note 2) | 1,272,618 | 1,145,950 | ||||||
| Total other assets | 58,641,204 | 64,671,341 | ||||||
| $ | 101,020,870 | $ | 97,336,960 | |||||
4
VPI Holdings Corp.
Consolidated Balance Sheets
| December 31, | 2013 | 2012 | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | 2,199,249 | $ | 3,071,103 | ||||
| Income taxes payable | 1,098,616 | - | ||||||
| Compensation accrual | 1,567,634 | 524,074 | ||||||
| Accrued expenses | 6,648,913 | 9,242,659 | ||||||
| Chargeback and returns accrual | 5,840,408 | 4,449,006 | ||||||
| Current portion of long-term debt (Note 4) | 4,781,250 | 2,750,000 | ||||||
| Total current liabilities | 22,136,070 | 20,036,842 | ||||||
| Long-Term Liabilities | ||||||||
| Deferred income taxes (Note 9) | 3,279,715 | 3,278,800 | ||||||
| Non-current portion of long-term debt (Note 4) | 79,156,250 | 52,250,000 | ||||||
| Total Liabilities | 104,572,035 | 75,565,642 | ||||||
Commitments and Contingencies (Note 8) | ||||||||
| Stockholders’ (Deficit) Equity | ||||||||
| Common stock, $0.01 par value; 1,200,000 | ||||||||
| shares authorized; 34,876 shares issued and | ||||||||
| outstanding at December 31, 2013 and 2012 | 349 | 349 | ||||||
| Series A preferred stock, $0.01 par value; | ||||||||
| 430,000 shares authorized; 422,900 shares | ||||||||
| issued and outstanding at December 31, | ||||||||
| 2013 and 2012 | 4,229 | 4,229 | ||||||
| Series B preferred stock, $0.01 par value; | ||||||||
| 76,500 shares authorized; 76,500 shares | ||||||||
| issued and outstanding at December 31, | ||||||||
| 2013 and 2012 | 765 | 765 | ||||||
| Series C preferred stock, $0.01 par value; | ||||||||
| 25,000 shares authorized; 25,000 shares | ||||||||
| issued and outstanding at December 31, | ||||||||
| 2013 and 2012 | 250 | 250 | ||||||
| Additional paid-in capital | (3,556,758 | ) | 21,765,725 | |||||
| Accumulated deficit | - | - | ||||||
| Total Stockholders' (Deficit) Equity | (3,551,165 | ) | 21,771,318 | |||||
| $ | 101,020,870 | $ | 97,336,960 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
5
VPI Holdings Corp.
Consolidated Statements of Operations
| Years ended December 31, | 2013 | 2012 | ||||||
| Net Sales | $ | 63,728,371 | $ | 39,706,214 | ||||
| Royalty Expense | 7,055,062 | 4,315,555 | ||||||
| Cost of Goods Sold | 12,224,033 | 10,012,701 | ||||||
| Gross profit | 44,449,276 | 25,377,958 | ||||||
| Selling, general and administrative | ||||||||
| expenses (Note 10) | 19,418,614 | 12,239,211 | ||||||
| Research and development expenses | 5,956,921 | 2,971,172 | ||||||
| Depreciation and amortization | 5,929,947 | 5,344,178 | ||||||
| Operating income | 13,143,794 | 4,823,397 | ||||||
Interest Expense, net (Note 4) | 4,918,366 | 2,318,675 | ||||||
| Income Before Income Tax Provision | 8,225,428 | 2,504,722 | ||||||
| Income Tax Provision | 2,890,133 | 904,555 | ||||||
| Net Income | $ | 5,335,295 | $ | 1,600,167 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
6
VPI Holdings Corp.
