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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020

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 001-36509

AMPHASTAR PHARMACEUTICALS, INC.

(Exact name of Registrant as specified in its charter)

Delaware

 

33-0702205

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer
Identification No.)

11570 6th Street

 

Rancho Cucamonga, CA

 

91730

(Address of principal executive offices)

(zip code)

(909) 980-9484

(Registrant’s telephone number, including area code)

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

Securities registered pursuant to Section 12(b) of the Act:

T

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

AMPH

The NASDAQ Stock Market LLC

The number of shares outstanding of the registrant’s common stock as of August 3, 2020 was 47,485,546.

AMPHASTAR PHARMACEUTICALS, INC.

TABLE OF CONTENTS

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020

Special Note About Forward-Looking Statements

Part I. FINANCIAL INFORMATION

PAGE

Item 1. Financial Statements (unaudited):

Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019

1

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2020 and 2019

2

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2020 and 2019

3

Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2020 and 2019

4

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019

6

Notes to Condensed Consolidated Financial Statements

7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

30

Item 3. Quantitative and Qualitative Disclosure about Market Risk

41

Item 4. Controls and Procedures

41

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

42

Item 1A. Risk Factors

42

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

46

Item 3. Defaults Upon Senior Securities

46

Item 4. Mine Safety Disclosures

46

Item 5. Other Information

46

Item 6. Exhibits

47

Signatures

48

SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, or Quarterly Report, contains “forward-looking statements” that involve substantial risks and uncertainties. In some cases, you can identify forward-looking statements by the following words: “may,” “might,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these identifying words. Forward-looking statements relate to future events or future financial performance or condition and involve known and unknown risks, uncertainties and other factors that could cause actual results, levels of activity, performance or achievement to differ materially from those expressed or implied by the forward-looking statements. These forward-looking statements include, but are not limited to, statements about:

our expectations regarding the sales and marketing of our products;
our expectations regarding our manufacturing and production and the integrity of our supply chain for our products, including the risks associated with our single source suppliers;
the impact of the COVID-19 pandemic and related responses of business and governments to the pandemic on our operations and personnel, and on commercial activity and demand across our business operations and results of operations;
interruptions to our manufacturing and production as a result of natural catastrophic events or other causes beyond our control such as power disruptions or widespread disease outbreaks, such as the COVID-19 pandemic;
global, national and local economic and market conditions, specifically with respect to geopolitical uncertainty, and the COVID-19 pandemic;
the timing and likelihood of U.S. Food and Drug Administration, or FDA, approvals and regulatory actions on our product candidates, manufacturing activities and product marketing activities;
our ability to advance product candidates in our platforms into successful and completed clinical trials and our subsequent ability to successfully commercialize our product candidates;
our ability to compete in the development and marketing of our products and product candidates;
our expectations regarding the business expansion plans for our Chinese subsidiary, ANP;
the potential for adverse application of environmental, health and safety and other laws and regulations on our operations;
our expectations for market acceptance of our new products and proprietary drug delivery technologies, as well as those of our active pharmaceutical ingredient, or API, customers;
the potential for our marketed products to be withdrawn due to patient adverse events or deaths, or if we fail to secure FDA approval for products subject to the Prescription Drug Wrap-Up program;
our expectations in obtaining insurance coverage and adequate reimbursement for our products from third-party payers;
the amount of price concessions or exclusion of suppliers adversely affecting our business;
our ability to establish and maintain intellectual property protection for our products and our ability to successfully defend our intellectual property in cases of alleged infringement;
the implementation of our business strategies, product development strategies and technology utilization;
the potential for exposure to product liability claims;
future acquisitions, divestitures or investments, including the anticipated benefits of such acquisitions, divestitures or investments;
our ability to expand internationally;
economic and industry trends and trend analysis;
our ability to remain in compliance with laws and regulations that currently apply or become applicable to our business both in the United States and internationally;
the impact of trade tariffs, export or import restrictions, or other trade barriers;
the impact of Patient Protection and Affordable Care Act (as amended) and other legislative and regulatory healthcare reforms in the countries in which we operate including the potential for drug price controls;
the impact of global and domestic tax reforms, including the Tax Cuts and Jobs Act of 2017, or the Tax Act, as amended by the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act;
the timing for completion and the validation of the new construction at our ANP and Amphastar facilities;
the timing and extent of share buybacks; and
our financial performance expectations, including our expectations regarding our backlog, revenue, cost of revenue, gross profit or gross margin, operating expenses, including changes in research and development, sales and marketing and general and administrative expenses, and our ability to achieve and maintain future profitability.

