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Significant Accounting Policies
 12 Months Ended
Dec. 31, 2011
Significant Accounting Policies [Abstract]  
Significant Accounting Policies
(2) Significant Accounting Policies

 

  (a) Principles of Consolidation

These consolidated financial statements are stated in U.S. dollars and are prepared under U.S. generally accepted accounting principles. The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated.

 

  (b) Cash and Cash Equivalents

Cash and cash equivalents include highly liquid investments with an original maturity of three months or less when purchased.

 

  (c) Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company records allowances for uncollectible amounts, cash discounts, chargebacks and credits to be taken by customers for product damaged in shipment based on historical experience. The Company reviews each customer balance for collectibility.

Discounts are reductions to invoiced amounts offered to customers for payment within a specified period of time from the date of the invoice.

The majority of the Company’s products are distributed through independent pharmaceutical wholesalers. Net product revenue and accounts receivable take into account the sale of the product at the wholesale acquisition cost, and an accrual is recorded to reflect the difference between the wholesale acquisition cost and the estimated average end-user contract price. This accrual is calculated on a product-specific basis and is based on the estimated number of outstanding units sold to wholesalers that will ultimately be sold under end-user contracts. When the wholesaler sells the product to the end-user at the agreed upon end-user contract price, the wholesaler charges the Company for the difference between the wholesale acquisition price and the end-user contract price and that chargeback is offset against the initial accrual balance.

The Company’s estimate of the allowance for damaged product is based upon historical experience of claims made for damaged product. At the time the transaction is recognized as a sale, the Company records a reduction in revenue for the estimate of product damaged in shipment.

 

  (d) Inventories

The Company works closely with third parties to manufacture and package finished goods for sale, takes title to the finished goods at the time of shipment from the manufacturer and warehouses such goods until distribution and sale. Inventories are stated at the lower of cost or market with cost determined using the first-in, first-out method.

The Company continually evaluates inventory for potential losses due to excess, obsolete or slow-moving inventory by comparing sales history and sales projections to the inventory on hand. When evidence indicates the carrying value may not be recoverable, a charge is taken to reduce the inventory to the net realizable value.

During 2009 and 2010, the Company built inventory in preparation for the Caldolor product launch. Caldolor inventory represented the majority of net inventory on hand at December 31, 2011 and 2010, respectively, and has varying expiration dates through January 2015. At December 31, 2011 and 2010, the Company has recognized a reserve for potential obsolescence and discontinuance primarily for Caldolor of approximately $2.1 million and $0.1 million, respectively. If actual sales in future periods are less than projected sales, the Company could incur additional obsolescence losses.

In the fourth quarter of 2010, the Company purchased certain packaging materials related to the manufacture of Caldolor. As these materials are consumed as part of the manufacturing process, the costs associated with these materials will be used to offset the finished goods price from the packager.

In connection with the purchase of certain Kristalose assets in 2011 as discussed in Note 4, the Company purchases the active pharmaceutical ingredient for Kristalose, and maintains the inventory at the third-party manufacturer. As the ingredients are consumed in production, the value of the ingredients is transferred from raw materials to finished goods.

 

As of December 31, 2011 and 2010, inventory was comprised of the following:

 

      September 30,       September 30,  
    December 31,  
    2011     2010  

Raw materials

   $ 774,637     $ 356,676  

Finished goods

     5,000,057       7,327,166  
   

 

 

    

 

 

  

Total

   $ 5,774,694     $ 7,683,842  
   

 

 

    

 

 

  

 

  (e) Prepaids and Other Current Assets

Prepaid and other current assets consist of unamortized deferred financing costs, prepaid insurance premiums, prepaid consulting services and annual fees to the U.S. Food and Drug Administration (FDA). The Company expenses all prepaid amounts as used or over the period of benefit primarily on a straight-line basis, as applicable.

 

  (f) Property and Equipment

Property and equipment, including leasehold improvements, are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the initial lease term plus its renewal options, if reasonably assured, or the remaining useful life of the asset. Upon retirement or disposal of assets, the asset and accumulated depreciation or amortization accounts are adjusted accordingly, and any gain or loss is reflected as a component of operating income in the consolidated statement of income. Repairs and maintenance costs are expensed as incurred. Improvements that extend an asset’s useful life are capitalized.

 

  (g) Intangible Assets

The Company’s intangible assets consist of costs incurred related to product rights, licenses, trademarks and patents.

The cost of acquiring product rights and licenses of products that are approved for commercial use are capitalized based on the fair value and amortized ratably over the estimated economic life of the products. At the time of acquisition, the economic life is estimated based upon the term of the license agreement, patent life or market exclusivity of the products and our assessment of future sales and profitability of the product. We assess this estimate regularly during the amortization period and adjust the asset value or useful life when appropriate.

Patents consist of outside legal costs associated with obtaining patents for products that have already been approved for marketing by the FDA. If it becomes probable that a patent will not be issued, related costs associated with the patent application will be expensed at the time such determination is made. All costs associated with obtaining patents for products that have not been approved for marketing by the FDA are expensed as incurred.