Consolidated Statements of Stockholders’ Equity (Deficit)
| Years ended December 31, 2013 and 2012 | ||||||||||||||||||||||||||||||||||||||||||||
| Additional | Total | |||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Preferred A | Preferred B | Preferred C | Paid-in | Accumulated | Stockholders' | ||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Equity (Deficit) | ||||||||||||||||||||||||||||||||||
Balance, December 31, 2011 | 34,876 | $ | 349 | 422,900 | $ | 4,229 | 76,500 | $ | 765 | 25,000 | $ | 250 | $ | 52,494,471 | $ | (92,849 | ) | $ | 52,407,215 | |||||||||||||||||||||||||
| Compensation expense - restricted | ||||||||||||||||||||||||||||||||||||||||||||
| stock | - | - | - | - | - | - | - | - | 12,772 | - | 12,772 | |||||||||||||||||||||||||||||||||
| Compensation expense - stock options | - | - | - | - | - | - | - | - | 40 | - | 40 | |||||||||||||||||||||||||||||||||
| Dividends paid | - | - | - | - | - | - | - | - | (30,741,558 | ) | (1,507,318 | ) | (32,248,876 | ) | ||||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | - | - | - | - | 1,600,167 | 1,600,167 | |||||||||||||||||||||||||||||||||
Balance, December 31, 2012 | 34,876 | 349 | 422,900 | 4,229 | 76,500 | 765 | 25,000 | 250 | 21,765,725 | - | 21,771,318 | |||||||||||||||||||||||||||||||||
| Compensation expense - stock options | - | - | - | - | - | - | - | - | 392,672 | - | 392,672 | |||||||||||||||||||||||||||||||||
| Dividends paid | - | - | - | - | - | - | - | - | (25,715,155 | ) | (5,335,295 | ) | (31,050,450 | ) | ||||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | - | - | - | - | 5,335,295 | 5,335,295 | |||||||||||||||||||||||||||||||||
Balance, December 31, 2013 | 34,876 | $ | 349 | 422,900 | $ | 4,229 | 76,500 | $ | 765 | 25,000 | $ | 250 | $ | (3,556,758 | ) | $ | - | $ | (3,551,165 | ) | ||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
7
VPI Holdings Corp.
Consolidated Statements of Cash Flows
| Years ended December 31, | 2013 | 2012 | ||||||
| Cash Flows from Operating Activities | ||||||||
| Net income | $ | 5,335,295 | $ | 1,600,167 | ||||
| Adjustments to reconcile net income to net cash | ||||||||
| provided by operating activities: | ||||||||
| Depreciation and amortization | 5,929,947 | 5,344,177 | ||||||
| Noncash stock compensation | 392,672 | 12,812 | ||||||
| Noncash interest expense | 422,020 | 288,869 | ||||||
| Deferred income taxes | 33,822 | 935,545 | ||||||
| Changes in operating assets and l11iabilities: | ||||||||
| Accounts receivable | (4,942,231 | ) | (11,417,553 | ) | ||||
| Inventories | (2,731,474 | ) | (1,548,597 | ) | ||||
| Prepaid expenses and other assets | (140,419 | ) | (498,547 | ) | ||||
| Accounts payable and accrued expenses | (1,030,638 | ) | 10,708,544 | |||||
| Income tax payable | 1,098,616 | - | ||||||
| Net cash provided by operating activities | 4,367,610 | 5,425,417 | ||||||
| Cash Flows from Investing Activity | ||||||||
| Capital expenditures | (614,579 | ) | (589,514 | ) | ||||
| (Purchase) refund of product rights | 1,045,423 | (11,021,730 | ) | |||||
| Net cash provided by (used in) investing activities | 430,844 | (11,611,244 | ) | |||||
| Cash Flows from Financing Activities | ||||||||
| Cash dividends paid | (31,050,450 | ) | (32,248,876 | ) | ||||
| Repayment of debt | (2,437,500 | ) | (975,000 | ) | ||||
| Payment of debt financing costs | (752,674 | ) | (1,033,526 | ) | ||||
| Proceeds from debt | 31,375,000 | 38,575,000 | ||||||
| Net cash (used in) provided by financing activities | (2,865,624 | ) | 4,317,598 | |||||
| Net Increase (Decrease) in Cash and Cash Equivalents | 1,932,830 | (1,868,229 | ) | |||||
Cash and Cash Equivalents, beginning of year | 1,305,792 | 3,174,021 | ||||||
Cash and Cash Equivalents, end of year | $ | 3,238,622 | $ | 1,305,792 | ||||
| Supplemental Cash Flow Information | ||||||||
| Cash paid for interest | $ | 4,577,228 | $ | 2,319,254 | ||||
| Cash paid for income taxes | $ | 1,634,529 | $ | 20,700 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
8
VPI Holdings Corp.
Notes to Consolidated Financial Statements
| 1. | Description of Business, Basis of Presentation, and Summary of Significant Accounting Policies |
9
VPI Holdings Corp.