You should read this Quarterly Report and the documents that we reference elsewhere in this Quarterly Report completely and with the understanding that our actual results may differ materially from what we expect as expressed or implied by our forward-looking statements. In light of the significant risks and uncertainties to which our forward-looking statements are subject, you should not place undue reliance on or regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified timeframe, or at all. In particular, the extent of COVID-19’s impact on our business will depend on several factors, including the severity, duration and extent of the pandemic, as well as actions taken by governments, businesses,

and consumers in response to the pandemic, all of which continue to evolve and remain uncertain at this time. We discuss many of these risks and uncertainties in greater detail in this Quarterly Report and in our Annual Report on Form 10-K for the year ended December 31, 2019, particularly in Item 1A. “Risk Factors.” These forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report regardless of the time of delivery of this Quarterly Report, and such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Quarterly Report.

Unless expressly indicated or the context requires otherwise, references in this Quarterly Report to “Amphastar,” “the Company,” “we,” “our,” and “us” refer to Amphastar Pharmaceuticals, Inc. and our subsidiaries.

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

    

June 30, 

    

December 31, 

 

2020

2019

 

(unaudited)

ASSETS

Current assets:

Cash and cash equivalents

$

87,388

$

73,685

Restricted cash

1,865

1,865

Short-term investments

11,101

11,675

Restricted short-term investments

 

2,200

 

2,290

Accounts receivable, net

 

49,862

 

45,376

Inventories

 

104,726

 

110,501

Income tax refunds and deposits

 

682

 

311

Prepaid expenses and other assets

 

8,997

 

9,538

Total current assets

 

266,821

 

255,241

Property, plant, and equipment, net

 

238,236

 

233,856

Finance lease right-of-use assets

774

887

Operating lease right-of-use assets

17,086

18,805

Goodwill and intangible assets, net

 

40,271

 

41,153

Other assets

 

12,635

 

11,156

Deferred tax assets

 

24,235

 

25,873

Total assets

$

600,058

$

586,971

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable and accrued liabilities

$

75,385

$

77,051

Income taxes payable

 

2,345

 

2,042

Current portion of long-term debt

 

12,075

 

7,741

Current portion of operating lease liabilities

3,481

3,175

Total current liabilities

 

93,286

 

90,009

Long-term reserve for income tax liabilities

 

3,425

 

3,425

Long-term debt, net of current portion

 

34,622

 

39,394

Long-term operating lease liabilities, net of current portion

14,530

16,315

Deferred tax liabilities

 

760

 

867

Other long-term liabilities

 

10,998

 

9,433

Total liabilities

 

157,621

 

159,443

Commitments and contingencies

Stockholders’ equity:

Preferred stock: par value $0.0001; 20,000,000 shares authorized; no shares issued and outstanding

 

 

Common stock: par value $0.0001; 300,000,000 shares authorized; 54,372,275 and 47,494,909 shares issued and outstanding as of June 30, 2020 and 52,495,483 and 46,576,968 shares issued and outstanding as of December 31, 2019, respectively

 

5

 

5

Additional paid-in capital

 

396,841

 

367,305

Retained earnings

 

120,127

 

116,370

Accumulated other comprehensive loss

 

(5,173)

 

(4,687)

Treasury stock

 

(114,119)

 

(97,627)

Total Amphastar Pharmaceuticals, Inc. stockholders’ equity

 

397,681

 

381,366

Non-controlling interests

44,756

46,162

Total equity

442,437

427,528

Total liabilities and stockholders’ equity

$

600,058

$

586,971

See Accompanying Notes to Condensed Consolidated Financial Statements.

-1-

AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; in thousands, except per share data)

Three Months Ended

Six Months Ended

 

June 30, 

June 30, 

    

2020

    

2019

    

2020

    

2019

 

Net revenues

$

85,806

$

79,047

$

170,494

$

158,837

Cost of revenues

 

52,629

 

46,660

 

100,494

 

95,547

Gross profit

 

33,177

 

32,387

 

70,000

 

63,290

Operating expenses:

Selling, distribution, and marketing

 

4,026

 

2,992

 

7,320

6,133

General and administrative

 

15,924

 

12,426

 

26,670

28,753

Research and development

 

16,149

 

15,996

 

31,452

30,603

Total operating expenses

 

36,099

 

31,414

 

65,442

 

65,489

(Loss) Income from operations

 

(2,922)

 

973

 

4,558

 

(2,199)

Non-operating income (expenses):

Interest income

 

198

 

143

 

351

291

Interest expense

 

(35)

 

(24)

 

(111)

(54)

Other income (expenses), net

 

1,255

 

60,001

 

(497)

59,422

Total non-operating income (expenses), net

 

1,418

 

60,120

 

(257)

 

59,659

(Loss) Income before income taxes

 

(1,504)

 

61,093

 

4,301

 

57,460

Income tax (benefit) provision

 

(75)

 

14,173

 

2,205

12,694

Net (loss) income

$

(1,429)

$

46,920

$

2,096

$

44,766

Net loss attributable to non-controlling interests

$

(1,237)

$

(867)

$

(1,661)

$

(3,889)

Net (loss) income attributable to Amphastar Pharmaceuticals, Inc.

