INDEBTEDNESS

12 Months Ended

Dec. 31, 2018

3. INDEBTEDNESS

Credit Facility

On December 27, 2018, we refinanced our $125.0 million Credit Agreement by entering into an amended and restated Senior Secured Credit Facility (the “Credit Facility”) for up to $265.2 million. The principal new feature of the Credit Facility is a $118.0 million Delayed Draw Term Loan (the “DDTL”), which can only be drawn on in order to pay down the Company’s remaining 3.0% Convertible Senior Notes, which will mature in December 2019. The Credit Facility (and specifically the DDTL) has a subjective acceleration clause in case of a material adverse event. As a result, the remaining

% Convertible Senior Notes are classified as current in the accompanying consolidated balance sheets. The Credit Facility also extended the maturity of the $72.2 million secured term loan balance (the “Term Loan”) to December 2023. In addition, the Credit Facility increased the previous $

50.0

million line of credit

(the “Revolver”)

to $75.0 million. Also on December 27, 2018, we entered into an interest rate swap arrangement to manage our exposure to changes in LIBOR-based interest rates underlying our refinanced Term Loan (Note 4). The Term Loan includes a repayment schedule, subsequent to which $3.6 million of the loan will be paid in quarterly installments during 2019. As a result, $3.6 million of the loan is recorded in current component of long-term borrowing, net of deferred financing in the accompanying consolidated balance sheets. Amounts drawn on the Term Loan and, if drawn upon, the DDTL, bear an interest rate equal to, at our option, either a LIBOR rate plus 1.50% to 2.75% per annum, depending on our total leverage ratio or an alternative base rate plus an applicable base rate margin, which varies within a range of 0.50% to 1.75%, depending our total leverage ratio. We will incur a commitment fee at a rate per annum that varies within a range of

0.25

% to

0.50

%, depending on our leverage ratio. We will also incur a delayed draw ticking fee at a rate per annum that varies within a range of 0.25% to 0.50%, depending on our leverage ratio.

The Credit Facility is secured by a lien on substantially all of ANI

Pharmaceuticals,

Inc.’s and its principal domestic subsidiary’s assets and any future domestic subsidiary guarantors’ assets. The Credit Facility imposes financial covenants consisting of a maximum total leverage ratio, which initially shall be no greater than 3.75 to 1.00 and a minimum fixed charge coverage ratio, which shall be greater than or equal to 1.25 to 1.00. The primary non-financial covenants under the Credit Facility limit, subject to various exceptions, our ability to incur future indebtedness, to place liens on assets, to pay dividends or make other distributions on our capital stock, to repurchase our capital stock, to conduct acquisitions, to alter our capital structure, and to dispose of assets.

The carrying value of the current and long-term components of the Term Loan as of December 31, 2018 and 2017 are:

	Current
(in thousands)	2018			2017
Current borrowing on secured term loan	$	3,609		$	3,750
Deferred financing costs		(353	)		(397	)
Current component of long-term borrowing, net of deferred financing costs	$	3,256		$	3,353

	Long-Term
(in thousands)	2018			2017
Long-term borrowing on secured term loan	$	68,578		$	71,250
Deferred financing costs		(1,282	)		(1,304	)
Long-term borrowing, net of deferred financing costs and current borrowing component	$	67,296		$	69,946

The refinancing of the Term Loan was accounted for as a modification of our previous term loan and consequently, the remaining balance of the deferred issuance costs related to the previous term loan are included with the lenders fees associated with the refinance of the Term Loan and amortized as interest expense over the life of the Term Loan using the effective interest method. Fees to third parties associated with the refinance of the Term Loan were recognized as other (expense)/income, net in the accompanying consolidated statements of operations. The refinancing of the Revolver was accounted for as a modification of our previous revolving credit facility and consequently, the remaining balance of the deferred issuance costs related to the previous revolving credit facility are included with the lenders fees and fees to third parties associated with the refinance of the Revolver and amortized as interest expense on a straight-line basis over the life of the Revolver. All issuance costs allocated to the DDTL were deferred and will be amortized as interest expense on a straight-line basis over the five-year term of the DDTL.

As of December 31, 2018, we had a $

72.2

million balance on the Term Loan. As of December 31, 2018, we had not drawn on the Revolving Credit Facility or DDTL. Of the $1.3 million of deferred debt issuance costs allocated to the Revolving Credit Facility, $1.0 million is included in other long-term assets in the accompanying consolidated balance sheets and $0.3 million is included in prepaid expenses and other current assets in the accompanying consolidated balance sheets. Of the $0.6 million of deferred debt issuance costs allocated to the DDTL, $0.5 million is included in other long-term assets in the accompanying consolidated balance sheets and $0.1 million is included in prepaid expenses and other current assets in the accompanying consolidated balance sheets. Of the $1.6 million of deferred debt issuance costs allocated to the Term Loan, $0.3 million is classified as a direct deduction to the current portion of the Term Loan and is included in current component of long-term borrowing, net of deferred financing costs in the accompanying consolidated balance sheets and $1.3 million is classified as a direct deduction to the long-term portion of the Term Loan and is included in long-term borrowing, net of deferred financing costs and current borrowing component in the accompanying consolidated balance sheets.

The contractual maturity for our Term Loan is as follows for the years ending December 31:

(in thousands)
2019	$	3,609
2020		3,609
2021		5,414
2022		5,414
2023		54,141
Total	$	72,187

Previous Credit Agreement

In December 2017, we entered into a five-year senior secured credit facility (the “Credit Agreement”) with Citizens Bank, N.A. as a lender and administrative agent. As contemplated in the initial agreement, the Credit Agreement was syndicated to five additional lenders on February 5, 2018. The Credit Agreement was comprised of a $75.0 million five-year term loan (the “previous Term Loan”) and a $50.0 million senior secured revolving credit facility (the “Revolving Credit Facility”), with availability subject to a borrowing base consisting of eligible accounts receivable and inventory and the satisfaction of conditions precedent specified in the agreement.