Notes to Consolidated Financial Statements
| The Company extends credit on an uncollateralized basis primarily to wholesale drug distributors and retail pharmacy chains throughout the U.S. The Company is required to estimate the level of accounts receivable which ultimately will not be paid. The Company calculates this estimate based on prior experience supplemented by a periodic customer specific review when needed. Historically, the Company has not experienced significant credit losses on its accounts and, therefore, has not established an allowance for doubtful accounts. |
| Three of the Company’s customers accounted for approximately 83% and 84% of accounts receivable at December 31, 2013 and 2012, respectively. |
| % of Accounts Receivable | ||||||||
| Customer | 2013 | 2012 | ||||||
| Customer 1 | 36 | % | 41 | % | ||||
| Customer 2 | 28 | % | 33 | % | ||||
| Customer 3 | 19 | % | 10 | % | ||||
| Total | 83 | % | 84 | % | ||||
| Revenue from these customers was approximately 73% and 65% of gross revenue for the years ended December 31, 2013 and 2012, respectively. |
| % of Total Revenues | ||||||||
| Customer | 2013 | 2012 | ||||||
| Customer 1 | 36 | % | 32 | % | ||||
| Customer 2 | 25 | % | 23 | % | ||||
| Customer 3 | 12 | % | 10 | % | ||||
| Total | 73 | % | 65 | % | ||||
| The Company derives a significant portion of its revenue from sales to large wholesale distributors on a limited number of products. Changes in economic conditions and unforeseen events could occur and reduce the demand for these products. The Company’s business success depends in part on its relationships with this limited number of large customers. |
| Inventories |
| Inventories consist of purchased pharmaceutical products and are stated at the lower of cost or market. Cost is determined using the first-in, first-out method, and market is considered to be net realizable value. Inventories consist of finished product, and bulk product awaiting processing and packaging into finished product. |
10
VPI Holdings Corp.
Notes to Consolidated Financial Statements
| Property and Equipment |
| Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the respective assets, ranging from two to ten years. Leasehold improvements are amortized on a straight-line basis over the shorter of their useful lives or the terms of the respective leases. Maintenance and repairs are expensed as incurred, and conversely, renewals and betterments are capitalized. |
| When events or changes in circumstances indicate that the carrying amount of property and equipment might not be recoverable, the expected future undiscounted cash flows from the assets are estimated and compared with the carrying amount of the assets. If the sum of the estimated undiscounted cash flows is less than the carrying amount of the assets, an impairment loss is recorded. The impairment loss is measured by comparing the fair value of the assets with their carrying amounts. Fair value is determined based on discounted cash flows or appraised values, as appropriate. The Company did not record any impairment losses related to our property and equipment during 2013 and 2012. |
| Intangible Assets |
| The Company’s intangible assets are primarily comprised of the intangible assets that were acquired in the acquisition of VersaPharm and CPI in 2007 and various product rights purchased subsequent to 2007. Specifically, the Company’s recognized intangible assets are for (i) customer relationships and (ii) product rights. |
| The intangible asset related to customer relationships is amortized for seven years over a method that reflects an appropriate allocation of the costs of these intangible assets to earnings in proportion to the amount of economic benefits obtained in each reporting period. The intangible asset related to product rights is amortized on a straight-line basis with estimated useful lives of seven years from the date each of the rights were acquired. |
| Intangible assets are tested for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when the carrying amount of the asset exceeds the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. The impairment loss to be recorded would be the excess of the asset's carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis or other valuation technique. No impairment charges have been recorded to intangible assets to date through December 31, 2013. |
| Goodwill |
| Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets acquired. Goodwill and intangible assets with indefinite lives are not amortized, but instead tested for impairment at least annually or whenever events or changes in circumstances indicate the carrying value may not be recoverable. The Company has no intangible assets with indefinite useful lives, other than goodwill. The Company considers the following to be important factors that could trigger an impairment review: significant underperformance relative to historical or projected future operating results; identification of other impaired assets within a reporting unit; significant adverse changes in business climate or regulations; significant changes in senior management; significant changes in the manner to use the acquired assets or the strategy for the Company’s overall business; significant negative industry or economic trends. |
11
VPI Holdings Corp.