$

(192)

$

47,787

$

3,757

$

48,655

Net (loss) income per share attributable to Amphastar Pharmaceuticals, Inc. shareholders:

Basic

$

(0.00)

$

1.01

$

0.08

$

1.04

Diluted

$

(0.00)

$

0.96

$

0.08

$

0.97

Weighted-average shares used to compute net (loss) income per share attributable to Amphastar Pharmaceuticals, Inc. shareholders:

Basic

 

46,753

 

47,107

 

46,581

 

46,925

Diluted

 

46,753

 

49,894

 

48,458

 

50,155

See Accompanying Notes to Condensed Consolidated Financial Statements.

-2-

AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited; in thousands)

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2020

    

2019

    

2020

    

2019

 

Net (loss) income attributable to Amphastar Pharmaceuticals, Inc.

$

(192)

$

47,787

$

3,757

$

48,655

Other comprehensive income (loss) income attributable to Amphastar Pharmaceuticals, Inc., net of income taxes

Foreign currency translation adjustment

 

288

 

(97)

 

(486)

 

(210)

Total other comprehensive income (loss) income attributable to Amphastar Pharmaceuticals, Inc.

 

288

 

(97)

 

(486)

 

(210)

Total comprehensive income attributable to Amphastar Pharmaceuticals, Inc.

$

96

$

47,690

$

3,271

$

48,445

See Accompanying Notes to Condensed Consolidated Financial Statements.

-3-

AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited; in thousands, except share data)

Common Stock

Accumulated

Treasury Stock

Total

Additional

Other

Amphastar

Non-

Paid-in

Retained

Comprehensive

Stockholders'

controlling

Shares

Amount

Capital

Earnings

loss

Shares

Amount

Equity

Interest

Total

Balance as of December 31, 2019

 

52,495,483

$

5

$

367,305

$

116,370

$

(4,687)

 

(5,918,515)

$

(97,627)

$

381,366

$

46,162

$

427,528

Net income attributable to Amphastar Pharmaceuticals, Inc.

 

 

 

 

3,949

 

 

 

 

3,949

 

 

3,949

Other comprehensive loss attributable to Amphastar Pharmaceuticals, Inc.

 

 

 

 

 

(774)

 

 

 

(774)

 

 

(774)

Net loss attributable to non-controlling interest

(424)

(424)

Purchase of treasury stock

 

 

 

 

 

 

(647,246)

(10,950)

(10,950)

 

(10,950)

Issuance of treasury stock in connection with the Company's equity plans

(84)

6,873

84

Issuance of common stock in connection with the Company's equity plans

 

369,508

 

 

(1,238)

 

 

 

 

 

(1,238)

 

 

(1,238)

Share-based compensation expense

 

 

 

5,161

 

 

 

 

 

5,161

 

121

 

5,282

Balance as of March 31, 2020

 

52,864,991

$

5

$

371,144

$

120,319

$

(5,461)

 

(6,558,888)

$

(108,493)

$

377,514

$

45,859

$

423,373

Net loss attributable to Amphastar Pharmaceuticals, Inc.

 

 

 

 

(192)

 

 

 

 

(192)

 

 

(192)

Other comprehensive income attributable to Amphastar Pharmaceuticals, Inc.

 

 

 

 

 

288

 

 

 

288

 

 

288

Net loss attributable to non-controlling interest

(1,237)

(1,237)

Purchase of treasury stock

 

 

 

 

 

 

(329,391)

(5,756)

(5,756)

 

(5,756)

Issuance of treasury stock in connection with the Company's equity plans

 

 

(130)

 

 

 

10,913

130

 

Issuance of common stock in connection with the Company's equity plans

 

1,507,284

 

 

19,448

 

 

 

 

 

19,448

 

 

19,448

Share-based compensation expense

 

 

 

6,379

 

 

 

 

 

6,379

 

134

 

6,513

Balance as of June 30, 2020

 

54,372,275

$

5

396,841

$

120,127

$

(5,173)

 

(6,877,366)

$

(114,119)

$

397,681

$

44,756

$

442,437

-4-

AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited; in thousands, except share data)

Common Stock

Accumulated

Treasury Stock

Total

Additional

Other

Amphastar

Non-

Paid-in

Retained

Comprehensive

Stockholders'

controlling

Shares

Amount

Capital

Earnings

loss

Shares

Amount

Equity

Interest

Total

Balance as of December 31, 2018

 

51,438,675

$

5

$

344,434

$

67,485

$

(4,013)

 

(4,807,557)

$

(75,476)

$

332,435

$

31,924

$

364,359

Beginning balance adjustment as a result of the adoption of new accounting standards

(54)

(54)

(54)

Net income attributable to Amphastar Pharmaceuticals, Inc.