The proceeds of the $75.0 million

Term Loan were used to finance our acquisition of the four NDAs acquired for $46.5 million in cash and to refinance the existing indebtedness of $25.0 million that was outstanding on our now retired asset-based revolving credit facility with Citizens Business Capital, a division of Citizens Asset Finance, Inc. We deferred $

2.7

million of total debt issuance costs related to the Credit Agreement, of which $1.7 million was allocated to the

Term Loan and $1.0 million was allocated to the undrawn Revolving Credit Facility.

The Term Loan was accounted for as a modification of our existing Line of Credit and consequently, the remaining balance of the deferred issuance costs related to the Line of Credit are included with the

Term Loan issuance costs and amortized as interest expense over the life of the

Term Loan using the effective interest method. The issuance costs allocated to the Revolving Credit Facility will be deferred and amortized as interest expense on a straight-line basis over the term of the Revolving Credit Facility. During the year ended December 31, 2018, we recorded $2.7 million of interest expense related to the original Credit Agreement.

Convertible Senior Notes

In December 2014, we issued $143.8 million of our Notes in a registered public offering. After deducting the underwriting discounts and commissions and other expenses (including the net cost of the bond hedge and warrant, discussed below), the net proceeds from the offering were approximately $122.6 million. The Notes pay 3.0% interest semi-annually in arrears on June 1 and December 1 of each year, starting on June 1, 2015, and are due December 1, 2019. In December 2018, we

entered into separate, privately negotiated agreements with certain holders of our Notes and repurchased

$25.0 million of our outstanding Notes. We accounted for the repurchase as an extinguishment of the portion of the Notes and recognized a loss on extinguishment of $0.5 million, which was recorded in other (expense)/income, net in the accompanying consolidated statements of operations. At the same time, we unwound a corresponding portion of the bond hedge and warrant, which are described in further detail below. As a result of unwinding this portion of the bond hedge and warrant, we received a net amount of $0.4 million.

The repurchase of the notes and the unwinding of the bond hedge and warrant resulted in a $1.7 million net reduction in additional paid-in capital (“APIC”) in the accompanying consolidated balance sheets.

The remaining Notes are convertible into 1,709,002 shares of common stock, based on an initial conversion price of $69.48 per share.

The Notes are convertible at the option of the holder (i) during any calendar quarter beginning after March 31, 2015, if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day, (ii) during the five business days after any five consecutive trading day period in which the trading price per $1,000 principal amount of the Notes for each trading day of such period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; and (iii) on or after June 1, 2019 until the second scheduled trading day immediately preceding the maturity date.

Upon conversion by the holders, we may elect to settle such conversion in shares of our common stock, cash, or a combination thereof. As a result of our cash conversion option, we separately accounted for the value of the embedded conversion option as a debt discount (with an offset to APIC) of $33.6 million. The value of the embedded conversion option was determined based on the estimated fair value of the debt without the conversion feature, which was determined using market comparables to estimate the fair value of similar non-convertible debt (Note 8); the debt discount is being amortized as additional non-cash interest expense using the effective interest method over the term of the Notes.

Offering costs of $5.5 million were allocated to the debt and equity components in proportion to the allocation of proceeds to the components, as deferred financing costs and equity issuance costs, respectively. The deferred financing costs of $4.2 million are being amortized as additional non-cash interest expense using the straight-line method over the term of the debt, since this method was not significantly different from the effective interest method. Pursuant to guidance issued by the FASB in April 2015, we have classified the deferred financing costs as a direct deduction to the net carrying value of our Convertible Debt. The $1.3 million portion allocated to equity issuance costs was charged to APIC.

A portion of the offering proceeds was used to simultaneously enter into “bond hedge” (or purchased call) and “warrant” (or written call) transactions with an affiliate of one of the offering underwriters (collectively, the “Call Option Overlay”). We entered into the Call Option Overlay to synthetically raise the initial conversion price of the Notes to $96.21 per share and reduce the potential common stock dilution that may arise from the conversion of the Notes. The exercise price of the bond hedge is $69.48 per share and the exercise price of the warrant is $96.21 per share of our common stock. Because the bond hedge and warrant are both indexed to our common stock and otherwise would be classified as equity, we recorded both elements as equity, resulting in a net reduction to APIC of $15.6 million. After the repurchase of $25.0 million of our outstanding Notes and the unwinding of the corresponding portion of the bond hedge and warrant, our remaining bond hedge had an underlying 1,709,002 common shares as of December 31, 2018 and the remaining warrant had an underlying 1,709,002 common shares as of December 31, 2018.

The carrying value of the Notes is as follows as of December 31:

(in thousands)	2018			2017
Principal amount	$	118,750		$	143,750
Unamortized debt discount		(5,648	)		(13,924	)
Deferred financing costs		(639	)		(1,618	)
Net carrying value	$	112,463		$	128,208

The effective interest rate on the Notes was 7.8% and 7.9%, on an annualized basis, as of December 31, 2018 and 2017, respectively.

The following table sets forth the components of total interest expense related to the Notes and Term Loan recognized in our consolidated statements of operations for the year ended December 31:

(in thousands)	2018			2017			2016
Contractual coupon	$	7,170		$	4,313		$	4,312
Amortization of debt discount		7,002			6,720			6,372
Amortization of finance fees		1,463			845			844
Capitalized interest		(724	)		(554	)		(234	)
	$	14,911		$	11,324		$	11,294