Notes to Consolidated Financial Statements
| Goodwill is assessed for impairment using a fair value approach at the reporting unit level. The goodwill impairment test is a two-step process, if necessary. The provisions for the accounting standard of goodwill provide an entity with the option to assess qualitative factors to determine whether the existence of events or circumstances leads to the determination that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. This qualitative assessment is referred to as a “step zero” approach. If, based on the qualitative factors, an entity determines it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying value, the entity may skip the two-step impairment test required by accounting guidance. If an entity determines otherwise or, at the option of the entity, a step zero is not performed, step one of the two-step impairment test is required. Under step one, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the entity must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit's goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation and the residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using the income approach. Impairment shall be recognized to the extent that the carrying amount of goodwill exceeds its implied fair value. |
| In performing step one of the goodwill impairment test, the Company compares the carrying amount of the reporting unit to the estimated fair value. This analysis contains uncertainties because it requires the Company to make market participant assumptions, and to apply judgment to estimate industry economic factors and the profitability and growth of future business strategies, to determine estimated future cash flows and an appropriate discount rate. The Company measures the fair value of its reporting units using the income approach. The income approach uses cash flow projections. Inherent in the development of cash flow projections are assumptions and estimates derived from a review of operating results, approved business plans, expected growth rates, capital expenditures and cost of capital, similar to those a market participant would use to assess fair value. The Company also makes certain assumptions about future economic conditions and other data. Many of the factors used in assessing fair value are outside the control of management, and these assumptions and estimates may change in future periods. Changes in assumptions or estimates can materially affect the fair value measurement of a reporting unit, and therefore, can affect the amount of the impairment. The following are key assumptions used in making cash flow projections: |
| § | Business projections. The Company makes assumptions about the demand for products in the marketplace and pending regulatory approvals. These assumptions drive the planning assumptions for volume, mix, and pricing. The Company also makes assumptions about cost levels. These projections are derived using internal business plans that are updated at least annually and reviewed by the Board of Directors. |
| § | Long-term growth rate. A growth rate is used to calculate the terminal value of the business and is added to the present value of the debt-free cash flows. The growth rate is the expected rate at which a business unit’s earnings stream is projected to grow beyond the planning period. |
12
VPI Holdings Corp.
Notes to Consolidated Financial Statements
| § | Discount rate. When measuring possible impairment, future cash flows are discounted at a rate that is consistent with a weighted-average cost of capital that the Company anticipates a potential market participant would use. Weighted-average cost of capital is an estimate of the overall risk-adjusted after-tax rate of return required by equity and debt holders of a business enterprise. |
| § | Economic projections. Assumptions regarding general economic conditions are included in and affect the assumptions regarding industry sales and pricing estimates. These macro-economic assumptions include, but are not limited to, industry sales volumes and interest rates. |
| For the 2013 annual goodwill impairment test performed as of December 31, 2013, the Company utilized the optional qualitative step zero assessment. Based on the Company’s review of the available qualitative factors, it was determined that it is not more-likely-than-not that the fair value of the Company’s reporting unit was less than its carrying value. Therefore, the step one test was not required and, based on this assessment, there is no indication of impairment as of December 31, 2013. |
| Income Taxes |
| Income taxes are accounted for under the asset and liability method in accordance with generally accepted accounting principles. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates, expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that the laws are enacted. |
| ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements using a two-step process for evaluating tax positions taken, or expected to be taken, on a tax return. The Company may only recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. Uncertain tax positions require determinations and estimated liabilities to be made based on provisions of the tax law, which may be subject to change or varying interpretation. If the Company’s determinations and estimates prove to be inaccurate, the resulting adjustments could be material to the Company’s future financial results. |
13
VPI Holdings Corp.
Notes to Consolidated Financial Statements
| Revenue Recognition |
| The Company recognizes revenues when it can determine that persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and it deems collection to be probable. In making these judgments, the Company evaluates these criteria as follows: |
| § | Evidence of an arrangement. The Company considers a purchase order to be representative of persuasive evidence of an arrangement. |
| § | Delivery has occurred. The Company considers delivery to have occurred when product shipment has occurred and delivery has been accepted by the customer. |
| § | Fees are fixed or determinable. The Company considers the fee to be fixed or determinable once product returns, chargebacks, and other allowances can be reasonably estimated. |
| § | Collection is deemed probable. Collection is deemed probable based upon the Company’s evaluation of the customer’s ability to pay. |
| Revenue Deductions and Product Returns |
| The Company gives certain discounts on pricing based on contractual price reductions with wholesalers, managed care providers, and certain other consumers. Provision for these estimated costs are recorded at the time of sale and are periodically adjusted to reflect actual experiences. In addition, the return policy allows customers to return products within a specified period before and after product expiration dates. In establishing the reserves, the Company considers the past experience of deductions and returns, inventory information from the wholesalers, contractual arrangements, and qualitative knowledge of the industry and trends. |
| Royalty Expense |
| The Company pays royalties on the sale of certain products and receives royalty income on two of its products. Royalty income is included in net sales in the accompanying consolidated statements of operations. Royalty expenses are estimated and accrued at the time of sale. |
| Cost of Goods Sold |
| Cost of goods sold is comprised of purchased product costs, freight, stability and similar testing costs. |
| Advertising and Marketing Costs |
| The Company charges the costs of advertising and marketing to expense as incurred. Advertising and marketing expenses were $4,631,025 and $2,444,899 for the years ended December 31, 2013 and 2012, respectively. |
14
VPI Holdings Corp.