 

 

 

 

868

 

 

 

 

868

 

 

868

Other comprehensive loss attributable to Amphastar Pharmaceuticals, Inc.

 

 

 

 

 

(113)

 

 

 

(113)

 

 

(113)

Proceeds from the private placement of ANP

2,588

2,588

16,378

18,966

Net loss attributable to non-controlling interest

(3,022)

(3,022)

Purchase of treasury stock

 

 

 

 

 

 

(145,479)

(3,015)

(3,015)

 

(3,015)

Issuance of treasury stock in connection with the Company's equity plans

(98)

8,334

98

Issuance of common stock in connection with the Company's equity plans

 

604,651

 

 

(2,397)

 

 

 

 

 

(2,397)

 

 

(2,397)

Share-based compensation expense

 

 

 

4,674

 

 

 

 

 

4,674

 

 

4,674

Balance as of March 31, 2019

 

52,043,326

$

5

$

349,201

$

68,299

$

(4,126)

 

(4,944,702)

$

(78,393)

$

334,986

$

45,280

$

380,266

Net income attributable to Amphastar Pharmaceuticals, Inc.

 

 

 

 

47,787

 

 

 

 

47,787

 

 

47,787

Other comprehensive loss attributable to Amphastar Pharmaceuticals, Inc.

 

 

 

 

 

(97)

 

 

 

(97)

 

 

(97)

Net loss attributable to non-controlling interest

(867)

(867)

Purchase of treasury stock

 

 

 

 

 

 

(50,980)

(1,073)

(1,073)

 

(1,073)

Issuance of treasury stock in connection with the Company's equity plans

 

 

(7)

 

 

 

597

7

 

Issuance of common stock in connection with the Company's equity plans

 

169,434

 

 

2,240

 

 

 

 

 

2,240

 

 

2,240

Share-based compensation expense

 

 

 

4,002

 

 

 

 

 

4,002

 

30

 

4,032

Balance as of June 30, 2019

 

52,212,760

$

5

$

355,436

$

116,086

$

(4,223)

 

(4,995,085)

$

(79,459)

$

387,845

$

44,443

$

432,288

See Accompanying Notes to Condensed Consolidated Financial Statements.

-5-

AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)

Six Months Ended

June 30, 

    

2020

    

2019

 

Cash Flows From Operating Activities:

Net income

$

2,096

$

44,766

Reconciliation to net cash provided by operating activities:

Loss on impairment and disposal of assets

 

30

 

850

Depreciation of property, plant, and equipment

 

9,531

 

8,311

Amortization of product rights, trademarks, and patents

 

509

 

526

Operating lease right-of-use asset amortization

1,700

1,390

Share-based compensation expense

 

11,795

 

8,706

Changes in deferred taxes, net

 

1,638

 

9,872

Changes in operating assets and liabilities:

Accounts receivable, net

 

(4,454)

 

1,700

Inventories

 

5,760

 

(30,012)

Prepaid expenses and other assets

 

541

 

(1,221)

Income tax refunds, deposits, and payables, net

 

(78)

 

1,784

Operating lease liabilities

(1,565)

(1,297)

Accounts payable and accrued liabilities

 

4,063

 

2,738

Net cash provided by operating activities

 

31,566

 

48,113

Cash Flows From Investing Activities:

Purchases and construction of property, plant, and equipment

 

(18,895)

 

(24,467)

Purchase of short-term investments

669

Payment of deposits and other assets

 

(562)

 

(86)

Net cash used in investing activities

 

(18,788)

 

(24,553)

Cash Flows From Financing Activities:

Proceeds from the private placement of ANP

18,298

Proceeds from equity plans, net of withholding tax payments

 

18,210

 

(157)

Purchase of treasury stock

 

(16,706)

 

(4,088)

Proceeds from borrowing under lines of credit

 

705

 

Repayments under lines of credit

 

 

(347)

Proceeds from issuance of long-term debt

 

3,067

 

Principal payments on long-term debt

 

(4,269)

 

(3,219)

Net cash provided by financing activities

 

1,007

 

10,487

Effect of exchange rate changes on cash

 

(82)

 

(11)

