10-Q 1 ipxl-06x30x2016x10q.htm 10-Q Document


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
OR 
☐
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 001-34263
Impax Laboratories, Inc.
(Exact name of registrant as specified in its charter)
  
Delaware
 
65-0403311
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
  
 
  
30831 Huntwood Avenue, Hayward, CA
 
94544
(Address of principal executive offices)
 
(Zip Code)
 
 
(510) 240-6000
 
 
(Registrant’s telephone number, including area code)
 
 
  
 
 Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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 ☒   No ☐
 
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☒ No ☐
 
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer (Do not check if a smaller reporting company)
☐ 
Smaller reporting company
☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐   No ☒

As of August 4, 2016, there were 73,859,323 shares of the registrant’s common stock outstanding.



Impax Laboratories, Inc.
Table of Contents 
PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements.
- Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015
- Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2015
- Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2016 and 2015
- Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015
- Notes to Interim Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Results of Operations and Financial Condition.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
Item 4.
Controls and Procedures.
 
 
 
PART II - OTHER INFORMATION
Item 1.
Legal Proceedings.
Item 1A.
Risk Factors.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3.
Defaults Upon Senior Securities.
Item 4.
Mine Safety Disclosures.
Item 5.
Other Information.
Item 6.
Exhibits.
 
 
 
SIGNATURES
 
 
 
 
EXHIBIT INDEX
 

2


PART I - FINANCIAL INFORMATION
Item 1.    Financial Statements.
IMPAX LABORATORIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited; In thousands, except share and per share data)

 
June 30, 2016
 
December 31, 2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
366,846

 
$
340,351

Accounts receivable, net
237,454

 
324,451

Inventory, net
148,079

 
125,582

Prepaid expenses and other current assets
24,339

 
31,689

Total current assets
776,718

 
822,073

 
 
 
 
Property, plant and equipment, net
223,475

 
214,156

Intangible assets, net
581,791

 
602,020

Goodwill
208,382

 
210,166

Deferred income taxes
597

 
315

Other non-current assets
58,973

 
73,757

Total assets
$
1,849,936

 
$
1,922,487

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
50,518

 
$
56,325

Accrued expenses
201,810

 
204,711

Accrued profit sharing and royalty expenses
13,620

 
65,725

Total current liabilities
265,948

 
326,761

 
 
 
 
Long-term debt, net
435,265

 
424,595

Deferred income taxes
38,172

 
72,770

Other non-current liabilities
37,161

 
35,952

Total liabilities
776,546

 
860,078

 
 
 
 
Commitments and contingencies (Notes 20 and 21)


 


 
 
 
 
Stockholders’ equity:
 
 
 
Preferred stock, $0.01 par value, 2,000,000 shares authorized; No shares issued or outstanding at June 30, 2016 and December 31, 2015
—

 
—

Common stock, $0.01 par value, 150,000,000 shares authorized; 74,106,376 issued and 73,862,647 outstanding shares at June 30, 2016; 72,926,205 issued and 72,682,476 outstanding shares at December 31, 2015
741

 
729

Treasury stock at cost: 243,729 shares at June 30, 2016 and December 31, 2015
(2,157
)
 
(2,157
)
Additional paid-in capital
525,182

 
504,077

Retained earnings
557,114

 
570,223

Accumulated other comprehensive loss
(7,490
)
 
(10,463
)
Total stockholders’ equity
1,073,390

 
1,062,409

Total liabilities and stockholders' equity
$
1,849,936

 
$
1,922,487


The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

3


IMPAX LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; In thousands, except share and per share data)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Impax Generics, net
$
121,695

 
$
174,679

 
$
291,774

 
$
303,420

Impax Specialty Pharma, net
50,895

 
39,503

 
106,324

 
53,858

Total revenues
172,590

 
214,182

 
398,098

 
357,278

Cost of revenues
99,606

 
129,331

 
222,524

 
213,193

Gross profit
72,984

 
84,851

 
175,574

 
144,085

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative
44,908

 
48,309

 
89,206

 
98,469

Research and development
21,746

 
16,995

 
40,768

 
31,957

Patent litigation
1,929

 
1,494

 
3,248

 
2,454

Total operating expenses
68,583

 
66,798

 
133,222

 
132,880

Income from operations
4,401

 
18,053

 
42,352

 
11,205

 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
Interest expense
(8,454
)
 
(6,953
)
 
(16,785
)
 
(10,928
)
Interest income
340

 
294

 
673

 
578

Reserve for Turing receivable
—

 
—

 
(48,043
)
 
—

Loss on debt extinguishment
—

 
(16,903
)
 
—


(16,903
)
Other, net
(237
)
 
961

 
359

 
795

Loss before income taxes
(3,950
)
 
(4,548
)
 
(21,444
)
 
(15,253
)
Benefit from income taxes
(1,249
)
 
(2,696
)
 
(8,335
)
 
(7,068
)
Net loss
$
(2,701
)
 
$
(1,852
)
 
$
(13,109
)
 
$
(8,185
)
 
 
 
 
 
 
 
 
Net loss per common share:
 
 
 
 
 
 
 
Basic
$
(0.04
)
 
$
(0.03
)
 
$
(0.18
)
 
$
(0.12
)
Diluted
$
(0.04
)
 
$
(0.03
)
 
$
(0.18
)
 
$
(0.12
)
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
71,100,123

 
69,338,789

 
70,882,759

 
69,154,357

Diluted
71,100,123

 
69,338,789

 
70,882,759

 
69,154,357


 The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

4


IMPAX LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited; In thousands)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Net loss
$
(2,701
)
 
$
(1,852
)
 
$
(13,109
)
 
$
(8,185
)
Other comprehensive loss component:
 
 
 
 
 
 
 
Currency translation adjustments
(70
)
 
684

 
2,973

 
3,584

Comprehensive loss
$
(2,771
)
 
$
(1,168
)
 
$
(10,136
)
 
$
(4,601
)

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

5


IMPAX LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; In thousands)
  
Six Months Ended June 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net loss
$
(13,109
)
 
$
(8,185
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
36,419

 
29,786

Non-cash interest expense
10,714

 
928

Share-based compensation expense
15,662

 
13,559

Tax benefit from employees’ exercises of stock options and vestings of
restricted stock awards
(540
)
 
(4,319
)
Deferred income taxes, net and uncertain tax positions
(21,294
)
 
(9,464
)
Intangible asset impairment charges
2,491

 
—

Accrued profit sharing and royalty expenses, net of payments
(52,105
)
 
20,236

Reserve for Turing receivable
48,043

 
—

Loss on debt extinguishment
—

 
16,903

Provision for inventory reserves
9,300

 
(6,597
)
Other
(144
)
 
(535
)
Changes in certain assets and liabilities:
 
 
 
Accounts receivable
38,954

 
(37,638
)
Inventory
(33,588
)
 
(6,146
)
Prepaid expenses and other assets
(5,185
)
 
(19,774
)
Accounts payable and accrued expenses
(13,324
)
 
(20,108
)
Other liabilities
1,489

 
(1,231
)
Net cash provided by (used in) operating activities
23,783

 
(32,585
)
 
 
 
 
Cash flows from investing activities:
 
 
 
Payment for business acquisition, net of cash acquired
—

 
(697,183
)
Proceeds from sales of intangible assets acquired and immediately divested
—

 
4,000

Purchases of property, plant and equipment
(20,512
)
 
(8,482
)
Proceeds from sales of property, plant and equipment
1,346

 
—

Payments for licensing agreements
(3,500
)
 
(5,550
)
Proceeds from repayment of Tolmar loan
15,000

 
—

Maturities of short-term investments
—

 
200,064

Net cash used in investing activities
(7,666
)
 
(507,151
)
 
 
 
 

6


Cash flows from financing activities:
 
 
 
Proceeds from sale of convertible notes
—

 
600,000

Proceeds from issuance of term loan
—

 
435,000

Repayment of term loan
—

 
(435,000
)
Payment of deferred financing fees
—

 
(36,440
)
Purchase of bond hedge derivative asset
—

 
(147,000
)
Proceeds from sale of warrants
—

 
88,320

Tax benefit from employees’ exercises of stock options and vestings of
restricted stock awards
540

 
4,319

Proceeds from exercises of stock options and ESPP
9,178

 
5,383

Net cash provided by financing activities
9,718

 
514,582

 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
660

 
572

 
 
 
 
Net increase (decrease) in cash and cash equivalents
26,495

 
(24,582
)
Cash and cash equivalents, beginning of period
340,351

 
214,873

Cash and cash equivalents, end of period
$
366,846

 
$
190,291

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
6,012

 
9,828

Cash paid for income taxes
22,449

 
24,422


The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

7


IMPAX LABORATORIES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS
Impax Laboratories, Inc. (“Impax” or the “Company”) is a specialty pharmaceutical company that focuses on developing, manufacturing, marketing and distributing generic and branded pharmaceutical products. The Company has two reportable segments, referred to as “Impax Generics” and “Impax Specialty Pharma.” The Impax Generics division focuses on a broad range of therapeutic areas, including products having technically challenging drug-delivery mechanisms or unique product formulations. In addition to developing solid oral dosage products, the Impax Generics division’s portfolio includes alternative dosage form products, primarily through alliance and collaboration agreements with third parties. The Company’s Impax Specialty Pharma division is focused on the development and promotion, through the Company’s specialty sales force, of proprietary branded pharmaceutical products for the treatment of central nervous system (“CNS”) disorders and other select specialty segments.
Tower Acquisition
On March 9, 2015, Impax completed its acquisition of Tower Holdings, Inc. (“Tower”), including its operating subsidiaries CorePharma LLC (“CorePharma”) and Amedra Pharmaceuticals LLC (“Amedra Pharmaceuticals”), and Lineage Therapeutics Inc. (“Lineage”) for a purchase price of $691.3 million, net of $41.5 million of cash acquired and including the repayment of indebtedness of Tower and Lineage and post-closing working capital adjustments (collectively, the “Tower acquisition”). The privately-held companies specialized in the development, manufacture and commercialization of complex generic and branded pharmaceutical products. For additional information on the acquisition and the related financing of the acquisition, refer to “Note 2. Business Acquisition” and “Note 13. Debt.”
Operating and Reporting Structure
The Company currently operates in two divisions: the Impax Generics division and the Impax Specialty Pharma division. The Impax Generics division includes the Company’s legacy Global Pharmaceuticals business as well as the acquired CorePharma and Lineage businesses from the Tower acquisition. The Impax Specialty Pharma division includes the legacy Impax Pharmaceuticals business as well as the acquired Amedra Pharmaceuticals business from the Tower acquisition.
Impax Generics develops, manufactures, sells, and distributes generic pharmaceutical products primarily through the following four sales channels: the “Impax Generics” sales channel, for generic pharmaceutical prescription products the Company sells directly to wholesalers, large retail drug chains, and others; the “Private Label” sales channel, for generic pharmaceutical over-the-counter (“OTC”) and prescription products the Company sells to unrelated third-party customers who, in turn, sell the product to third parties under their own label; the “Rx Partner” sales channel, for generic prescription products sold through unrelated third-party pharmaceutical entities under their own label pursuant to alliance agreements; and the “OTC Partner” sales channel, for generic pharmaceutical OTC products sold through unrelated third-party pharmaceutical entities under their own labels pursuant to alliance and supply agreements. Revenues from the “Impax Generics” sales channel and the “Private Label” sales channel are reported under the caption “Impax Generics sales, net” in “Note 23. Supplementary Financial Information.” Revenues from the “OTC Partner” sales channel are reported under the caption “Other Revenues” in “Note 23. Supplementary Financial Information.”
Impax Specialty Pharma is engaged in the development, sale and distribution of proprietary branded pharmaceutical products that the Company believes represent improvements to already-approved pharmaceutical products addressing CNS disorders and other select specialty segments. Impax Specialty Pharma currently has one internally developed branded pharmaceutical product, Rytary® (IPX066), an extended release oral capsule formulation of carbidopa-levodopa for the treatment of Parkinson’s disease, post-encephalitic parkinsonism, and parkinsonism that may follow carbon monoxide intoxication and/or manganese intoxication, which was approved by the U.S. Food and Drug Administration ("FDA") on January 7, 2015 and which the Company began marketing in the United States in April 2015. The Company received marketing authorization from the European Commission for NUMIENT™ (the brand name of IPX066 outside of the United States) during the fourth quarter of fiscal year 2015. In addition to Rytary®, Impax Specialty Pharma is also currently engaged in the sale and distribution of four other branded products; the more significant include Zomig® (zolmitriptan) products, indicated for the treatment of migraine headaches, under the terms of a Distribution, License, Development and Supply Agreement with AstraZeneca UK Limited (“AstraZeneca”) in the United States and in certain U.S. territories (the "AZ Agreement"), and Emverm® (mebendazole) 100 mg chewable tablets, indicated for the treatment of pinworm, whipworm, common roundworm, common hookworm, and American hookworm in single or mixed infections. Revenues from Impax-labeled branded products are reported under the caption “Impax Specialty Pharma sales, net” in “Note 23. Supplementary Financial Information.” Finally, the Company generated revenue in Impax Specialty Pharma from research and development services provided under a development and license agreement with another unrelated third-party pharmaceutical company (which was terminated by mutual agreement of the parties effective

8


December 23, 2015), and reports such revenue under the caption “Other Revenues” in “Note 23. Supplementary Financial Information.” Impax Specialty Pharma also has a number of product candidates that are in varying stages of development. See “Note 22. Segment Information” for financial information about our segments for the three and six months ended June 30, 2016 and 2015.

Operating Locations

The Company owns and/or leases facilities in California, Pennsylvania, New Jersey and Taiwan, Republic of China (“R.O.C.”). In California, the Company utilizes a combination of owned and leased facilities mainly located in Hayward. The Company’s primary properties in California consist of a leased office building used as the Company’s corporate headquarters, in addition to five properties it owns, including a research and development center facility and a manufacturing facility. Additionally, the Company leases two facilities in Hayward, utilized for additional research and development, equipment storage and quality assurance support. In Pennsylvania, the Company leases facilities in Chalfont, Montgomeryville, and Horsham used for sales and marketing, finance, and administrative personnel. In addition, the Company previously owned a packaging plant in Philadelphia, PA that was closed and sold in February 2016 in conjunction with the Company's restructuring of its packaging and distribution operations announced in June 2015 and discussed below in "Note 17. Restructurings." In New Jersey, the Company leases manufacturing, packaging, research and development and warehousing facilities in Middlesex, New Jersey and office space in Bridgewater, New Jersey. Outside the United States, in Taiwan, R.O.C., the Company owns a manufacturing facility.

2. BUSINESS ACQUISITION
On March 9, 2015, the Company completed the Tower acquisition, which included the acquisition of all of the outstanding shares of common stock of Tower and Lineage, pursuant to the Stock Purchase Agreement dated as of October 8, 2014, by and among the Company, Tower, Lineage, Roundtable Healthcare Partners II, L.P., Roundtable Healthcare Investors II, L.P., and the other parties thereto, including holders of certain options and warrants, to acquire the common stock of Tower and Lineage. In connection with the Tower acquisition, all of the options and warrants of Tower and Lineage that were outstanding at the time of the acquisition were cancelled. The total consideration paid for Tower and Lineage was $691.3 million, net of $41.5 million of cash acquired and including the repayment of indebtedness of Tower and Lineage and post-closing working capital adjustments. The Company incurred total acquisition-related costs of $10.9 million, of which $6.8 million were incurred during the six months ended June 30, 2015 and included in selling, general and administrative expenses in the Company’s consolidated statement of operations for that period. In connection with the Tower acquisition, the Company recorded an accrual for severance and related termination costs of $2.4 million during 2015 related to the elimination of approximately 10 positions at the acquired companies. As of June 30, 2016, the Company had paid all severance and related termination costs related to the Tower acquisition.
The Tower acquisition allows the Company to expand its commercialized generic and branded product portfolios. The Company has also leveraged its sales and marketing organization to promote the marketed products acquired.
Consideration
The Company has accounted for the Tower acquisition as a business combination under the acquisition method of accounting. The Company has allocated the purchase price for the transaction based upon the fair value of net assets acquired and liabilities assumed at the date of acquisition.

9


Recognition and Measurement of Assets Acquired and Liabilities Assumed at Fair Value
The following tables summarize the final fair values of the tangible and identifiable intangible assets acquired and liabilities assumed in the transaction at the acquisition date, net of cash acquired of $41.5 million (in thousands):
Accounts receivable (1)
$
56,851

Inventory
31,259

Income tax receivable and other prepaid expenses
2,407

Property, plant and equipment
27,540

Intangible assets
632,600

Intangible assets held for sale
4,000

Goodwill
180,808

Deferred income taxes
37,041

Other non-current assets
3,844

Total assets acquired
976,350

 
 
Current liabilities
67,706

Deferred tax liabilities
210,005

Other non-current liabilities
7,291

Total liabilities assumed
285,002

 
 
Cash paid, net of cash acquired (2)
$
691,348

(1)
The accounts receivable acquired in the Tower acquisition had a fair value of $56.9 million, net of an allowance for doubtful accounts of $9.0 million, which represented the Company’s best estimate on March 9, 2015 (the closing date of the transaction) of the contractual cash flows not expected to be collected by the acquired companies.
(2)
The initial net purchase price of $697.2 million was subject to post-closing working capital adjustments, which resulted in the return of $5.9 million to the Company during the third quarter of 2015.
Intangible Assets
The following table identifies the Company’s allocations, by category, of the Tower purchase price to the intangible assets acquired:
 
Estimated Fair
Value
 
Weighted-Average
Estimated Useful
Life (years)
Currently marketed product rights
$
381,100

 
13
Current and future royalty rights
80,800

 
12
In-process research and development product rights
170,700

 
n/a
Total intangible assets
$
632,600

 
12
The estimated fair value of the in-process research and development and identifiable intangible assets was determined using the “income approach,” which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the more significant assumptions inherent in the development of those asset valuations include the estimated net cash flows for each year for each asset or product (including net revenues, cost of sales, research and development costs, selling and marketing costs and working capital /contributory asset charges), the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, the potential regulatory and commercial success risks, competitive trends impacting the asset and each cash flow stream, as well as other factors. The discount rates used to arrive at the present value at the acquisition date of currently marketed products was 15%. For in-process research and development, the discount rate used was 16% to reflect the internal rate of return and incremental commercial uncertainty in the cash flow projections. No assurances can be given that

10


the underlying assumptions used to prepare the discounted cash flow analysis will not change. For these and other reasons, actual results may vary significantly from estimated results.

Goodwill
The Company recorded $180.8 million of goodwill in connection with the Tower acquisition, some of which will not be tax-deductible. Goodwill of $59.7 million was assigned to the Impax Specialty Pharma segment and $121.1 million was assigned to the Impax Generics segment. Factors that contributed to the Company’s recognition of goodwill include the Company’s intent to expand its generic and branded pharmaceutical product portfolios and to acquire certain benefits from the Tower and Lineage product pipelines, in addition to the anticipated synergies that the Company expects to generate from the acquisition.
Unaudited Pro Forma Results of Operations
The following table reflects the unaudited pro forma combined results of operations for the six months ended June 30, 2015 (assuming the closing of the Tower acquisition occurred on January 1, 2014) (in thousands):
 
 
Six Months Ended June 30, 2015
Total revenues
 
$
389,715

Net income (loss)
 
$
(6,158
)
The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the actual results of operations had the closing of the transaction taken place on January 1, 2014. Furthermore, the pro forma results do not purport to project the future results of operations of the Company.

The unaudited pro forma information reflects primarily the following adjustments:

•
Adjustments to amortization expense related to identifiable intangible assets acquired;
•
Adjustments to depreciation expense related to property, plant and equipment acquired;
•
Adjustments to interest expense to reflect the long-term debt held by Tower and Lineage paid out and eliminated at the closing and the Company's Senior Secured Credit Facilities with Barclays Bank PLC (described in "Note 13. Debt" below);
•
Adjustments to cost of revenues related to the fair value adjustments in inventory sold, including elimination of $5 million for the six months ended June 30, 2015, respectively;
•
Adjustments to selling, general and administrative expense related to severance and retention costs of $3 million incurred as part of the transaction.  These costs were eliminated in the pro forma results for the six months ended June 30, 2015;
•
Adjustments to selling, general and administrative expense related to transaction costs directly attributable to the transaction include the elimination of $12 million of charges in the pro forma results for the six month period ended June 30, 2015; and
•
Adjustments to reflect the elimination of $2.3 million in commitment fees related to the Company's $435 million term loan with Barclays Bank PLC (described in "Note 13. Debt" below) that were incurred during the six months ended June 30, 2015.
All of the items above were adjusted for the applicable tax impact.



11


3. BASIS OF PRESENTATION
Interim Financial Statements
The accompanying unaudited interim consolidated financial statements have been prepared from the books and records of the Company in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") for interim financial information and Rule 10-01 of Regulation S-X promulgated by the United States Securities and Exchange Commission (“SEC”), which permit reduced disclosures for interim periods. All adjustments necessary for a fair presentation of the accompanying balance sheets and statements of operations, comprehensive loss, and cash flows have been made. Although these interim consolidated financial statements do not include all of the information and footnotes required for complete annual financial statements, management believes the disclosures are adequate to make the information presented not misleading. Unaudited interim results of operations and cash flows are not necessarily indicative of the results that may be expected for the full year. Unaudited interim consolidated financial statements and footnotes should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the SEC, wherein a more complete discussion of significant accounting policies and certain other information can be found.
Principles of Consolidation
The Company's unaudited interim consolidated financial statements include the accounts of the operating parent company, Impax Laboratories, Inc., its wholly owned subsidiaries, including Impax Laboratories USA, LLC, Impax Laboratories (Taiwan), Inc., ThoRx Laboratories, Inc., Impax International Holdings, Inc., Impax Holdings, LLC, Impax Laboratories (Netherlands) C.V., Impax Laboratories (Netherlands) B.V., Impax Laboratories Ireland Limited, Lineage and Tower, including operating subsidiaries CorePharma, Amedra Pharmaceuticals, Mountain LLC and Trail Services, Inc., in addition to an equity investment in Prohealth Biotech (Taiwan), Inc. (“Prohealth”), in which the Company held a 57.54% majority ownership interest at June 30, 2016. All significant intercompany accounts and transactions have been eliminated.
Foreign Currency Translation
The Company translates the assets and liabilities of the Taiwan dollar functional currency of its majority-owned affiliate Prohealth and its wholly-owned subsidiary Impax Laboratories (Taiwan), Inc. into the U.S. dollar reporting currency using exchange rates in effect at the end of each reporting period. The revenues and expenses of these entities are translated using an average of the rates in effect during the reporting period. Gains and losses from these translations are recorded as currency translation adjustments included in the consolidated statements of comprehensive loss.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP and the rules and regulations of the SEC requires the use of estimates and assumptions, based on complex judgments considered reasonable, which affect the reported amounts of assets and liabilities and disclosure of contingent assets and contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant judgments are employed in estimates used in determining values of tangible and intangible assets, legal contingencies, tax assets and tax liabilities, fair value of share-based compensation related to equity incentive awards issued to employees and directors, and estimates used in applying the Company’s revenue recognition policy, including those related to accrued chargebacks, rebates, product returns, Medicare, Medicaid, and other government rebate programs, shelf-stock adjustments, and the timing and amount of deferred and recognized revenue and deferred and amortized product manufacturing costs related to alliance and collaboration agreements. Actual results may differ from estimated results.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation.



12


4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's complete Summary of Significant Accounting Policies can be found in "Item 15. Exhibits and Financial Statement Schedules - Note 4. Summary of Significant Accounting Policies" in the Company's Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the SEC. Certain significant accounting policies have been repeated below.
Revenue Recognition
The Company recognizes revenue when the earnings process is complete, which under SEC Staff Accounting Bulletin No. 104, Topic No. 13, “Revenue Recognition” (“SAB 104”), is when revenue is realized or realizable and earned, there is persuasive evidence a revenue arrangement exists, delivery of goods or services has occurred, the sales price is fixed or determinable, and collectability is reasonably assured.
The Company accounts for material revenue arrangements which contain multiple deliverables in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 605-25, Revenue Recognition - Multiple-Element Arrangements ("ASC 605-25"), which addresses the determination of whether an arrangement involving multiple deliverables contains more than one unit of accounting. A delivered item within an arrangement is considered a separate unit of accounting only if both of the following criteria are met:
•
the delivered item has value to the customer on a stand-alone basis; and
•
if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in the control of the vendor.
Under ASC 605-25, if both of the criteria above are not met, then separate accounting for the individual deliverables is not appropriate. Revenue recognition for arrangements with multiple deliverables constituting a single unit of accounting is recognized generally over the greater of the term of the arrangement or the expected period of performance, either on a straight-line basis or on a modified proportional performance method.
The Company accounts for milestones related to research and development activities in accordance with FASB ASC Topic 605-28, Revenue Recognition - Milestone Method ("ASC 605-28"). ASC 605-28 allows for the recognition of consideration, which is contingent on the achievement of a substantive milestone, in its entirety in the period the milestone is achieved. A milestone is considered to be substantive if all of the following criteria are met:
•
the milestone is commensurate with either (1) the performance required to achieve the milestone or (2) the enhancement of the value of the delivered items resulting from the performance required to achieve the milestone;
•
the milestone relates solely to past performance; and
•
the milestone payment is reasonable relative to all of the deliverables and payment terms within the agreement.
Impax Generics revenues, net and Impax Specialty Pharma revenues, net
The Impax Generics revenues, net and Impax Specialty Pharma revenues, net include revenue recognized related to shipments of generic and branded pharmaceutical products to the Company’s customers, primarily drug wholesalers and retail chains. Gross sales revenue is recognized at the time title and risk of loss passes to the customer, which is generally when product is received by the customer. Net revenues may include deductions from the gross sales price related to estimates for chargebacks, rebates, distribution service fees, returns, shelf-stock adjustments, and other pricing adjustments. The Company records an estimate for these deductions in the same period when revenue is recognized. A description of each of these gross-to-net deductions follows.
•
Chargebacks
The Company has agreements establishing contract prices for certain products with certain indirect customers, such as managed care organizations, hospitals and government agencies who purchase products from drug wholesalers. The contract prices are lower than the prices the customer would otherwise pay to the wholesaler, and the price difference is referred to as a chargeback, which generally takes the form of a credit memo issued by the Company to reduce the invoiced gross selling price charged to the wholesaler. An estimated accrued provision for chargeback deductions is recognized at the time of product shipment. The primary factors considered when estimating the provision for chargebacks are the average historical chargeback credits given, the mix of products shipped, and the amount of inventory on hand at the major drug wholesalers with whom the Company does business. The Company also monitors actual chargebacks granted and compares them to the estimated provision for chargebacks to assess the reasonableness of the chargeback reserve at each quarterly balance sheet date.
•
Rebates

13


The Company maintains various rebate programs with its customers in an effort to maintain a competitive position in the marketplace and to promote sales and customer loyalty. The rebates generally take the form of a credit memo to reduce the invoiced gross selling price charged to a customer for products shipped. An estimated accrued provision for rebate deductions is recognized at the time of product shipment. The primary factors the Company considers when estimating the provision for rebates are the average historical experience of aggregate credits issued, the mix of products shipped and the historical relationship of rebates as a percentage of total gross product sales, the contract terms and conditions of the various rebate programs in effect at the time of shipment, and the amount of inventory on hand at the major drug wholesalers with whom the Company does business. The Company also monitors actual rebates granted and compares them to the estimated provision for rebates to assess the reasonableness of the rebate reserve at each quarterly balance sheet date.
•
Distribution Service Fees
The Company pays distribution service fees to several of its wholesaler customers related to sales of its Impax Products. The wholesalers are generally obligated to provide the Company with periodic outbound sales information as well as inventory levels of the Company’s Impax Products held in their warehouses. Additionally, the wholesalers have agreed to manage the variability of their purchases and inventory levels within specified days on hand limits. An accrued provision for distribution service fees is recognized at the time products are shipped to wholesalers.
•
Returns
The Company allows its customers to return product if approved by authorized personnel in writing or by telephone with the lot number and expiration date accompanying any request and if such products are returned within six months prior to or until twelve months following, the product’s expiration date. The Company estimates and recognizes an accrued provision for product returns as a percentage of gross sales based upon historical experience. The product return reserve is estimated using a historical lag period, which is the time between when the product is sold and when it is ultimately returned, and estimated return rates which may be adjusted based on various assumptions including: changes to internal policies and procedures, business practices, commercial terms with customers, and the competitive position of each product; the amount of inventory in the wholesale and retail supply chain; the introduction of new products; and changes in market sales information. The Company also considers other factors, including significant market changes which may impact future expected returns and actual product returns. The Company monitors actual returns on a quarterly basis and may record specific provisions for returns it believes are not covered by historical percentages.
•
Shelf-Stock Adjustments
Based upon competitive market conditions, the Company may reduce the selling price of certain Impax Generics division products. The Company may issue a credit against the sales amount to a customer based upon their remaining inventory of the product in question, provided the customer agrees to continue to make future purchases of product from the Company. This type of customer credit is referred to as a shelf-stock adjustment, which is the difference between the initial sales price and the revised lower sales price, multiplied by an estimate of the number of product units on hand at a given date. Decreases in selling prices are discretionary decisions made by the Company in response to market conditions, including estimated launch dates of competing products and declines in market price. The Company records an estimate for shelf-stock adjustments in the period it agrees to grant such a credit memo to a customer.
•
Cash Discounts
The Company offers cash discounts to its customers, generally 2% to 3% of the gross selling price, as an incentive for paying within invoice terms, which generally range from 30 to 90 days. An estimate of cash discounts is recorded in the same period when revenue is recognized.
•
Medicaid and Other U.S. Government Pricing Programs
As required by law, the Company provides a rebate on drugs dispensed under the Medicaid program, Medicare Part D, TRICARE, and other U.S. government pricing programs. The Company determines its estimated government rebate accrual primarily based on historical experience of claims submitted by the various states and other jurisdictions and any new information regarding changes in the various programs which may impact the Company’s estimate of government rebates. In determining the appropriate accrual amount, the Company considers historical payment rates and processing lag for outstanding claims and payments. The Company records estimates for government rebates as a deduction from gross sales, with a corresponding adjustment to accrued liabilities.
•
Rx Partner and OTC Partner