Notes to Consolidated Financial Statements
| Share-Based Compensation |
| As of December 31, 2013, the Company had a share-based compensation plan, which is more fully described in Note 6 below. |
| The fair value of each option award was estimated on the date of grant using the Black-Scholes valuation model that uses assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate. Expected volatility is based on the historical volatility of public companies in the Company’s peer group over the expected term of the options. The expected term of options granted to employees is derived using the “simplified method” which computes expected terms as the average of the sum of the vesting term plus the contract term. The risk-free interest rate is based on the U.S. Treasury yield rates in effect at the time of grant for the period of the expected term. The Company generally expenses the fair value of the option awards on a straight-line basis over the requisite service period. |
| 2. | Property and Equipment, Net |
| The components of property and equipment at December 31, 2013 and 2012 are as follows: |
| Estimated | ||||||||||||
| Useful Life | ||||||||||||
| December 31, | (Years) | 2013 | 2012 | |||||||||
| Furniture and fixtures | 3-5 | $ | 284,270 | $ | 278,102 | |||||||
| Lesser of | ||||||||||||
| useful life or | ||||||||||||
| Leasehold improvements | lease term | 210,891 | 172,475 | |||||||||
| Computer equipment | 3 | 1,076,570 | 870,060 | |||||||||
| Machinery and equipment | 5-10 | 1,377,718 | 1,022,488 | |||||||||
| 2,949,449 | 2,343,125 | |||||||||||
| Accumulated depreciation and amortization | (1,676,831 | ) | (1,197,175 | ) | ||||||||
| Property and equipment, net | $ | 1,272,618 | $ | 1,145,950 | ||||||||
| Depreciation and amortization expense for the years ended December 31, 2013 and 2012 were $487,911 and $437,514, respectively. |
15
VPI Holdings Corp.
Notes to Consolidated Financial Statements
| 3. | Goodwill and Intangible Assets |
| Goodwill and intangible assets and accumulated amortization as of December 31, 2013 and 2012 consist of the following: |
| Amortization | ||||||||||
| December 31, | Period | 2013 | 2012 | |||||||
| Goodwill | $ | 41,304,522 | $ | 41,304,522 | ||||||
| Amortizable intangible assets: | ||||||||||
| Customer relationships | 7 years | 18,500,000 | 18,500,000 | |||||||
| Intangible product rights | 7 years | 19,865,565 | 20,910,988 | |||||||
| 38,365,565 | 39,410,988 | |||||||||
| Accumulated amortization | (24,372,160 | ) | (18,930,124 | ) | ||||||
| Intangible Assets, net | $ | 13,993,405 | $ | 20,480,864 | ||||||
| During 2013, the Company received approximately $1,400,000 from a certain pharmaceutical company when that company joined an FDA mandated program. VPI had purchased the rights to join this FDA program in a prior year; therefore VPI treated this payment as a reduction in the related intangible asset. |
| Amortization expense related to intangible assets amounted to $5,442,036 and $4,906,663 for the years ended December 31, 2013 and 2012, respectively. The estimated life of the intangible assets is 7 years and the weighted average remaining life were 4.30 years and 4.84 years at December 31, 2013 and 2012, respectively. |
| Estimated annual amortization of intangible assets is as follows: |
| Year | Amount | |||
| 2014 | $ | 5,054,101 | ||
| 2015 | 2,129,101 | |||
| 2016 | 2,129,101 | |||
| 2017 | 2,129,101 | |||
| 2018 | 1,931,497 | |||
| Thereafter | 620,504 | |||
| $ | 13,993,405 | |||
16
VPI Holdings Corp.