Net increase in cash, cash equivalents, and restricted cash

 

13,703

 

34,036

Cash, cash equivalents, and restricted cash at beginning of period

 

75,550

 

88,202

Cash, cash equivalents, and restricted cash at end of period

$

89,253

$

122,238

Noncash Investing and Financing Activities:

Capital expenditure included in accounts payable

$

9,662

$

6,631

Operating lease right-of-use assets

$

$

7,671

Equipment acquired under finance leases

$

61

$

61

Supplemental Disclosures of Cash Flow Information:

Interest paid, net of capitalized interest

$

1,119

$

1,277

Income taxes paid

$

662

$

1,147

See Accompanying Notes to Condensed Consolidated Financial Statements.

-6-

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. General

Amphastar Pharmaceuticals, Inc., a Delaware corporation (together with its subsidiaries, hereinafter referred to as the “Company”) is a specialty pharmaceutical company that develops, manufactures, markets, and sells generic and proprietary injectable, inhalation, and intranasal products, including products with high technical barriers to market entry. Additionally, the Company sells insulin active pharmaceutical ingredient, or API, products. Most of the Company’s products are used in hospital or urgent care clinical settings and are primarily contracted and distributed through group purchasing organizations and drug wholesalers. The Company’s insulin API products are sold to other pharmaceutical companies for use in their own products and are being used by the Company in the development of injectable finished pharmaceutical products. The Company’s inhalation product, Primatene® Mist, is primarily distributed through drug retailers.

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2019 and the notes thereto as filed with the Securities and Exchange Commission, or SEC, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles, or GAAP, have been condensed or omitted from the accompanying condensed consolidated financial statements. The accompanying year-end condensed consolidated balance sheet was derived from the audited financial statements. The accompanying interim financial statements are unaudited, but reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the Company’s consolidated financial position, results of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the periods presented. Unless otherwise noted, all such adjustments are of a normal, recurring nature. The Company’s results of operations, comprehensive income (loss) and cash flows for the interim periods are not necessarily indicative of the results of operations and cash flows that it may achieve in future periods.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries, and are prepared in accordance with United States generally accepted accounting principles, or GAAP. All intercompany activity has been eliminated in the preparation of the condensed consolidated financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments necessary to present fairly the consolidated financial position, results of operations, and cash flows of the Company.

The Company’s subsidiaries include: (1) International Medication Systems, Limited, or IMS, (2) Armstrong Pharmaceuticals, Inc., or Armstrong, (3) Amphastar Nanjing Pharmaceuticals Inc., or ANP, (4) Nanjing Letop Biological Technology Co., Ltd., or Letop, (5) Nanjing Hanxin Pharmaceutical Technology Co., Ltd., or Hanxin, (6) Nanjing Hanxin Biomedical Testing Service Co., Ltd., or Hanxin Biomedical, (7) Nanjing Baixin Trading Co. Ltd., or Baixin, (8) Amphastar France Pharmaceuticals, S.A.S., or AFP, (9) Amphastar UK Ltd., or AUK, and (10) International Medication Systems (UK) Limited, or IMS UK.

In July 2018, the Company’s Chinese subsidiary, ANP, completed a private placement of its common equity interest to accredited investors for aggregate gross proceeds of approximately $57 million, a portion of which was received in 2019. The Company has retained approximately 58% of the equity interest in ANP following the private placement and continues to consolidate the financial results of ANP with the Company’s results of operations. ANP’s net income after July 2, 2018, was attributed to the Company in accordance with the Company’s equity interest of approximately 58% in ANP.

-7-

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

COVID-19 Pandemic

The Company is subject to risks and uncertainties as a result of the novel coronavirus pandemic, or COVID-19. The extent of the impact of the COVID-19 pandemic on the Company’s business is highly uncertain and difficult to predict, as the response to the pandemic is in its initial stages and information is rapidly evolving. The Company considered the impact of COVID-19 on the assumptions and estimates used to determine the results reported and asset valuations as of June 30, 2020.

In March 2020, the World Health Organization declared the outbreak of a novel coronavirus, or COVID-19, as a pandemic, which continues to spread throughout the world, including locations where the Company operates, such as the United States, China and France. The Company has been actively monitoring the COVID-19 pandemic and its impact globally. In late January 2020, China implemented extensive curfews and travel restrictions to control the outbreak, and started easing these restrictions in March. Our business operations in China experienced a temporary disruption but resumed full operation in February 2020. In March 2020, France also implemented a stay-at-home order limiting movement and restricting travel, however, the Company was deemed to be an essential business and was not impacted by the restrictions. In March 2020, the Governors of the States of California and Massachusetts declared a health emergency and issued orders to close all nonessential business; as a specialty pharmaceutical company, the Company was deemed to be an essential businesses. In June 2020, some but not all of the restrictions were lifted in China, France, and states where the Company operates, and most businesses were allowed to reopen. All of the Company’s production facilities continued to operate during the quarter as they had prior to the COVID-19 pandemic with very little change, other than for enhanced safety measures intended to prevent the spread of the virus.