Amortization expense is recognized on a straight-line basis over the following periods:

 

     
Product rights   15 years
License rights   Term of license agreement
Trademarks   10 years
Patents   Life of patent

 

  (h) Impairment of Long-Lived Assets

Long-lived assets, such as property and equipment and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying amount of the long-lived asset is not recoverable on an undiscounted cash flow basis, an impairment charge is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including quoted market prices, third-party independent appraisals and discounted cash flow models, as considered necessary. Assets to be disposed of would be separately presented in the consolidated balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated. The assets and liabilities of a disposed group classified as held-for-sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheet. The Company recorded no impairment charges during the three-year period ended December 31, 2011.

 

  (i) Revenue Recognition

Revenue is realized or realizable and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed and determinable; and (4) collectibility is reasonably assured. Delivery is considered to have occurred upon either shipment of the product or arrival at its destination, depending upon the shipping terms of the transaction.

The Company is a party to several licensing arrangements that allows the licensee access to our FDA registration file. In addition, the licensee is required to purchase product from the Company. Typical arrangements require an up-front payment in exchange for access to the FDA registration file, royalties and milestone payments upon the achievement of specific sales levels. Generally, the amounts received for access to the FDA registration file are recognized as revenue over the term of the arrangement, and royalties and milestones are recognized as income when earned.

The Company’s net product revenue reflects reduction from gross product revenue for estimated allowances for chargebacks, discounts, and damaged goods and for accruals for rebates, product returns, certain administrative fees and fee for services. Allowances of $0.2 million as of December 31, 2011 and 2010 for chargebacks, discounts and product damaged in shipment are recorded as a reduction of accounts receivable, and liabilities of $3.2 million and $2.6 million as of December 31, 2011 and 2010, respectively, for rebates, product returns, administrative fees and fee for services are included in other accrued liabilities.

As discussed in Note 2(c) above, the allowances for chargebacks, discounts and damaged goods are determined on a product-by-product basis, and are established by management as the Company’s best estimate at the time of sale based on each product’s historical experience adjusted to reflect known changes in the factors that impact such allowances. These allowances are established based on the contractual terms with direct and indirect customers and analyses of historical levels of chargebacks, discounts and credits claimed for damaged product.

Other organizations, such as managed care providers, pharmacy benefit management companies and government agencies, may receive rebates from the Company based on either negotiated contracts to carry the Company’s products or reimbursements for filled prescriptions. These entities represent indirect customers of the Company. In addition, the Company may provide rebates to the end-user. In conjunction with recognizing a sale to a wholesaler, sales revenues are reduced and accrued liabilities are increased by the Company’s estimates of the rebates that will be owed.

 

Consistent with industry practice, the Company maintains a return policy that allows customers to return product within a specified period prior to and subsequent to the expiration date. The Company’s estimate of the provision for returns is based upon historical experience. Any changes in the assumptions used to estimate the provision for returns are recognized in the period those assumptions were changed.

The Company has agreements with certain key wholesalers that include fee for service costs. These costs have been netted against product revenues.

The Company’s net product revenue (loss) consisted of the following as of December 31:

 

      September 30,       September 30,       September 30,  
    Net product revenue  
    2011     2010     2009  
       

Acetadote

   $ 42,454,055     $ 35,092,796     $ 30,176,981  

Kristalose

     8,517,873       9,510,275       9,688,998  

Caldolor

     (78,134 )      101,499       3,276,371  
   

 

 

    

 

 

    

 

 

  
    $ 50,893,794     $ 44,704,570     $ 43,142,350  
   

 

 

    

 

 

    

 

 

  

The Company obtained FDA approval for Caldolor in June 2009 and launched the product in September 2009. In December 2011, the Company discontinued sales of the 400mg offering and focused on the 800mg offering. Gross product revenue for Caldolor was approximately $0.3 million for the year ended December 31, 2011. Gross product revenue for Caldolor was approximately $0.1 million and $3.6 million for the years ended December 31, 2010 and 2009, respectively. The Company recognized approximately $0.4 million of sales allowances in the fourth quarter of 2011 for estimated returns of discontinued product.

Other revenue is comprised of revenue generated by CET through grant funding from federal Small Business (SBIR/STTR) grant programs, lease income generated by CET’s Life Sciences Center and contract services. The Life Sciences Center is a research center that provides scientists with access to flexible lab space and other resources to develop biomedical products. Revenue related to grants is recognized when all conditions related to such grants have been met. Grant revenue from SBIR/STTR programs totaled approximately $0.1 million for the years ended December 31, 2011 and 2010, and $0.2 million for the year ended December 31, 2009, respectively.

In addition to the items identified above, other revenue in 2010 includes approximately $0.9 million of federal grants associated with the Therapeutic Discovery Project Credit, a component of the U.S. health care reform act enacted in March 2010. The Therapeutic Discovery Project Credit allowed entities to apply for funding based on qualified research activities. Funds were then granted to entities based on their qualified research expenses. Revenue was recognized after the application was approved and as qualified research expenses were incurred.

 

  (j) Income Taxes

The Company provides for deferred taxes using the asset and liability approach. Under this method, deferred tax assets and liabilities are recognized for future tax consequences attributable to operating loss and tax credit carryforwards, as well as differences between the carrying amounts of existing assets and liabilities and their respective tax bases. The Company’s principal differences are related to the timing of deductibility of certain items, such as depreciation, amortization and expense for nonqualified stock options. Deferred tax assets and liabilities are measured using enacted tax rates that are expected to apply to taxable income in the years such temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period of enactment. The Company only recognizes income tax benefits associated with an income tax position where it is “more likely than not” that the position would be sustained upon examination by the taxing authorities.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Excluding the alternative minimum tax (AMT) tax credits, the Company will need to generate future taxable income of approximately $4.0 million in order to fully realize the deferred tax assets. Taxable income, excluding tax deductions generated by the exercise of nonqualified options, for the years ended December 31, 2011, 2010 and 2009 was approximately $5.7 million, $7.3 million and $7.0 million, respectively. Based upon the level of taxable income over the last three years and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at December 31, 2011. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.

The tax benefit associated with the exercise of nonqualified stock options is recognized when the benefit is used to offset income taxes payable.

The Company’s accounting policy with respect to interest and penalties arising from income tax settlements is to recognize them as part of the provision for income taxes.

 

  (k) Share-Based Payments

The Company recognizes compensation cost for all share-based payments issued, modified, repurchased or cancelled. The cost of stock options is measured based on the grant-date fair value using the Black-Scholes option-pricing model, and the expense is recognized over the employee’s requisite service period. Depending on the nature of the vesting provisions, restricted stock awards are measured using either the fair value on the grant date or the fair value of common stock on the date the vesting provisions lapse. Prior to the lapse for those options not valued on the grant date, the fair value is measured on the last day of the reporting period.

 

  (l) Research and Development

Research and development costs are expensed in the period incurred. Research and development costs are comprised mainly of clinical trial expenses, salary and wages and other related costs such as materials and supplies. Development expense includes activities performed by third-party providers participating in the Company’s clinical studies. The Company accounts for these costs based on estimates of work performed, patients enrolled or fixed fees for services.

 

  (m) Advertising Costs

Advertising costs are expensed as incurred and amounted to $0.9 million, $0.8 million and $1.4 million in 2011, 2010 and 2009, respectively, and are included as a component of selling and marketing expenses in the consolidated statements of income.

 

  (n) Selling and Marketing Expense

Selling and marketing expense consists primarily of expense relating to the promotion, distribution and sale of products, including royalty expense, salaries and related costs.

 

  (o) Distribution Costs

The Company expenses distribution costs as incurred. Distribution costs included in selling and marketing expenses amounted to $1.2 million in 2011 and 2010, and $1.1 million in 2009.

 

  (p) Cost of Products Sold

Cost of products sold consists principally of the cost to acquire each unit of product sold, including in-bound freight expense. Cost of products sold also includes expenses associated with the write-down of slow-moving or expired product.

 

  (q) Earnings per Share

Basic earnings per share is calculated by dividing net income attributable to common shareholders by the weighted-average number of shares outstanding. Except where the result would be antidilutive to income from continuing operations, diluted earnings per share is calculated by assuming the vesting of unvested restricted stock and the exercise of stock options and warrants, unrecognized compensation costs, as well as their related income tax benefits. The following table reconciles the numerator and the denominator used to calculate diluted earnings per share:

 

      September 30,       September 30,       September 30,  
    2011     2010     2009  
       

Numerator:

                        

Net income attributable to common shareholders

   $ 5,657,856     $ 2,456,680     $ 3,091,415  
   

 

 

    

 

 

    

 

 

  
       

Denominator:

                        

Weighted-average shares outstanding – basic

     20,342,913       20,333,932       14,199,479  

Convertible preferred stock shares

     —         —         986,840  

Dilutive effect of other securities

     229,219       724,645       3,047,852  
   

 

 

    

 

 

    

 

 

  
       

Weighted-average shares outstanding – diluted

     20,572,132       21,058,577       18,234,171  
   

 

 

    

 

 

    

 

 

  
       

Antidilutive restricted shares and options outstanding not included above

     1,079,904       640,718       246,332  
   

 

 

    

 

 

    

 

 

  

 

  (r) Comprehensive Income

Total comprehensive income was comprised solely of net income for all periods presented.

 

  (s) Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management of the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to estimates and assumptions include those related to chargebacks, rebates, discounts, credits for damaged product and returns, the valuation and determination of useful lives of intangible assets and the rate such assets are amortized, the realization of deferred tax assets, inventory reserves and stock-based compensation. Actual results could differ from those estimates.

 

  (t) Fair Value of Financial Instruments

The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, revolving line of credit and long-term debt. The carrying values for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short-term nature. The terms of the revolving line of credit and term debt include variable interest rates, which approximate current market rates. The term debt was paid in full during 2011.