Notes to Consolidated Financial Statements
| 4. | Long-Term Debt |
| Long-term debt at December 31, 2013 and 2012 consists of the following: |
| December 31, | 2013 | 2012 | ||||||
| Credit Agreements term loan | $ | 83,937,500 | $ | 55,000,000 | ||||
| Revolving credit facilities | - | - | ||||||
| 83,937,500 | 55,000,000 | |||||||
| Less current maturities | (4,781,250 | ) | (2,750,000 | ) | ||||
| $ | 79,156,250 | $ | 52,250,000 | |||||
| Following are the future maturities of long-term debt as of December 31, 2012: |
| Year | Amount | |||
| 2014 | $ | 4,781,250 | ||
| 2015 | 6,906,250 | |||
| 2016 | 8,500,000 | |||
| 2017 | 63,750,000 | |||
| $ | 83,937,500 | |||
| Credit Agreement |
| On July 3, 2011, the Company paid off a previous credit agreement and entered into a new credit agreement (the “Credit Agreement”). The Credit Agreement provided for a term loan in the amount of $18,000,000 and a revolving credit facility of $5,000,000. An additional $7,000,000 term loan could also be drawn by the Company in the future, in conjunction with the launch of a certain product. The term loan required a quarterly principal and monthly interest payment with all remaining principal and interest due on June 3, 2016. The term loan and revolving credit facility had an interest rate of Prime plus 4.5% with a 2.75% Prime Floor. In addition, the revolving credit facility also had a commitment fee of 0.50% of the unused balance. |
| On December 17, 2012, the Company amended its Credit Agreement. The amended Credit Agreement provided a term loan of $55,000,000 and a revolving facility for $5,000,000 due on December 17, 2017. The term loan requires quarterly principal payments and monthly interest payments with all remaining principal and interest due on December 17, 2017. The term loan and revolving credit facility bear an interest rate of LIBOR plus 5.5%, with a LIBOR floor of 1.25%. |
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VPI Holdings Corp.
Notes to Consolidated Financial Statements
| On September 18, 2013, the Company and the lender modified the Credit Agreement by entering into a second amendment to the Credit Agreement. The second amendment replaced the existing term loans with a new loan in an aggregate principal amount of $85,000,000 and a revolving facility for $5,000,000 due on December 17, 2017. The term loan requires quarterly principal payments and monthly interest payments with all remaining principal and interest due on December 17, 2017. The term loan and revolving credit facility bear an interest rate of LIBOR plus applicable margin, with a LIBOR floor of 1.25%. The interest rate was 6.75% and there was $5,000,000 available on the revolving credit facility as of December 31, 2013. |
| During 2011, the Company entered into an interest rate cap agreement with a bank. This derivative instrument, which has a demimus value, has been recorded at its estimated fair value as of December 31, 2013 and 2012 and included in prepaid and other current assets on the consolidated balance sheet and the change in estimated fair value is recorded as interest expense. |
| In 2013 and 2012, the Company capitalized $752,674 and $1,033,526 in costs related to the Credit Agreement for an aggregate of $2,202,265 which is being amortized using the effective interest method over the term of the Credit Agreement. During 2013 and 2012, $422,020 and $254,312, respectively, were expensed relating to the amortization of these costs. |
| The Credit Agreement contains, among other things, financial covenants related to maximum total debt to adjusted EBITDA ratio, a minimum fixed charge coverage ratio, and maximum capital expenditures. The Company was in compliance with these covenants at December 31, 2013 and 2012. The Credit Agreement is secured by substantially all of the assets of the Company. |
| Interest expense, including amortization of deferred loan costs, for the years ended December 31 2013 and 2012 was $4,918,366 and $2,318,675, respectively. |
| 5. | Stockholders’ Equity |
| On November 19, 2007, VPI Holdings Corp. issued 100 shares of common stock and 422,900 shares of Series A Cumulative Convertible Preferred Stock at the price of $100 per share. The proceeds from the issuance of the common and preferred shares were used to purchase all the outstanding common shares of VersaPharm and CPI. |
| Common Stock |
| At December 31, 2013 and 2012, the Company has authorized 1,200,000 shares of common stock ($.01 par value), of which 34,876 shares were outstanding. |
| Series A Cumulative Convertible Preferred Stock |
| During 2007, the Company authorized 430,000 shares of Series A Cumulative Convertible Preferred Stock ($.01 par value) (“Preferred A Stock”), of which 422,900 shares were outstanding at December 31, 2013 and 2012. The Preferred A Stock shares are convertible into shares of the Company’s common stock on a one for one basis, subject to adjustment for future common stock changes. The Preferred A Stock shareholders are entitled to receive a dividend computed at 8% per annum, compounded annually, based on the Original Issue Price, as adjusted. As of December 31, 2013, the Preferred A Stock shareholders are entitled to receive approximately $65,138,331 in the event of the liquidation of the Company. |
18
VPI Holdings Corp.