It is not possible at this time to estimate the complete impact that COVID-19 could have on the Company’s business, as the impact will depend on future developments, which are highly uncertain and cannot be predicted. Infections may resurge or become more widespread and the limitation on the Company’s ability to travel and timely sell and distribute its products, as well as any closures or supply disruptions, may be extended for longer periods of time, all of which would have a negative impact on the Company’s business, financial condition and operating results. The Company will continue to monitor the impact of COVID-19 on all aspects of its business.

Use of Estimates

The preparation of condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The principal accounting estimates include: determination of allowances for credit losses, allowance for discounts, provision for chargebacks and rebates, provision for product returns, adjustment of inventory to their net realizable values, impairment of long-lived and intangible assets and goodwill, workers’ compensation liabilities, litigation reserves, stock price volatilities for share-based compensation expense, valuation allowances for deferred tax assets, and liabilities for uncertain income tax positions.

Foreign Currency

The functional currency of the Company, its domestic subsidiaries, its Chinese subsidiary, ANP, and its U.K. subsidiary, AUK, is the USD. ANP maintains its books of record in Chinese yuan. These books are remeasured into the functional currency of USD using the current or historical exchange rates. The resulting currency remeasurement adjustments and other transactional foreign currency exchange gains and losses are reflected in the Company’s condensed consolidated statements of operations.

The Company’s French subsidiary, AFP, maintains its book of record in euros. ANP’s Chinese subsidiaries maintain their books of record in Chinese yuan. AUK’s subsidiary, IMS UK, maintains its book of record in British pounds. These local currencies have been determined to be the subsidiaries’ respective functional currencies. These books of record are translated into USD using average exchange rates during the period. Assets and liabilities are translated at the rate of exchange prevailing on the balance sheet date. Equity is translated at the prevailing rate of exchange at the date of the

-8-

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

equity transactions. Translation adjustments are reflected in stockholders’ equity and are included as a component of other accumulated comprehensive income (loss). The unrealized gains or losses of intercompany foreign currency transactions that are of a long-term investment nature are reported in other accumulated comprehensive income (loss). The unrealized gains or losses of intercompany foreign currency transactions that are of a long-term investment nature for the three months ended June 30, 2020, was $0.7 million gain and an immaterial loss for the six months ended June 30, 2020. For the three and six months ended June 30, 2019, the unrealized gains or losses of intercompany foreign currency transactions that are of a long-term investment nature was $0.4 million gain and $0.2 million loss, respectively.

Comprehensive Income (Loss)

For the three and six months ended June 30, 2020 and 2019, the Company included its foreign currency translation gain or loss as part of its comprehensive income (loss). There was no material income tax (benefit) expense allocated to other comprehensive income (loss) for the three and six months ended June 30, 2020 and 2019.

Advertising Expense

In connection with the launch of Primatene® Mist, in July 2019, the Company began to incur advertising expenses. Advertising expenses are recorded as incurred, except for expenses related to the development of a major commercial or media campaign, which are expensed in the period in which the commercial or campaign is first presented, and are reflected as a component of selling, distribution, and marketing in the Company’s condensed consolidated statement of operations. For the three and six months ended June 30, 2020, advertising expenses were $1.4 million and $2.4 million, respectively.

Financial Instruments

The carrying amounts of cash and cash equivalents, short-term investments, restricted cash and short-term investments, accounts receivable, accounts payable, accrued expenses, and short-term borrowings approximate fair value due to the short maturity of these items. The majority of the Company’s long-term obligations consist of variable rate debt, and their carrying value approximates fair value as the stated borrowing rates are comparable to rates currently offered to the Company for instruments with similar maturities. The Company at times enters into fixed interest rate swap contracts to exchange the variable interest rates for fixed interest rates without the exchange of the underlying notional debt amounts. Such interest rate swap contracts are recorded at their fair values.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash, money market accounts, certificates of deposit and highly liquid investments purchased with original maturities of three months or less.

Short-Term Investments

Short-term investments as of June 30, 2020 and December 31, 2019 consisted of certificates of deposit and investment grade corporate bonds with original expiration dates within 12 months.

Restricted Cash

Restricted cash is collateral required for the Company to guarantee certain vendor payments in France. As of June 30, 2020 and December 31, 2019, the restricted cash balance was $1.9 million.