14


The Rx Partner and OTC Partner contracts include revenue recognized under alliance and collaboration agreements between the Company and unrelated third-party pharmaceutical companies. The Company has entered into these alliance agreements to develop marketing and/or distribution relationships with its partners to fully leverage its technology platform.
The Rx Partners and OTC Partners alliance agreements obligate the Company to deliver multiple goods and/or services over extended periods. Such deliverables include manufactured pharmaceutical products, exclusive and semi-exclusive marketing rights, distribution licenses, and research and development services. In exchange for these deliverables the Company receives payments from its agreement partners for product shipments and research and development services, and may also receive other payments including royalties, profit sharing payments, and upfront and periodic milestone payments. Revenue received from the alliance agreement partners for product shipments under these agreements is not subject to deductions for chargebacks, rebates, product returns, and other pricing adjustments. Royalty and profit sharing amounts the Company receives under these agreements are calculated by the respective agreement partner, with such royalty and profit share amounts generally based upon estimates of net product sales or gross profit which include estimates of deductions for chargebacks, rebates, product returns, and other adjustments the alliance agreement partners may negotiate with their respective customers. The Company records the agreement partner's adjustments to such estimated amounts in the period the agreement partner reports the amounts to the Company.
The Company applies the guidance of ASC 605-25 to the Strategic Alliance Agreement, as amended, with Teva Pharmaceuticals USA, Inc., an affiliate of Teva Pharmaceutical Industries Limited (the “Teva Agreement”). The Company looks to the underlying delivery of goods and/or services which give rise to the payment of consideration under the Teva Agreement to determine the appropriate revenue recognition. The Company initially defers consideration received as a result of research and development-related activities performed under the Teva Agreement. The Company recognizes deferred revenue on a straight-line basis over the expected period of performance for such services. Consideration received as a result of the manufacture and delivery of products under the Teva Agreement is recognized at the time title and risk of loss passes to the customer, which is generally when product is received by Teva. The Company recognizes profit share revenue in the period earned.
OTC Partner revenue is related to agreements with Pfizer, Inc., formerly Wyeth LLC (“Pfizer”) and L. Perrigo Company (“Perrigo”) with respect to the supply of over-the-counter pharmaceutical products. The OTC Partner sales channel is no longer a core area of the business, and the over-the-counter pharmaceutical products the Company sells through this sales channel are older products which are only sold to Pfizer and Perrigo. The Company is currently only required to manufacture the over-the-counter pharmaceutical products under its agreements with Pfizer and Perrigo. The Company recognizes profit share revenue in the period earned.
•
Research Partner
The Research Partner contract revenue results from development agreements the Company enters into with unrelated third-party pharmaceutical companies. The development agreements generally obligate the Company to provide research and development services over multiple periods. In exchange for this service, the Company generally receives upfront payments upon signing of each development agreement and is eligible to receive contingent milestone payments, payment of which is based upon the achievement of contractually specified events. Additionally, the Company may also receive royalty payments from the sale, if any, of a successfully developed and commercialized product under one of these development agreements. The Company recognizes revenue received from the achievement of contingent research and development milestones in the period such payment is earned. Royalty revenue, if any, will be recognized as current period revenue when earned.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are cash, cash equivalents, and accounts receivable. The Company limits its credit risk associated with cash and cash equivalents by placing its investments with high quality money market funds, corporate debt, and short-term commercial paper and in securities backed by the U.S. Government. The Company limits its credit risk with respect to accounts receivable by performing credit evaluations when deemed necessary. The Company does not require collateral to secure amounts owed to it by its customers.
In July 2015, the Company received an unsolicited offer from Turing Pharmaceuticals AG (“Turing”) to purchase the U.S. rights to Daraprim®, one of the marketed products acquired in the Tower acquisition, as well as the active pharmaceutical ingredient for the product and the finished goods inventory on hand. Pursuant to the terms of the Asset Purchase Agreement between the Company and Turing dated August 7, 2015 (the “Turing APA”), the Company also granted a limited license to sell the existing Daraprim® product under the Company’s labeler code with the Company’s trade dress. The sale closed on August 7, 2015.
In accordance with the terms of the Turing APA and in accordance with federal laws and regulations, the Company receives, and is initially responsible for processing and paying (subject to reimbursement by Turing), all chargebacks and rebates resulting from utilization by Medicaid, Medicare and other federal, state and local governmental programs, health plans and other health

15


care providers for product sold under the Company’s labeler code.  Under the terms of the Turing APA, Turing is responsible for liabilities related to chargebacks and rebates that arise as a result of Turing’s marketing or selling related activities in connection with Daraprim®.
During the fourth quarter of 2015, the Company began receiving invoices for chargebacks from wholesalers and rebates from various state Medicaid agencies for Daraprim® purchases made by governmental agencies during the third quarter of 2015.  As a result, the Company recorded a $40.6 million receivable from Turing as of December 31, 2015, representing actual invoices received related to the third quarter of 2015 and an estimate for invoices not yet received related to the third and fourth quarters of 2015. During the first and second quarters of 2016, the Company received additional invoices related to the third and fourth quarters of 2015, respectively, and recorded an estimate for invoices not yet received related to the first and second quarters of 2016. In total, the Company recorded an additional $7.4 million receivable from Turing during the six month period ended June 30, 2016, resulting in an estimated accounts receivable balance due to the Company of $48.0 million as of June 30, 2016, with over $30.0 million of such amount representing overdue unpaid invoices due from Turing for chargebacks and Medicaid rebate liability as of June 30, 2016. The Company also recorded as of June 30, 2016 an estimated accrued liability of $24.4 million for amounts owed to wholesalers, Medicaid and other governmental agencies for Daraprim®. The difference of $23.6 million between the estimated accounts receivable due from Turing and the estimated accrued liability represents payments made by the Company on Turing's behalf during the first and second quarters of 2016. As of August 4, 2016, the amount of total payments made by the Company on Turing’s behalf was $30.2 million.

As a result of the uncertainty of the Company collecting the reimbursement amounts owed by Turing that developed since the filing of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015, the Company recorded a reserve in the amount of $48.0 million on the Company’s consolidated statement of operations in "Other income (expense)" for the three month period ended March 31, 2016, representing the full amount of the estimated receivable due from Turing as of March 31, 2016. There was no change to the reserve as of June 30, 2016.

On May 2, 2016, the Company filed suit against Turing in the United States District Court for the Southern District of New York alleging breach of the terms of the Turing APA seeking (i) a declaratory judgment that the Company may revoke Turing’s right to sell Daraprim® under the Company’s labeler code and national drug codes; (ii) specific performance to require Turing to comply with its obligations under the Turing APA for past due reports and for reports going forward; and (iii) money damages to remedy Turing’s failure to reimburse the Company for chargebacks and Medicaid rebate liability when due, currently in excess of $30 million, and for future amounts that may be due.  See “Note 21. Legal and Regulatory Matters” for a description of the Company’s suit against Turing. If the Company receives an unfavorable outcome in its suit against Turing or if Turing for any reason does not, or is unable to, make its reimbursement payments to the Company, it could have a material adverse effect on the Company’s business, results of operation and financial condition.

5. RECENT ACCOUNTING PRONOUNCEMENTS 
In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09, “Revenue from Contracts with Customers” (Topic 606) regarding the accounting for and disclosures of revenue recognition, with an effective date for annual and interim periods beginning after December 15, 2016. This update provides a single comprehensive model for accounting for revenue from contracts with customers. The model requires that revenue recognized reflect the actual consideration to which the entity expects to be entitled in exchange for the goods or services defined in the contract, including in situations with multiple performance obligations. In July 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which deferred the effective date of the previously issued revenue recognition guidance by one year. The guidance will be effective for annual and interim periods beginning after December 15, 2017. In April 2016 and May 2016, the FASB issued ASU 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing" and ASU 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients," respectively. Both of these updates provide improvements and clarification to the previously issued revenue recognition guidance. The guidance can be applied using one of two methods: retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application. The Company is currently evaluating the effect that this guidance may have on its consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): “Simplifying the Measurement of Inventory,” with guidance regarding the accounting for and measurement of inventory. The update requires that inventory measured using first-in, first-out ("FIFO") shall be measured at the lower of cost and net realizable value. When there is evidence that the net realizable value of inventory is lower than its cost, the difference shall be recognized as a loss in earnings in the period in which it occurs. The guidance will be effective for annual and interim periods beginning after December 15, 2016. The Company is currently evaluating the effect that this guidance may have on its consolidated financial statements.

16


In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): “Simplifying the Accounting for Measurement-Period Adjustments,” with guidance regarding the accounting for and disclosure of measurement-period adjustments that occur in periods after a business combination is consummated. This update requires that the acquirer recognize measurement-period adjustments in the reporting period in which they are determined and, as such, eliminates the previous requirement to retrospectively account for these adjustments. This update also requires an entity to present separately on the face of the income statement, or disclose in the notes, the amount recorded in the current-period income statement that would have been recorded in previous reporting periods if the adjustments had been recognized as of the acquisition date. The effective date for annual and interim periods begins after December 15, 2015. The Company adopted this guidance during 2016, and it did not have a material effect on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), with guidance regarding the accounting for and disclosure of leases. The update requires lessees to recognize all leases, including operating leases, with a term greater than 12 months on the balance sheet. This update also requires lessees and lessors to disclose key information about their leasing transactions. The guidance will be effective for annual and interim periods beginning after December 15, 2018. The Company is currently evaluating the effect that this guidance may have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-06, Contingent Put and Call Options in Debt Instruments (Topic 815), with guidance regarding the accounting for embedded derivatives related to debt contracts. The update clarifies that determining whether the economic characteristics of a put or call are clearly and closely related to its debt host requires only an assessment of the four-step decision sequence outlined in FASB ASC paragraph 815-15-25-24. The update also indicates that entities are not required to separately assess whether the contingency itself is clearly and closely related. The guidance will be effective for annual and interim periods beginning after December 15, 2016. The Company is currently evaluating the effect that this guidance may have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718), with guidance regarding the simplification of accounting for share-based payment award transactions. The update changes the accounting for such areas as the accounting and cash flow classification for excess tax benefits and deficiencies; forfeitures; and tax withholding requirements and cash flow classification. The guidance will be effective for annual and interim periods beginning after December 15, 2016. The Company is currently evaluating the effect that this guidance may have on its consolidated financial statements.

6. FAIR VALUE MEASUREMENT AND FINANCIAL INSTRUMENTS 
The carrying values of cash equivalents, accounts receivable, prepaid expenses and other current assets, and accounts payable in the Company’s consolidated balance sheets approximated their fair values as of June 30, 2016 and December 31, 2015 due to their short-term nature.     
Certain of the Company’s financial instruments are measured at fair value using a three-level hierarchy that prioritizes the inputs used to measure fair value. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows: 
•
Level 1 - Inputs are quoted prices for identical instruments in active markets.
•
Level 2 - Inputs are quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; or model-derived valuations whose inputs are observable or whose significant value drivers are observable.
•
Level 3 - Inputs are unobservable and reflect the Company's own assumptions, based on the best information available, including the Company's own data.
The carrying amounts and fair values of the Company’s financial instruments as of June 30, 2016 and December 31, 2015 are indicated below (in thousands): 

17


 
As of June 30, 2016
 
 
 
 
 
Fair Value Measurement Based on
 
Carrying
Amount
 
Fair Value
 
Quoted Prices in Active Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
 
 
Deferred Compensation Plan assets(1)
$
30,980

 
$
30,980

 
$
—

 
$
30,980

 
$
—

Liabilities
 
 
 
 
 
 
 
 
 
2% Convertible senior notes due June 2022(2)
$
600,000

 
$
524,988

 
$
524,988

 
$
—

 
$
—

Deferred Compensation Plan liabilities(1)
$
27,768

 
$
27,768

 
$
—

 
$
27,768

 
$
—

 
As of December 31, 2015
 
 
 
 
 
Fair Value Measurement Based on
 
Carrying
Amount
 
Fair Value
 
Quoted Prices in Active Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
 
 
Deferred Compensation Plan assets(1)
$
30,726

 
$
30,726

 
$
—

 
$
30,726

 
$
—

Liabilities
 
 
 
 
 
 
 
 
 
2% Convertible senior notes due June 2022(2)
$
600,000

 
$
602,250

 
$
602,250

 
$
—

 
$
—

Deferred Compensation Plan liabilities(1)
$
25,581

 
$
25,581

 
$
—

 
$
25,581

 
$
—

(1)
The Deferred Compensation Plan liabilities are non-current liabilities recorded at the value of the amount owed to the plan participants, with changes in value recognized as compensation expense in the Company’s consolidated statements of operations. The calculation of the Deferred Compensation Plan obligation is derived from observable market data by reference to hypothetical investments selected by the participants and is included in the line items captioned “Other non-current liabilities” on the Company’s consolidated balance sheets. The Company invests participant contributions in corporate-owned life insurance (“COLI”) policies, for which the cash surrender value is included in the line item captioned “Other non-current assets” on the Company’s consolidated balance sheets.

(2)
The difference between the amount shown as the carrying value in the above tables and the amount shown on the Company’s consolidated balance sheets at June 30, 2016 and December 31, 2015 represents the unaccreted discounts related to deferred debt issuance costs and bifurcation of the conversion feature of the notes.

7. SHORT-TERM INVESTMENTS
Prior to December 31, 2014, the Company invested its excess cash in high quality (AAA-rated) short-maturity marketable debt securities, such as commercial paper and corporate bonds. The Company historically held all of its investments in marketable debt securities until maturity. Accordingly, these investments were accounted for as “held-to-maturity” securities and were recorded at amortized cost, which approximated fair value. During the first quarter of 2015, the Company allowed all of its investments in marketable debt securities to mature. The proceeds from these maturities of $200.1 million were used to fund the Tower acquisition on March 9, 2015. The Company held no short-term investments as of June 30, 2016 and December 31, 2015.



18


8.  ACCOUNTS RECEIVABLE
The composition of accounts receivable, net is as follows (in thousands):
 
June 30, 2016
 
December 31, 2015
Gross accounts receivable (1)
$
778,444

 
$
738,730

Less: Rebate reserve
(359,755
)
 
(265,229
)
Less: Chargeback reserve
(92,543
)
 
(102,630
)
Less: Distribution services reserve
(12,704
)
 
(12,576
)
Less: Discount reserve
(14,731
)
 
(18,657
)
Less: Uncollectible accounts reserve (2)
(61,257
)
 
(15,187
)
Accounts receivable, net
$
237,454

 
$
324,451

(1) Includes estimated $48.0 million and $40.6 million as of June 30, 2016 and December 31, 2015, respectively, receivable due from Turing for reimbursement of Daraprim® chargebacks and Medicaid rebate liabilities.
(2) As a result of the uncertainty of collection that developed since the filing of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, the Company recorded a reserve of $48.0 million as of June 30, 2016, which represents the full amount of the estimated receivable due from Turing as of that date. See "Note 4. Summary of Significant Accounting Policies - Concentration of Credit Risk" for additional information regarding the Turing receivable.
A roll-forward of the rebate and chargeback reserves activity for the six months ended June 30, 2016 and the year ended December 31, 2015 is as follows (in thousands):
Rebate reserve
June 30, 2016
 
December 31, 2015
Beginning balance
$
265,229

 
$
88,812

Acquired balances
—

 
75,447

Provision recorded during the period for Impax Generics rebates
363,573

 
571,642

Credits issued during the period for Impax Generics rebates
(269,047
)
 
(470,672
)
Ending balance
$
359,755

 
$
265,229

The payment mechanisms for rebates in the Impax Generics and Impax Specialty Pharma divisions are different, which impacts the location on the Company's balance sheet. Impax Specialty Pharma rebates are classified as Accrued Expenses on the Company's consolidated balance sheets.

Chargeback reserve
June 30, 2016
 
December 31, 2015
Beginning balance
$
102,630

 
$
43,125

Acquired balances
—

 
24,532

Provision recorded during the period
430,155

 
833,157

Credits issued during the period
(440,242
)
 
(798,184
)
Ending balance
$
92,543

 
$
102,630




19


9.  INVENTORY
Inventory, net of carrying value reserves, at June 30, 2016 and December 31, 2015 consisted of the following (in thousands): 
 
June 30, 2016
 
December 31, 2015
Raw materials
$
55,589

 
$
52,366

Work in-process
5,632

 
4,417

Finished goods
102,664

 
82,311

Total inventory
163,885

 
139,094

Less: Non-current inventory
15,806

 
13,512

Total current inventory
$
148,079

 
$
125,582

Inventory carrying value reserves were $33.4 million and $24.1 million at June 30, 2016 and December 31, 2015, respectively.
The Company recognizes pre-launch inventories at the lower of its cost or the expected net selling price. Cost is determined using a standard cost method, which approximates actual cost, and assumes a FIFO flow of goods. Costs of unapproved products are the same as approved products and include materials, labor, quality control, and production overhead. When the Company concludes FDA approval is expected within approximately six months, the Company will generally begin to schedule manufacturing process validation studies as required by the FDA to demonstrate the production process can be scaled up to manufacture commercial batches. Consistent with industry practice, the Company may build quantities of pre-launch inventories of certain products pending required final FDA approval and/or resolution of patent infringement litigation, when, in the Company’s assessment, such action is appropriate to prepare for the anticipated commercial launch, FDA approval is expected in the near term, and/or the related litigation will be resolved in the Company’s favor. The capitalization of unapproved pre-launch inventory involves risks, including, among other items, FDA approval of product may not occur; approvals may require additional or different testing and/or specifications than used for unapproved inventory; and, in cases where the unapproved inventory is for a product subject to litigation, the litigation may not be resolved or settled in favor of the Company. If any of these risks were to materialize and the launch of the unapproved product delayed or prevented, then the net carrying value of unapproved inventory may be partially or fully reserved. Generally, the selling price of a generic pharmaceutical product is at discount from the corresponding brand product selling price. Typically, a generic drug is easily substituted for the corresponding branded product, and once a generic product is approved, the pre-launch inventory is typically sold within the subsequent three months. If the market prices become lower than the product inventory carrying costs, then the pre-launch inventory value is reduced to such lower market value. If the inventory produced exceeds the estimated market acceptance of the generic product and becomes short-dated, a carrying value reserve will be recorded. In all cases, the carrying value of the Company's pre-launch product inventory is lower than the respective estimated net selling prices. The carrying value of unapproved inventory less reserves was $7.8 million and $8.7 million at June 30, 2016 and December 31, 2015, respectively.
To the extent inventory is not scheduled to be utilized in the manufacturing process and/or sold within twelve months of the balance sheet date, it is included as a component of other non-current assets. Amounts classified as non-current inventory consist of raw materials, net of valuation reserves. Raw materials generally have a shelf life of approximately three to five years, while finished goods generally have a shelf life of approximately two years.



20


10. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net of accumulated depreciation, consists of the following (in thousands):
 
June 30, 2016
 
December 31, 2015
Land
$
5,603

 
$
5,773

Buildings and improvements
170,968

 
165,322

Equipment
140,069

 
135,998

Office furniture and equipment
15,983

 
14,548

Construction in-progress
36,093

 
25,659

Property, plant and equipment, gross
368,716

 
347,300

Less: Accumulated depreciation
(145,241
)
 
(133,144
)
Property, plant and equipment, net
$
223,475

 
$
214,156

Depreciation expense was $14.2 million and $10.4 million for the six months ended June 30, 2016 and June 30, 2015, respectively.
Unpaid vendor invoices relating to purchases of property, plant and equipment of $5.7 million and $1.3 million, which were accrued as of June 30, 2016 and June 30, 2015, respectively, have been excluded from the purchase of property, plant, and equipment and the change in accounts payable and accrued expenses in the Company’s consolidated statements of cash flows.

11. INTANGIBLE ASSETS AND GOODWILL
Intangible Assets
The Company’s finite-lived intangible assets, consisting of marketed product rights and royalties received from product sales by the Company’s third-party partners, are amortized over the estimated useful life of the asset based on the pattern of economic benefit expected to be realized or, if that pattern is not readily determinable, on a straight-line basis. The remaining weighted-average amortization period for the Company's finite-lived intangible assets not yet fully amortized is 10.7 years as of June 30, 2016. The Company’s indefinite-lived intangible assets consist of acquired in-process research and development ("IPR&D") product rights and acquired future royalty rights to be paid based on other companies’ net sales of products not yet approved. Amortization over the estimated useful life will commence at the time of the respective product’s launch. If FDA approval to market the product is not obtained, the Company will immediately expense the related capitalized cost.
The following tables show the gross carrying values and accumulated amortization, where applicable, of the Company’s intangible assets by type for the consolidated balance sheets presented (in thousands):
June 30, 2016
Gross Carrying Value
 
Accumulated Amortization
 
Intangible Assets, Net
Amortized intangible assets:
 
 
 
 
 
Marketed product rights
$
543,430

 
$
(104,030
)
 
$
439,400

Royalties
2,200

 
(302
)
 
1,898

 
545,630

 
(104,332
)
 
441,298

Non-amortized intangible assets:
 
 
 
 
 
Acquired IPR&D product rights
61,893

 
—

 
61,893

Acquired future royalty rights
78,600

 
—

 
78,600

 
140,493

 
—

 
140,493

Total intangible assets
$
686,123

 
$
(104,332
)
 
$
581,791


21


December 31, 2015
Gross Carrying Value
 
Accumulated Amortization
 
Intangible Assets, Net
Amortized intangible assets:
 
 
 
 
 
Marketed product rights
$
458,675

 
$
(82,906
)
 
$
375,769

Royalties
2,200

 
(189
)
 
2,011

 
460,875

 
(83,095
)
 
377,780

Non-amortized intangible assets:
 
 
 
 
 
Acquired IPR&D product rights
145,640

 
—

 
145,640

Acquired future royalty rights
78,600

 
—

 
78,600

 
224,240

 
—

 
224,240

Total intangible assets
$
685,115

 
$
(83,095
)
 
$
602,020

During the first quarter of 2016, the Company capitalized $3.5 million of milestone payments due to an affiliate of Teva under the terms of the product agreement between the parties and related to the FDA's approval and the Company's subsequent commercial launch of Emverm® (mebendazole) 100 mg chewable tablets. As of December 31, 2015, the Emverm® acquired IPR&D product right had a carrying value of $82.8 million, which was the fair value assigned by the Company during the purchase price allocation accounting for the Tower acquisition. As a result of the Company's commercial launch of the product during the first quarter of 2016, the Company transferred the total $86.3 million of asset value from non-amortized, indefinite-lived acquired IPR&D product rights to amortized, finite-lived marketed product rights and began amortization of the asset. The Emverm® marketed product right intangible asset will be amortized over an estimated useful life of nine years based on the pattern of economic benefit expected to be realized through 2024.
During the second quarter of 2016, the Company recognized a total of $1.5 million of impairment charges within cost of revenues on the Company's consolidated statements of operations related to two currently marketed products, which were acquired as part of the Tower acquisition, primarily due to active pharmaceutical ingredient ("API") supply issues and minimal sales activity, resulting in immediate discontinuation of one product and rapid phase-out of the other. Additionally, one of the Company's IPR&D generic products, also acquired as part of the Tower acquisition, was determined to be impaired as a result of the commercial launch of a competitor's generic product, resulting in a $1.0 million charge to research and development expenses on the Company's consolidated statements of operations.
The Company recognized amortization expense of $12.5 million and $21.2 million for the three and six months ended June 30, 2016, respectively, and $12.6 million and $16.9 million for the three and six months ended June 30, 2015, respectively, in cost of revenues on its consolidated statements of operations. Assuming no changes to the gross carrying amount of finite-lived intangible assets, amortization expense for fiscal years 2016 through 2020 is estimated to be in the range of $37.7 million to $58.8 million annually.
Goodwill
Goodwill on the Company’s consolidated balance sheets at June 30, 2016 and December 31, 2015 is the result of the 2015 Tower acquisition and the 1999 merger of Impax Pharmaceuticals, Inc. with Global Pharmaceuticals Corporation. Goodwill had a carrying value of $208.4 million and $210.2 million at June 30, 2016 and December 31, 2015, respectively. The change in the carrying value during the six months ended June 30, 2016 compared to December 31, 2015 was entirely attributable to the finalization of the purchase price allocation during the first quarter of 2016 for the Tower acquisition as a result of the completion and filing of federal and state tax returns for the various entities acquired, which resulted in the adjustment of goodwill. At June 30, 2016, the Company attributed $148.7 million and $59.7 million to the Impax Generics division and the Impax Specialty Pharma division, respectively.


22


12. ACCRUED EXPENSES
The following table sets forth the Company’s accrued expenses (in thousands):  
 
June 30, 2016
 
December 31, 2015
Payroll-related expenses
$
25,855

 
$
37,419

Product returns
60,190

 
48,950

Accrued shelf stock
6,945

 
6,619

Government rebates (1)
86,439

 
91,717

Legal and professional fees
13,279

 
5,929

Income taxes payable
—

 
830

Physician detailing sales force fees
394

 
1,132

Interest payable
500

 
500

Other
8,208

 
11,615

Total accrued expenses
$
201,810

 
$
204,711


(1) Includes estimated $24.4 million and $40.6 million as of June 30, 2016 and December 31, 2015, respectively, of liabilities for Daraprim® chargebacks and rebates resulting from utilization by Medicaid, Medicare and other federal, state and local governmental programs, health plans and other health care providers for product sold under the Company’s labeler code, which amounts are subject to reimbursement by Turing in accordance with the terms of the Company's purchase agreement with Turing. The Company made payments of $23.6 million on Turing's behalf during the first and second quarters of 2016. See "Note 4. Summary of Significant Accounting Policies - Concentration of Credit Risk" for additional information related to the Turing receivable.

Product Returns
The Company maintains a return policy to allow customers to return product within specified guidelines. The Company estimates a provision for product returns as a percentage of gross sales based upon historical experience for sales made through its Impax Generics and Impax Specialty Pharma sales channels. Sales of product under the Private Label, Rx Partner and OTC Partner alliance, collaboration and supply agreements are not subject to returns.
A roll-forward of the return reserve activity for the six months ended June 30, 2016 and the year ended December 31, 2015 is as follows (in thousands):

Returns Reserve
June 30, 2016
 
December 31, 2015
Beginning balance
$
48,950

 
$
27,174

Acquired balances
—

 
11,364

Provision related to sales recorded in the period
24,937

 
43,967

Credits issued during the period
(13,697
)
 
(33,555
)
Ending balance
$
60,190

 
$
48,950


13. DEBT
2% Convertible Senior Notes due June 2022
On June 30, 2015, the Company issued an aggregate principal amount of $600.0 million of 2.00% Convertible Senior Notes due June 2022 (the “Notes”) in a private placement offering, which are the Company’s senior unsecured obligations. The Notes were issued pursuant to an Indenture dated June 30, 2015 (the “Indenture”) between the Company and Wilmington Trust, N.A. as trustee. The Indenture includes customary covenants and sets forth certain events of default after which the Notes may be due and payable immediately. The Notes will mature on June 15, 2022, unless earlier redeemed, repurchased or converted. The Notes bear interest at a rate of 2.00% per year, and interest is payable semiannually in arrears on June 15 and December 15 of each year, beginning from December 15, 2015.