Notes to Consolidated Financial Statements
| Series B Cumulative Convertible Preferred Stock |
| During 2008, the Company authorized and issued 76,500 shares of Series B Cumulative Convertible Preferred Stock ($.01 par value) (“Preferred B Stock”), of which 76,500 shares were outstanding at December 31, 2013 and 2012. The Preferred B Stock shares are convertible into shares of the Company’s common stock on a one for one basis, subject to adjustment for future common stock changes. The Preferred B Stock shareholders are entitled to receive a dividend computed at 8% per annum, compounded annually, based on the Original Issue Price, as adjusted. As of December 31, 2013, the Preferred B Stock shareholders are entitled to receive approximately $10,851,694 in the event of the liquidation of the Company. |
| Series C Cumulative Convertible Preferred Stock |
| During 2009, the Company authorized and issued 25,000 shares of Series C Cumulative Convertible Preferred Stock ($.01 par value) (“Preferred C Stock”), of which 25,000 shares were outstanding at December 31, 2009. The Preferred C Stock shares are convertible into shares of the Company’s common stock on a one for one basis, subject to adjustment for future common stock changes. The Preferred C Shareholders are entitled to receive a dividend computed at 8% per annum, compounded annually, based on the Original Issue Price, as adjusted. As of December 31, 2013, the Preferred C Stock shareholders are entitled to receive approximately $3,242,381 in the event of the liquidation of the Company. |
| 6. | Stock-based Compensation |
| The Company’s 2007 Amended and Restated Stock Option and Restricted Stock Plan (the “Plan”) provides for the grant of nonqualified stock options and stock awards to eligible employees, and directors of the Company. Options granted under the Plan are exercisable for a period determined by the Company, but in no event longer than ten years from the date of the grant. The fair value of the options is expensed on a straight-line basis over the requisite service period. |
| Stock based compensation during the years ended December 31, 2013 and 2012 totaled $392,672 and $12,812, respectively. For the years ended December 31, 2013 and 2012, respectively, $392,672 and $40 relates to stock options and $0 and $12,772 relates to restricted stock. Stock based compensation expense is recorded in selling, general and administrative expenses, in the accompanying consolidated statements of operations. |
19
VPI Holdings Corp.
Notes to Consolidated Financial Statements
| The following is a summary of the Company’s stock options as of December 31, 2013 and the stock option activity from January 1, 2012 through December 31, 2013: |
| Weighted | ||||||||
| Average | ||||||||
| Exercise | ||||||||
| Number of | Price | |||||||
| Options | Per Share | |||||||
Outstanding at January 1, 2012 | 34,776 | $ | 73.18 | |||||
| Granted | - | - | ||||||
| Exercised | - | - | ||||||
| Cancelled | - | - | ||||||
Outstanding at December 31, 2012 | 34,776 | 73.18 | ||||||
| Granted | 5,095 | 114.17 | ||||||
| Exercised | - | - | ||||||
| Cancelled | (5,095 | ) | 114.17 | |||||
Outstanding at December 31, 2013 | 34,776 | $ | 73.18 | |||||
| Remaining contractual life in years 5.15 | ||||||||
| Exercisable at end of period | 34,776 | $ | 73.18 | |||||
| Of the stock options outstanding as of December 31, 2013 and 2012, all options were held by employees. There is no stock-based compensation expense remaining to be recognized in future periods. |
| As of December 31, 2012, all previously issued shares of restricted stock were fully vested. There were no shares of restricted stock issued in 2013. There were no shares forfeited in the years ended December 31, 2013 and 2012. |
| 7. | Retirement Plan |
| The Company operates a qualified defined contribution 401(k) plan, which provides benefits to substantially all employees. Any annual contribution to the plan above the mandatory “Safe Harbor” amount is at the discretion of the Officers of the Company. The Company contributed $95,601 and $80,515 during the years ended December 31, 2013 and 2012, respectively. |
| 8. | Commitments and Contingencies |
| The Company is obligated under the terms of operating lease arrangements for its offices, warehouse, and research and development facility. Rent expense was $492,947 and $438,179 for the years ended December 31, 2013 and 2012, respectively. |
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VPI Holdings Corp.
Notes to Consolidated Financial Statements
| The total minimum future commitments under the operating leases for years succeeding December 31, 2013 are as follows: |
| Year | Amount | |||
| 2014 | $ | 223,897 | ||
| 2015 | 23,350 | |||
| $ | 247,247 | |||
| 9. | Income Taxes |
| The initial purchase transaction of VersaPharm and CPI met certain attributes of the Internal Revenue Code such that a portion of the purchase price can be amortized and deducted for income tax purposes (the “Goodwill Amortization”). This Goodwill Amortization (tax amortization) is approximately $2,754,000 per year for the first 15 years following acquisition. |
| The provision for income taxes for the years ended December 31, 2013 and 2012 consists of the following: |
| 2013 | 2012 | |||||||
| Current Tax Expense | ||||||||
| Federal | $ | 2,721,847 | $ | (50,739 | ) | |||
| State | 134,464 | 19,748 | ||||||
| Total current tax expense (benefit) | 2,856,311 | (30,991 | ) | |||||
| Deferred Tax Expense | ||||||||
| Federal | 15,818 | 905,647 | ||||||
| State | 18,004 | 29,899 | ||||||
| Total deferred tax expense | 33,822 | 935,546 | ||||||
| Total income tax expense | $ | 2,890,133 | $ | 904,555 | ||||
| A reconciliation of income tax expense at the statutory federal income tax rate and income taxes as reflected in the financial statements for the years ended December 31, 2013 and 2012 are as follows: |
| 2013 | 2012 | |||||||
| Federal income tax expense at statutory federal rate | $ | 2,796,646 | $ | 851,605 | ||||
| State income tax expense, net of federal taxes | 107,490 | 42,932 | ||||||
| Other | (14,003 | ) | 10,018 | |||||
| Total | $ | 2,890,133 | $ | 904,555 | ||||
21
VPI Holdings Corp.
Notes to Consolidated Financial Statements
| Deferred tax assets (liabilities) at December 31, 2013 and 2012 consist of the following: |
| 2013 | 2012 | |||||||
| Deferred Income Tax Assets | ||||||||
| Net operating loss carryforward | $ | - | $ | 588,840 | ||||
| Reserves and accruals | 3,416,169 | 3,275,673 | ||||||
| Charitable contributions | 223,665 | 520,468 | ||||||
| Other | 458,586 | 232,330 | ||||||
| Intangible assets | 1,884,646 | 301,737 | ||||||
| Total gross deferred tax assets | 5,983,066 | 4,919,048 | ||||||
| Deferred Tax Liabilities | ||||||||
| Tax deductible goodwill | (5,003,416 | ) | (3,950,447 | ) | ||||
| Prepaids | (79,189 | ) | (113,513 | ) | ||||
| Property and equipment | (331,163 | ) | (251,968 | ) | ||||
| Total gross deferred tax liabilities | (5,413,768 | ) | (4,315,928 | ) | ||||
| Net deferred tax assets | $ | 569,298 | $ | 603,120 | ||||
| The Company files income tax returns in the U.S. federal tax jurisdiction and various state jurisdictions. The tax years from 2009 forward remain open for federal and state tax jurisdiction examinations. The Company is currently not under examination by any tax jurisdictions for any tax years. |
| The Company has applied ASC 740-10 to all open tax positions and has recorded no liability for unrecognized tax benefits at December 31, 2013 and 2012. The Company’s policy is to classify interest and penalties related to unrecognized tax benefits in income tax expense. As of December 31, 2013 and 2012, the Company had recorded no accrued interest and penalties related to unrecognized tax benefits. |
| 10. | Related Parties |
Tailwind Capital Partners, L.P. (“Tailwind”) owns a significant portion of the Company’s Preferred A, Preferred B and Preferred C shares. Tailwind provides management services to the Company in return for an annual management fee. For the years ended December 31, 2013 and 2012, the Company incurred charges in the amount of $500,000 per year in connection with the contracted management services. This amount is included in selling, general and administrative expenses in the accompanying consolidated statement of operations. |
| A member of the Company’s management owns the building that is leased by the Company on a month-to-month basis for their research and development facility. For the years ended December 31, 2013 and 2012, the Company incurred rent expense in the amount of $140,798 and $118,036, respectively, in connection with the lease agreement. |
22
VPI Holdings Corp.
Notes to Consolidated Financial Statements
| 11. | Subsequent Events |
| Management evaluates events occurring subsequent to the date of the financial statements in determining the accounting for and disclosure of transactions and events that affect the financial statements. Subsequent events have been evaluated through March 31, 2014, which is the date the consolidated financial statements were available to be issued. |
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