Restricted Short-Term Investments

Restricted short-term investments consist of certificates of deposit that are collateral for standby letter of credit to qualify for workers’ compensation self-insurance. The certificates of deposit have original maturities greater than three months.

-9-

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As of June 30, 2020 and December 31, 2019, the balance of restricted short-term investments was $2.2 million and $2.3 million, respectively.

Deferred Income Taxes

The Company utilizes the liability method of accounting for income taxes, under which deferred taxes are determined based on the temporary differences between the financial statements and the tax basis of assets and liabilities using enacted tax rates. A valuation allowance is recorded when it is more likely than not that the deferred tax assets will not be realized.

Recent Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board, or FASB, issued Accounting Standard Update, or ASU, No. 2019-12 Simplifying the Accounting for Income Taxes (Topic 740), which simplifies various aspects related to accounting for income taxes. The amendment also improves consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The guidance is effective for the Company’s interim and annual reporting periods during the year ended December 31, 2021, with early adoption permitted, including in any interim period. The Company is currently evaluating the impact that the adoption of this guidance will have on its condensed consolidated financial statements and related disclosures.

In April 2020, the FASB issued ASU No. 2020-04 Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The Company is currently evaluating the impact that the adoption of this guidance will have on its condensed consolidated financial statements and related disclosures.

Note 3. Revenue Recognition

In accordance with Accounting Standard Codification, or ASC, 606 Revenue from Contacts with Customers, revenue is recognized at the time that the Company’s customers obtain control of the promised goods.

Generally, revenue is recognized at the time of product delivery to the Company’s customers. In some cases, revenue is recognized at the time of shipment when stipulated by the terms of the sale agreements.

The consideration the Company receives in exchange for its goods or services is only recognized when it is probable that a significant reversal will not occur. The consideration to which the Company expects to be entitled includes a stated list price, less various forms of variable consideration. The Company makes significant estimates for related variable consideration at the point of sale, including chargebacks, rebates, product returns, other discounts and allowances.

Provisions for estimated chargebacks, rebates, discounts, product returns and credit losses are made at the time of sale and are analyzed and adjusted, if necessary, at each balance sheet date.

Revenues derived from contract manufacturing services are recognized when third-party products are shipped to customers, and after the customer has accepted test samples of the products to be shipped.

The Company’s accounting policy is to review each agreement involving contract development and manufacturing services to determine if there are multiple revenue-generating activities that constitute more than one unit of accounting. Revenues are recognized for each unit of accounting based on revenue recognition criteria relevant to that unit. The Company does not have any revenue arrangements with multiple performance obligations.

-10-

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Provision for Chargebacks and Rebates

The provision for chargebacks and rebates is a significant estimate used in the recognition of revenue. Wholesaler chargebacks relate to sales terms under which the Company agrees to reimburse wholesalers for differences between the gross sales prices at which the Company sells its products to wholesalers and the actual prices of such products that wholesalers resell under the Company’s various contractual arrangements with third parties such as hospitals and group purchasing organizations in the United States. Rebates include primarily amounts paid to retailers, payers, and providers in the United States, including those paid to state Medicaid programs, and are based on contractual arrangements or statutory requirements. The Company estimates chargebacks and rebates using the expected value method at the time of sale to wholesalers based on wholesaler inventory stocking levels, historic chargeback and rebate rates, and current contract pricing.

The provision for chargebacks and rebates is reflected as a component of net revenues. The following table is an analysis of the chargeback and rebate provision:

Six Months Ended

 

June 30, 

2020

2019

 

(in thousands)

 

Beginning balance

    

$

21,644

    

$

22,423

Provision for chargebacks and rebates

 

69,424

 

58,001

Credits and payments issued to third parties

 

(72,625)

 

(61,704)

Ending balance

$

18,443

$

18,720

Changes in the chargeback provision from period to period are primarily dependent on the Company’s sales to its wholesalers, the level of inventory held by wholesalers, and the wholesalers’ customer mix. Changes in the rebate provision from period to period are primarily dependent on retailer’s and other indirect customers’ purchases. The approach that the Company uses to estimate chargebacks has been consistently applied for all periods presented. Variations in estimates have been historically small. The Company continually monitors the provision for chargebacks and rebates and makes adjustments when it believes that the actual chargebacks and rebates may differ from the estimates. The settlement of chargebacks and rebates generally occurs within 30 days to 60 days after the sale to wholesalers. Accounts receivable and/or accounts payable and accrued liabilities are reduced and/or increased by the chargebacks and rebate amounts depending on whether the Company has the right to offset with the customer. Of the provision for chargebacks and rebates as of June 30, 2020 and December 31, 2019, $14.1 million and $15.4 million were included in accounts receivable, net, on the condensed consolidated balance sheets, respectively. The remaining provision as of June 30, 2020 and December 31, 2019 of $4.3 million and $6.2 million, respectively, were included in accounts payable and accrued liabilities.