23


The conversion rate for the Notes is initially set at 15.7858 shares per $1,000 of principal amount, which is equivalent to an initial conversion price of $63.35 per share of the Company’s common stock. If a Make-Whole Fundamental Change (as defined in the Indenture) occurs or becomes effective prior to the maturity date and a holder elects to convert its Notes in connection with the Make-Whole Fundamental Change, the Company is obligated to increase the conversion rate for the Notes so surrendered by a number of additional shares of the Company’s common stock as prescribed in the Indenture. Additionally, the conversion rate is subject to adjustment in the event of an equity restructuring transaction such as a stock dividend, stock split, spinoff, rights offering, or recapitalization through a large, nonrecurring cash dividend (“standard antidilution provisions,” per FASB ASC Topic 815-40, Contracts in Entity’s Own Equity ("ASC 815-40")).
The Notes are convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding December 15, 2021 only under the following circumstances:
(i)
If during any calendar quarter commencing after the quarter ending September 30, 2015 (and only during such calendar quarter) the last reported sale price of the Company’s 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 130% of the conversion price on each applicable trading day; or
(ii)
If during the 5 business day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price per $1,000 of principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last report sale price of the Company’s common stock and the conversion rate on each such trading day; or
(iii)
Upon the occurrence of corporate events specified in the Indenture.
On or after December 15, 2021 until the close of business on the second scheduled trading day immediately preceding the maturity date, the holders may convert their Notes at any time, regardless of the foregoing circumstances. The Company may satisfy its conversion obligation by paying or delivering, as the case may be, cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock, at the Company’s election and in the manner and subject to the terms and conditions provided in the Indenture.
Concurrently with the offering of the Notes and using a portion of the proceeds from the sale of the Notes, the Company entered into a series of convertible note hedge and warrant transactions (the “Note Hedge Transactions” and “Warrant Transactions”) which are designed to reduce the potential dilution to the Company’s stockholders and/or offset the cash payments the Company is required to make in excess of the principal amount upon conversion of the Notes. The Note Hedge Transactions and Warrant Transactions are separate transactions, in each case, entered into by the Company with a financial institution and are not part of the terms of the Notes. These transactions will not affect any holder’s rights under the Notes, and the holders of the Notes have no rights with respect to the Note Hedge Transactions and Warrant Transactions. See “Note 14. Stockholders’ Equity” for additional information.
At the June 30, 2015 issuance date of the Notes, the Company did not have the necessary number of authorized but unissued shares of its common stock available to share-settle the conversion option of the Notes. Therefore, in accordance with guidance found in FASB ASC Topic 470-20, Debt with Conversion and Other Options, and FASB Topic ASC 815-15, Embedded Derivatives, the conversion option of the Notes was deemed an embedded derivative requiring bifurcation from the Notes (host contract) and separate accounting as a derivative liability. The fair value of the conversion option derivative liability at June 30, 2015 was $167.0 million, which was recorded as a reduction to the carrying value of the debt and will be accreted to interest expense over the term of the debt using the effective interest method. Although the Company received stockholder approval on December 8, 2015 to amend the Company’s Restated Certificate of Incorporation to increase the authorized number of shares of the Company’s common stock (which amendment has occurred), the debt discount remains and continues to be accreted to interest expense. See “Note 14. Stockholders’ Equity” for additional information.
In connection with the issuance of the Notes, the Company incurred $18.7 million of debt issuance costs for banking, legal and accounting fees and other expenses. This amount was also recorded on the Company’s balance sheet as a reduction to the carrying value of the debt, in accordance with the Company’s early adoption of ASU No. 2015-03 - Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), and will be accreted to interest expense over the term of the debt using the effective interest method.
For the three and six months ended June 30, 2016, the Company recognized $8.5 million and $16.8 million, respectively, of interest expense related to the Notes, of which $3.0 million and $6.0 million, respectively, was cash and $5.5 million and $10.8 million, respectively, was non-cash accretion of the debt discounts recorded. As the Notes mature in 2022, they have been classified as long-term debt on the Company's consolidated balance sheets, with a carrying value of $435.3 million and $424.6 million as

24


of June 30, 2016 and December 31, 2015, respectively. Accrued interest payable on the Notes of $0.5 million as of both June 30, 2016 and December 31, 2015 is included in accrued expenses on the Company's consolidated balance sheets.
Royal Bank of Canada Credit Facilities
On August 4, 2015, the Company entered into a senior secured revolving credit facility (the “Revolving Credit Facility”) of up to $100 million, pursuant to a credit agreement by and among the Company, the lenders party thereto from time to time and Royal Bank of Canada, as administrative agent and collateral agent. The Revolving Credit Facility is available for working capital and other general corporate purposes. No borrowings have been drawn from the Revolving Credit Facility from its inception through June 30, 2016. The Revolving Credit Facility was originally set to mature on August 4, 2020. Refer to "Note 24. Subsequent Events" for additional information on the significant changes to the Company's Revolving Credit Facility.

Loss on Early Extinguishment of Debt – Barclays $435.0 million Term Loan
In connection with the acquisition of Tower during the first quarter of 2015, the Company entered into a $435.0 million senior secured term loan facility (the “Barclays Term Loan”) and a $50.0 million senior secured revolving credit facility (the “Barclays Revolver,” and collectively with the Barclays Term Loan, the “Barclays Senior Secured Credit Facilities”), pursuant to a credit agreement, dated as of March 9, 2015, by and among the Company, the lenders party thereto from time to time and Barclays Bank PLC ("Barclays"), as administrative and collateral agent (the “Barclays Credit Agreement”). In connection with the Barclays Senior Secured Credit Facilities, the Company incurred debt issuance costs for banking, legal and accounting fees and other expenses of $17.8 million, which were previously reflected as a discount to the carrying value of the debt on the Company’s consolidated balance sheet in accordance with ASU 2015-03. Prior to repayment of the Barclays Term Loan on June 30, 2015, this debt discount was accreted to interest expense over the term of the loan using the effective interest rate method.
On June 30, 2015, the Company used $436.4 million of the proceeds from the sale of the Notes to repay the $435.0 million of principal and $1.4 million of accrued interest due on its Barclays Term Loan under the Barclays Credit Agreement. In connection with this repayment of the loan, for the quarter ended June 30, 2015, the Company recorded a loss on early extinguishment of debt of $16.9 million related to the unaccreted portion of the debt discount.
For the three months ended June 30, 2015, the Company incurred total interest expense related to the Barclays Term Loan of $6.8 million, of which $6.0 million was cash and $0.8 million was non-cash accretion of the debt discount recorded. For the six months ended June 30, 2015, the Company incurred total interest expense related to the Barclays Term Loan of $10.7 million, of which $9.8 million was cash and $0.9 million was non-cash accretion of the debt discount recorded. Included in the prior year-to-date cash interest expense of $9.8 million is a $2.3 million ticking fee paid to Barclays during the first quarter of 2015, prior to the funding of the Barclays Senior Secured Credit Facilities on March 9, 2015, to lock in the financing terms from the lenders' commitment of the Barclays Term Loan until the actual allocation of the loan occurred at the closing of the Tower acquisition.

14. STOCKHOLDERS’ EQUITY
Preferred Stock
Pursuant to its Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”), the Company is authorized to issue 2,000,000 shares of “blank check” preferred stock, $0.01 par value per share, which enables the Board of Directors, from time to time, to create one or more new series of preferred stock. Each series of preferred stock issued can have the rights, preferences, privileges and restrictions designated by the Board of Directors. The issuance of any new series of preferred stock could affect, among other things, the dividend, voting, and liquidation rights of the Company’s common stock. The Company had no preferred stock issued or outstanding as of June 30, 2016 and December 31, 2015. 
Common Stock
Pursuant to its Certificate of Incorporation, the Company is authorized to issue 150,000,000 shares of common stock, $0.01 par value per share, of which 74,106,376 shares have been issued and 73,862,647 shares were outstanding as of June 30, 2016. In addition, the Company had reserved for issuance the following amounts of shares of its common stock for the purposes described below as of June 30, 2016 (in thousands):

25


Shares issued
74,106

Stock options outstanding(1)
2,453

Conversion of Notes payable (2)
9,471

Warrants outstanding (see below)
9,471

Total shares of common stock issued and reserved for issuance
95,501

(1)See “Note 16. Share-based Compensation.”
(2)See “Note 13. Debt.”

Warrants
As discussed in “Note 13. Debt,” on June 30, 2015, the Company entered into a series of Note Hedge Transactions and Warrant Transactions with a financial institution which are designed to reduce the potential dilution to the Company’s stockholders and/or offset the cash payments the Company is required to make in excess of the principal amount upon conversion of the Notes. Pursuant to the Warrant Transactions, the Company sold to a financial institution 9.47 million warrants to purchase the Company’s common stock, for which it received proceeds of $88.3 million. The warrants have an exercise price of $81.277 per share (subject to adjustment), are immediately exercisable, and have an expiration date of September 15, 2022.
Additional Paid-in Capital
Pursuant to the Note Hedge Transactions, the Company purchased from a financial institution 0.6 million call options on the Company's common stock, for which it paid consideration of $147.0 million. Each call option entitles the Company to purchase 15.7858 shares of the Company's common stock at an exercise price of $63.35 per share, is immediately exercisable, and has an expiration date of June 15, 2022, subject to earlier exercise. At the time of the Note Hedge Transactions, because of an insufficient number of authorized but unissued shares of the Company's common stock, these call options did not meet the criteria for equity classification under ASC 815-40 and were accounted for as a derivative asset.
As of December 8, 2015, pursuant to the Company's amendment to its Certificate of Incorporation to increase the number of authorized shares of common stock, the call options purchased pursuant to the Note Hedge Transactions (formerly a derivative asset) and the conversion option of the Notes (formerly an embedded derivative liability) were reclassified to equity in additional paid-in capital. The net effect of the reclassification of these derivatives was a $21.0 million, net of tax, increase in additional paid-in capital reflected on the Company's December 31, 2015 consolidated balance sheet.

15. EARNINGS PER SHARE
The Company's basic earnings per common share (“EPS”) is computed by dividing net income (loss) available to the Company’s common stockholders (as presented on the consolidated statements of operations) by the weighted-average number of shares of the Company’s common stock outstanding during the period. The Company’s restricted stock awards (non-vested shares) are issued and outstanding at the time of grant but are excluded from the Company’s computation of weighted-average shares outstanding in the determination of basic EPS until vesting occurs.
For purposes of calculating diluted EPS, the denominator includes both the weighted-average number of shares of common stock outstanding and the number of common stock equivalents if the inclusion of such common stock equivalents would be dilutive. Dilutive common stock equivalents potentially include warrants, stock options and non-vested restricted stock awards using the treasury stock method and the number of shares of common stock issuable upon conversion of the Company’s outstanding convertible notes payable. In the case of the Company’s outstanding convertible notes payable, the diluted EPS calculation is further affected by an add-back of interest expense, net of tax, to the numerator under the assumption that the interest would not have been incurred if the convertible notes had been converted into common stock.

26


The following is a reconciliation of basic and diluted net loss per share of common stock for the three and six months ended June 30, 2016 and 2015 (in thousands, except per share amounts):  
 
Three Months Ended June 30,
 
 
Six Months Ended June 30,
 
 
2016
 
 
2015
 
 
2016
 
 
2015
 
Basic Loss Per Common Share:
 
 
 
 
 
 
 
 
 
 
 
Net loss
$
(2,701
)
 
 
$
(1,852
)
 
 
$
(13,109
)
 
 
$
(8,185
)
 
Weighted-average common shares outstanding
71,100

 
 
69,339

 
 
70,883

 
 
69,154

 
Basic loss per share
$
(0.04
)
 
 
$
(0.03
)
 
 
$
(0.18
)
 
 
$
(0.12
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted Loss Per Common Share:
 
 
 
 
 
 
 
 
 
 
 
Net loss
$
(2,701
)
 
 
$
(1,852
)
 
 
$
(13,109
)
 
 
$
(8,185
)
 
Add-back of interest expense on outstanding convertible notes payable, net of tax
—

(1) 
 
—

(1) 
 
—

(1) 
 
—

(1) 
Adjusted net loss
$
(2,701
)
 
 
$
(1,852
)
 
 
$
(13,109
)
 
 
$
(8,185
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
71,100

 
 
69,339

 
 
70,883

 
 
69,154

 
Weighted-average incremental shares related to assumed exercise of warrants and stock options, vesting of non-vested shares and ESPP share issuance
—

(2) 
 
—

(3) 
 
—

(2) 
 
—

(3) 
Weighted-average incremental shares assuming conversion of outstanding notes payable
—

(1) 
 
—

(1) 
 
—

(1) 
 
—

(1) 
Diluted weighted-average common shares outstanding
71,100

(2) 
 
69,339

(3) 
 
70,883

(2) 
 
69,154

(3) 
Diluted net loss per share
$
(0.04
)
 
 
$
(0.03
)
 
 
$
(0.18
)
 
 
$
(0.12
)
 
(1)
For the three and six month periods ended June 30, 2016 and 2015, the Company incurred a net loss, which cannot be diluted, so basic and diluted loss per common share were the same. Accordingly, there were no numerator or denominator adjustments related to the Company’s convertible notes payable.
(2)
For the three and six month periods ended June 30, 2016, the Company incurred a net loss, which cannot be diluted, so basic and diluted loss per common share were the same. As of June 30, 2016, shares issuable but not included in the Company's calculation of diluted EPS, which could potentially dilute future earnings, include 9.47 million warrants outstanding, 9.47 million shares for conversion of outstanding convertible notes payable, 2.45 million stock options outstanding and 2.63 million non-vested restricted stock awards.
(3)
For the three and six month periods ended June 30, 2015, the Company incurred a net loss, which cannot be diluted, so basic and diluted loss per common share were the same. As of June 30, 2015, shares issuable but not included in the Company's calculation of diluted EPS, which could potentially dilute future earnings, include 9.47 million warrants outstanding, 9.47 million shares for conversion of outstanding convertible notes payable, 3.07 million stock options outstanding and 2.28 million non-vested restricted stock awards.


27


16. SHARE-BASED COMPENSATION
The Company recognizes the grant date fair value of each stock option and restricted stock award over its vesting period. Stock options and restricted stock awards are granted under the Company’s Second Amended and Restated 2002 Equity Incentive Plan (the “2002 Plan”) and generally vest over a three or four year period and have a term of 10 years.
Impax Laboratories, Inc. 1999 Equity Incentive Plan ("1999 Plan")

The aggregate number of shares of common stock authorized for issuance pursuant to the Company’s 1999 Plan is 5,000,000 shares. There were 938 and 10,938 stock options outstanding at June 30, 2016 and December 31, 2015, respectively, under the 1999 Plan.

Impax Laboratories, Inc. Second Amended and Restated 2002 Equity Incentive Plan ("2002 Plan")

The aggregate number of shares of common stock authorized for issuance pursuant to the Company's 2002 Plan is 14,950,000 shares. There were 2,451,915 and 2,394,433 stock options outstanding at June 30, 2016 and December 31, 2015, respectively, and 2,630,117 and 2,146,498 non-vested restricted stock awards outstanding at June 30, 2016 and December 31, 2015, respectively, under the 2002 Plan.

The stock option activity for all of the Company’s equity compensation plans noted above is summarized as follows:
Stock Options
Number of
Shares
Under
Option
 
Weighted-
Average
Exercise
Price
per Share
Outstanding at December 31, 2015
2,405,371

 
$
21.39

     Options granted
489,840

 
$
12.86

     Options exercised
(420,092
)
 
$
20.74

     Options forfeited
(22,266
)
 
$
38.10

Outstanding at June 30, 2016
2,452,853

 
$
23.65

Options exercisable at June 30, 2016
1,493,835

 
$
17.15

As of June 30, 2016, stock options outstanding and exercisable had average remaining contractual lives of 7.56 years and 5.71 years, respectively. Also, as of June 30, 2016, stock options outstanding and exercisable each had aggregate intrinsic values of $20.1 million and $18.7 million, respectively, and restricted stock awards outstanding had an aggregate intrinsic value of $75.8 million. As of June 30, 2016, the Company estimated there were 2,171,494 stock options and 2,328,424 restricted shares granted to employees which were vested or expected to vest.

The Company grants restricted stock to certain eligible employees as a component of its long-term incentive compensation program. The restricted stock award grants are made in accordance with the Company’s 2002 Plan and are issued and outstanding at the time of grant but are subject to forfeiture if the vesting conditions are not met. A summary of the non-vested restricted stock awards is as follows:
Restricted Stock Awards
Number of
Restricted
Stock Awards
 
Weighted-
Average
Grant Date
Fair Value
Non-vested at December 31, 2015
2,146,498

 
$
33.20

     Granted
1,043,132

 
$
32.71

     Vested
(385,566
)
 
$
26.79

     Forfeited
(173,947
)
 
$
32.85

Non-vested at June 30, 2016
2,630,117

 
$
33.97

Included in the 385,566 shares of restricted stock vested during the six months ended June 30, 2016 are 126,647 shares with a weighted-average fair value of $33.66 per share that were withheld for minimum withholding tax purposes upon vesting of such awards from stockholders who elected to net share settle such tax withholding obligation.


28


As of June 30, 2016, the Company had 643,386 shares available for issuance of either stock options or restricted stock awards, including 282,756 shares from the 2002 Plan, 296,921 shares from the 1999 Plan, and 63,709 shares from the 2001 Non-Qualified Employee Stock Purchase Plan (“ESPP”) Plan.

As of June 30, 2016, the Company had total unrecognized share-based compensation expense, net of estimated forfeitures, of $81.1 million related to all of its share-based awards, which will be recognized over a weighted average period of 2.4 years. The intrinsic value of options exercised during the six months ended June 30, 2016 and 2015 was $4.9 million and $9.6 million, respectively. The total fair value of restricted shares which vested during the six months ended June 30, 2016 and 2015 was $10.3 million and $8.1 million, respectively.

The Company estimated the fair value of each stock option award on the grant date using the Black-Scholes option pricing model, wherein expected volatility is based on historical volatility of the Company’s common stock. The expected term calculation is based on the “simplified” method described in SAB No. 107, Share-Based Payment and SAB No. 110, Share-Based Payment, as the result of the simplified method provides a reasonable estimate in comparison to actual experience. The risk-free interest rate is based on the U.S. Treasury yield at the date of grant for an instrument with a maturity that is commensurate with the expected term of the stock options. The dividend yield of zero is based on the fact that the Company has never paid cash dividends on its common stock, and has no present intention to pay cash dividends. Options granted under each of the above plans generally vest from three to four years and have a term of 10 years.

The amount of share-based compensation expense recognized by the Company is as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Manufacturing expenses
$
1,880

 
$
1,192

 
$
3,248

 
$
2,238

Research and development
1,607

 
1,367

 
2,947

 
2,732

Selling, general and administrative
4,898

 
4,512

 
9,467

 
8,589

Total
$
8,385

 
$
7,071

 
$
15,662

 
$
13,559


17. RESTRUCTURINGS
Middlesex, New Jersey Manufacturing and Packaging Operations

In March 2016, the Company's Board of Directors approved a plan of restructuring designed to reduce costs, improve operating efficiencies and enhance the Company's long-term competitive position by closing the Company's Middlesex, New Jersey manufacturing and packaging site and transferring the products and the functions performed there to the Company's other facilities or to third-party manufacturers. This plan will take up to two years to complete, over which time 215 positions are currently expected to be eliminated. This plan does not impact the Company's R&D activities at the Middlesex site.

Management currently estimates that over the next two years the Company will incur aggregate pre-tax charges in connection with this plan of $45.0 million, of which approximately half will be incurred in 2016 and the remainder by the second quarter of 2018. The following is a summary of the total estimated charges to be incurred by major type of cost (in millions):

Type of Cost
Amount Expected to be Incurred
Employee retention and severance payments
$15.0
Technical transfer of products
14.5
Asset impairment and accelerated depreciation charges
13.0
Facilities lease terminations and asset retirement obligations
2.2
Legal and professional fees
0.3
Total estimated restructuring charges
$45.0


Employee retention and severance payments are being accrued over the estimated service period. For the three months ended June 30, 2016, the Company recorded to cost of goods sold accrued expenses for employee retention and severance payments

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of $1.9 million and accelerated depreciation and technical transfer expenses of $1.7 million and $1.6 million, respectively. For the six months ended June 30, 2016, the Company recorded to cost of goods sold accrued expenses for employee retention and severance payments of $2.6 million and accelerated depreciation, technical transfer and legal and professional fees and expenses of $2.3 million, $1.6 million and $0.1 million, respectively. At June 30, 2016, the $2.6 million balance of accrued employee retention and severance payments was included in accrued expenses on the Company’s consolidated balance sheet.

Hayward, California Technical Operations and R&D
In November 2015, the Company's management assessed the headcount in the technical operations and research and development groups in Hayward, California, primarily as a result of the resolution of the warning letter at the Hayward facility, and determined that a reduction-in-force was necessary to adjust the headcount to the operating conditions of the post-warning letter resolution environment. The Company eliminated 27 positions and recorded an accrual for severance and related employee termination benefits of $2.5 million during the quarter ended December 31, 2015. As of June 30, 2016, $1.8 million has been paid, and the Company currently expects the remainder of this balance to be paid by early 2017.
Philadelphia, Pennsylvania Packaging and Distribution Operations
On June 30, 2015, the Company committed to a plan of restructuring of its packaging and distribution operations and as a result of this plan, the Company closed its Philadelphia packaging site and all Company-wide distribution operations were outsourced to United Parcel Services during the fiscal year ended December 31, 2015. The Company eliminated 93 positions and recorded an accrual for severance and related employee termination benefits of $2.6 million during the quarter ended June 30, 2015. As of June 30, 2016, the full $2.6 million had been paid.

18. INCOME TAXES
The Company calculates its interim income tax provision in accordance with FASB ASC Topics 270 and 740. At the end of each interim period, the Company makes an estimate of the annual United States domestic and foreign jurisdictions’ expected effective tax rates and applies these rates to its respective year-to-date taxable income or loss. The computation of the annual estimated effective tax rates at each interim period requires certain estimates and assumptions including, but not limited to, the expected operating income for the year, projections of the proportion of income (or loss) earned and taxed in the United States, and the various state and local tax jurisdictions, as well as tax jurisdictions outside the United States, along with permanent differences, and the likelihood of deferred tax asset utilization. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is acquired or additional information is obtained. The computation of the annual estimated effective tax rate includes modifications, which were projected for the year, for share-based compensation and state research and development credits, among others. In addition, the effect of changes in enacted tax laws, rates, or tax status is recognized in the interim period in which the respective change occurs.

The Company's effective tax rate for the six month periods ended June 30, 2016 and 2015 was 39% and 46%, respectively. During the six month period ended June 30, 2016 and 2015, the Company recognized aggregate consolidated tax benefits of $8.3 million and $7.1 million, respectively, for U.S. domestic and foreign income taxes. The amount of tax benefit recorded for the six months ended June 30, 2016 reflects the Company’s estimate as of such date of the annual effective tax rate applied to the year-to-date loss. A discrete tax benefit of $17.4 million for the reserve recorded against the Turing receivable as described above under "Note 4. Summary of Significant Accounting Policies - Concentration of Credit Risk" is also reflected in income tax benefit for the six months ended June 30, 2016. Excluding discrete items, the Company’s estimate of the annualized effective tax rate for the six months ended June 30, 2016 was 32%. The effective tax rate, including the effects of discrete tax income tax items, was 39% for the six months ended June 30, 2016. Due to the taxable loss for the six months ended June 30, 2016, the discrete tax benefit increased the tax rate. The increase in the aggregate tax benefit compared to the prior year period resulted from higher consolidated loss before taxes in the six month period ended June 30, 2016, as compared to the same period in the prior year. The increase in tax benefit during the six month period ended June 30, 2016 was also a result of a change in the timing and mix of U.S. and foreign income; the exclusion of a zero-rate jurisdiction from the interim effective tax rate calculation; the inclusion of the federal research and development credit which was permanently reinstated in December of 2015; and an increase in the deferred tax asset related to a state R&D tax credit carryforward in a state with indefinite carryforwards. The Company is closely monitoring the events and circumstances that determine the need for a valuation allowance related to state research and development tax credit carryforwards and have determined that, based upon the evaluation of the provisions of ASC 740, no valuation allowance will be recorded at this time.
As of June 30, 2016, Lineage was in the process of closing an audit for federal income tax by the U.S. Internal Revenue Service ("IRS") for the 2013 tax year, which pre-dates the Company’s acquisition of Lineage. The Company and the former stockholders of Lineage cooperated with the IRS in connection with the audit. Under the terms of the Stock Purchase Agreement

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related to the Tower acquisition, the Company is not responsible for pre-acquisition income tax liabilities. Lineage audit results have been discussed with the Company and communicated to the former stockholders of Lineage. As of June 30, 2016,the Company had been informed that a no change letter would be issued by the IRS. Neither the Company nor any of its other affiliates is currently under audit for federal income tax. No provision has been made for U.S. federal deferred income taxes on accumulated earnings on foreign subsidiaries since it is the current intention of management to indefinitely reinvest the undistributed earnings in the foreign subsidiary. See "Note. 24 - Subsequent Events" for additional information on the results of the IRS audit.

19. ALLIANCE AND COLLABORATION AGREEMENTS
The Company has entered into several alliance, collaboration, license and distribution agreements, and similar agreements with respect to certain of its products and services, with unrelated third-party pharmaceutical companies. The consolidated statements of operations include revenue recognized under agreements the Company has entered into to develop marketing and/or distribution relationships with its partners to fully leverage its technology platform and revenue recognized under development agreements which generally obligate the Company to provide research and development services over multiple periods.
The Company’s alliance and collaboration agreements often include milestones and provide for milestone payments upon achievement of these milestones. Generally, the milestone events contained in the Company’s alliance and collaboration agreements coincide with the progression of the Company’s products and technologies from pre-commercialization to commercialization.
The Company groups pre-commercialization milestones in its alliance and collaboration agreements into clinical and regulatory categories, each of which may include the following types of events:
Clinical Milestone Events:
•
Designation of a development candidate. Following the designation of a development candidate, generally, IND-enabling animal studies for a new development candidate take 12 to 18 months to complete.
•
Initiation of a Phase I clinical trial. Generally, Phase I clinical trials take one to two years to complete.
•
Initiation or completion of a Phase II clinical trial. Generally, Phase II clinical trials take one to three years to complete.
•
Initiation or completion of a Phase III clinical trial. Generally, Phase III clinical trials take two to four years to complete.
•
Completion of a bioequivalence study. Generally, bioequivalence studies take three months to one year to complete.
Regulatory Milestone Events:
•
Filing or acceptance of regulatory applications for marketing approval such as a New Drug Application in the United States or Marketing Authorization Application in Europe. Generally, it takes six to 12 months to prepare and submit regulatory filings and two months for a regulatory filing to be accepted for substantive review.
•
Marketing approval in a major market, such as the United States or Europe. Generally it takes one to three years after an application is submitted to obtain approval from the applicable regulatory agency.
•
Marketing approval in a major market, such as the United States or Europe for a new indication of an already-approved product. Generally it takes one to three years after an application for a new indication is submitted to obtain approval from the applicable regulatory agency.
Commercialization Milestones Events:
•
 First commercial sale in a particular market, such as in the United States or Europe.
•
 Product sales in excess of a pre-specified threshold, such as annual sales exceeding $100 million. The amount of time to achieve this type of milestone depends on several factors including but not limited to the dollar amount of the threshold, the pricing of the product and the pace at which customers begin using the product.
License and Distribution Agreement with Shire
In January 2006, the Company entered into a License and Distribution Agreement with an affiliate of Shire Laboratories, Inc., which was subsequently amended (“Prior Shire Agreement”), under which the Company received a non-exclusive license to market and sell an authorized generic of Shire’s Adderall XR® product (“AG Product”) subject to certain conditions, but in

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any event by no later than January 1, 2010. The Company commenced sales of the AG Product in October 2009. On February 7, 2013, the Company entered into an Amended and Restated License and Distribution Agreement with Shire (the “Amended and Restated Shire Agreement”), which amended and restated the Prior Shire Agreement. The Amended and Restated Shire Agreement was entered into by the parties in connection with the settlement of the Company’s litigation with Shire relating to Shire’s supply of the AG Product to the Company under the Prior Shire Agreement. During 2013, the Company received a payment of $48.0 million from Shire in connection with such litigation settlement, which was recorded in the first quarter of 2013 under the line item “Other Income” on the consolidated statement of operations. Under the Amended and Restated Shire Agreement, Shire was required to supply the AG Product and the Company was responsible for marketing and selling the AG Product subject to the terms and conditions thereof until the earlier of (i) the first commercial sale of the Company’s generic equivalent product to Adderall XR® and (ii) September 30, 2014 (the “Supply Term”), subject to certain continuing obligations of the parties upon expiration or early termination of the Supply Term, including Shire’s obligation to deliver AG Products still owed to the Company as of the end of the Supply Term. The Company is required to pay a profit share to Shire on sales of the AG Product, of which the Company owed a profit share payable to Shire of $5.5 million and $11.3 million on sales of the AG Product during the six months ended June 30, 2016 and 2015, respectively, with a corresponding charge included in the cost of revenues line in the consolidated statement of operations. Although the Supply Term expired on September 30, 2014, the Company was permitted to sell any AG Products in its inventory or owed to the Company by Shire under the Amended and Restated Shire Agreement until all such products are sold. The Company continued to pay a profit share to Shire on sales of such products during the six months ended June 30, 2016.
Development, Supply and Distribution Agreement with TOLMAR, Inc.
In June 2012, the Company entered into the Tolmar Agreement with Tolmar. Under the terms of the Tolmar Agreement, Tolmar granted to the Company an exclusive license to commercialize up to 11 generic topical prescription drug products, including ten currently approved products in the United States and its territories; the parties agreed in 2015 to terminate development efforts of one product under the Tolmar Agreement that had been pending approval at the FDA. Under the terms of the Tolmar Agreement, Tolmar is responsible for developing and manufacturing the products, and the Company is responsible for marketing and sale of the products. As of June 30, 2016, the Company was currently marketing and selling four approved products. The Company is required to pay a profit share to Tolmar on sales of each product commercialized pursuant to the terms of the Tolmar Agreement.
The Company paid Tolmar a $21.0 million upfront payment upon signing of the agreement and, pursuant to the terms of the agreement, is also required to make payments to Tolmar upon the achievement of certain specified milestone events. Such contingent milestone payments will initially be recognized in the period the triggering event occurs. Milestone payments which are contingent upon commercialization events will be accounted for as an additional cost of acquiring the product license rights. Milestone payments which are contingent upon regulatory approval events will be capitalized and amortized over the remaining estimated useful life of the approved product. During the year ended December 31, 2012, the Company made a $1.0 million milestone payment and, during the fourth quarter of 2013, the Company made a $12.0 million payment to Tolmar upon Tolmar’s achievement of a regulatory milestone event in accordance with the terms of pursuant to the Tolmar Agreement. The $21.0 million upfront payment for the Tolmar product rights has been allocated to the underlying topical products based upon the relative fair value of each product and will be amortized over the remaining estimated useful life of each underlying product, ranging from five to 12 years, starting upon commencement of commercialization activities by the Company during the second half of 2012. The amortization of the Tolmar product rights has been included as a component of cost of revenues on the consolidated statements of operations. The Company initially allocated $1.55 million of the upfront payment to two products which were in development and has recorded such amount as in-process research and development expense in its results of operations for the year ended December 31, 2012. The Company similarly recorded the $1.0 million milestone paid in the year ended December 31, 2012 as a research and development expense. The Company is required to pay a profit share to Tolmar on sales of the topical products, of which the Company owed a profit share payable to Tolmar of $28.6 million and $18.1 million during the six months ended June 30, 2016 and 2015, respectively, with a corresponding charge included in the cost of revenues line in the Company’s consolidated statement of operations. During the fourth quarter of 2014, the Company paid a $2.0 million milestone related to the Diclofenac Sodium Gel 3% or Solaraze® product to Tolmar pursuant to the Tolmar Agreement. During the second quarter of 2015, the Company paid a $5.0 million milestone related to certain topical products pursuant to the Tolmar Agreement.
The Company entered into a Loan and Security Agreement with Tolmar in March 2012 (the “Tolmar Loan Agreement”), under which the Company agreed to lend to Tolmar one or more loans through December 31, 2014, in an aggregate amount not to exceed $15.0 million. The outstanding principal amount of, including any accrued and unpaid interest on, the loans under the Tolmar Loan Agreement was payable by Tolmar beginning from March 31, 2017 through March 31, 2020 or the maturity date, in accordance with the terms therein. Pursuant to the Tolmar Loan Agreement, Tolmar could prepay all or any portion of the outstanding balance of the loans prior to the maturity date without penalty or premium. In May 2016, Tolmar repaid in full the $15.0 million due to the Company under the Tolmar Loan Agreement.
Strategic Alliance Agreement with Teva

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The Company entered into a Strategic Alliance Agreement with Teva Pharmaceutical USA, Inc. (“Teva USA”), an affiliate of Teva, which was subsequently amended (“Teva Agreement”). The Teva Agreement commits the Company to develop and manufacture, and Teva to distribute, a specified number of controlled release generic pharmaceutical products (“generic products”), each for a 10-year period. The Company is required to develop the products, obtain FDA approval to market the products, and manufacture the products for Teva. The revenue the Company earns from the sale of product under the Teva Agreement consists of Teva’s reimbursement of the Company’s manufacturing costs plus a profit share on Teva’s sales of the product to its customers. The Company invoices Teva for the manufacturing costs or products it ships to Teva and payment is due within 30 days. Teva has the right to determine all terms and conditions of the product sales to its customers. Within 30 days of the end of each calendar quarter, Teva is required to provide the Company with a report of its net sales and profits during the quarter and to pay the Company its share of the profits resulting from those sales. Net sales are Teva’s gross sales less discounts, rebates, chargebacks, returns, and other adjustments, all of which are based upon fixed percentages, except chargebacks, which are estimated by Teva and subject to a true-up reconciliation.
As of June 30, 2016, the Company was supplying Teva with oxybutynin extended release tablets (Ditropan XL® 5 mg, 10 mg and 15 mg extended release tablets); the other products under the Teva Agreement have either been returned to the Company, are being manufactured by Teva at its election, were voluntarily withdrawn from the market or the Company’s obligations to supply such product had expired or were terminated in accordance with the agreement. Refer to "Note 24. Subsequent Events" for additional information on developments related to the Teva Agreement.
OTC Partners Alliance Agreement
In June 2002, the Company entered into a Development, License and Supply Agreement with Pfizer, Inc., formerly Wyeth LLC (“Pfizer”), for a term of 15 years, relating to the Company’s Loratadine and Pseudoephedrine Sulfate 5 mg/120 mg 12-hour Extended Release Tablets (the "D12 Product") and Loratadine and Pseudoephedrine Sulfate 10 mg/240 mg 24-hour Extended Release Tablets for the OTC market (the "D-24 Product"). The Company previously developed the products, and is currently only responsible for manufacturing the products, and Pfizer is responsible for marketing and sale. The agreement included payments to the Company upon achievement of development milestones, as well as royalties paid to the Company by Pfizer on its sales of the product. Pfizer launched this product in May 2003 as Alavert® D-12 Hour. In February 2005, the agreement was partially cancelled with respect to the 24-hour Extended Release Product due to lower than planned sales volume. In December 2011, Pfizer and the Company entered into an agreement with L. Perrigo Company (“Perrigo”), which was subsequently amended whereby the parties agreed that the Company would supply the Company’s D-12 Product to Perrigo in the United States and its territories. The agreements with Pfizer and Perrigo are no longer a core area of the Company’s business, and the over-the-counter pharmaceutical products the Company sells to Pfizer and Perrigo under the agreements are older products which are only sold to Pfizer and to Perrigo. As noted above, the Company is currently only required to manufacture the products under its agreements with Pfizer and Perrigo. The Company recognizes profit share revenue in the period earned. On March 31, 2016, the Company entered into an asset purchase agreement with Perrigo (the "Perrigo APA") whereby the Company agreed to, among other things, sell the assets related to the D-12 Product and D-24 Product, including the ANDAs for both products, to Perrigo. Under the terms of the Perrigo APA, the Company will continue to supply the D-12 Product to Pfizer and Perrigo until the date that is the earliest of (i) the date Perrigo’s manufacturing facility is approved to manufacture the D-12 Product and (ii) December 31, 2017 (the "Supply End Date"). On the Supply End Date, the Company will transfer its supply agreement with Pfizer in its entirety to Perrigo in accordance with the Perrigo APA. The closing of the transactions covered under the Perrigo APA is currently expected to occur during the second half of 2016.

Agreements with Valeant Pharmaceuticals International, Inc.
In November 2008, the Company and Valeant Pharmaceuticals International, Inc., formerly Medicis Pharmaceutical Corporation (“Valeant”), entered into a Joint Development Agreement and a License and Settlement Agreement (the “Joint Development Agreement”). The Joint Development Agreement provides for the Company and Valeant to collaborate in the development of a total of five dermatology products, including four of the Company’s generic products and one branded advanced form of Valeant’s SOLODYN® product. Under the provisions of the Joint Development Agreement the Company received a $40.0 million upfront payment, paid by Valeant in December 2008. The Company has also received an aggregate of $15.0 million in milestone payments composed of two $5 million milestone payments, paid by Valeant in March 2009 and September 2009, a $2.0 million milestone payment paid by Valeant in December 2009, and a $3.0 million milestone payment paid by Valeant in March 2011. The Company has the potential to receive up to an additional $8.0 million of contingent regulatory milestone payments each of which the Company believes to be substantive, as well as the potential to receive royalty payments from sales, if any, by Valeant of its advanced form SOLODYN® brand product. Finally, to the extent the Company commercializes any of its four generic dermatology products covered by the Joint Development Agreement, the Company will pay to Valeant a gross profit share on sales of such products. The Company began selling one of the four dermatology products during the year ended December 31, 2011. As of December 31, 2014, the full amount of deferred revenue under the Joint Development Agreement was recognized.

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The Joint Development Agreement results in three items of revenue for the Company, as follows:
(1)
Research & Development Services. Revenue received from the provision of research and development services including the $40.0 million upfront payment and the $12.0 million of milestone payments received prior to January 1, 2011, have been deferred and are being recognized on a straight-line basis over the expected period of performance of the research and development services. During the three month period ended March 31, 2013, the Company extended the revenue recognition period for the Joint Development Agreement from the previous recognition period ending in November 2013 to December 2014, due to changes in the estimated timing of completion of certain research and development activities. This change was made on a prospective basis, and resulted in a reduced periodic amount of revenue recognized in current and future periods. Revenue from the remaining $8.0 million of contingent milestone payments, including the $3.0 million received from Valeant in March 2011, will be recognized using the Milestone Method of accounting. Revenue recognized under the Joint Development Agreement is included in “Note 23. Supplementary Financial Information,” in the line item captioned “Other Revenues.”
(2)
Royalty Fees Earned - Valeant’s Sale of Advanced Form SOLODYN® (Brand) Product. Under the Joint Development Agreement, the Company granted Valeant a license for the advanced form of the SOLODYN® product, with the Company receiving royalty fee income under such license for a period ending eight years after the first commercial sale of the advanced form SOLODYN® product. Commercial sales of the new SOLODYN® product, if any, are expected to commence upon FDA approval of Valeant’s NDA. The royalty fee income, if any, from the new SOLODYN® product, will be recognized by the Company as current period revenue when earned.
(3)
Accounting for Sales of the Company’s Four Generic Dermatology Products. Upon FDA approval of the Company’s ANDA for each of the four generic products covered by the Joint Development Agreement, the Company will have the right (but not the obligation) to begin manufacture and sale of its four generic dermatology products. The Company sells its manufactured generic products to all Impax Generics division customers in the ordinary course of business through its Impax Generics Product sales channel. The Company accounts for the sale, if any, of the generic products covered by the Joint Development Agreement as current period revenue according to the Company’s revenue recognition policy applicable to its Impax Generics products. To the extent the Company sells any of the four generic dermatology products covered by the Joint Development Agreement, the Company pays Valeant a gross profit share, with such profit share payments accounted for as a current period cost of revenues in the consolidated statement of operations.
Development and Co-Promotion Agreement with Endo Pharmaceuticals Inc.
In June 2010, the Company and Endo Pharmaceuticals, Inc. ("Endo") entered into a Development and Co-Promotion Agreement (“Endo Agreement”) under which the Company and Endo agreed to collaborate in the development and commercialization of a next-generation advanced form of the Company’s lead branded product candidate ("Endo Agreement Product"). The Endo Agreement was terminated upon mutual agreement by the parties effective December 23, 2015. Under the provisions of the Endo Agreement, in June 2010, Endo paid to the Company a $10.0 million upfront payment. Prior to termination of the agreement, the Company also had the potential to receive up to an additional $30.0 million of contingent milestone payments.
Prior to the termination of the Endo Agreement, the Company had recognized the $10.0 million upfront payment as revenue on a straight-line basis over a period of 112 months, which was the estimated expected period of performance of research and development activities under the Endo Agreement, commencing with the June 2010 effective date of the Endo Agreement and ending in September 2019, the estimated date of FDA approval of the Company's NDA for the Endo Agreement Product. The FDA approval of the Endo Agreement Product NDA represented the end of the Company’s expected period of performance, as the Company would have had no further contractual obligation to perform research and development activities under the Endo Agreement, and therefore the earnings process would have been completed on such date. There was no deferred revenue under the Endo Agreement as of June 30, 2016 and December 31, 2015. Revenue recognized under the Endo Agreement was reported in “Note 23. Supplementary Financial Information” in the line item captioned “Other Revenues”.
The Company and Endo also entered into a Settlement and License Agreement in June 2010 (the “Endo Settlement Agreement”) pursuant to which Endo agreed to make a payment to the Company should prescription sales of Opana® ER (as defined in the Endo Settlement Agreement) fall below a predetermined contractual threshold in the quarter immediately prior to the Company launching a generic version of Opana® ER. As a result of the Company’s launch of its generic version of Opana ER in January 2013 and Endo’s prescription sales of Opana ER during the fourth quarter of 2012, the Company recorded a $102.0 million settlement gain during the three month period ended March 31, 2013. Payment of the $102.0 million settlement was received from Endo in April 2013. In May 2016, Endo filed suit against the Company alleging that the Company breached the Endo Settlement Agreement with respect to the Company’s marketed generic version of Opana® ER products. Refer to “Note 21. Legal and Regulatory Matters” for a description of the legal proceeding related to the suit.

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Distribution, License, Development and Supply Agreement with AstraZeneca UK Limited
In January 2012, the Company entered into the AZ Agreement with AstraZeneca and the parties subsequently entered into a First Amendment to the AZ Agreement dated May 31, 2016 (as amended, the “AZ Amendment”). Under the terms of the AZ Agreement, AstraZeneca granted to the Company an exclusive license to commercialize the tablet, orally disintegrating tablet and nasal spray formulations of Zomig® (zolmitriptan) products for the treatment of migraine headaches in the United States and in certain U.S. territories, except during an initial transition period when AstraZeneca fulfilled all orders of Zomig® products on the Company’s behalf and AstraZeneca paid to the Company the gross profit on such Zomig® products. The Company is obligated to fulfill certain minimum requirements with respect to the promotion of currently approved Zomig® products as well as other dosage strengths of such products approved by the FDA in the future. The Company may, but has no obligation to, develop and commercialize additional products containing zolmitriptan and additional indications for Zomig®, subject to certain restrictions as set forth in the AZ Agreement. Subject to the terms of the AZ Amendment, the Company will be responsible for conducting clinical studies and preparing regulatory filings related to the development of any such additional products and would bear all related costs. During the term of the AZ Agreement, AstraZeneca will continue to be the holder of the NDA for existing Zomig® products, as well as any future dosage strengths thereof approved by the FDA, and will be responsible for certain regulatory and quality-related activities for such Zomig® products. AstraZeneca will manufacture and supply Zomig® products to the Company and the Company will purchase its requirements of Zomig® products from AstraZeneca until a date determined in the AZ Agreement. Thereafter, AstraZeneca may terminate its supply obligations upon certain advance notice to the Company, in which case the Company would have the right to manufacture or have manufactured its own requirements for the applicable Zomig® product. Under the terms of the AZ Amendment, under certain conditions and depending on the nature and terms of the study agreed to with the FDA, the Company agreed to conduct, at its own expense, the juvenile toxicity study and pediatric study required by the FDA under the Pediatric Research Equity Act (“PREA”) for approval of the nasal formulation of Zomig® for the acute treatment of migraine in pediatric patients ages six through 11 years old, as further described in the study protocol mutually agreed to by the parties (the “PREA Study”). In consideration for the Company conducting the PREA Study at its own expense, the AZ Amendment provides for the total royalty payments payable by the Company to AstraZeneca on net sales of Zomig® products under the AZ Agreement to be reduced by certain specified amounts beginning from the quarter ended June 30, 2016 and through the quarter ended December 31, 2020, with such reduced royalty amounts totaling an aggregate amount of $30.0 million. In the event the royalty reduction amounts exceed the royalty payments payable by the Company to AstraZeneca pursuant to the AZ Agreement in any given quarter, AstraZeneca will be required to pay the Company an amount equal to the difference between the royalty reduction amount and the royalty payment payable by the Company to AstraZeneca. The Company’s commitment to perform the PREA Study may be terminated, without penalty, under certain circumstances as set forth in the AZ Amendment.
Under the terms of the AZ Agreement, AstraZeneca was required to make payments to the Company representing 100% of the gross profit on sales of AstraZeneca-labeled Zomig® products during the specified transition period. The Company received transition payments from AstraZeneca aggregating $43.6 million during 2012. Beginning in January 2013, the Company was obligated to pay AstraZeneca tiered royalties on net sales of branded Zomig® products, depending on brand exclusivity and subject to customary reductions and other terms and conditions set forth in the AZ Agreement. The Company is also obligated to pay AstraZeneca royalties after a certain specified date based on gross profit from sales of authorized generic versions of the Zomig® products subject to certain terms and conditions set forth in the AZ Agreement. In May 2013, the Company’s exclusivity period for branded Zomig® tablets and orally disintegrating tablets expired and the Company launched authorized generic versions of those products in the United States. As discussed above, pursuant to the AZ Amendment, the total royalty payments payable by the Company to AstraZeneca on net sales of Zomig® products under the AZ Agreement will be reduced by certain specified amounts beginning from the quarter ended June 30, 2016 and through the quarter ended December 31, 2020, with such reduced royalty amounts totaling an aggregate amount of $30 million. The Company owed a royalty payable to AstraZeneca of $7.4 million and $7.9 million during the six months ended June 30, 2016 and 2015, respectively, with a corresponding charge included in the cost of revenues line on the consolidated statements of operations.
Agreement with DURECT Corporation
During the three month period ended March 31, 2014, the Company entered into an agreement with DURECT Corporation (“Durect”) granting the Company the exclusive worldwide rights to develop and commercialize DURECT’s investigational transdermal bupivacaine patch for the treatment of pain associated with post-herpetic neuralgia (PHN), referred to by the Company as IPX239. The Company paid Durect a $2.0 million up-front payment upon signing of the agreement which was recognized immediately as research and development expense. The Company has the potential to pay up to $61.0 million in additional contingent milestone payments upon the achievement of predefined development and commercialization milestones. If IPX239 is commercialized, Durect would also receive a tiered royalty on product sales.
Amedra Product Acquisition Agreement with Teva Pharmaceuticals USA, Inc.

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In August 2013, the Company, through its Amedra Pharmaceuticals subsidiary, entered into a product acquisition agreement (the “Teva Product Acquisition Agreement”) with Teva Pharmaceuticals USA, Inc. (“Teva”) pursuant to which the Company acquired the assets (including the ANDA and other regulatory materials) and related liabilities related to Teva’s mebendazole tablet product in all dosage forms. During the first quarter of 2016, the Company recognized $3.5 million of milestone payments due to Teva under the terms of the agreement related to the FDA's approval and the Company's subsequent launch of Emverm® (mebendazole) 100 mg chewable tablets. The Company is also obligated to pay Teva a royalty payment based on net sales of Emverm®, including a specified annual minimum royalty payment, subject to customary reductions and the other terms and conditions set forth in the Teva Product Acquisition Agreement.

20. COMMITMENTS AND CONTINGENCIES
Executive Employment Agreements
The Company is a party to employment and separation agreements with certain members of its executive management team that provide for severance and other payments following termination of their employment for various reasons.
Lease Agreements
The Company leases land, office space, manufacturing, warehouse and research and development facilities, and equipment under non-cancelable operating leases expiring at various dates through December 2026.
Purchase Order Commitments
As of June 30, 2016, the Company had $82.7 million of open purchase order commitments, primarily for raw materials. The terms of these purchase order commitments are generally less than one year in duration.
Taiwan Facility Expansion
The Company has entered into several contracts related to ongoing expansion activities at its Taiwan manufacturing facility. As of June 30, 2016, the Company had remaining obligations under these contracts of $1.4 million.

21. LEGAL AND REGULATORY MATTERS         
Patent Litigation
There is substantial litigation in the pharmaceutical, biological, and biotechnology industries with respect to the manufacture, use, and sale of new products which are the subject of conflicting patent and intellectual property claims. One or more patents often cover the brand name products for which the Company is developing generic versions and the Company typically has patent rights covering the Company’s branded products. 
Under federal law, when a drug developer files an ANDA for a generic drug seeking approval before expiration of a patent, which has been listed with the FDA as covering the brand name product, the developer must certify its product will not infringe the listed patent(s) and/or the listed patent is invalid or unenforceable (commonly referred to as a “Paragraph IV” certification). Notices of such certification must be provided to the patent holder, who may file a suit for patent infringement within 45 days of the patent holder’s receipt of such notice. If the patent holder files suit within the 45 days period, the FDA can review and approve the ANDA, but is prevented from granting final marketing approval of the product until a final judgment in the action has been rendered in favor of the generic drug developer, or 30 months from the date the notice was received, whichever is sooner. The Company’s generic products division is typically subject to patent infringement litigation brought by branded pharmaceutical manufacturers in connection with the Company’s Paragraph IV certifications seeking an order delaying the approval of the Company’s ANDA until expiration of the patent(s) at issue in the litigation. Likewise, the Company’s branded products division is currently involved in patent infringement litigation against generic drug manufacturers who have filed Paragraph IV certifications to market their generic drugs prior to expiration of the Company’s patents at issue in the litigation.  
The uncertainties inherent in patent litigation make the outcome of such litigation difficult to predict. For the Company’s generic products division, the potential consequences in the event of an unfavorable outcome in such litigation include delaying launch of its generic products until patent expiration. If the Company were to launch its generic product prior to successful resolution of a patent litigation, the Company could be liable for potential damages measured by the profits lost by the branded product manufacturer rather than the profits earned by the Company if we are found to infringe a valid, enforceable patent.  For the Company’s branded products division, an unfavorable outcome may significantly accelerate generic competition ahead of expiration of the patents covering the Company’s branded products. All such litigation typically involves significant expense.  

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The Company is generally responsible for all of the patent litigation fees and costs associated with current and future products not covered by its alliance and collaboration agreements. The Company has agreed to share legal expenses with respect to third-party and Company products under the terms of certain of the alliance and collaboration agreements. The Company records the costs of patent litigation as expense in the period when incurred for products it has developed, as well as for products which are the subject of an alliance or collaboration agreement with a third-party. 
Although the outcome and costs of the asserted and unasserted claims is difficult to predict, based on the information presently known to management, the Company does not currently expect the ultimate liability, if any, for such matters to have a material adverse effect on its business, financial condition, results of operations, or cash flows.  
Patent Infringement Litigation  
Endo Pharmaceuticals Inc. and Grunenthal GmbH v. Impax Laboratories, Inc. and ThoRx Laboratories, Inc. (Oxymorphone hydrochloride); Endo Pharmaceuticals Inc. and Grunenthal GmbH v. Impax Laboratories, Inc. (Oxymorphone hydrochloride) 
In November 2012, Endo Pharmaceuticals, Inc. and Grunenthal GmbH (collectively, “Endo”) filed suit against ThoRx Laboratories, Inc., a wholly owned subsidiary of the Company (“ThoRx”), and the Company in the U.S. District Court for the Southern District of New York alleging patent infringement based on the filing of ThoRx’s ANDA relating to Oxymorphone hydrochloride, Extended Release tablets, 5 mg, 7.5 mg, 10 mg, 15 mg, 20 mg, 30 mg and 40 mg, generic to Opana ER®. In January 2013, Endo filed a separate suit against the Company in the U.S. District Court for the Southern District of New York alleging patent infringement based on the filing of the Company’s ANDA relating to the same products. ThoRx and the Company filed an answer and counterclaims to the November 2012 suit and the Company filed an answer and counterclaims with respect to the January 2013 suit. A bench trial was completed in April 2015. In June 2016, the Court entered an amended judgment in both cases that the products described in the Company’s and ThoRx’s ANDAs would, if marketed, infringe certain claims of the patents asserted by Endo and Grunenthal. The Court also found that the asserted claims of patents owned by Endo were not invalid, but that the asserted claims of patents owned by Grunenthal were invalid. As a result, the Court enjoined the Company and ThoRx from marketing their products until expiration of the Endo patents in 2023. The Company and ThoRx are appealing the Court’s judgment.
In November 2014, Endo Pharmaceuticals Inc. and Mallinckrodt LLC filed suit against the Company in the U.S. District Court for the District of Delaware making additional allegations of patent infringement based on the filing of the Company’s Oxymorphone hydrochloride ANDA described above. Also in November 2014, Endo and Mallinckrodt filed a separate suit in the U.S. District Court for the District of Delaware making additional allegations of patent infringement based on the filing of the ThoRx Oxymorphone hydrochloride ANDA described above. ThoRx and the Company filed an answer and counterclaim to those suits in which they are named as a defendant. The cases are currently stayed pending the outcome of further proceedings in related cases in these District of Delaware cases and/or an appellate decision in the New York proceedings described above.
In May 2016, Endo Pharmaceuticals Inc. filed suit against the Company in the U.S. District Court for the District of New Jersey, alleging that the Company’s marketed oxymorphone hydrochloride tablets infringe certain patents owned by Endo. Endo’s complaint also alleges that the Company and Endo entered into a settlement and license agreement with respect to these products, but that the Company later breached that contract and breached its implied duty of good faith and fair dealing with respect to that agreement. The Company filed a motion to dismiss the complaint on July 11, 2016 and Endo filed an amended complaint on August 1, 2016. The Company has not yet responded to the amended complaint.
Impax Laboratories Inc., et al. v. Lannett Holdings, Inc. and Lannett Company (Zomig®) 
In July 2014, the Company filed suit against Lannett Holdings, Inc. and Lannett Company (collectively, “Lannett”) in the United States District Court for the District of Delaware, alleging patent infringement based on the filing of the Lannett ANDA relating to Zolmitriptan Nasal Spray, 5mg, generic to Zomig® Nasal Spray. Lannett filed an answer and counterclaims alleging non-infringement and invalidity in September 2014, and the Company filed an answer to the counterclaims in October 2014. Discovery is proceeding, and trial is set for September 6, 2016. On July 28, 2015, Lannett filed petitions for Inter Partes Review (“IPR”) of U.S. Patent Nos. 6,750,237 and 7,220,767 related to the product in the U.S. Patent and Trademark Office before the Patent Trial and Appeal Board (“PTAB”). Patent owner filed its preliminary responses in these PTAB proceedings on November 4, 2015. In January and February 2016, the PTAB denied Lannett’s petitions, declining to institute IPR proceedings with respect to the patents.  Discovery is scheduled to close in August 2016, and trial is set for September 6, 2016.
Impax Laboratories Inc., et al. v. Actavis Laboratories, Inc. and Actavis Pharma Inc. (Rytary®) 
In September 2015, the Company filed suit against Actavis Laboratories, Inc. and Actavis Pharma Inc. (collectively, “Actavis”) in the United States District Court for the District of New Jersey, alleging patent infringement based on the filing of the Actavis ANDA relating to carbidopa and levodopa extended release capsules, generic to Rytary®. Actavis filed an answer and counterclaims on November 19, 2015. Discovery is proceeding. A claim construction hearing is set for November/December 2016 and trial is scheduled for September 2017.   
Other Litigation Related to the Company’s Business 

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Solodyn® Antitrust Class Actions 
From July 2013 to January 2016, 18 complaints were filed as class actions on behalf of direct and indirect purchasers, as well as by certain direct purchasers against manufacturers of the brand drug Solodyn® and its generic equivalents, including the Company. 
On July 22, 2013, Plaintiff United Food and Commercial Workers Local 1776 & Participating Employers Health and Welfare Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated. 
On July 23, 2013, Plaintiff Rochester Drug Co-Operative, Inc., a direct purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.   
On August 1, 2013, Plaintiff International Union of Operating Engineers Local 132 Health and Welfare Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Northern District of California on behalf of itself and others similarly situated. On August 29, 2013, this Plaintiff withdrew its complaint from the United States District Court for the Northern District of California, and on August 30, 2013, re-filed the same complaint in the United States Court for the Eastern District of Pennsylvania, on behalf of itself and others similarly situated. 
On August 9, 2013, Plaintiff Local 274 Health & Welfare Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated. 
On August 12, 2013, Plaintiff Sheet Metal Workers Local No. 25 Health & Welfare Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated. 
On August 27, 2013, Plaintiff Fraternal Order of Police, Fort Lauderdale Lodge 31, Insurance Trust Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated. 
On August 29, 2013, Plaintiff Heather Morgan, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated. 
On August 30, 2013, Plaintiff Plumbers & Pipefitters Local 178 Health & Welfare Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated. 
On September 9, 2013, Plaintiff Ahold USA, Inc., a direct purchaser, filed a class action complaint in the United States District Court for the District of Massachusetts on behalf of itself and others similarly situated. 
On September 24, 2013, Plaintiff City of Providence, Rhode Island, an indirect purchaser, filed a class action complaint in the United States District Court for the District of Arizona on behalf of itself and others similarly situated. 
On October 2, 2013, Plaintiff International Union of Operating Engineers Stationary Engineers Local 39 Health & Welfare Trust Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the District of Massachusetts on behalf of itself and others similarly situated. 
On October 7, 2013, Painters District Council No. 30 Health and Welfare Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the District of Massachusetts on behalf of itself and others similarly situated. 
On October 25, 2013, Plaintiff Man-U Service Contract Trust Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.  
On March 13, 2014, Plaintiff Allied Services Division Welfare Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the District of Massachusetts on behalf of itself and others similarly situated. 
On March 19, 2014, Plaintiff NECA-IBEW Welfare Trust Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the District of Massachusetts on behalf of itself and others similarly situated. 
On February 25, 2014, the United States Judicial Panel on Multidistrict Litigation ordered the pending actions transferred to the District of Massachusetts for coordinated pretrial proceedings, as In Re Solodyn (Minocycline Hydrochloride) Antitrust Litigation. 
On March 26, 2015, Walgreen Co., The Kruger Co., Safeway Inc., HEB Grocery Company L.P., Albertson’s LLC, direct purchasers, filed a separate complaint in the United States District Court for the Middle District of Pennsylvania. On April 8, 2015, the Judicial Panel on Multi-District Litigation ordered the action be transferred to the District of Massachusetts, to be coordinated or consolidated with the coordinated proceedings. The original complaint filed by the plaintiffs asserted claims only against defendant Medicis. On October 5, 2015, the plaintiffs filed an amended complaint asserting claims against the Company and the other generic defendants. 

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On April 16, 2015, Rite Aid Corporation and Rite Aid Hdqtrs. Corp, direct purchasers, filed a separate complaint in the United States District Court for the Middle District of Pennsylvania. On May 1, 2015, the Judicial Panel on Multi-District Litigation ordered the action be transferred to the District of Massachusetts, to be coordinated or consolidated with the coordinated proceedings. The original complaint filed by the plaintiffs asserted claims only against defendant Medicis. On October 5, 2015, the plaintiffs filed an amended complaint asserting claims against the Company and the other generic defendants.
On January 25, 2016, CVS Pharmacy, Inc., a direct purchaser, filed a separate complaint in the United States District Court for the Middle District of Pennsylvania.  On February 11, 2016, the Judicial Panel on Multi-District Litigation ordered the action to be transferred to the District of Massachusetts to be coordinated or consolidated with the coordinated proceedings.
 The consolidated amended complaints allege that Medicis engaged in anticompetitive schemes by, among other things, filing frivolous patent litigation lawsuits, submitting frivolous Citizen Petitions, and entering into anticompetitive settlement agreements with several generic manufacturers, including the Company, to delay generic competition of Solodyn® and in violation of state and federal antitrust laws. Plaintiffs seek, among other things, unspecified monetary damages and equitable relief, including disgorgement and restitution. On August 14, 2015, the Court granted in part and denied in part defendants’ motion to dismiss the consolidated amended complaints. Discovery is ongoing. No trial date has been scheduled. 
Opana ER® FTC Antitrust Suit 
As previously disclosed, on February 25, 2014, the Company received a Civil Investigative Demand ("CID") from the FTC concerning its investigation into the drug Opana® ER and its generic equivalents. According to the FTC, the investigation relates to whether Endo Pharmaceuticals, Inc. (“Endo”) and the Company have engaged or are engaged in unfair methods of competition in or affecting commerce by (i) entering into agreements regarding Opana® ER or its generic equivalents and/or (ii) engaging in other conduct regarding the regulatory filings, sale or marketing of Opana® ER or its generic equivalents. On March 30, 2016, the FTC filed a complaint against the Company, Endo, and others in the United States District Court for the Eastern District of Pennsylvania, alleging that the Company and Endo violated antitrust laws when they entered into a June 2010 co-promotion and development agreement and a June 2010 settlement agreement that resolved patent litigation in connection with the submission of the Company’s ANDA for generic original Opana® ER.  In July 2016, the defendants filed a motion to dismiss the complaint, and a motion to sever the claims regarding Opana® ER from claims with respect to a separate settlement agreement that is challenged by FTC. Those motions are pending.
Opana ER® Antitrust Class Actions 
From June 2014 to February 2016, 14 complaints were filed as class actions on behalf of direct and end-payor (indirect) purchasers, as well as by certain direct purchasers, against the manufacturer of the brand drug Opana ER® and the Company. 
On June 4, 2014, Plaintiff Fraternal Order of Police, Miami Lodge 20, Insurance Trust Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated. 
On June 4, 2014, Plaintiff Rochester Drug Co-Operative, Inc., a direct purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated. 
On June 6, 2014, Plaintiff Value Drug Company, a direct purchaser, filed a class action complaint in the United States District Court for the Northern District of California on behalf of itself and others similarly situated. On June 26, 2014, this Plaintiff withdrew its complaint from the United States District Court for the Northern District of California, and on July 16, 2014, re-filed the same complaint in the United States District Court for the Northern District of Illinois, on behalf of itself and others similarly situated. 
On June 19, 2014, Plaintiff Wisconsin Masons’ Health Care Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Northern District of Illinois on behalf of itself and others similarly situated. 
On July 17, 2014, Plaintiff Massachusetts Bricklayers, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated. 
On August 11, 2014, Plaintiff Pennsylvania Employees Benefit Trust Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Northern District of Illinois on behalf of itself and others similarly situated. 
On September 19, 2014, Plaintiff Meijer Inc., a direct purchaser, filed a class action complaint in the United States District Court for the Northern District of Illinois on behalf of itself and others similarly situated. 
On October 3, 2014, Plaintiff International Union of Operating Engineers, Local 138 Welfare Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Northern District of Illinois on behalf of itself and others similarly situated. 

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On November 17, 2014, Louisiana Health Service & Indemnity Company d/b/a Blue Cross and Blue Shield of Louisiana, an indirect purchaser, filed a class action complaint in the United Stated District Court for the Middle District of Louisiana on behalf of itself and others similarly situated.
On December 19, 2014, Plaintiff Kim Mahaffay, an indirect purchaser, filed a class action complaint in the Superior Court of the State of California, Alameda County, on behalf of herself and others similarly situated. On January 27, 2015, the Defendants removed the action to the United States District Court for the Northern District of California. 
On January 12, 2015, Plaintiff Plumbers & Pipefitters Local 178 Health & Welfare Trust Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Northern District of Illinois on behalf of itself and others similarly situated.  
 On December 12, 2014, the United States Judicial Panel on Multidistrict Litigation ordered the pending actions transferred to the Northern District of Illinois for coordinated pretrial proceedings, as In Re Opana ER Antitrust Litigation. 
On March 26, 2015 Walgreen Co., The Kruger Co., Safeway Inc., HEB Grocery Company L.P., Albertson’s LLC, direct purchasers, filed a separate complaint in the United States District Court for the Northern District of Illinois. 
On April 23, 2015, Rite Aid Corporation and Rite Aid Hdqtrs. Corp, direct purchasers, filed a separate complaint in the United States District Court for the Northern District of Illinois.
In each case, the complaints allege that Endo engaged in an anticompetitive scheme by, among other things, entering into an anticompetitive settlement agreement with the Company to delay generic competition of Opana ER® and in violation of state and federal antitrust laws. Plaintiffs seek, among other things, unspecified monetary damages and equitable relief, including disgorgement and restitution. Consolidated amended complaints were filed on May 4, 2015 by direct purchaser plaintiffs and end-payor (indirect) purchaser plaintiffs.
On July 3, 2015, defendants filed motions to dismiss the consolidated amended complaints, as well as the complaints of the “Opt-Out Plaintiffs” (Walgreen Co., The Kruger Co., Safeway Inc., HEB Grocery Company L.P., Albertson’s LLC, Rite Aid Corporation and Rite Aid Hdqtrs. Corp.).

On February 1, 2016, CVS Pharmacy, Inc. filed a complaint in the United States District Court for the Northern District of Illinois. The parties agreed that CVS Pharmacy, Inc. would be bound by the court’s ruling on the defendants’ motion to dismiss the Opt-Out Plaintiffs’ complaints.
On February 10, 2016, the court granted in part and denied in part defendants’ motion to dismiss the end-payor purchaser plaintiffs’ consolidated amended complaint, and denied defendants’ motion to dismiss the direct purchaser plaintiffs’ consolidated amended complaint. The end-payor purchaser plaintiffs have filed a second consolidated amended complaint and the Company has moved to dismiss certain state law claims.
On February 25, 2016, the court granted defendants’ motion to dismiss the Opt-Out Plaintiffs’ complaints, with leave to amend. The Opt-Out Plaintiffs and CVS Pharmacy, Inc. have filed amended complaints and the Company has filed its answer.
Discovery is ongoing. No trial date has been scheduled.
Civil Investigation Demand from the Attorney General of the State of Alaska 
On February 10, 2015, the Company received three CIDs from the Office of the Attorney General of the State of Alaska (“Alaska AG”) concerning its investigations into the drugs Adderall XR®, Effexor XR® and Opana® ER (each a “Product” and collectively, the “Products”) and their generic equivalents. According to the Alaska AG, the investigation is to determine whether the Company may have violated Alaskan state law by entering into settlement agreements with the respective brand name manufacturer for each of the foregoing Products that delayed generic entry of such Product into the marketplace.  The Company has cooperated with the Alaska AG in producing documents and information in response to the CIDs. To the knowledge of the Company, no proceedings have been initiated against the Company at this time, however no assurance can be given as to the timing or outcome of this investigation. 
United States Department of Justice Investigations 
Previously on November 6, 2014, the Company disclosed that one of its sales representatives received a grand jury subpoena from the Antitrust Division of the United States Justice Department (the “Justice Department”). In connection with this same investigation, on March 13, 2015, the Company received a grand jury subpoena from the Justice Department requesting the production of information and documents regarding the sales, marketing, and pricing of certain generic prescription medications. In particular, the Justice Department’s investigation currently focuses on four generic medications: digoxin tablets, terbutaline sulfate tablets, prilocaine/lidocaine cream, and calcipotriene topical solution. The Company has been cooperating and intends to continue cooperating with the investigation. However, no assurance can be given as to the timing or outcome of the investigation. 

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Attorney General of the State of Connecticut Interrogatories and Subpoena Duces Tecum 
On July 14, 2014, the Company received a subpoena and interrogatories (the “Subpoena”) from the State of Connecticut Attorney General (“Connecticut AG”) concerning its investigation into sales of the Company’s generic product, digoxin. According to the Connecticut AG, the investigation is to determine whether anyone engaged in a contract, combination or conspiracy in restraint of trade or commerce which has the effect of (i) fixing, controlling or maintaining prices or (ii) allocating or dividing customers or territories relating to the sale of digoxin in violation of Connecticut state antitrust law. The Company intends to cooperate with the Connecticut AG in producing documents and information in response to the Subpoena. To the knowledge of the Company, no proceedings by the Connecticut AG have been initiated against the Company at this time, however no assurance can be given as to the timing or outcome of this investigation. 
In re Generic Digoxin and Doxycycline Class Action

From March 2016 to July 2016, 19 complaints were filed as class actions on behalf of direct and indirect purchasers against manufacturers of generic digoxin and doxycycline and the Company.

On March 2, 2016, Plaintiff International Union of Operating Engineers Local 30 Benefits Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated. The plaintiff filed an amended complaint on June 9, 2016.

On March 25, 2016, Plaintiff Tulsa Firefighters Health and Welfare Trust, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.

On March 25, 2016, Plaintiff NECA-IBEW Welfare Trust Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.

On April 4, 2016, Plaintiff Pipe Trade Services MN, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.

On April 25, 2016, Plaintiff Edward Carpinelli, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.

On April 27, 2016, Plaintiff Fraternal Order of Police, Miami Lodge 20, Insurance Trust Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.

On May 2, 2016, Plaintiff Nina Diamond, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.

On May 5, 2016, Plaintiff UFCW Local 1500 Welfare Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.

On May 6, 2016, Plaintiff Minnesota Laborers Health and Welfare Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.

On May 12, 2016, Plaintiff The City of Providence, Rhode Island, an indirect purchaser, filed a class action complaint in the United States District Court for the District of Rhode Island on behalf of itself and others similarly situated.

On May 18, 2016, Plaintiff KPH Healthcare Services, Inc. a/k/a Kinney Drugs, Inc., a direct purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.

On May 19, 2016, Plaintiff Philadelphia Federation of Teachers Health and Welfare Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.


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On June 8, 2016, Plaintiff United Food & Commercial Workers and Employers Arizona Health and Welfare Trust, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.

On June 17, 2016, Plaintiff Ottis McCrary, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.

On June 20, 2016, Plaintiff Rochester Drug Co-Operative, Inc., a direct purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.

On June 27, 2016, Plaintiff César Castillo Inc., a direct purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.

On June 29, 2016, Plaintiff Plumbers & Pipefitters Local 33 Health and Welfare Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.

On July 1, 2016, Plaintiff Plumbers & Pipefitters Local 178 Health and Welfare Trust Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.

On July 15, 2016, Plaintiff Ahold USA, Inc., a direct purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.

On May 19, 2016, several indirect purchaser plaintiffs filed a motion with the Judicial Panel on Multidistrict Litigation to transfer and consolidate the actions in the United States District Court for the Eastern District of Pennsylvania. The Judicial Panel ordered the actions consolidated in the Eastern District of Pennsylvania and ordered that the actions be renamed “In re Generic Digoxin and Doxycycline Antitrust Litigation”.
AWP Actions
On December 30, 2015, Plumbers’ Local Union No. 690 Health Plan and others similarly situated filed a class action against several generic drug manufacturers, including the Company, in the Court of Common Pleas of Philadelphia County, First Judicial District of Pennsylvania, Civil Trial Division, alleging that the Company and others violated the law, including the Pennsylvania Unfair Trade Practices and Consumer Protection law, by inflating the Average Wholesale Price (“AWP”) of certain generic drugs. The case has since been removed to federal court in the United States District Court for the Eastern District of Pennsylvania. By virtue of an amended complaint filed on March 29, 2016, the suit has been amended to comprise a nationwide class of third party payors that allegedly reimbursed or purchased certain generic drugs based on AWP and to assert causes of action under the laws of other states in addition to Pennsylvania. On May 17, 2016, this case was stayed.
On February 5, 2016, Delaware Valley Health Care Coalition filed a lawsuit based on substantially similar allegations in the Court of Common Pleas of Philadelphia County, First Judicial District of Pennsylvania, Civil Trial Division that seeks declaratory judgment. On May 20, 2016, this case was stayed pending resolution of the federal court action described above.
CID from the U.S. Attorney Office, Southern District of New York
On March 8, 2016, the Company received a CID from the U.S. Attorney Office, Southern District of New York, Civil Frauds Unit. The CID requests information and documents relating to the Company and any pharmacy benefit manager (“PBM”) concerning Zomig®, including any contracts between the Company and PBMs, as well as services performed by and payments to the PBMs pursuant to those contracts. The Company intends to cooperate with the U.S. Attorney Office in response to the CID. To the knowledge of the Company, no proceedings by the U.S. Attorney Office have been initiated against the Company at this time; however, no assurance can be given as to the timing or outcome of this investigation.
Impax Laboratories, Inc. v. Turing Pharmaceuticals AG
On May 2, 2016, the Company filed suit against Turing Pharmaceuticals AG ("Turing") in the United States District Court for the Southern District of New York alleging breach of the terms of the contract by which Turing purchased from the Company the right to sell the drug Daraprim®, as well as the right to sell certain Daraprim® inventory (the “Purchase Agreement”).  Specifically, the Company seeks (i) a declaratory judgment that the Company may revoke Turing’s right to sell Daraprim® under the Company’s labeler code and national drug codes; (ii) specific performance to require Turing to comply with its obligations under the Purchase Agreement for past due reports and for reports going forward; and (iii) money damages to remedy Turing’s

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failure to reimburse the Company for chargebacks and Medicaid rebate liability when due, currently in excess of $30 million, and for future amounts that may be due.  Turing has filed its answer and a counterclaim against the Company alleging breach of contract and breach of the duty of good faith and fair dealing. Discovery is ongoing and is scheduled to be completed by September 15, 2016. No trial date has been set.
22. SEGMENT INFORMATION
The Company has two reportable segments, Impax Generics and Impax Specialty Pharma. Impax Generics develops, manufactures, sells, and distributes generic pharmaceutical products, primarily through the following sales channels: the Impax Generics sales channel for sales of generic prescription products directly to wholesalers, large retail drug chains, and others; the Private Label Product sales channel for generic over-the-counter and prescription products sold to unrelated third-party customers who, in turn, sell the products under their own label; the Rx Partner sales channel for generic prescription products sold through unrelated third-party pharmaceutical entities under their own label pursuant to alliance agreements; and the OTC Partner sales channel for over-the-counter products sold through unrelated third-party pharmaceutical entities under their own labels pursuant to alliance and supply agreements. Revenues from the “Impax Generics” sales channel and the “Private Label” sales channel are reported under the caption “Impax Generics sales, net” in “Note 23. Supplementary Financial Information.” Revenues from the “OTC Partner” sales channel are reported under the caption “Other Revenues” in “Note 23. Supplementary Financial Information.”
Impax Specialty Pharma is engaged in the development, sale and distribution of proprietary brand pharmaceutical products that the Company believes represent improvements to already-approved pharmaceutical products addressing central nervous system (“CNS”) disorders and other select specialty segments. Impax Specialty Pharma currently has one internally developed branded pharmaceutical product, Rytary® (IPX066), an extended release oral capsule formulation of carbidopa-levodopa for the treatment of Parkinson’s disease, post-encephalitic parkinsonism, and parkinsonism that may follow carbon monoxide intoxication and/or manganese intoxication, which was approved by the FDA on January 7, 2015 and which the Company launched in April 2015. In November 2015, the European Commission granted marketing authorization for NUMIENT™ (IPX066) (referred to as Rytary® in the United States). The review of the NUMIENT™ application was conducted under the centralized licensing procedure as a therapeutic innovation, and authorization is applicable in all 28 member states of the European Union, as well as Iceland, Liechtenstein and Norway. Impax Specialty Pharma is also engaged in the sale and distribution of four other branded products including Zomig® (zolmitriptan) products, indicated for the treatment of migraine headaches, under the terms of the AZ Agreement with AstraZeneca in the United States and in certain U.S. territories, and Emverm® (mebendazole) 100 mg chewable tablets, indicated for the treatment of pinworm, whipworm, common roundworm, common hookworm, and American hookworm in single or mixed infections.
Revenues from Impax-labeled branded products are reported under the caption “Impax Specialty Pharma sales, net” in “Note 23. Supplementary Financial Information.” Finally, the Company generated revenue in Impax Specialty Pharma from research and development services provided under a development and license agreement with another unrelated third-party pharmaceutical company (which was terminated by mutual agreement of the parties effective December 23, 2015), and reports such revenue under the caption “Other Revenues” in “Note 23. Supplementary Financial Information.” Impax Specialty Pharma also has a number of product candidates that are in varying stages of development.
The Company’s chief operating decision maker evaluates the financial performance of the Company’s segments based upon segment income (loss) before income taxes. Items below income (loss) from operations are not reported by segment, since they are excluded from the measure of segment profitability reviewed by the Company’s chief operating decision maker. Additionally, general and administrative expenses, certain selling expenses, certain litigation settlements, and non-operating income and expenses are included below in “Corporate and Other.” The Company does not report balance sheet information by segment since it is not reviewed by the Company’s chief operating decision maker. The accounting policies for the Company’s segments are the same as those described above in the discussion of "Revenue Recognition" in “Note 4. Summary of Significant Accounting Policies.” The Company has no inter-segment revenue.

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The tables below present segment information reconciled to total Company financial results, with segment operating income or loss including gross profit less direct research and development expenses and direct selling expenses as well as any litigation settlements, to the extent specifically identified by segment (in thousands):

Three Months Ended June 30, 2016
Impax
Generics
 
Impax
Specialty
Pharma
 
Corporate
and Other
 
Total
Company
Revenues, net
$
121,695

 
$
50,895

 
$
—

 
$
172,590

Cost of revenues
$
84,339

 
$
15,267

 
$
—

 
99,606

Selling, general and administrative
$
1,565

 
$
16,133

 
$
27,210

 
44,908

Research and development
$
17,089

 
$
4,657

 
$
—

 
21,746

Patent litigation expense
$
155

 
$
1,774

 
$
—

 
1,929

Income (loss) before provision for income taxes
$
18,547

 
$
13,064

 
$
(35,561
)
 
$
(3,950
)
Three Months Ended June 30, 2015
Impax
Generics
 
Impax
Specialty
Pharma
 
Corporate
and Other
 
Total
Company
Revenues, net
$
174,679

 
$
39,503

 
$
—

 
$
214,182

Cost of revenues
$
110,767

 
$
18,564

 
$
—

 
$
129,331

Selling, general and administrative
$
7,284

 
$
12,912

 
$
28,113

 
$
48,309

Research and development
$
12,891

 
$
4,104

 
$
—

 
$
16,995

Patent litigation expense
$
1,332

 
$
162

 
$
—

 
$
1,494

Income (loss) before provision for income taxes
$
42,405

 
$
3,761

 
$
(50,714
)
 
$
(4,548
)
Six Months Ended June 30, 2016
Impax
Generics
 
Impax
Specialty
Pharma
 
Corporate
and Other
 
Total
Company
Revenues, net
$
291,774

 
$
106,324

 
$
—

 
$
398,098

Cost of revenues
$
194,461

 
$
28,063

 
$
—

 
$
222,524

Selling, general and administrative
$
6,339

 
$
29,951

 
$
52,916

 
$
89,206

Research and development
$
31,684

 
$
9,084

 
$
—

 
$
40,768

Patent litigation expense
$
269

 
$
2,979

 
$
—

 
$
3,248

Income (loss) before income taxes
$
59,021

 
$
36,247

 
$
(116,712
)
 
$
(21,444
)
Six Months Ended June 30, 2015
Impax
Generics
 
Impax
Specialty
Pharma
 
Corporate
and Other
 
Total
Company
Revenues, net
$
303,420

 
$
53,858

 
$
—

 
$
357,278

Cost of revenues
$
186,880

 
$
26,313

 
$
—

 
$
213,193

Selling, general and administrative
$
11,570

 
$
27,768

 
$
59,131

 
$
98,469

Research and development
$
23,754

 
$
8,203

 
$
—

 
$
31,957

Patent litigation expense
$
2,110

 
$
344

 
$
—

 
$
2,454

Income (loss) before income taxes
$
79,106

 
$
(8,770
)
 
$
(85,589
)
 
$
(15,253
)
Foreign Operations
The Company’s wholly-owned subsidiary, Impax Laboratories (Taiwan) Inc., has constructed a facility in Taiwan which is utilized for manufacturing, research and development, warehouse, and administrative functions, with $145.6 million and $131.6 million of net carrying value of assets, composed principally of a building and equipment, included in the Company's consolidated balance sheets at June 30, 2016 and December 31, 2015, respectively.



44


23. SUPPLEMENTARY FINANCIAL INFORMATION (Unaudited)
Selected financial information for the quarterly period noted is as follows:
 
 
 
 
 
(in thousands, except share and per share amounts)
 
Quarter Ended March 31, 2016
 
Quarter Ended June 30, 2016
Revenue:
 
 
 
 
Impax Generic Product sales, gross
 
$
611,281

 
$
531,226

Less:
 
 
 
 
Chargebacks
 
217,354

 
197,864

Rebates
 
185,476

 
178,097

Product Returns
 
11,913

 
10,237

Other credits
 
29,354

 
25,075

Impax Generic Product sales, net
 
167,184

 
119,953

 
 
 
 
 
Rx Partner
 
2,835

 
1,669

Other Revenues
 
60

 
73

Impax Generic Division revenues, net
 
170,079

 
121,695

 
 
 
 
 
Impax Specialty Pharma sales, gross
 
82,073

 
81,254

Less:
 
 
 
 
Chargebacks
 
6,111

 
8,826

Rebates
 
2,853

 
2,430

Product Returns
 
1,508

 
1,279

Other credits
 
16,172

 
17,824

Impax Specialty Pharma sales, net
 
55,429

 
50,895

 
 
 
 
 
Other Revenues
 
—

 
—

Impax Specialty Pharma revenues, net
 
55,429

 
50,895

 
 
 
 
 
Total revenues
 
225,508

 
172,590

 
 
 
 
 
Gross profit
 
102,590

 
72,984

 
 
 
 
 
Net loss
 
$
(10,408
)
 
$
(2,701
)
 
 
 
 
 
Net loss per common share:
 
 
 
 
    Basic
 
$
(0.15
)
 
$
(0.04
)
    Diluted
 
$
(0.15
)
 
$
(0.04
)
 
 
 
 
 
Weighted-average common shares outstanding:
 
 
 
 
    Basic
 
70,665,394

 
71,100,123

    Diluted
 
70,665,394

 
71,100,123


45


 
 
 
 
 
(in thousands, except share and per share amounts)
 
Quarter Ended March 31, 2015
 
Quarter Ended June 30, 2015
Revenue:
 
 
 
 
Impax Generic Product sales, gross
 
$
355,321

 
$
572,079

Less:
 
 
 
 
Chargebacks
 
126,607

 
228,977

Rebates
 
83,130

 
139,477

Product Returns
 
6,427

 
7,528

Other credits
 
13,198

 
24,824

Impax Generic Product sales, net
 
125,959

 
171,273

 
 
 
 
 
Rx Partner
 
2,239

 
2,579

Other Revenues
 
543

 
827

Impax Generic Division revenues, net
 
128,741

 
174,679

 
 
 
 
 
Impax Specialty Pharma sales, gross
 
29,219

 
65,269

Less:
 
 
 
 
Chargebacks
 
5,561

 
4,452

Rebates
 
2,132

 
2,970

Product Returns
 
2,620

 
6,763

Other credits
 
4,778

 
11,809

Impax Specialty Pharma sales, net
 
14,128

 
39,275

 
 
 
 
 
Other Revenues
 
227

 
228

Impax Specialty Pharma revenues, net
 
14,355

 
39,503

 
 
 
 


Total revenues
 
143,096

 
214,182

 
 
 
 
 
Gross profit
 
59,234

 
84,851

 
 
 
 
 
Net loss
 
$
(6,333
)
 
$
(1,852
)
 
 
 
 
 
Net loss per common share:
 
 
 
 
    Basic
 
$
(0.09
)
 
$
(0.03
)
    Diluted
 
$
(0.09
)
 
$
(0.03
)
 
 
 
 
 
Weighted-average common shares outstanding:
 
 
 
 
    Basic
 
68,967,875

 
69,338,789

    Diluted
 
68,967,875

 
69,338,789



46


24. SUBSEQUENT EVENTS
Completion and Financing of the Teva Transaction

Teva Transaction

On June 20, 2016, the Company entered into definitive agreements with Teva and affiliates of Allergan plc ("Allergan") for the acquisition of a broad portfolio of generic products across solid oral, inhalable, injectable and topical dosage forms and the return to the Company of its rights to its pending ANDAs for the generic equivalent to Concerta® (methylphenidate hydrochloride) for an aggregate purchase price of $585.8 million in cash at closing plus contingent consideration consisting of future payments of up to $40.0 million as discussed below (the "Teva Transaction"). The Teva Transaction was part of the divestiture process mandated by the Federal Trade Commission (the "FTC") in connection with the acquisition by Teva of the U.S. generics business of Allergan.

On August 3, 2016, the Company closed the Teva Transaction and completed the acquisition of the following assets:

•
A portfolio of 15 currently marketed generic products;
•
One approved generic product and two tentatively approved strengths of a currently marketed product, which have not yet launched;
•
One pipeline generic product and one pipeline strength of a currently marketed product, which are pending FDA approval;
•
The full commercial rights to the Company's pending ANDA for the generic equivalent to Concerta® (methylphenidate hydrochloride), a product previously partnered with Teva; and
•
One generic product under development.

The acquisition of the foregoing currently marketed and pipeline products fits with the Company’s strategic priorities of maximizing its Generics Division’s platform and optimizing research and development. Through the Teva Transaction, the Company expects to expand its portfolio of difficult-to-manufacture or limited-competition products and maximize utilization of its existing manufacturing facilities in Hayward, California and Taiwan.

As part of the Teva Transaction, and subject to and effective with its closing, the Company and Teva entered into a letter agreement whereby the parties agreed to terminate all of the rights and obligations of each party with respect to generic Concerta® under the Teva Agreement as discussed in “ Note 19. Alliance and Collaboration Agreements,” including any and all licenses, rights or interests granted by the Company to Teva with respect to such product. In consideration thereof, the Company will make certain specified contingent payments to Teva in the aggregate amount of up to $40.0 million, payable upon the achievement of specified commercialization events related to generic Concerta® as set forth in the letter agreement. The acquisition of full commercial rights to generic Concerta® pursuant to the letter agreement provides the Company with an additional potential product launch.

The Teva Transaction will be accounted for in accordance with the acquisition method of accounting for business combinations, which requires the Company to record the assets acquired and the liabilities assumed on its consolidated balance sheet at their respective fair values on the acquisition date. The results of operations for the acquired products will be included in the Company’s consolidated financial statements from the date of acquisition.

Due to the Company’s limited access to product-related information prior to the closing of the acquisition and the limited time that has elapsed from the closing of the acquisition date to the filing date of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, the initial accounting for the business combination is incomplete. As a result, the Company is unable to provide contingent consideration disclosures and the amounts recognized as of the acquisition date for the major classes of assets acquired and liabilities assumed, including the information required for net working capital, pre-acquisition contingencies, intangible assets and goodwill in its Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 . The Company is also unable to include the effects of the acquisition in pro forma revenues and earnings of the combined entity in its Quarterly Report on Form 10-Q for the quarter ended June 30, 2016. The Company intends to include the required information in its next Quarterly Report on Form 10-Q for the quarter ending September 30, 2016.

Financing

On August 3, 2016, the Company also entered into a restatement agreement with Royal Bank of Canada, as administrative agent, and the lenders and guarantors party thereto (the "Restatement Agreement"). The Restatement Agreement amends and restates the Company's existing Revolving Credit Facility Agreement (as amended and restated, the "Amended and Restated Credit

47


Agreement") to, among other things, (i) add a term loan feature to allow for the borrowing of up to $400.0 million of term loans (the "Term Loan Facility") by the Company in accordance with the terms of the Amended and Restated Credit Agreement and (ii) increase the aggregate principal amount of revolving loans permitted under the Amended and Restated Credit Agreement (the "Revolving Credit Facility," and, together with the Term Loan Facility, the "RBC Credit Facilities"), from $100.0 million to $200.0 million and (iii) extend the maturity date of the Revolving Credit Facility from August 4, 2020 to August 3, 2021.

Borrowings under the Amended and Restated Credit Agreement will accrue interest at a rate equal to LIBOR or the base rate, plus an applicable margin. The applicable margin may be increased or reduced by 0.25% based on the Company's total net leverage ratio. Up to $12.5 million of the Revolving Credit Facility is available for issuance of letters of credit and any such letters of credit will reduce the amount available under the Revolving Credit Facility on a dollar-for-dollar basis. The Company is required to pay a commitment fee to the lenders on the average daily unused portion of the Revolving Credit Facility at 0.50% or 0.375% per annum, depending the Company's total net leverage ratio.
The Amended and Restated Credit Agreement contains certain negative covenants (subject to exceptions, materiality thresholds and other allowances) including, without limitation, negative covenants that limit the Company's and its restricted subsidiaries' ability to incur additional debt, guarantee other obligations, grant liens on assets, make loans, acquisitions or other investments, dispose of assets, make optional payments in connection with or modify certain debt instruments, pay dividends or make other payments on capital stock, engage in mergers or consolidations, enter into arrangements that restrict the Company's and its restricted subsidiaries' ability to pay dividends or grant liens, engage in transactions with affiliates, or change its fiscal year. The Amended and Restated Credit Agreement also includes a financial maintenance covenant whereby the Company must not permit its total net leverage ratio in any 12-month period to exceed 5.00:1.00, as tested at the end of each fiscal quarter.
The Amended and Restated Credit Agreement contains events of default, including, without limitation (subject to customary grace periods and materiality thresholds), events of default upon (i) the failure to make payments pursuant to the terms of the Amended and Restated Credit Agreement, (ii) violation of covenants, (iii) incorrectness of representations and warranties, (iv) cross-default and cross-acceleration to other material indebtedness, (v) bankruptcy events, (vi) material monetary judgments (to the extent not covered by insurance), (vii) certain matters arising under the Employee Retirement Income Security Act of 1974, as amended, that could reasonably be expected to result in a material adverse effect, (viii) the actual or asserted invalidity of the documents governing the RBC Credit Facilities, any material guarantees or the security interests (including priority thereof) required under the Amended and Restated Credit Agreement and (ix) the occurrence of a change of control (as defined therein). Upon the occurrence of certain events of default, the obligations under the Amended and Restated Credit Agreement may be accelerated and any remaining commitments thereunder may be terminated.
The full amount of proceeds from the Term Loan Facility of $400.0 million, along with $196.4 million (inclusive of transaction costs) of cash on the Company's consolidated balance sheet, were used to finance the Teva Transaction at closing on August 3, 2016. The full amount of the $200.0 million Revolving Credit Facility remains available to the Company for working capital and other general corporate purposes.
Appointment of President of Generics Division
On August 1, 2016, Douglas S. Boothe joined the Company as President of the Generics Division. Mr. Boothe became a member of the Company's Executive Committee, reporting directly to the Chief Executive Officer, and is now responsible for all aspects of the Company's Generics business.
In connection with his appointment as President of the Generics Division of the Company, Mr. Boothe and the Company entered into an Employment Agreement dated July 14, 2016 (the “Employment Agreement”). The initial term of the Employment Agreement expires on August 1, 2018, unless further extended or earlier terminated as provided in the Employment Agreement. The Employment Agreement automatically renews for single one-year periods unless either party provides at least 90 days written notice of non-renewal prior to the end of the applicable term or unless it is terminated earlier.
Receipt of No Change Letter - Lineage IRS Audit
In early August 2016, the Company received a "no change letter" from the IRS indicating that the IRS had determined that no changes were required to Lineage's tax return for the 2013 tax year, which was the period under IRS examination, and that the IRS had closed its audit. Neither the Company nor any of its affiliates is currently under audit for federal income tax.


48


Item 2.    Management’s Discussion and Analysis of Results of Operations and Financial Condition
The following discussion and analysis, as well as other sections in this Quarterly Report on Form 10-Q, should be read in conjunction with the unaudited interim consolidated financial statements and related notes to the unaudited interim consolidated financial statements included elsewhere herein.
Statements included in this Quarterly Report on Form 10-Q that do not relate to present or historical conditions are “forward-looking statements.” Such forward-looking statements involve risks and uncertainties that could cause results or outcomes to differ materially from those expressed in the forward-looking statements. Forward-looking statements may include statements relating to our plans, strategies, objectives, expectations and intentions. Words such as “believes,” “forecasts,” “intends,” “possible,” “estimates,” “anticipates,” and “plans” and similar expressions are intended to identify forward-looking statements. Our ability to predict results or the effect of events on our operating results is inherently uncertain. Forward-looking statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those discussed in this Quarterly Report on Form 10-Q. Such risks and uncertainties include, but are not limited to, fluctuations in our revenues and operating income, our ability to successfully develop and commercialize pharmaceutical products in a timely manner, reductions or loss of business with any significant customer, the substantial portion of our total revenues derived from sales of a limited number of products, the impact of consolidation of our customer base, the impact of competition, our ability to sustain profitability and positive cash flows, any delays or unanticipated expenses in connection with the operation of our manufacturing facilities, the effect of foreign economic, political, legal and other risks on our operations abroad, the uncertainty of patent litigation and other legal proceedings, the increased government scrutiny on our agreements with brand pharmaceutical companies, product development risks and the difficulty of predicting FDA filings and approvals, consumer acceptance and demand for new pharmaceutical products, the impact of market perceptions of us and the safety and quality of our products, our determinations to discontinue the manufacture and distribution of certain products, our ability to achieve returns on our investments in research and development activities, changes to FDA approval requirements, our ability to successfully conduct clinical trials, our reliance on third parties to conduct clinical trials and testing, our lack of a license partner for commercialization of NUMIENTTM IPX066 outside of the United States, impact of illegal distribution and sale by third parties of counterfeits or stolen products, the availability of raw materials and impact of interruptions in our supply chain, our policies regarding returns, rebates, allowances and chargebacks, the use of controlled substances in our products, the effect of current economic conditions on our industry, business, results of operations and financial condition, disruptions or failures in our information technology systems and network infrastructure caused by third party breaches or other events, our reliance on alliance and collaboration agreements, our reliance on licenses to proprietary technologies, our dependence on certain employees, our ability to comply with legal and regulatory requirements governing the healthcare industry, the regulatory environment, the effect of certain provisions in our government contracts, our ability to protect our intellectual property, exposure to product liability claims, risks relating to goodwill and intangibles, changes in tax regulations, our ability to manage our growth, including through potential acquisitions and investments, the risks related to the Company’s acquisitions of or investments in technologies, products or businesses, the restrictions imposed by our credit facility and indenture, the Company’s level of indebtedness and liabilities and the potential impact on cash flow available for operations, uncertainties involved in the preparation of our financial statements, our ability to maintain an effective system of internal control over financial reporting, the effect of terrorist attacks on our business, the location of our manufacturing and research and development facilities near earthquake fault lines, expansion of social media platforms and other risks described herein and in our Annual Report on Form 10-K for the year ended December 31, 2015. You should not place undue reliance on forward-looking statements. Such statements speak only as to the date on which they are made, and we undertake no obligation to update or revise any forward-looking statement, regardless of future developments or availability of new information.    
 
Rytary® and Emverm® are registered trademarks of Impax Laboratories, Inc. Other names are for informational purposes only and are used to identify companies and products and may be trademarks of their respective owners.
 
Overview
We are a specialty pharmaceutical company applying formulation and development expertise, as well as our drug delivery technology, to the development, manufacture and marketing of bioequivalent pharmaceutical products, commonly referred to as “generics,” in addition to the development, manufacture and marketing of branded products. We operate in two segments, referred to as “Impax Generics” and “Impax Specialty Pharma.” Impax Generics concentrates its efforts on generic products, which are the pharmaceutical and therapeutic equivalents of brand-name drug products and are usually marketed under their established nonproprietary drug names rather than by a brand name. Impax Specialty Pharma utilizes its specialty sales force to market proprietary branded pharmaceutical products for the treatment of CNS disorders and other select specialty segments. Impax Specialty Pharma also generated revenue from research and development services provided to an unrelated third-party pharmaceutical entity (which agreement was terminated by mutual agreement of the parties effective December 23, 2015). We currently sell our generic and branded products within the continental United States and the Commonwealth of Puerto Rico. We currently have no sales in foreign countries.

49


We plan to continue to expand Impax Generics through targeted ANDAs and a first-to-file and first-to-market strategy and to continue to evaluate and pursue external growth initiatives, including acquisitions and partnerships. We focus our efforts on a broad range of therapeutic areas including products that have technically challenging drug-delivery mechanisms or unique product formulations. We employ our technologies and formulation expertise to develop generic products that reproduce brand-name products’ physiological characteristics but do not infringe any valid patents relating to such brand-name products. We generally focus our generic product development on brand-name products as to which the patents covering the active pharmaceutical ingredient have expired or are near expiration, and we employ our proprietary formulation expertise to develop controlled-release technologies that do not infringe patents covering the brand-name products’ controlled-release technologies. We also develop, manufacture, sell and distribute specialty generic pharmaceuticals that we believe present one or more competitive advantages, such as difficulty in raw materials sourcing, complex formulation or development characteristics or special handling requirements. In addition to our focus on solid oral dosage products, we have expanded our generic pharmaceutical products portfolio to include alternative dosage form products, primarily through alliance and collaboration agreements with third parties. As of June 30, 2016, we marketed 199 generic pharmaceuticals, which represent dosage variations of 70 different pharmaceutical compounds through our Impax Generics division; another five of our generic pharmaceuticals representing dosage variations of two different pharmaceutical compounds are marketed by our alliance and collaboration agreement partners. As of June 30, 2016, we had 20 applications pending at the FDA and 23 other products in various stages of development for which applications have not yet been filed.

The Impax Generics division develops, manufactures, sells, and distributes generic pharmaceutical products primarily through the following sales channels:

•
the “Impax Generics sales channel” for sales of generic prescription products we sell directly to wholesalers, large retail drug chains, and others;
•
the “Private Label Product sales channel” for generic pharmaceutical over-the-counter and prescription products we sell to unrelated third-party customers who in-turn sell the product to third parties under their own label;
•
the “Rx Partner sales channel” for generic prescription products sold through unrelated third-party pharmaceutical entities under their own label pursuant to alliance agreements; and
•
the “OTC Partner sales channel” for sales of generic pharmaceutical over-the-counter products sold through unrelated third-party pharmaceutical entities under their own label pursuant to alliance agreements.

Revenues from the Impax Generics sales channel and the Private Label Product sales channel are reported under the caption “Impax Generics sales, net” in our consolidated statements of operations.

Impax Specialty Pharma is focused on developing proprietary branded pharmaceuticals products for the treatment of CNS disorders, which include migraine, multiple sclerosis, Parkinson’s disease and post herpetic neuralgia, as well as developing other select specialty products. Impax Specialty Pharma is involved in the promotion and sale of branded pharmaceutical products through our specialty sales force. We believe that we have the research, development and formulation expertise to develop branded products that will deliver significant improvements over existing therapies.

Our branded pharmaceutical product portfolio consists of commercial CNS and other select specialty products, as well as development stage projects. In February 2012, we licensed from AZ the exclusive U.S. commercial rights to Zomig® (zolmitriptan) tablet, orally disintegrating tablet and nasal spray formulations pursuant to the terms of the AZ Agreement (which was subsequently amended) and began sales of the Zomig® products under our label during the year ended December 31, 2012 through our specialty sales force. In May 2013, our exclusivity period for branded Zomig® tablets and orally disintegrating tablets expired and we launched authorized generic versions of those products in the United States. In June 2015, the FDA approved the Zomig® nasal spray for use in pediatric patients 12 years of age or older for the acute treatment of migraine with or without aura. In addition to the Zomig® products and our internally developed pharmaceutical product, Rytary® for the treatment of Parkinson’s disease, post-encephalitic parkinsonism, and parkinsonism that may follow carbon monoxide intoxication and/or manganese intoxication, which was approved by the FDA on January 7, 2015, we are currently engaged in the sales and marketing of Emverm® (mebendazole) 100 mg chewable tablets, indicated for the treatment of pinworm, whipworm, common roundworm, common hookworm, and two other products, all acquired in our acquisition of Tower and Lineage which closed in March 2015. In November 2015, the European Commission granted marketing authorization for NUMIENT™ (referred to as Rytary® in the United States). The review of the NUMIENT™ application was conducted under the centralized licensing procedure as a therapeutic innovation, and the authorization is applicable in all 28 member states of the European Union, as well as Iceland, Liechtenstein and Norway.

We have entered into several alliance, collaboration or license and distribution agreements with respect to certain of our products and services and may enter into similar agreements in the future. These agreements may require us to relinquish rights

50


to certain of our technologies or product candidates, or to grant licenses on terms which ultimately may prove to be unfavorable to us. Relationships with alliance and collaboration partners may also include risks due to the failure of a partner to perform under the agreement, incomplete marketplace information, inventories, development capabilities, regulatory compliance and commercial strategies of our partners and our agreements may be the subject of contractual disputes. For instance, we have historically experienced some disruptions in supply of certain products. If we suffer similar supply failures on our significant products in the future, or if we or our partners are not successful in commercializing the products covered by such alliance, collaboration or license and distribution agreements, our revenues and relationships with our customers may be materially adversely affected.

Quality Control 

Regulatory agencies such as the FDA regularly inspect our manufacturing facilities and the facilities of our third party suppliers. The failure of one of our facilities, or a facility of one of our third party suppliers, to comply with applicable laws and regulations may lead to breach of representations made to our customers or to regulatory or government action against us related to products made in that facility. We have in the past received a warning letter from the FDA regarding certain operations within our manufacturing network at our Hayward manufacturing facility, which we subsequently resolved in 2015. We remain committed to continuing to improve our quality control and manufacturing practices, however, we cannot be assured that the FDA will continue to be satisfied with our corrective actions and with our quality control and manufacturing systems and standards. If we receive any future FDA observations, we may be subject to regulatory action including, among others, monetary sanctions or penalties, product recalls or seizure, injunctions, total or partial suspension of production and/or distribution, and suspension or withdrawal of regulatory approvals. Further, other federal agencies, our customers and partners in our alliance, development, collaboration and other partnership agreements with respect to our products and services may take any such Form 483 observations or warning letters into account when considering the award of contracts or the continuation or extension of such partnership agreements. If we receive any future Form 483 observations or warning letters from the FDA, our business, consolidated results of operations and consolidated financial condition could be materially and adversely affected.

Critical Accounting Policies and Use of Estimates
The preparation of our consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) and the rules and regulations of the U.S. Securities & Exchange Commission (“SEC”) require the use of estimates and assumptions, based on complex judgments considered reasonable, and affect the reported amounts of assets and liabilities and disclosure of contingent assets and contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant judgments are employed in estimates used in determining values of tangible and intangible assets, legal contingencies, tax assets and tax liabilities, fair value of share-based compensation related to equity incentive awards issued to employees and directors, and estimates used in applying our revenue recognition policy including those related to accrued chargebacks, rebates, distribution service fees, product returns, Medicare, Medicaid, and other government rebate programs, shelf-stock adjustments, and the timing and amount of deferred and recognized revenue under our several alliance and collaboration agreements. Actual results may differ from estimated results.

Although we believe our estimates and assumptions are reasonable when made, they are based upon information available to us at the time they are made. We periodically review the factors having an influence on our estimates and, if necessary, adjust such estimates. Although historically our estimates have generally been reasonably accurate, due to the risks and uncertainties involved in our business and evolving market conditions, and given the subjective element of the estimates made, actual results may differ from estimated results. This possibility may be greater than normal during times of pronounced economic volatility.
Impax Generics sales, net, and Impax Specialty Pharma sales, net. We recognize revenue from the sale of products when title and risk of loss of the product is transferred to the customer and the sales price is fixed and determinable. Provisions for discounts, early payments, rebates, sales returns and distributor chargebacks under terms customary in the industry are provided for in the same period the related sales are recorded. We record estimated reductions to revenue at the time of the initial sale and these estimates are based on the sales terms, historical experience and trend analysis.
Gross to Net Sales Accruals.

Sales returns accruals are based on estimated on-hand inventories at our customers, measured end-customer demand as reported by third-party sources, actual returns history and other factors, such as the trend experience for lots where product is still being returned or inventory centralization and rationalization initiatives conducted by major pharmacy chains, as applicable. If the historical data we use to calculate these estimates do not properly reflect future returns, then a change in the allowance would be made in the period in which such a determination is made and revenues in that period could be materially affected. Under this methodology, we track actual returns by individual production lots. Returns on closed lots, that is, lots no longer eligible for return credits, are analyzed to determine historical returns experience. Returns on open lots, that is, lots still eligible for return credits,

51


are monitored and compared with historical return trend rates. Any changes from the historical trend rates are considered in determining the current sales return allowance.
 
Sales discount accruals are based on payment terms extended to customers.

Government rebate accruals are based on estimated payments due to governmental agencies for purchases made by third parties under various governmental programs. U.S. Medicaid rebate accruals are generally based on historical payment data and estimates of future Medicaid beneficiary utilization applied to the Medicaid unit rebate formula established by the Center for Medicaid and Medicare Services. The Medicaid rebate percentage was increased and extended to Medicaid Managed Care Organizations in March 2010. The accrual of the rebates associated with Medicaid Managed Care Organizations is calculated based on actual billings received from the states. We adjust the rebate accruals as more information becomes available and to reflect actual claims experience. Effective January 1, 2011, manufacturers of pharmaceutical products are responsible for 50% of the patient’s cost of branded prescription drugs related to the Medicare Part D Coverage Gap. In order to estimate the cost to us of this coverage gap responsibility, we analyze the historical invoices. This expense is recognized throughout the year as costs are incurred. TRICARE is a health care program of the U.S. Department of Defense Military Health System that provides civilian health benefits for military personnel, military retirees and their dependents. TRICARE rebate accruals are based on estimated Department of Defense eligible sales multiplied by the TRICARE rebate formula.

Rebates or administrative fees are offered to certain customers, group purchasing organizations and pharmacy benefit managers, consistent with pharmaceutical industry practices. Settlement of rebates and fees may generally occur from one to 15 months from the date of sale. We provide a provision for rebates at the time of sale based on contracted rates and historical redemption rates. Assumptions used to establish the provision include level of customer inventories, contract sales mix and average contract pricing. We regularly review the information related to these estimates and adjust the provision accordingly.
 
Chargeback accruals are based on the differentials between product acquisition prices paid by wholesalers and lower contract pricing paid by eligible customers.

Distributor service fee accruals are based on contractual fees to be paid to the wholesale distributor for services provided.

A significant majority of our gross to net accruals are the result of chargebacks and rebates, with the majority of those programs having an accrual to payment cycle of three months. In addition to this relatively short accrual to payment cycle, we receive monthly information from the wholesalers regarding their sales of our products and actual on hand inventory levels of our products. During the six months ended June 30, 2016, the three large wholesalers account for 97% of our chargebacks and 83% of our indirect sales rebates. This enables us to execute accurate provisioning procedures. Consistent with the pharmaceutical industry, the accrual to payment cycle for returns is longer and can take several years depending on the expiration of the related products. However, returns represent the smallest gross to net adjustment. We have not experienced any significant changes in our estimates as it relates to our chargebacks, rebates or returns in the six month and one year periods ended June 30, 2016 and December 31, 2015, respectively.

The following tables are roll-forwards of the activity in the reserves for the six months ended June 30, 2016 and the year ended December 31, 2015 with an explanation for any significant changes in the accrual percentages (in thousands):
 
June 30, 2016
 
December 31, 2015
Chargeback reserve
 
 
 
Beginning balance
$
102,630

 
$
43,125

Acquired balances
—

 
24,532

Provision recorded during the period
430,155

 
833,157

Credits issued during the period
(440,242
)
 
(798,184
)
Ending balance
$
92,543

 
$
102,630

Provision as a percent of gross product sales
33
%
 
34
%
As noted in the table above, the provision for chargebacks, as a percent of gross product sales, decreased from 34% during the year ended December 31, 2015 to 33% during the six months ended June 30, 2016 as a result of product sales mix and the inclusion of product sales from the Tower acquisition.

52


 
June 30, 2016
 
December 31, 2015
Rebate reserve
 
 
 
Beginning balance
$
265,229

 
$
88,812

Acquired balances
—

 
75,447

Provision recorded during the period
368,856

 
571,642

Credits issued during the period
(271,089
)
 
(470,672
)
Ending balance
$
362,996

 
$
265,229

Provision as a percent of gross product sales
28
%
 
23
%
As noted in the table above, the provision for rebates, as a percent of gross product sales, increased from 23% during the year ended December 31, 2015 to 28% during the six months ended June 30, 2016 as a result of product sales mix, the formation of alliances between major wholesalers and major retailers and the inclusion of product sales from the Tower acquisition which carried a higher rebate rate. The table above represents rebates in both the Impax Generics and Impax Specialty Pharma divisions. The payment mechanisms for rebates in the Impax Generics and Impax Specialty Pharma divisions are different, which impacts the location on our balance sheet. Only rebates in the Impax Generics division are shown in "Item 1. Financial Information - Notes to Interim Consolidated Financial Statements - Note 8. Accounts Receivable," as Impax Specialty Pharma rebates are classified as Accrued Expenses on our consolidated balance sheets.
 
June 30, 2016
 
December 31, 2015
Returns reserve
 
 
 
Beginning balance
$
48,950

 
$
27,174

Acquired balances
—

 
11,364

Provision related to sales recorded in the period
24,937

 
43,967

Credits issued during the period
(13,697
)
 
(33,555
)
Ending balance
$
60,190

 
$
48,950

Provision as a percent of gross product sales
1.9
%
 
2.0
%
The provision for returns as a percent of gross product sales decreased to 1.9% during the six month period ended June 30, 2016 compared to 2.0% during the year ended December 31, 2015 as a result of slightly lower historical returns experience.
Medicaid and Other Government Pricing Programs. As required by law, we provide a rebate payment on drugs dispensed under the Medicaid, Medicare Part D, TRICARE, and other U.S. government pricing programs. We determine our estimate of the accrued rebate reserve for government programs primarily based on historical experience of claims submitted by the various states, and other jurisdictions, as well as any new information regarding changes in the pricing programs that may impact our estimate of rebates. In determining the appropriate accrual amount, we consider historical payment rates and processing lag for outstanding claims and payments. We record estimates for government rebate payments as a deduction from gross sales, with corresponding adjustments to accrued liabilities. The accrual for payments under government pricing programs totaled $86.4 million and $91.7 million as of June 30, 2016 and December 31, 2015, respectively.
 
Shelf-Stock Adjustments. Based upon competitive market conditions, we may reduce the selling price of some of our products to customers for certain future product shipments. We may issue a credit against the sales amount to a customer based upon its remaining inventory of the product in question, provided the customer agrees to continue to make future purchases of product from us. This type of customer credit is referred to as a shelf-stock adjustment, which is the difference between the sales price and the revised lower sales price, multiplied by an estimate of the number of product units on hand at a given date. Decreases in selling prices are discretionary decisions made by us in response to market conditions, including estimated launch dates of competing products and estimated declines in market price. The accrued reserve for shelf-stock adjustments totaled $6.9 million and $6.6 million as of June 30, 2016 and December 31, 2015, respectively.
Rx Partner and OTC Partner. Each of our Rx Partner and OTC Partner agreements contain multiple deliverables in the form of products, services and/or licenses over extended periods. FASB ASC Topic 605-25 supplemented SAB 104 and provides guidance for accounting for such multiple-element revenue arrangements. With respect to our multiple-element revenue arrangements that are material to our financial results, we determine whether any or all of the elements of the arrangement should be separated into individual units of accounting under FASB ASC Topic 605-25. If separation into individual units of accounting is appropriate, we recognize revenue for each deliverable when the revenue recognition criteria specified by SAB 104 are achieved for the deliverable. If separation is not appropriate, we recognize revenue and related direct manufacturing costs over the estimated

53


life of the agreement or our estimated expected period of performance using either the straight-line method or a modified proportional performance method.
The Rx Partners and OTC Partners agreements obligate us to deliver multiple goods and/or services over extended periods. Such deliverables include manufactured pharmaceutical products, exclusive and semi-exclusive marketing rights, distribution licenses, and research and development services. In exchange for these deliverables, we receive payments from our agreement partners for product shipments and research and development services, and may also receive other payments including royalty, profit sharing, upfront payments, and periodic milestone payments. Revenue received from our partners for product shipments under these agreements is generally not subject to deductions for chargebacks, rebates, product returns, and other pricing adjustments. Royalty and profit sharing amounts we receive under these agreements are calculated by the respective agreement partner, with such royalty and profit share amounts generally based upon estimates of net product sales or gross profit which include estimates of deductions for chargebacks, rebates, product returns, and other adjustments the alliance agreement partners may negotiate with their customers. We record the agreement partner's adjustments to such estimated amounts in the period the agreement partner reports the amounts to us.
OTC Partner revenue is related to our alliance and collaboration agreement with Pfizer, Inc., formerly Wyeth LLC (“Pfizer”) and our supply agreement with L. Perrigo Company (“Perrigo”) with respect to the supply of over-the-counter pharmaceutical products. The OTC Partner sales channel is no longer a core area of our business, and the over-the-counter pharmaceutical products we sell through this sales channel are older products which are only sold to Pfizer and Perrigo. We are currently only required to manufacture the over-the-counter pharmaceutical products under our agreements with Pfizer and Perrigo. We recognize profit share revenue in the period earned.
Research Partner. We have entered into development agreements with unrelated third-party pharmaceutical companies under which we are collaborating in the development of five dermatological products, including four generic products and one branded dermatological product. Under each of the development agreements, we received an upfront fee with the potential to receive additional milestone payments upon completion of contractually specified clinical and regulatory milestones. Additionally, we may also receive royalty payments from the sale, if any, of a successfully developed and commercialized branded product under one of the development agreements. We defer and recognize revenue received from the achievement of contingent research and development milestones in the period such payment is earned. We will recognize royalty fee income, if any, as current period revenue when earned.
Estimated Lives of Alliance and Collaboration Agreements. Because we may defer revenue we receive under our alliance agreements, and recognize it over the estimated life of the related agreement, or our expected period of performance, we are required to estimate the recognition period under each such agreement in order to determine the amount of revenue to be recognized in each period. Sometimes this estimate is based on the fixed term of the particular alliance agreement. In other cases the estimate may be based on more subjective factors as noted in the following paragraphs. While changes to the estimated recognition periods have been infrequent, such changes, should they occur, may have a significant impact on our consolidated financial statements.

As an illustration, the consideration received from the provision of research and development services under the Joint Development Agreement with Valeant Pharmaceuticals International, Inc. (“Valeant Agreement”), including the upfront fee and milestone payments received before January 1, 2011, have been initially deferred and are being recognized as revenue on a straight-line basis over our expected period of performance to provide research and development services under the Valeant Agreement. The completion of the final deliverable under the Valeant Agreement represents the end of our estimated expected period of performance, as we will have no further contractual obligation to perform research and development services under the Valeant Agreement, and therefore the earnings process will be complete. The expected period of performance was initially estimated to be a 48 month period, starting in December 2008, upon receipt of the $40.0 million upfront payment, and ending in November 2012. During the year ended December 31, 2012, we extended the end of the revenue recognition period for the Valeant Agreement from November 2012 to November 2013 and during the three month period ended March 31, 2013, we further extended the end of the revenue recognition period for the agreement from November 2013 to December 2014 due to changes in the estimated timing of completion of certain research and development activities under the agreement. All deferred revenue under the Valeant Agreement was completely recognized as of December 31, 2014.

Third-Party Research Agreements. In addition to our own research and development resources, we may use unrelated third-party vendors, including universities and independent research companies, to assist in our research and development activities. These vendors provide a range of research and development services to us, including clinical and bio-equivalency studies. We generally sign agreements with these vendors which establish the terms of each study performed by them, including, among other things, the technical specifications of the study, the payment schedule, and timing of work to be performed. Third-party researchers generally earn payments either upon the achievement of a milestone, or on a pre-determined date, as specified in each study agreement. We account for third-party research and development expenses as they are incurred according to the terms and conditions of the respective agreement for each study performed, with an accrued expense at each balance sheet date for estimated fees and

54


charges incurred by us, but not yet billed to us. We monitor aggregate actual payments and compare them to the estimated provisions to assess the reasonableness of the accrued expense balance at each quarterly balance sheet date.
Share-Based Compensation. We recognize the grant date fair value of each stock option and restricted share over its vesting period. Stock options and restricted shares granted under the 2002 Plan generally vest over a three or four year period and generally have a term of 10 years. We estimate the fair value of each stock option award on the grant date using the Black-Scholes-Merton option-pricing model, wherein expected volatility is based on historical volatility of our common stock. We base the expected term calculation on the “simplified” method described in SAB No. 107, Share-Based Payment and SAB No. 110, Share-Based Payment, because it provides a reasonable estimate in comparison to our actual experience. We base the risk-free interest rate on the U.S. Treasury yield in effect at the time of grant for an instrument with a maturity that is commensurate with the expected term of the stock options. The dividend yield is zero as we have never paid cash dividends on our common stock, and have no present intention to pay cash dividends. During the year ended December 31, 2014, we granted shares of restricted stock that vested upon the achievement of certain stock price performance criteria. We valued these awards using a Monte Carlo simulation.
Income Taxes. We are subject to U.S. federal, state and local income taxes, Netherlands income tax and Taiwan R.O.C. income taxes. We create a deferred tax asset, or a deferred tax liability, when we have temporary differences between the financial statement carrying values (in accordance with U.S. GAAP) and the tax bases of our assets and liabilities.

Fair Value of Financial Instruments. We carry our deferred compensation liability at the value of the amount owed to participants and derive it from observable market data by reference to hypothetical investments. The carrying values of other financial assets and liabilities such as cash equivalents, accounts receivable, prepaid and other current assets, and accounts payable approximate their fair values due to their short-term nature.

Contingencies. In the normal course of business, we are subject to loss contingencies, such as legal proceedings and claims arising out of our business, covering a wide range of matters, including, among others, patent litigation, stockholder lawsuits, and product and clinical trial liability. In accordance with FASB ASC Topic 450, “Contingencies”, we record accrued loss contingencies when it is probable a liability will be incurred and the amount of loss can be reasonably estimated. We do not recognize gain contingencies until they have been realized.

Intangible Assets. Our intangible assets include both indefinite-lived and finite-lived assets. Indefinite-lived intangible assets are not amortized. In-process research and development assets acquired in a business combination are considered indefinite lived until the completion or abandonment of the associated research and development efforts. Finite-lived intangible assets are amortized over the estimated useful life based on the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up. If that pattern cannot be reliably determined, the straight-line amortization method is used. All of our intangible assets are tested for impairment at least annually during the fourth quarter of the fiscal year, or more often if indicators of impairment are present. Impairment testing requires management to estimate the future undiscounted cash flows of the finite lived intangible assets using assumptions believed to be reasonable, but which are unpredictable and inherently uncertain. Actual future cash flows may differ from the estimates used in the impairment testing. We recognize an impairment loss when and to the extent that the estimated fair value of an intangible asset is less than its carrying value.
Goodwill. In accordance with FASB ASC Topic 350, "Goodwill and Other Intangibles," rather than recording periodic amortization of goodwill, goodwill is subject to an annual assessment for impairment. Under FASB ASC Topic 350, if the fair value of the reporting unit exceeds the reporting unit’s carrying value, including goodwill, then goodwill is considered not impaired, making further analysis not required. We consider each of our Impax Generics division and Impax Specialty Pharma division operating segments to be a reporting unit, as this is the lowest level for each of which discrete financial information is available. We attribute $59.7 million of goodwill to the Impax Specialty Pharma division and $148.7 million of goodwill to the Impax Generics division. We concluded the carrying value of goodwill was not impaired as of December 31, 2015 as the fair value of the Impax Specialty Pharma division and the Impax Generics division exceeded their respective carrying values at each date. We perform our annual goodwill impairment test in the fourth quarter of each year. We estimate the fair value of the Impax Specialty Pharma division and the Impax Generics division using a discounted cash flow model for both the reporting unit and the enterprise, as well as earnings and revenue multiples per common share outstanding for enterprise fair value. In addition, on a quarterly basis, we perform a review of our business operations to determine whether events or changes in circumstances have occurred that could have a material adverse effect on the estimated fair value of each reporting unit, and thus indicate a potential impairment of the goodwill carrying value. If such events or changes in circumstances were deemed to have occurred, we would perform an interim impairment analysis, which may include the preparation of a discounted cash flow model, or consultation with one or more valuation specialists, to analyze the impact, if any, on our assessment of the reporting unit’s fair value. As of June 30, 2016, we have not deemed there to be any significant adverse changes in the legal, regulatory or business environment in which we conduct our operations that would require us to perform an interim impairment test.


55


Results of Operations
Three Months Ended June 30, 2016 Compared to the Three Months Ended June 30, 2015
Overview
The following table sets forth our summarized, consolidated results of operations for the three month periods ended June 30, 2016 and 2015 (in thousands): 
 
Three Months Ended June 30,
 
Increase / (Decrease)
 
2016
 
2015
 
Dollars
 
Percentage
Total revenues
$
172,590

 
$
214,182

 
$
(41,592
)
 
(19
)%
Gross profit
72,984

 
84,851

 
(11,867
)
 
(14
)%
Income from operations
4,401

 
18,053

 
(13,652
)
 
(76
)%
Loss before income taxes
(3,950
)
 
(4,548
)
 
598

 
(13
)%
Benefit from income taxes
(1,249
)
 
(2,696
)
 
1,447

 
(54
)%
Net loss
$
(2,701
)
 
$
(1,852
)
 
$
(849
)
 
46
 %
Consolidated total revenues for the three month period ended June 30, 2016 decreased by 19% or $41.6 million to $172.6 million, compared to $214.2 million in the prior year period. The decrease was primarily due to lower Impax Generics division product sales partially offset by an increase in sales of Impax Specialty Pharma division products. Existing product selling price decreased total revenues by 14.2% and product volumes decreased total revenues by 7.0%, while volumes from new product launches increased total revenues by 1.9%.
Revenues from our Impax Generics division decreased by $53.0 million during the three month period ended June 30, 2016, as compared to the prior year period, driven primarily by increased competition in diclofenac sodium gel and metaxalone as well as lower market share of generic Adderall XR®, in each case compared to the prior year period. In addition, during the second quarter of 2016, the Company recorded shelf-stock adjustments totaling $15.0 million on diclofenac sodium gel and metaxalone as a result of a decline in price during the current year period. Revenues from Impax Specialty Pharma division increased $11.4 million during the three month period ended June 30, 2016 as compared to the prior year period, primarily as a result of sales from Rytary® as well as increased sales from products acquired in the Tower acquisition, including sales from our anthelmintic products franchise.
Net loss for the three month period ended June 30, 2016 was $2.7 million, an increase of $0.8 million as compared to a net loss of $1.9 million for the three month period ended June 30, 2015. The increase in net loss compared to the prior year period was primarily attributable to lower gross profit as a result of lower Impax Generics division sales combined with higher operating expenses, which were partially offset by the absence of a loss on debt extinguishment in the current period compared to a loss of $16.9 million incurred in the second quarter 2015.

56


Impax Generics
The following table sets forth results of operations for Impax Generics for the three month periods ended June 30, 2016 and 2015 (in thousands):
 
Three Months Ended June 30,
 
Increase / (Decrease)
 
2016
 
2015
 
Dollars
 
Percentage
Revenues:
 
 
 
 
 
 
 
Impax Generics sales, net
$
119,953

 
$
171,273

 
$
(51,320
)
 
(30
)%
Rx Partner
1,669

 
2,579

 
(910
)
 
(35
)%
Other Revenues
73

 
827

 
(754
)
 
(91
)%
Total revenues
121,695

 
174,679

 
(52,984
)
 
(30
)%
Cost of revenues
84,339

 
110,767

 
(26,428
)
 
(24
)%
Gross profit
37,356

 
63,912

 
(26,556
)
 
(42
)%
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative
1,565

 
7,284

 
(5,719
)
 
(79
)%
Research and development
17,089

 
12,891

 
4,198

 
33
 %
Patent litigation expenses
155

 
1,332

 
(1,177
)
 
(88
)%
Total operating expenses
18,809

 
21,507

 
(2,698
)
 
(13
)%
Income from operations
$
18,547

 
$
42,405

 
$
(23,858
)
 
(56
)%
Revenues
Total revenues for Impax Generics for the three month period ended June 30, 2016, were $121.7 million, a decrease of 30% over the same period in 2015, driven primarily by increased competition in diclofenac sodium gel and metaxalone as well as lower market share of generic Adderall XR®, in each case compared to the prior year period. In addition, during the second quarter of 2016, the Company recorded shelf-stock adjustments totaling $15.0 million on diclofenac sodium gel and metaxalone as a result of a decline in price during the current year period.
Cost of Revenues
Cost of revenues was $84.3 million for the three month period ended June 30, 2016, a decrease of $26.4 million compared to the prior year period, principally resulting from the decreased costs related to lower product revenue as well as an overall net decrease in other production costs such as lower remediation costs, absence of inventory step-up charges in the current period compared to $0.7 million of such charges in the prior year period, and improved production efficiencies. Such reduced costs in the current year period were partially offset by higher severance costs incurred in conjunction with the previously announced closure of our Middlesex, New Jersey facility and intangible asset impairment charges.
Gross Profit
Gross profit for the three month period ended June 30, 2016 was $37.4 million, or 31% of total revenues, as compared to $63.9 million, or 37% of total revenues, in the prior year period. The decrease in gross profit was primarily driven by the decrease in sales of certain products as described above. The decrease in gross margin in the current period compared to the prior year period was primarily attributable to lower sales from our higher margin products versus the product sales mix for the prior year period as well as the impact of the $15.0 million in shelf-stock adjustments.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three month period ended June 30, 2016 were $1.6 million, as compared to $7.3 million for the three month period ended June 30, 2015. The decrease of $5.7 million compared to the prior year period was primarily due to a decrease in failure-to-supply claims and trade accounts receivables reserves in the current period.    
Research and Development Expenses
Total research and development expenses for the three month period ended June 30, 2016 were $17.1 million, an increase of 33%, as compared to $12.9 million in the prior year period, primarily due to an increase in project spend due to a ramp up of

57


the research and development activities for both internal and external development projects and an asset impairment charge related to a generic product partially offset by lower spending on various other research and development projects, as compared to the prior year period.
Patent Litigation Expenses
Patent litigation expenses for the three month period ended June 30, 2016 were $0.2 million, as compared to $1.3 million for the three month period ended June 30, 2015. The decrease in patent litigation expenses of $1.1 million compared to the prior year period was the result of legal activity related to cases in the prior year period for which there was no corresponding activity in the current year period.
Impax Specialty Pharma
The following table sets forth results of operations for Impax Specialty Pharma for the three month periods ended June 30, 2016 and 2015 (in thousands):
 
Three Months Ended June 30,
 
Increase / (Decrease)
 
2016
 
2015
 
Dollars
 
Percentage
Revenues:
 
 
 
 
 
 
 
Impax Specialty Pharma sales, net
$
50,895

 
$
39,275

 
$
11,620

 
30
 %
Other Revenues
—

 
228

 
(228
)
 
(100
)%
Total revenues
50,895

 
39,503

 
11,392

 
29
 %
Cost of revenues
15,267

 
18,564

 
(3,297
)
 
(18
)%
Gross profit
35,628

 
20,939

 
14,689

 
70
 %
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative
16,133

 
12,912

 
3,221

 
25
 %
Research and development
4,657

 
4,104

 
553

 
13
 %
Patent litigation expenses
1,774

 
162

 
1,612

 
*

Total operating expenses
22,564

 
17,178

 
5,386

 
31
 %
Income from operations
$
13,064

 
$
3,761

 
$
9,303

 
*

* Percentage exceeds 100%
Revenues
Total revenues for Impax Specialty Pharma were $50.9 million for the three month period ended June 30, 2016, an increase of $11.4 million over the same period in the prior year, primarily due to sales from Rytary® which we launched in April 2015 and increased revenues resulting from the Tower acquisition, including sales from our anthelmintic products franchise.
Cost of Revenues
Cost of revenues was $15.3 million for the three month period ended June 30, 2016, a decrease of $3.3 million over the prior year period. The decrease was primarily due to a $3.5 million step-up to fair value charge of inventory in connection with the Tower acquisition in the prior year period, for which there were no comparable charges in the current period.
Gross Profit
Gross profit for the three month period ended June 30, 2016 was $35.6 million, or 70% of total revenues, as compared to $20.9 million, or 53% of total revenues, in the prior year period. The increase in gross profit during the current period was primarily attributable to lower cost of revenues as detailed above.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $16.1 million for the three month period ended June 30, 2016, an increase of $3.2 million as compared to $12.9 million in the prior year period. The increase in expenses during the current period was primarily driven by our sales force expansion to support the sales and marketing of Rytary®.

58


Research and Development Expenses
Total research and development expenses for the three month period ended June 30, 2016 were $4.7 million, an increase of $0.6 million as compared to $4.1 million in the prior year period. The increase during the current period was primarily driven by an increase in research and development expenses related to our branded initiatives.
Patent Litigation Expenses
Patent litigation expenses for the three month period ended June 30, 2016 were $1.8 million, as compared to $0.2 million for the three month period ended June 30, 2015. The increase in patent litigation expense was the result of legal activity related to patent matters in the current period for which there was no corresponding activity in the prior year period.
Corporate and Other
The following table sets forth corporate general and administrative expenses, as well as other items of income and expense presented below income or loss from operations for the three month periods ended June 30, 2016 and 2015 (in thousands):
 
Three Months Ended June 30,
 
Increase / (Decrease)
 
2016
 
2015
 
Dollars
 
Percentage
General and administrative expenses
$
27,210

 
$
28,113

 
$
(903
)
 
(3
)%
Unallocated corporate expenses
(27,210
)
 
(28,113
)
 
903

 
(3
)%
 
 
 
 
 
 
 
 
Interest expense
(8,454
)
 
(6,953
)
 
(1,501
)
 
22
 %
Interest income
340

 
294

 
46

 
16
 %
Loss on debt extinguishment
—

 
(16,903
)
 
16,903

 
(100
)%
Other income (expense), net
(237
)
 
961

 
(1,198
)
 
*

Loss before income taxes
(35,561
)
 
(50,714
)
 
15,153

 
(30
)%
Benefit from income taxes
$
(1,249
)
 
$
(2,696
)
 
$
1,447

 
(54
)%
* Percentage exceeds 100%
General and Administrative Expenses
General and administrative expenses for the three month period ended June 30, 2016 were $27.2 million, a $0.9 million decrease over the same period in 2015. The decrease was principally driven by lower business development expenses, which largely consisted of transaction and/ or integration-related activities related to the Tower acquisition in 2015, partially offset by increased information technology expenses, higher legal expenses and higher net inflationary and other costs.
Interest Expense
Interest expense in the three month period ended June 30, 2016 was $8.5 million, compared to $7.0 million of interest expense during the prior year period. The current year $8.5 million of interest expense was incurred on our outstanding convertible notes, of which $3.0 million was cash and $5.5 million was non-cash accretion of the debt discount attributable to the deferred financing costs and bifurcation of the conversion option of our convertible senior notes, which also increased the carrying value of the notes on our consolidated balance sheet. The prior year interest expense of $7.0 million related to our $435.0 million term loan with Barclays (which was repaid in full using the proceeds of our convertible notes issued subsequently in June 2015) and consisted of $6.3 million in cash interest expense incurred on the Barclays term loan as well as $0.7 million in amortization of deferred financing costs.
Interest Income
Interest income in the three month period ended June 30, 2016 was $0.3 million and was relatively consistent with the same period in 2015.
Loss on Debt Extinguishment
During the three month period ended June 30, 2015, we recognized a $16.9 million loss on debt extinguishment related to the repayment of our term loan with Barclays. There was no comparable loss in the current period.

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Other Income (Expense), net
Other expense, net in the three month period ended June 30, 2016 was $0.2 million, as compared to other income, net of $1.0 million in the three month period ended June 30, 2015. The income in the prior year period included a gain on the sale of an ANDA in the amount of $1.0 million, for which there was no comparable gain in the current period.
Income Taxes
Our effective tax rate for the three months ended June 30, 2016 and 2015 was 32% and 59%, respectively. During the three month period ended June 30, 2016 and 2015, we recognized aggregate consolidated tax benefits of $1.2 million and $2.7 million, respectively, for U.S. domestic and foreign income taxes. The decrease in aggregate tax benefit during the current year period resulted from lower consolidated loss before taxes in the current year period, as compared to the prior year period in addition to a change in the timing and mix of U.S. and foreign income.    
    
Six Months Ended June 30, 2016 Compared to the Six Months Ended June 30, 2015
Overview
The following table sets forth our summarized, consolidated results of operations for the six month periods ended June 30, 2016 and 2015 (in thousands): 

Six Months Ended June 30,
 
Increase / (Decrease)

2016
 
2015
 
Dollars
 
Percentage
Total revenues
$
398,098

 
$
357,278

 
$
40,820

 
11
%
Gross profit
175,574

 
144,085

 
31,489

 
22
%
Income from operations
42,352

 
11,205

 
31,147

 
*

Loss before income taxes
(21,444
)
 
(15,253
)
 
(6,191
)
 
41
%
Benefit from income taxes
(8,335
)
 
(7,068
)
 
(1,267
)
 
18
%
Net loss
$
(13,109
)
 
$
(8,185
)
 
$
(4,924
)
 
60
%
* Percentage exceeds 100%
Consolidated total revenues for the six month period ended June 30, 2016 increased by 11% or $40.8 million to $398.1 million, compared to $357.3 million in the prior year period. The increase was primarily due to the addition of product revenues from the Tower acquisition that closed in March 2015, increased sales of diclofenac sodium gel, a product licensed under our agreement with Tolmar, the addition of sales from Rytary®, which we launched in April 2015, and the addition of sales from Emverm®, which we launched in March 2016. Product volumes (including acquisitions) and new product launches increased total revenues by 20.5% and 5.4%, respectively, while product selling price decreased total revenues by 14.5%, in each case compared to the prior year period.
Revenues from our Impax Generics division decreased by $11.6 million during the six month period ended June 30, 2016, as compared to the prior year period, driven primarily by lower revenues due to mixed results from both price and volume from products acquired in the Tower acquisition as well as from our legacy products. In addition, during the second quarter of 2016, the Company recorded shelf-stock adjustments totaling $15.0 million on diclofenac sodium gel and metaxalone as a result of a decline in price during the current year period. Revenues from Impax Specialty Pharma division increased $52.5 million during the six month period ended June 30, 2016 as compared to the prior year period, as a result of sales from Rytary® as well as increased sales from products acquired in the Tower acquisition, including sales from our anthelmintic products franchise.
Net loss for the six month period ended June 30, 2016 was $13.1 million, an increase of $4.9 million as compared to a net loss of $8.2 million for the six month period ended June 30, 2015. The increase in net loss compared to the prior year period was primarily attributable to the $48.0 million reserve recorded as a result of the uncertainty of collection of the receivable from Turing for reimbursement of Daraprim® chargebacks and Medicaid rebate liabilities, partially offset by higher operating profit as a result of an overall increase in consolidated total revenues during the current period as noted above. Refer to “Item 1. Financial Information - Notes to Interim Consolidated Financial Statements - Note 4. Summary of Significant Accounting Policies - Concentration of Credit Risk” for information related to the Turing reserve.

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Impax Generics
The following table sets forth results of operations for Impax Generics for the six month periods ended June 30, 2016 and 2015 (in thousands):
 
Six Months Ended June 30,
 
Increase / (Decrease)
 
2016
 
2015
 
Dollars
 
Percentage
Revenues:
 
 
 
 
 
 
 
Impax Generics sales, net
$
287,137

 
$
297,232

 
$
(10,095
)
 
(3
)%
Rx Partner
4,504

 
4,818

 
(314
)
 
(7
)%
Other Revenues
133

 
1,370

 
(1,237
)
 
(90
)%
Total revenues
291,774

 
303,420

 
(11,646
)
 
(4
)%
Cost of revenues
194,461

 
186,880

 
7,581

 
4
 %
Gross profit
97,313

 
116,540

 
(19,227
)
 
(16
)%
Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative
6,339

 
11,570

 
(5,231
)
 
(45
)%
Research and development
31,684

 
23,754

 
7,930

 
33
 %
Patent litigation expense
269

 
2,110

 
(1,841
)
 
(87
)%
Total operating expenses
38,292

 
37,434

 
858

 
2
 %
Income from operations
$
59,021

 
$
79,106

 
$
(20,085
)
 
(25
)%
Revenues
Total revenues for Impax Generics for the six month period ended June 30, 2016, were $291.8 million, a decrease of 4% over the same period in 2015, principally driven by increased competition in metaxalone as well as lower market share of generic Adderall XR®, partially offset by the increased sales of diclofenac sodium gel and Epinephrine Auto-Injector, both acquired in the Tower acquisition in March 2015. In addition, during the second quarter of 2016, the Company recorded shelf-stock adjustments totaling $15.0 million on diclofenac sodium gel and metaxalone as a result of a decline in price during the current year period.
Cost of Revenues
Cost of revenues was $194.5 million for the six month period ended June 30, 2016, an increase of $7.6 million compared to the prior year period, principally resulting from the increased costs related to product mix, increased product amortization incurred in connection with the Tower acquisition and costs related to our Middlesex, New Jersey manufacturing and packaging restructuring partially offset by the absence of Hayward remediation costs in the current period compared to the prior year period.
Gross Profit
Gross profit for the six month period ended June 30, 2016 was $97.3 million, or 33% of total revenues, as compared to $116.5 million, or 38% of total revenues, in the prior year period. The decrease in gross profit was primarily driven by the decrease in sales of certain products as described above including the shelf-stock adjustments partially offset by an increase in sales of diclofenac sodium gel and Epinephrine Auto-Injector, compared to the prior year period. The decrease in gross margin in the current period compared to the prior year period was primarily attributable to lower sales from our higher margin products versus the product sales mix for the prior year period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the six month period ended June 30, 2016 were $6.3 million, as compared to $11.6 million for the six month period ended June 30, 2015. The decrease of $5.2 million compared to the prior year period was primarily due to a decrease in failure-to-supply claims and trade accounts receivable reserves in the current period, partially offset by increases in annual FDA fees and increased expenses related to temporary and contract employees.    
Research and Development Expenses
Total research and development expenses for the six month period ended June 30, 2016 were $31.7 million, an increase of 33%, as compared to $23.8 million in the prior year period, primarily due to an increase in external development costs due to

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increased research and development activities, including a full year of research and development expenses from the Tower acquired companies.
Patent Litigation Expenses
Patent litigation expenses for the six month period ended June 30, 2016 were $0.3 million, as compared to $2.1 million for the six month period ended June 30, 2015. The decrease in patent litigation expenses of $1.8 million compared to the prior year period was the result of legal activity related to cases in the prior year period for which there was no corresponding activity in the current year period.
Impax Specialty Pharma
The following table sets forth results of operations for Impax Specialty Pharma for the six month periods ended June 30, 2016 and 2015 (in thousands):
 
Six Months Ended June 30,
 
Increase / (Decrease)
 
2016
 
2015
 
Dollars
 
Percentage
Revenues:
 
 
 
 
 
 
 
Impax Specialty Pharma sales, net
$
106,324

 
$
53,403

 
$
52,921

 
99
 %
Other Revenues
—

 
455

 
(455
)
 
(100
)%
Total revenues
106,324

 
53,858

 
52,466

 
97
 %
Cost of revenues
28,063

 
26,313

 
1,750

 
7
 %
Gross profit
78,261

 
27,545

 
50,716

 
*

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative
29,951

 
27,768

 
2,183

 
8
 %
Research and development
9,084

 
8,203

 
881

 
11
 %
Patent litigation expense
2,979

 
344

 
2,635

 
*

Total operating expenses
42,014

 
36,315

 
5,699

 
16
 %
Income (loss) from operations
$
36,247

 
$
(8,770
)
 
$
45,017

 
*

* Percentage exceeds 100%
Revenues
Total revenues for Impax Specialty Pharma were $106.3 million for the six month period ended June 30, 2016, an increase of $52.5 million over the same period in the prior year, primarily due to increased sales from Rytary® which we launched in April 2015 and increased revenues resulting from the Tower acquisition, including sales from our anthelmintic products franchise.
Cost of Revenues
Cost of revenues was $28.1 million for the six month period ended June 30, 2016, an increase of $1.8 million over the prior year period, primarily due to increased costs related to increased product sales. Cost of revenues for the prior year period included a $4.4 million step-up to fair value of inventory charge in connection with the Tower acquisition in the prior year period, for which there were no comparable charges in the current period.
Gross Profit
Gross profit for the six month period ended June 30, 2016 was $78.3 million, or 74% of total revenues, as compared to $27.5 million, or 51% of total revenues, in the prior year period. The increase in gross profit was primarily attributable to lower cost of revenues as a percentage of net sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $30.0 million for the six month period ended June 30, 2016, an increase of $2.2 million as compared to $27.8 million in the prior year period. The increase in expenses during the current period was primarily driven by our sales force expansion to support sales and marketing activities for Rytary® and increased advertising and promotion expenses to support the new indication of Zomig® nasal spray approved by the FDA in June 2015. The increase in

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expenses during the current period was partially offset by training expenses incurred during the six month period ending June 30, 2015 to support the launch of Rytary®, for which there was no comparable expense during the current period.
Research and Development Expenses
Total research and development expenses for the six month period ended June 30, 2016 were $9.1 million, an increase of $0.9 million as compared to $8.2 million in the prior year period. The increase during the current period was primarily driven by an increase in research and development expenses related to our branded initiatives.
Patent Litigation Expenses
Patent litigation expenses for the six month period ended June 30, 2016 were $3.0 million, as compared to $0.3 million for the six month period ended June 30, 2015. The increase in patent litigation expense was the result of legal activity related to patent matters in the current period for which there was no corresponding activity in the prior year period.
Corporate and Other
The following table sets forth corporate general and administrative expenses, as well as other items of income and expense presented below income or loss from operations for the six month periods ended June 30, 2016 and 2015 (in thousands):
 
Six Months Ended June 30,
 
Increase / (Decrease)
 
2016
 
2015
 
Dollars
 
Percentage
General and administrative expenses
$
52,916

 
$
59,131

 
$
(6,215
)
 
(11
)%
Unallocated corporate expenses
(52,916
)
 
(59,131
)
 
6,215

 
(11
)%
Interest expense
(16,785
)
 
(10,928
)
 
(5,857
)
 
54
 %
Interest income
673

 
578

 
95

 
16
 %
Reserve for Turing receivable
(48,043
)
 
—

 
(48,043
)
 
*

Loss on debt extinguishment
—

 
(16,903
)
 
16,903

 
(100
)%
Other income, net
359

 
795

 
(436
)
 
(55
)%
Loss before income taxes
(116,712
)
 
(85,589
)
 
(31,123
)
 
36
 %
Benefit from income taxes
$
(8,335
)
 
$
(7,068
)
 
$
(1,267
)
 
18
 %
* Percentage exceeds 100%
General and Administrative Expenses
General and administrative expenses for the six month period ended June 30, 2016 were $52.9 million, a $6.2 million decrease over the same period in 2015. The decrease was principally driven by lower business development expenses in the current period; expenses in the prior year period included Tower acquisition related costs for which there were no comparable amounts in the current period.
Interest Expense
Interest expense in the six month period ended June 30, 2016 was $16.8 million, compared to $10.9 million of interest expense during the prior year period. The current year $16.8 million of interest expense was incurred on our outstanding convertible notes, of which $6.0 million was cash and $10.8 million was non-cash accretion of the debt discount attributable to the deferred financing costs and bifurcation of the conversion option of our convertible senior notes, which also increased the carrying value of the notes on our consolidated balance sheet. The prior period interest expense of $10.9 million related to our $435.0 million term loan with Barclays (which was repaid in full using the proceeds of our convertible notes issued subsequently in June 2015), and consisted of $2.3 million in commitment fees incurred prior to the closing of the Tower acquisition, $7.5 million of interest expense and $1.1 million in amortization of deferred financing costs.
Interest Income
Interest income in the six month period ended June 30, 2016 was $0.7 million and was relatively consistent with the same period in 2015.
Reserve for Turing Receivable

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During the six month period ended June 30, 2016, we recorded a reserve of $48.0 million, representing the full amount of the estimated receivable due from Turing for reimbursement of Daraprim® chargebacks and Medicaid rebate liabilities as of June 30, 2016. Refer to “Item 1. Financial Information - Notes to Interim Consolidated Financial Statements - Note 4. Summary of Significant Accounting Policies - Concentration of Credit Risk” for additional information related to the Turing receivable.

Other Income (Expense), net
Other income, net in the six month period ended June 30, 2016 was $0.4 million, as compared to other income, net of $0.8 million in the six month period ended June 30, 2015. The income in the current year was primarily driven by a legal settlement payment received during the current period, while the prior year income was attributable to the gain on sale of an ANDA for $1.0 million for which there was no comparable amount in the current year period.
Income Taxes
Our effective tax rate for the six months ended June 30, 2016 and 2015 was 39% and 46%, respectively. During the six month period ended June 30, 2016 and 2015, we recognized aggregate consolidated tax benefits of $8.3 million and $7.1 million, respectively, for U.S. domestic and foreign income taxes. The amount of tax benefit recorded for the six months ended June 30, 2016 reflects our estimate as of such date of the annual effective tax rate applied to the year-to-date loss. A discrete tax benefit of $17.4 million for the reserve recorded against the Turing receivable as described above under "Item 1. Financial Information - Notes to Interim Consolidated Financial Statements - Note 4. Summary of Significant Accounting Policies - Concentration of Credit Risk" is also reflected in income tax benefit for the six months ended June 30, 2016. Excluding discrete items, our estimate of the annualized effective tax rate for the six months ended June 30, 2016 was 32%. The effective tax rate, including the effects of discrete tax income tax items, was 39% for the six months ended June 30, 2016. Due to the taxable loss for the six months ended June 30, 2016, the discrete tax benefit increased the tax rate. The increase in the aggregate tax benefit compared to the prior year period resulted from a higher consolidated loss before taxes in the six month period ended June 30, 2016, as compared to the same period in the prior year. The increase in tax benefit during the six month period ended June 30, 2016 was also a result of a change in the timing and mix of U.S. and foreign income; the exclusion of a zero-rate jurisdiction from the interim effective tax rate calculation; the inclusion of the federal research and development credit which was permanently reinstated in December 2015; and an increase in the deferred tax asset related to a state R&D tax credit carryforward in a state with indefinite carryforwards. We are closely monitoring the events and circumstances that determine the need for a valuation allowance related to state research and development tax credit carryforwards and have determined that, based upon the evaluation of the provisions of ASC 740, no valuation allowance will be recorded at this time.

Liquidity and Capital Resources
 
We generally fund our operations with cash flows from operating activities, although we have also funded our operations with proceeds from the sale of debt and equity securities. Our cash flows from operating activities consist primarily of the proceeds from sales of our products and services.
 
We expect to incur significant operating expenses, including research and development and patent litigation expenses, for the foreseeable future. In addition, we are generally required to make cash expenditures to manufacture and/or acquire finished product inventory in advance of selling the finished product to our customers and collecting payment, which may result in a significant use of cash. We believe our existing cash and cash equivalents, together with cash expected to be generated from operations and our revolving line of credit facility, will be sufficient to meet our cash requirements through the next 12 months. We may, however, seek additional financing through alliance, collaboration and licensing agreements, as well as from the debt and equity capital markets, to fund capital expenditures, research and development plans, potential acquisitions, and potential revenue shortfalls due to delays in new product introductions or otherwise. We cannot be assured that such financing will be available on favorable terms, or at all.
 
Cash and Cash Equivalents

At June 30, 2016, we had $366.8 million in cash and cash equivalents, an increase of $26.5 million as compared to December 31, 2015. As more fully discussed below, the increase in cash and cash equivalents during the six month period ended June 30, 2016 was primarily driven by $23.8 million of net cash provided by operating activities and $9.7 million of net cash provided by financing activities, partially offset by $7.7 million of net cash used in investing activities.
 
Cash Flows - Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015
 

64


Net cash provided by operating activities for the six month period ended June 30, 2016 was $23.8 million, an increase of $56.4 million compared to $32.6 million used in operating activities for the same period of the prior year. The period over period increase in net cash provided by operating activities principally resulted from an increase in income from operations and improvement in working capital, primarily attributable to a reduction in accounts receivable and increased non-cash expenses during the current period, including depreciation, amortization, share-based compensation expense, and intangible asset impairment charges, which were added back to the net loss to determine cash flows from operating activities. The significant reduction in accounts receivable was due to cash collections in the current year period of high sales during the fourth quarter of 2015. Depreciation and amortization expense increased primarily as a result of higher asset balances resulting from the Tower acquisition. The above items contributing to increased net cash were partially offset by cash payments related to accrued profit sharing and royalties to third parties, primarily related to Diclofenac sodium gel under the Tolmar agreement.
 
Net cash used in investing activities for the six month period ended June 30, 2016 was $7.7 million, a decrease of $499.5 million compared to $507.2 million for the same period of the prior year. The period over period decrease in net cash used in investing activities was due primarily to $697.2 million of cash used (net of cash acquired) to fund the Tower acquisition in March 2015, partially offset by proceeds from maturities of short-term investments of $200.1 million, with those cash proceeds used to fund part of the Tower acquisition purchase price. There were no similar significant transactions during the six month period ended June 30, 2016. In addition, the $15.0 million loan outstanding under the Tolmar Loan Agreement was repaid during the three months ended June 30, 2016.
 
Net cash provided by financing activities for the six month period ended June 30, 2016 was $9.7 million, a decrease of $504.9 million compared to $514.6 million for the same period of the prior year. The period over period decrease in net cash provided by financing activities was attributable to the June 2015 issuance of $600.0 million of 2% Convertible Senior Notes due June 2022, offset by net cash payments of $58.7 million under the Note Hedge Transactions and Warrant Transactions and the payment of $36.4 million in deferred financing fees, during the six month period ended June 30, 2015. There were no similar significant transactions during the six month period ended June 30, 2016. Please refer to “Outstanding Debt Obligations” below for further details on our debt obligations.
 
Outstanding Debt Obligations

Royal Bank of Canada Credit Facilities
On August 4, 2015, we entered into a senior secured revolving credit facility of up to $100 million, pursuant to a credit agreement, by and among us, the lenders party thereto from time to time and Royal Bank of Canada, as administrative agent and collateral agent (the “Revolving Credit Facility Agreement”). No borrowings were drawn from the Revolving Credit Facility from its inception through August 3, 2016. The Revolving Credit Facility was originally set to mature on August 4, 2020.
On August 3, 2016, we entered into a restatement agreement with Royal Bank of Canada, as administrative agent, and the lenders and guarantors party thereto (the "Restatement Agreement"). The Restatement Agreement amends and restates the existing Revolving Credit Facility Agreement (as amended and restated, the "Amended and Restated Credit Agreement") to, among other things, (i) add a term loan feature to allow for the borrowing of up to $400.0 million of term loans (the "Term Loan Facility") by us in accordance with the terms of the Amended and Restated Credit Agreement and (ii) increase the aggregate principal amount of revolving loans permitted under the Amended and Restated Credit Agreement (the "Revolving Credit Facility," and, together with the Term Loan Facility, the "RBC Credit Facilities"), from $100.0 million to $200.0 million and (iii) extend the maturity date of the Revolving Credit Facility from August 4, 2020 to August 3, 2021.
Borrowings under the Amended and Restated Credit Agreement will accrue interest at a rate equal to LIBOR or the base rate, plus an applicable margin. The applicable margin may be increased or reduced by 0.25% based on our total net leverage ratio. Up to $12.5 million of the Revolving Credit Facility is available for issuance of letters of credit and any such letters of credit will reduce the amount available under the Revolving Credit Facility on a dollar-for-dollar basis. We are required to pay a commitment fee to the lenders on the average daily unused portion of the Revolving Credit Facility at 0.50% or 0.375% per annum, depending our total net leverage ratio.
The Amended and Restated Credit Agreement contains certain negative covenants (subject to exceptions, materiality thresholds and other allowances) including, without limitation, negative covenants that limit our and our restricted subsidiaries' ability to incur additional debt, guarantee other obligations, grant liens on assets, make loans, acquisitions or other investments, dispose of assets, make optional payments in connection with or modify certain debt instruments, pay dividends or make other payments on capital stock, engage in mergers or consolidations, enter into arrangements that restrict our and our restricted subsidiaries' ability to pay dividends or grant liens, engage in transactions with affiliates, or change our fiscal year. The Amended and Restated Credit Agreement also includes a financial maintenance covenant whereby we must not permit our total net leverage ratio in any 12-month period to exceed 5.00:1.00, as tested at the end of each fiscal quarter.

65


The Amended and Restated Credit Agreement contains events of default, including, without limitation (subject to customary grace periods and materiality thresholds), events of default upon (i) the failure to make payments pursuant to the terms of the Amended and Restated Credit Agreement, (ii) violation of covenants, (iii) incorrectness of representations and warranties, (iv) cross-default and cross-acceleration to other material indebtedness, (v) bankruptcy events, (vi) material monetary judgments (to the extent not covered by insurance), (vii) certain matters arising under the Employee Retirement Income Security Act of 1974, as amended, that could reasonably be expected to result in a material adverse effect, (viii) the actual or asserted invalidity of the documents governing the RBC Credit Facilities, any material guarantees or the security interests (including priority thereof) required under the Amended and Restated Credit Agreement and (ix) the occurrence of a change of control (as defined therein). Upon the occurrence of certain events of default, the obligations under the Amended and Restated Credit Agreement may be accelerated and any remaining commitments thereunder may be terminated.
The full amount of the proceeds from the Term Loan Facility of $400.0 million, along with $196.4 million of cash on our consolidated balance sheet, were used to finance the Teva Transaction, including transaction fees, on its closing date of August 3, 2016. The full amount of the $200.0 million Revolving Credit Facility remains available to us for working capital and other general corporate purposes.
2% Convertible Senior Notes due June 2022    
On June 30, 2015, we issued an aggregate principal amount of $600.0 million of 2.00% Convertible Senior Notes due June 2022 (the “Notes”) in a private placement offering, which are our senior unsecured obligations. The Notes were issued pursuant to an Indenture dated June 30, 2015 (the “Indenture”) between us and Wilmington Trust, N.A. as trustee. The Indenture includes customary covenants and sets forth certain events of default after which the Notes may be due and payable immediately. The Notes will mature on June 15, 2022, unless earlier redeemed, repurchased or converted. The Notes bear interest at a rate of 2.00% per year, and interest is payable semiannually in arrears on June 15 and December 15 of each year, beginning from December 15, 2015.
The conversion rate for the Notes is initially set at 15.7858 shares per $1,000 of principal amount, which is equivalent to an initial conversion price of $63.35 per share of our common stock. If a Make-Whole Fundamental Change (as defined in the Indenture) occurs or becomes effective prior to the maturity date and a holder elects to convert its Notes in connection with the Make-Whole Fundamental Change, we are obligated to increase the conversion rate for the Notes so surrendered by a number of additional shares of our common stock as prescribed in the Indenture. Additionally, the conversion rate is subject to adjustment in the event of an equity restructuring transaction such as a stock dividend, stock split, spinoff, rights offering, or recapitalization through a large, nonrecurring cash dividend (“standard antidilution provisions,” per ASC 815-40).
The Notes are convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding December 15, 2021 only under the following circumstances:
(i)
If during any calendar quarter commencing after the quarter ending September 30, 2015 (and only during such calendar quarter) the last reported sale price of our 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 130% of the conversion price on each applicable trading day; or
(ii)
If during the 5 business day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price per $1,000 of principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last report sale price of our common stock and the conversion rate on each such trading day; or
(iii)
Upon the occurrence of corporate events specified in the Indenture.
On or after December 15, 2021 until the close of business on the second scheduled trading day immediately preceding the maturity date, the holders may convert their Notes at any time, regardless of the foregoing circumstances. We may satisfy our conversion obligation by paying or delivering, as the case may be, cash, shares of our common stock, or a combination of cash and shares of our common stock, at our election and in the manner and subject to the terms and conditions provided in the Indenture.
Concurrently with the offering of the Notes and using a portion of the proceeds from the sale of the Notes, we entered into a series of convertible note hedge and warrant transactions (the “Note Hedge Transactions” and “Warrant Transactions”) which are designed to reduce the potential dilution to our stockholders and/or offset the cash payments we are required to make in excess of the principal amount upon conversion of the Notes. The Note Hedge Transactions and Warrant Transactions are separate transactions, in each case, entered into by us with a financial institution and are not part of the terms of the Notes. These transactions will not affect any holder’s rights under the Notes, and the holders of the Notes have no rights with respect to the

66


Note Hedge Transactions and Warrant Transactions. See "Note 13. Debt" and “Note 14. Stockholders’ Equity” for additional information.
For the three and six months ended June 30, 2016, we recognized $8.5 million and $16.8 million, respectively, of interest expense related to the Notes, of which $3.0 million and $6.0 million, respectively, was cash and $5.5 million and $10.8 million, respectively, was non-cash accretion of the debt discounts recorded. As the Notes mature in 2022, they have been classified as long-term debt on our consolidated balance sheets, with a carrying value of $435.3 million and $424.6 million as of June 30, 2016 and December 31, 2015, respectively. Accrued interest payable on the Notes of $0.5 million as of both June 30, 2016 and December 31, 2015 is included in accrued expenses on our consolidated balance sheets.
Off-Balance Sheet Arrangements
 
We did not have any off-balance sheet arrangements as of June 30, 2016.
 
Commitments and Contractual Obligations
 
As of June 30, 2016, there were no significant changes to our contractual obligations as set forth in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015.

Recently Issued Accounting Standards 

Recently issued accounting standards are discussed in "Item 1. Financial Information - Notes to Interim Consolidated Financial Statements - Note 5. Recent Accounting Pronouncements" above.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk
Our cash equivalents and short-term investments included a portfolio of high credit quality securities, including U.S. government securities, treasury bills, short-term commercial paper, and highly-rated money market funds. We had no short-term investments as of June 30, 2016 or December 31, 2015.
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash equivalents, short-term investments and accounts receivable. We limit our credit risk associated with cash equivalents and short-term investments by placing investments with high credit quality securities, including U.S. government securities, treasury bills, corporate debt, short-term commercial paper and highly-rated money market funds. As discussed above under “Outstanding Debt Obligations,” we are party to a Term Loan facility of $400.0 million and a Revolving Credit Facility of up to $200.0 million pursuant to the RBC Credit Facilities. The amount under our Revolving Credit Facility is available for working capital and other general corporate purposes. We also issued the Notes in a private placement offering on June 30, 2015, which are our senior unsecured obligations, as described above under “Outstanding Debt Obligations.”
We limit our credit risk with respect to accounts receivable by performing credit evaluations when deemed necessary. We do not require collateral to secure amounts owed to us by our customers. As discussed above under "Item 1. Financial Information - Notes to Interim Consolidated Financial Statements - Note 4. Summary of Significant Accounting Policies - Concentration of Credit Risk” we recorded a reserve in the amount of $48.0 million on our consolidated statement of operations for the period ended March 31, 2016, representing the full amount of the estimated receivable due from Turing for reimbursement of Daraprim® chargebacks and Medicaid rebate liabilities as of March 31, 2016. There was no change to the reserve as of June 30, 2016.
We do not use derivative financial instruments or engage in hedging activities in our ordinary course of business and have no material foreign currency exchange exposure or commodity price risks. See “Item 1. Financial Information - Notes to Interim Consolidated Financial Statements - Note 22. Segment Information” for more information regarding the value of our investment in Impax Laboratories (Taiwan), Inc. 
We do not believe that inflation has had a significant impact on our revenues or operations to date.

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Item 4.    Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) that are designed to ensure that information required to be disclosed by us in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, were effective as of June 30, 2016 at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
During the quarter ended June 30, 2016, there were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) which materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Limitations on the Effectiveness of Controls
Systems of disclosure controls and internal controls over financial reporting and their associated policies and procedures, no matter how well conceived and operated, are designed to provide a reasonable, but not an absolute, level of assurance the objectives of the system of control are achieved. Further, the design of a control system must be balanced against resource constraints, and therefore the benefits of controls must be considered relative to their costs. Given the inherent limitations in all systems of controls, no evaluation of controls can provide absolute assurance all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Accordingly, given the inherent limitations in a cost-effective system of internal control, financial statement misstatements due to error or fraud may occur and may not be detected. Our disclosure controls and procedures are designed to provide a reasonable assurance of achieving their objectives. We conduct periodic evaluations of our systems of controls to enhance, where necessary, our control policies and procedures.



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PART II - OTHER INFORMATION
Item 1.    Legal Proceedings
Information pertaining to legal proceedings can be found in “Item 1. Financial Statements - Notes to Interim Consolidated Financial Statements - Note 21. Legal and Regulatory Matters” and is incorporated by reference herein.
Item 1A. Risk Factors
During the quarter ended June 30, 2016, there were no material changes to the risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2016. Please carefully consider the information set forth in this Quarterly Report on Form 10-Q and the risk factors discussed in "Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, which could materially affect our business, consolidated financial condition or consolidated results of operations. The risks described herein, and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 are not the only risks we face. Additional risks and uncertainties not currently known to us or which we currently deem to be immaterial may also materially adversely affect our business, consolidated financial condition and/or consolidated results of operations.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table provides information regarding the purchases of our equity securities by us during the three months ended June 30, 2016.
Period
 
Total Number of Shares (or Units) Purchased(1)
 
Average
Price Paid
Per Share
(or Unit)
 
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
April 1, 2016 to April 30, 2016
 
82,390
 
$33.41
 
—

 
—

May 1, 2016 to May 31, 2016
 
16,965
 
$29.66
 
—

 
—

June 1, 2016 to June 30, 2016
 
86
 
$35.63
 
—

 
—

(1)
Represents shares of our common stock that we accepted during the indicated periods as a tax withholding from certain of our employees in connection with the vesting of shares of restricted stock pursuant to the terms of our 2002 Plan.
Item 3.    Defaults Upon Senior Securities.
Not Applicable.
Item 4.    Mine Safety Disclosures.
Not Applicable.
Item 5.    Other Information.
Not Applicable.  

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Item 6.    Exhibits.
Exhibit No.
 
Description of Document
3.1.1
 
Amendment No. 4 to Amended and Restated Bylaws of the Company, as amended effective as of May 17, 2016.*
 
 
 
3.1.2
 
Amendment No. 3 to Amended and Restated Bylaws of the Company, as amended effective as of October 7, 2015.*
 
 
 
3.1.3
 
Amendment No. 2 to Amended and Restated Bylaws of the Company, as amended effective as of July 7, 2015.*
 
 
 
3.1.4
 
Amendment No. 1 to Amended and Restated Bylaws of the Company, effective as of March 24, 2015.*
 
 
 
3.1.5
 
Amended and Restated Bylaws of the Company, effective as of May 14, 2014.*
 
 
 
10.1
 
First Amendment dated as of May 31, 2016 to the Distribution, License, Development and Supply Agreement by and between AstraZeneca UK Limited and the Company dated as of January 31, 2012.**
 
 
 
10.2.1
 
Asset Purchase Agreement between Teva Pharmaceutical Industries Ltd. and the Company dated as of June 20, 2016.**†
 
 
 
10.2.2
 
Amendment No. 1 dated as of June 30, 2016 to the Asset Purchase Agreement between Teva Pharmaceutical Industries Ltd. and the Company dated as of June 20, 2016.*
 
 
 
10.3.1
 
Asset Purchase Agreement by and among Actavis Elizabeth LLC, Actavis Group PTC Ehf., Actavis Holdco US, Inc., Actavis LLC, Actavis Mid Atlantic LLC, Actavis Pharma, Inc., Actavis South Atlantic LLC, Andrx LLC, Breath Ltd., The Rugby Group, Inc., Watson Laboratories, Inc. and the Company dated as of June 20, 2016.**†
 
 
 
10.3.2
 
Amendment No. 1 dated as of June 30, 2016 to the Asset Purchase Agreement by and among Actavis Elizabeth LLC, Actavis Group PTC Ehf., Actavis Holdco US, Inc., Actavis LLC, Actavis Mid Atlantic LLC, Actavis Pharma, Inc., Actavis South Atlantic LLC, Andrx LLC, Breath Ltd., The Rugby Group, Inc., Watson Laboratories, Inc. and the Company dated as of June 20, 2016.**
 
 
 
10.4.1
 
Supply Agreement between Teva Pharmaceutical Industries Ltd. and the Company dated as of June 20, 2016.**
 
 
 
10.4.2
 
Amendment No. 1 dated as of June 30, 2016 to the Supply Agreement between Teva Pharmaceutical Industries Ltd. and the Company dated as of June 20, 2016.**
 
 
 
10.5.1
 
Supply Agreement by and among Actavis Elizabeth LLC, Actavis Group PTC Ehf., Actavis Holdco US, Inc., Actavis LLC, Actavis Mid Atlantic LLC, Actavis Pharma, Inc., Actavis South Atlantic LLC, Andrx LLC, Breath Ltd., The Rugby Group, Inc., Watson Laboratories, Inc. and the Company dated as of June 20, 2016.**
 
 
 
10.5.2
 
Amendment No. 1 dated as of June 30, 2016 to the Supply Agreement by and among Actavis Elizabeth LLC, Actavis Group PTC Ehf., Actavis Holdco US, Inc., Actavis LLC, Actavis Mid Atlantic LLC, Actavis Pharma, Inc., Actavis South Atlantic LLC, Andrx LLC, Breath Ltd., The Rugby Group, Inc., Watson Laboratories, Inc. and the Company dated as of June 20, 2016.**
 
 
 
10.6
 
Employment Agreement dated as of July 14, 2016 by and between the Company and Douglas S. Boothe.*††
 
 
 
10.7
 
Restatement Agreement dated as of August 3, 2016 by and among the Company,  the guarantors party thereto, Royal Bank of Canada, as administrative agent, and the lenders party thereto.*

 
 
 

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11.1
 
Statement re computation of per share earnings (incorporated by reference to Note 15 in the Notes to Interim Consolidated Financial Statements in this Quarterly Report on Form 10-Q).
 
 
 
31.1
 
Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
 
 
 
31.2
 
Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
 
 
 
32.1
 
Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
 
 
 
32.2
 
Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
 
 
 
101
 
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015, (ii) Consolidated Statements of Operations for each of the three and six months ended June 30, 2016 and 2015, (iii) Consolidated Statements of Comprehensive Income for each of the three and six months ended June 30, 2016 and 2015, (iv) Consolidated Statements of Cash Flows for each of the six months ended June 30, 2016 and 2015 and (v) Notes to Interim Consolidated Financial Statements.*
* Filed herewith.
** Confidential treatment requested for certain portions of this exhibit pursuant to Rule 24b-2 under the Exchange Act, which portions are omitted and filed separately with the SEC.
† Schedules omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish a supplemental copy of any omitted schedule to the SEC upon request.

†† Indicates management contract or compensatory plan or arrangement.



71


SIGNATURES 
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. 
Date: August 9, 2016
 
Impax Laboratories, Inc.
 
 
(Registrant)
 
 
 
 
 
 
 
By:
/s/ Fred Wilkinson
 
 
Fred Wilkinson
 
 
President and Chief Executive Officer
(Principal Executive Officer)
 
 
 
 
 
 
 
By:
/s/ Bryan M. Reasons
 
 
Bryan M. Reasons
 
 
Chief Financial Officer and
Senior Vice President, Finance
(Principal Financial and Accounting Officer)



72


EXHIBIT INDEX
Exhibit No.
 
Description of Document
3.1.1
 
Amendment No. 4 to Amended and Restated Bylaws of the Company, as amended effective as of May 17, 2016.*
 
 
 
3.1.2
 
Amendment No. 3 to Amended and Restated Bylaws of the Company, as amended effective as of October 7, 2015.*
 
 
 
3.1.3
 
Amendment No. 2 to Amended and Restated Bylaws of the Company, as amended effective as of July 7, 2015.*
 
 
 
3.1.4
 
Amendment No. 1 to Amended and Restated Bylaws of the Company, effective as of March 24, 2015.*
 
 
 
3.1.5
 
Amended and Restated Bylaws of the Company, effective as of May 14, 2014.*
 
 
 
10.1
 
First Amendment dated as of May 31, 2016 to the Distribution, License, Development and Supply Agreement by and between AstraZeneca UK Limited and the Company dated as of January 31, 2012.**
 
 
 
10.2.1
 
Asset Purchase Agreement between Teva Pharmaceutical Industries Ltd. and the Company dated as of June 20, 2016.**†
 
 
 
10.2.2
 
Amendment No. 1 dated as of June 30, 2016 to the Asset Purchase Agreement between Teva Pharmaceutical Industries Ltd. and the Company dated as of June 20, 2016.*
 
 
 
10.3.1
 
Asset Purchase Agreement by and among Actavis Elizabeth LLC, Actavis Group PTC Ehf., Actavis Holdco US, Inc., Actavis LLC, Actavis Mid Atlantic LLC, Actavis Pharma, Inc., Actavis South Atlantic LLC, Andrx LLC, Breath Ltd., The Rugby Group, Inc., Watson Laboratories, Inc. and the Company dated as of June 20, 2016.**†
 
 
 
10.3.2
 
Amendment No. 1 dated as of June 30, 2016 to the Asset Purchase Agreement by and among Actavis Elizabeth LLC, Actavis Group PTC Ehf., Actavis Holdco US, Inc., Actavis LLC, Actavis Mid Atlantic LLC, Actavis Pharma, Inc., Actavis South Atlantic LLC, Andrx LLC, Breath Ltd., The Rugby Group, Inc., Watson Laboratories, Inc. and the Company dated as of June 20, 2016.**
 
 
 
10.4.1
 
Supply Agreement between Teva Pharmaceutical Industries Ltd. and the Company dated as of June 20, 2016.**
 
 
 
10.4.2
 
Amendment No. 1 dated as of June 30, 2016 to the Supply Agreement between Teva Pharmaceutical Industries Ltd. and the Company dated as of June 20, 2016.**
 
 
 
10.5.1
 
Supply Agreement by and among Actavis Elizabeth LLC, Actavis Group PTC Ehf., Actavis Holdco US, Inc., Actavis LLC, Actavis Mid Atlantic LLC, Actavis Pharma, Inc., Actavis South Atlantic LLC, Andrx LLC, Breath Ltd., The Rugby Group, Inc., Watson Laboratories, Inc. and the Company dated as of June 20, 2016.**
 
 
 
10.5.2
 
Amendment No. 1 dated as of June 30, 2016 to the Supply Agreement by and among Actavis Elizabeth LLC, Actavis Group PTC Ehf., Actavis Holdco US, Inc., Actavis LLC, Actavis Mid Atlantic LLC, Actavis Pharma, Inc., Actavis South Atlantic LLC, Andrx LLC, Breath Ltd., The Rugby Group, Inc., Watson Laboratories, Inc. and the Company dated as of June 20, 2016.**
 
 
 
10.6
 
Employment Agreement dated as of July 14, 2016 by and between the Company and Douglas S. Boothe.*††
 
 
 
10.7
 
Restatement Agreement dated as of August 3, 2016 by and among the Company,  the guarantors party thereto, Royal Bank of Canada, as administrative agent, and the lenders party thereto.*
 
 
 
11.1
 
Statement re computation of per share earnings (incorporated by reference to Note 15 in the Notes to Interim Consolidated Financial Statements in this Quarterly Report on Form 10-Q).

73


 
 
 
31.1
 
Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
 
 
 
31.2
 
Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
 
 
 
32.1
 
Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
 
 
 
32.2
 
Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
 
 
 
101
 
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015, (ii) Consolidated Statements of Operations for each of the three and six months ended June 30, 2016 and 2015, (iii) Consolidated Statements of Comprehensive Income for each of the three and six months ended June 30, 2016 and 2015, (iv) Consolidated Statements of Cash Flows for each of the six months ended June 30, 2016 and 2015 and (v) Notes to Interim Consolidated Financial Statements.*
* Filed herewith.
** Confidential treatment requested for certain portions of this exhibit pursuant to Rule 24b-2 under the Exchange Act, which portions are omitted and filed separately with the SEC.
† Schedules omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish a supplemental copy of any omitted schedule to the SEC upon request.

†† Indicates management contract or compensatory plan or arrangement.


74