Accrual for Product Returns

The Company offers most customers the right to return qualified excess or expired inventory for partial credit; however, API product sales are generally non-returnable. The Company’s product returns primarily consist of the returns of expired products from sales made in prior periods. Returned products cannot be resold. At the time product revenue is recognized, the Company records an accrual for product returns estimated using the expected value method. The accrual is based, in part, upon the historical relationship of product returns to sales and customer contract terms. The Company also assesses other factors that could affect product returns including market conditions, product obsolescence, and the introduction of new competition. Although these factors do not normally give the Company’s customers the right to return products outside of the regular return policy, the Company realizes that such factors could ultimately lead to increased returns. The Company analyzes these situations on a case-by-case basis and makes adjustments to the product return reserve as appropriate.

-11-

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The provision for product returns is reflected as a component of net revenues. The following table is an analysis of the product return liability:

Six Months Ended

 

June 30, 

2020

2019

 

(in thousands)

 

Beginning balance

    

$

10,339

    

$

8,030

Provision for product returns

 

6,208

 

3,654

Credits issued to third parties

 

(3,989)

 

(2,243)

Ending balance

$

12,558

$

9,441

Of the provision of product returns as of June 30, 2020 and December 31, 2019, $8.3 million and $7.1 million, respectively, were included in accounts payable and accrued liabilities on the condensed consolidated balance sheets. The remaining provision as of June 30, 2020 and December 31, 2019, of $4.3 million and $3.2 million, respectively, were included in other long-term liabilities. For the six months ended June 30, 2020 and 2019, the Company’s aggregate product return rate was 1.3% and 1.5% of qualified sales, respectively.

Note 4. (Loss) Income per Share Attributable to Amphastar Pharmaceuticals, Inc. Shareholders

Basic net (loss) income per share attributable to Amphastar Pharmaceuticals, Inc. shareholders is calculated based upon the weighted-average number of shares outstanding during the period. Diluted net (loss) income per share attributable to Amphastar Pharmaceuticals, Inc. shareholders gives effect to all potential dilutive shares outstanding during the period, such as stock options, non-vested restricted stock units and shares issuable under the Company’s Employee Stock Purchase Plan, or ESPP and the reallocation of net income attributable to non-controlling interest from the assumed dilutive effect of stock options issued under the 2018 ANP Equity Incentive Plan, or the 2018 Plan.

As the Company reported a net loss for the three months ended June 30, 2020, the diluted net loss per share attributable to Amphastar Pharmaceuticals, Inc. shareholders, as reported, equals the basic net loss per share attributable to Amphastar Pharmaceuticals, Inc. shareholders since the effect of the assumed exercise of stock options, vesting of non-vested RSUs, and issuance of common shares under the Company’s ESPP are anti-dilutive. Total stock options, non-vested RSUs, and shares issuable under the Company’s ESPP excluded from the three months ended June 30, 2020 net loss per share were 8,887,036 stock options, 1,176,479 non-vested RSUs, and 60,386 shares issuable under the ESPP.

For the six months ended June 30, 2020, options to purchase 1,928,773 shares of stock, with a weighted-average exercise price of $20.84 per share, and the reallocation of net income attributable to non-controlling interest were excluded in the computation of diluted net income per common share attributable to Amphastar Pharmaceuticals, Inc.’s shareholders because the effect would be anti-dilutive.

For the three and six months ended June 30, 2019, options to purchase 783,001 and 762,937 shares of stock, respectively, with a weighted-average exercise price of $21.98 per share and $22.00 per share, respectively, and the reallocation of net income attributable to non-controlling interest were excluded in the computation of diluted net income per common share attributable to Amphastar Pharmaceuticals, Inc.’s shareholders because the effect would be anti-dilutive.

-12-

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table provides the calculation of basic and diluted net (loss) income per share attributable to Amphastar Pharmaceuticals, Inc. shareholders for each of the periods presented:

Three Months Ended

Six Months Ended

June 30, 

June 30, 

2020

2019

2020

2019

(in thousands, except per share data)

Basic and dilutive numerator:

    

    

    

    

    

    

    

    

 

Net (loss) income attributable to Amphastar Pharmaceuticals, Inc.

$

(192)

$

47,787

$

3,757

$

48,655

Denominator:

Weighted-average shares outstanding — basic

 

46,753

 

47,107

 

46,581

 

46,925

Net effect of dilutive securities: