amph_Current_Folio_10Q

Table of Contents

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, 2018

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, including 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 (1) has submitted 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 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, 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  ☒

 

The number of shares outstanding of the registrant’s only class of common stock as of August 2, 2018 was 46,256,454.

 

 


 

Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

TABLE OF CONTENTS

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018

 

Special Note About Forward-Looking Statements 

 

 

 

Part I. FINANCIAL INFORMATION 

 

 

PAGE

Item 1. Financial Statements (unaudited)

 

 

Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017 

 

1

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2018 and 2017 

 

2

Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2018 and 2017 

 

3

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017 

 

4

Notes to Condensed Consolidated Financial Statements 

 

5

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

 

31

Item 3. Quantitative and Qualitative Disclosure about Market Risk 

 

41

Item 4. Controls and Procedures 

 

42

Part II. OTHER INFORMATION 

Item 1. Legal Proceedings 

 

43

Item 1A. Risk Factors 

 

43

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

 

49

Item 3. Defaults Upon Senior Securities 

 

49

Item 4. Mine Safety Disclosures 

 

49

Item 5. Other Information 

 

49

Item 6. Exhibits 

 

50

Signatures 

 

51

 

 

 


 

Table of Contents

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 timing and likelihood of 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 of 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 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 global and domestic tax reform, including the Tax Cuts and Jobs Act of 2017;

·

the impact of trade tariffs or other trade barriers;

 

·

the timing for completion of the validation of the new construction at our IMS facility; 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. 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, 2017, 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.

 

 


 

Table of Contents

PART I – FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

 

2018

 

2017

 

 

 

(unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

48,070

 

$

65,594

 

Short-term investments

 

 

2,818

 

 

2,635

 

Restricted cash and short-term investments

 

 

4,155

 

 

4,155

 

Accounts receivable, net

 

 

41,279

 

 

35,996

 

Inventories

 

 

61,678

 

 

63,609

 

Income tax refunds and deposits

 

 

7,542

 

 

6,036

 

Prepaid expenses and other assets

 

 

4,404

 

 

9,753

 

Total current assets

 

 

169,946

 

 

187,778

 

 

 

 

 

 

 

 

 

Property, plant, and equipment, net

 

 

198,241

 

 

185,339

 

Goodwill and intangible assets, net

 

 

43,450

 

 

45,140

 

Other assets

 

 

11,752

 

 

8,663

 

Deferred tax assets

 

 

28,257

 

 

27,745

 

 

 

 

 

 

 

 

 

Total assets

 

$

451,646

 

$

454,665

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

67,092

 

$

57,555

 

Income taxes payable

 

 

1,607

 

 

3,325

 

Current portion of long-term debt and capital leases

 

 

18,891

 

 

6,312

 

Total current liabilities

 

 

87,590

 

 

67,192

 

 

 

 

 

 

 

 

 

Long-term reserve for income tax liabilities

 

 

879

 

 

879

 

Long-term debt and capital leases, net of current portion

 

 

33,695

 

 

40,844

 

Deferred tax liabilities

 

 

1,325

 

 

1,361

 

Other long-term liabilities

 

 

7,631

 

 

7,060

 

Total liabilities

 

 

131,120

 

 

117,336

 

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; 50,661,676 and 46,416,789 shares issued and outstanding as of June 30, 2018 and 50,039,212 and 46,623,581 shares issued and outstanding as of December 31, 2017, respectively

 

 

 5

 

 

 5

 

Additional paid-in capital

 

 

322,357

 

 

313,891

 

Retained earnings

 

 

66,780

 

 

76,235

 

Accumulated other comprehensive loss

 

 

(3,166)

 

 

(2,100)

 

Treasury stock

 

 

(65,450)

 

 

(50,702)

 

Total stockholders’ equity

 

 

320,526

 

 

337,329

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

451,646

 

$

454,665

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

-1-


 

Table of Contents

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, 

 

 

    

2018

    

2017

    

2018

    

2017

 

Net revenues

 

$

71,040

 

$

65,187

 

$

129,433

 

$

121,857

 

Cost of revenues

 

 

44,884

 

 

38,440

 

 

86,216

 

 

72,282

 

Gross profit

 

 

26,156

 

 

26,747

 

 

43,217

 

 

49,575

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating (income) expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, distribution, and marketing

 

 

1,876

 

 

1,596

 

 

3,597

 

 

3,075

 

General and administrative

 

 

11,669

 

 

12,234

 

 

22,667

 

 

23,572

 

Research and development

 

 

15,468

 

 

10,732

 

 

29,728

 

 

21,982

 

Gain on sale of intangible assets

 

 

 —

 

 

 —

 

 

 —

 

 

(2,643)

 

Total operating expenses

 

 

29,013

 

 

24,562

 

 

55,992

 

 

45,986

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

 

(2,857)

 

 

2,185

 

 

(12,775)

 

 

3,589

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-operating income (expenses):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

106

 

 

87

 

 

230

 

 

178

 

Interest expense

 

 

(100)

 

 

(237)

 

 

(118)

 

 

(428)

 

Other income (expenses), net

 

 

(1,265)

 

 

1,138

 

 

(483)

 

 

1,338

 

Total non-operating income (expenses), net

 

 

(1,259)

 

 

988

 

 

(371)

 

 

1,088

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

(4,116)

 

 

3,173

 

 

(13,146)

 

 

4,677

 

Income tax expense (benefit)

 

 

(1,326)

 

 

1,201

 

 

(3,110)

 

 

1,812

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(2,790)

 

$

1,972

 

$

(10,036)

 

$

2,865

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.06)

 

$

0.04

 

$

(0.22)

 

$

0.06

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

(0.06)

 

$

0.04

 

$

(0.22)

 

$

0.06

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares used to compute net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

46,557

 

 

46,025

 

 

46,535

 

 

46,047

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

46,557

 

 

47,866

 

 

46,535

 

 

47,962

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

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Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited; in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2018

    

2017

    

2018

    

2017

 

Net income (loss)

 

$

(2,790)

 

$

1,972

 

$

(10,036)

 

$

2,865

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(2,256)

 

 

1,010

 

 

(1,066)

 

 

1,476

 

Total other comprehensive income (loss)

 

 

(2,256)

 

 

1,010

 

 

(1,066)

 

 

1,476

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

$

(5,046)

 

$

2,982

 

$

(11,102)

 

$

4,341

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

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Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 

 

 

    

2018

    

2017

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

Net income (loss)

 

$

(10,036)

 

$

2,865

 

Reconciliation to net cash provided by operating activities:

 

 

 

 

 

 

 

Loss (gain) on disposal and impairment of long-lived assets

 

 

743

 

 

(2,561)

 

Depreciation of property, plant, and equipment

 

 

6,570

 

 

6,235

 

Amortization of product rights, trademarks, and patents

 

 

1,451

 

 

1,426

 

Share-based compensation expense

 

 

8,862

 

 

8,749

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(5,221)

 

 

2,820

 

Inventories

 

 

1,625

 

 

6,965

 

Prepaid expenses and other assets

 

 

1,715

 

 

(1,106)

 

Income tax refund, deposits, and payable

 

 

(3,224)

 

 

(2,758)

 

Accounts payable and accrued liabilities

 

 

10,408

 

 

4,337

 

Net cash provided by operating activities

 

 

12,893

 

 

26,972

 

 

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

Purchases and construction of property, plant, and equipment

 

 

(24,591)

 

 

(13,568)

 

Sale of intangible assets

 

 

4,400

 

 

2,000

 

Purchase of short-term investments

 

 

(204)

 

 

(1,261)

 

Maturity of short-term investments

 

 

 —

 

 

1,061

 

Changes in short-term investments

 

 

 —

 

 

(900)

 

Payment of deposits and other assets

 

 

(114)

 

 

(1,123)

 

Net cash used in investing activities

 

 

(20,509)

 

 

(13,791)

 

 

 

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

Proceeds from equity plans, net of withholding tax payments

 

 

(294)

 

 

7,278

 

Purchase of treasury stock

 

 

(14,851)

 

 

(17,181)

 

Proceeds from borrowing under lines of credit

 

 

261

 

 

 —

 

Proceeds from issuance of long-term debt

 

 

8,000

 

 

11,118

 

Principal payments on long-term debt

 

 

(2,834)

 

 

(2,618)

 

Net cash used in financing activities

 

 

(9,718)

 

 

(1,403)

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

(190)

 

 

277

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash, cash equivalents, and restricted cash

 

 

(17,524)

 

 

12,055

 

 

 

 

 

 

 

 

 

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

 

 

67,459

 

 

72,354

 

 

 

 

 

 

 

 

 

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

 

$

49,935

 

$

84,409

 

 

 

 

 

 

 

 

 

Noncash Investing and Financing Activities:

 

 

 

 

 

 

 

Equipment acquired under capital leases

 

$

14

 

$

 —

 

 

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

 

Interest paid, net of capitalized interest

 

$

1,078

 

$

792

 

Income taxes paid

 

$

149

 

$

4,569

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1.  General

 

Amphastar Pharmaceuticals, Inc., a California corporation, was incorporated in February 1996 and merged with and into Amphastar Pharmaceuticals, Inc., a Delaware corporation, in July 2004 (together with its subsidiaries, hereinafter referred to as “the Company”). The Company is a specialty pharmaceutical company that primarily 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 products will be primarily distributed through drug retailers if they are approved and brought to market.

 

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, 2017, 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, 2017. 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) 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 wholly-owned subsidiaries, and are prepared in accordance with the requirements of the SEC for interim reporting. Effective January 1, 2018, the Company retrospectively adopted Accounting Standard Update, or ASU, No. 2016-15 Classification of Certain Cash Receipts and Cash Payments. Certain amounts in the prior year’s condensed consolidated statement of cash flows have been reclassified to conform to the current quarter presentation. This reclassification has no impact on net income or cash flows. All significant 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 (consisting only of normal recurring 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 Fine Chemistry Co., Ltd., or Letop, (5) Nanjing Hanxin Medical Technology Co., Ltd, or Hanxin, (6) Nanjing Baixin Trading Co. Ltd., or Baixin, (7) Amphastar France Pharmaceuticals, S.A.S., or AFP, (8) Amphastar UK Ltd., or AUK, and (9) International Medication Systems (UK) Limited, or IMS UK.

 

In July 2018, ANP completed a private placement of its equity for aggregate gross proceeds of approximately $57.2 million. The Company has retained approximately 58% of the equity interest of ANP immediately after the private placement and continues to consolidate the financial results of ANP with the Company’s results of operations.  (See Note 18 for additional information)

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Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 doubtful accounts and 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, self-insured claims, 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 U.S. dollar, or 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 statements of operations. 

 

The Company’s French subsidiary, AFP, maintains its book of record in Euros. Its other Chinese subsidiaries maintain their books of record in Chinese Yuan. Its U.K. subsidiary, IMS UK, maintains its book of record in Great Britain 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 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 and losses of intercompany foreign currency transactions that are of a long-term investment nature for the three and six months ended June 30, 2018 were $1.7 million loss and $0.8 million loss, respectively, and for the three and six months ended June 30, 2017 were $2.2 million gain and $2.7 million gain, respectively.

 

The Company does not undertake hedging transactions to cover its foreign currency exposure.

 

Comprehensive Income (loss)

 

For the three and six months ended June 30, 2018 and 2017, the Company included its foreign currency translation gain or loss as part of its comprehensive income (loss). 

 

Restricted Cash and Short-term Investments

 

Restricted cash and short-term investments are collateral required for the Company to effect a standby letter of credit and to qualify for workers’ compensation self-insurance and are available to meet the Company’s workers’ compensation obligations on a current basis, as needed. As of June 30, 2018 and December 31, 2017, restricted cash and short-term investments include $1.9 million in cash and $2.3 million in certificates of deposit, respectively. The certificates of deposit have original maturities greater than three months and are classified as short-term investments.

 

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

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Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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.

 

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. At June 30, 2018, the Company had not completed its accounting for the tax effects of the enactment of the Tax Cuts and Jobs Act of 2017, or the Tax Act.

 

Business Combinations

 

If an acquired set of activities and assets is capable of being operated as a business consisting of inputs and processes from the viewpoint of a market participant, the asset acquired and liabilities assumed are a business. Business combinations are accounted for using the acquisition method of accounting, which requires an acquirer to recognize the assets acquired and the liabilities assumed at the acquisition date measured at their fair values as of that date. Fair value determinations are based on discounted cash flow analyses or other valuation techniques. In determining the fair value of the assets acquired and liabilities assumed in a material acquisition, the Company may utilize appraisals from third party valuation firms to determine fair values of some or all of the assets acquired and liabilities assumed, or may complete some or all of the valuations internally. In either case, the Company takes full responsibility for the determination of the fair value of the assets acquired and liabilities assumed. The value of goodwill reflects the excess of the fair value of the consideration conveyed to the seller over the fair value of the net assets received.

 

Acquisition-related costs that the Company incurs to effect a business combination are expensed in the periods in which the costs are incurred. When the operations of the acquired businesses were not material to the Company’s condensed consolidated financial statements, no pro forma presentations were disclosed.

 

Recent Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board, or FASB, issued ASU No. 2016-02, Leases, that is aimed at making leasing activities more transparent and comparable, and which requires substantially all leases be recognized by lessees on their balance sheets as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. The ASU and the related clarifications subsequently issued by the FASB will become effective for the Company’s interim and annual reporting periods during the year ending December 31, 2019, and all annual and interim reporting periods thereafter. Early adoption is permitted. The Company is required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements for the reporting periods in which the guidance is adopted. While the Company continues to evaluate the provisions of ASC 842 to determine how it will be affected, the primary effect of adopting the new standard will be to record right-to-use assets and obligations for current operating leases on its consolidated financial statements. Note 16 provides details on the Company’s current operating lease arrangements. The adoption of ASC 842 is not expected to have a material impact on the Company’s results of operations or cash flows.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses, which is aimed at providing financial statement users with more useful information about the expected credit losses on financial instruments and other commitments to extend credit. The standard update changes the impairment model for financial assets measured at amortized cost, requiring presentation at the net amount expected to be collected. The measurement of expected credit losses requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Available-for-sale debt securities with unrealized losses will be recorded through an allowance for credit losses. The guidance is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2020. Early adoption is permitted for interim or annual periods after December 31, 2019. The Company will be required to apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company does not believe the adoption of this accounting guidance will have a material impact on its consolidated financial statements and related disclosures.

 

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, which eliminates the requirement to calculate the implied fair value of goodwill. An entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The update also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. The guidance is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2020, and applied on a prospective basis. Early adoption is permitted for interim and annual goodwill impairment testing dates after January 1, 2017. The Company currently does not believe that the adoption of this accounting guidance will have a material impact on its consolidated financial statements and related disclosures.

 

In August 2017, the FASB issued ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities, which amends the hedge accounting model in ASC 815 to enable entities to better portray the economics of their risk management activities in the financial statements and enhance the transparency and understandability of hedge results. The amendments also simplify the application of hedge accounting in certain situations. The new guidance is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2019. Early adoption is permitted. The Company does not believe that the adoption of this accounting guidance will have a material impact on its consolidated financial statements and related disclosures.

 

In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows entities to reclassify from accumulated other comprehensive income to retained earnings stranded tax effects resulting from the Tax Act. The guidance is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2019. Early adoption is permitted. The Company does not believe that the adoption of this accounting guidance will have a material impact on its consolidated financial statements and related disclosures.

 

In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees. The Company will early-adopt the guidance on July 1, 2018. The adoption will not have a material impact on its consolidated financial statements and related disclosures.

 

Note 3.  Revenue Recognition

 

In 2018, the Company adopted ASC 606, Revenue from Contracts with Customers, or ASC 606, using the modified retrospective transition method. The adoption of ASC 606 did not have a material impact on the Company’s revenue recognition or on the condensed consolidated financial statements and related disclosures. Subsequent to the adoption of ASC 606 revenue is recognized at the time that the Company’s customers obtain control of the promised goods. Revenues derived from contract manufacturing services are recognized when third-party products are shipped to customers, after the customer has accepted test samples of the products to be shipped. The results for the reporting period beginning after January 1, 2018, are presented in accordance with the new standard, although comparative information continues to be reported under the accounting standards and policies in effect for those periods. For the accounting policy related to

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

revenue recognition for the years ended prior to and on December 31, 2017, see Note 4, Revenue Recognition, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2017.

 

The Company only records revenue to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved, by estimating and recording reductions to revenue for discounts, product returns, and pricing adjustments, such as wholesaler chargebacks and retailer rebates, in the same period that the related revenue is recorded.

 

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 in net revenues. The following table is an analysis of the chargeback and rebate provision:

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 

 

 

 

2018

 

2017

 

 

 

(in thousands)

 

Beginning balance

    

$

18,470

    

$

39,709

 

Provision for chargebacks and rebates

 

 

55,372

 

 

86,935

 

Credits and payments issued to third parties

 

 

(55,999)

 

 

(116,429)

 

Ending balance

 

$

17,843

 

$

10,215

 

 

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 wholesaler’s 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 dates 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, 2018 and December 31, 2017, $6.4 million and $6.8 million were included in accounts receivable, net, on the condensed consolidated balance sheets, respectively. The remaining provision of $11.4 million and $11.7 million were included in accounts payable and accrued liabilities, respectively.

 

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

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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. As of June 30, 2018 and December 31, 2017, cumulative sales of approximately $0.7 million and $1.2 million, respectively, for one of the Company’s products were not recognized in revenues, due to insufficient information available to determine that a significant reversal of such amount will not occur when the uncertainty associated with the return refund is subsequently resolved.

 

The provision for product returns is reflected in net revenues. The following table is an analysis of product return liability:

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 

 

 

 

2018

 

2017

 

 

 

(in thousands)

 

Beginning balance

    

$

6,522

    

$

3,143

 

Provision for product returns

 

 

917

 

 

2,979

 

Credits issued to third parties

 

 

(865)

 

 

(966)

 

Ending balance

 

$

6,574

 

$

5,156

 

 

Of the provision of product returns as of June 30, 2018 and December 31, 2017, $4.6 million and $4.1 million were included in accounts payable and accrued liabilities on the condensed consolidated balance sheets, respectively. The remaining provision of $1.9 million and $2.4 million were included in other long-term liabilities, respectively. For the six months ended June 30, 2018 and 2017,  the Company’s aggregate product return rate was 1.3% and 1.2% of qualified sales, respectively.

 

Note 4.  Income (loss) per Share

 

Basic income (loss) per share is calculated based upon the weighted-average number of shares outstanding during the period. Diluted income (loss) per share 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.

 

As the Company reported a net loss for the three and six months ended June 30, 2018, the diluted net loss per share, as reported, equals the basic net loss per share 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 and six months ended June 30, 2018 net loss per share were 11,649,241 stock options; 1,232,237 non-vested RSUs, and 60,854 shares issuable under the ESPP.

 

For the three and six months ended June 30, 2017, options to purchase 3,170,200 shares of stock with a weighted-average exercise price of $20.52 per share, were excluded in the computation of diluted net income per share because the effect from the assumed exercise of these options would be anti-dilutive.

 

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Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table provides the calculation of basic and diluted net income per share for each of the periods presented:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

(in thousands, except per share data)

 

Basic and dilutive numerator:

    

 

    

    

 

    

    

 

    

    

 

    

 

Net income (loss)

 

$

(2,790)

 

$

1,972

 

$

(10,036)

 

$

2,865

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding — basic

 

 

46,557

 

 

46,025

 

 

46,535

 

 

46,047

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Incremental shares from equity awards

 

 

 —

 

 

1,841

 

 

 —

 

 

1,915

 

Weighted-average shares outstanding — diluted

 

 

46,557

 

 

47,866

 

 

46,535

 

 

47,962

 

Net income (loss) per share — basic

 

$

(0.06)

 

$

0.04

 

$

(0.22)

 

$

0.06

 

Net income (loss) per share — diluted

 

$

(0.06)

 

$

0.04

 

$

(0.22)

 

$

0.06

 

 

 

Note 5.  Segment Reporting

 

The Company’s business is the development, manufacture, and marketing of pharmaceutical products. The Company has established two reporting segments that each report to the Chief Operating Decision Maker, or CODM, as defined in ASC 280, Segment Reporting. The Company’s performance is assessed and resources are allocated by the CODM based on the following two reportable segments:

 

·

Finished pharmaceutical products

·

Active pharmaceutical ingredients, or API

 

The finished pharmaceutical products segment manufactures, markets, and distributes enoxaparin, naloxone, phytonadione, lidocaine, medroxyprogesterone acetate, as well as various other critical and non-critical care drugs. The API segment manufactures and distributes recombinant human insulin API and porcine insulin API for external customers and internal product development.

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Selected financial information by reporting segment is presented below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

(in thousands)

 

Net revenues:

    

 

    

    

 

    

    

 

    

    

 

    

 

Finished pharmaceutical products

 

$

63,241

 

$

63,765

 

$

116,358

 

$

119,699

 

API

 

 

7,799

 

 

1,422

 

 

13,075

 

 

2,158

 

Total net revenues

 

 

71,040

 

 

65,187

 

 

129,433

 

 

121,857

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

Finished pharmaceutical products

 

 

27,741

 

 

28,866

 

 

47,466

 

 

53,176

 

API

 

 

(1,585)

 

 

(2,119)

 

 

(4,249)

 

 

(3,601)

 

Total gross profit

 

 

26,156

 

 

26,747

 

 

43,217

 

 

49,575

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

29,013

 

 

24,562

 

 

55,992

 

 

45,986

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

 

(2,857)

 

 

2,185

 

 

(12,775)

 

 

3,589

 

Non-operating income

 

 

(1,259)

 

 

988

 

 

(371)

 

 

1,088

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

$

(4,116)

 

$

3,173

 

$

(13,146)

 

$

4,677

 

 

The Company manages its business segments to the gross profit level and manages its operating and other costs on a company-wide basis. The Company does not identify total assets by segment for internal purposes, as the Company’s CODM does not assess performance, make strategic decisions, or allocate resources based on assets.

 

The amount of net revenues in the finished pharmaceutical product segment is presented below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

(in thousands)

 

Finished pharmaceutical products net revenues:

    

 

    

    

 

    

    

 

 

    

 

    

 

Naloxone

 

$

11,133

 

$

10,261

 

$

20,060

 

$

21,200

 

Phytonadione

 

 

10,806

 

 

10,003

 

 

19,987

 

 

17,890

 

Lidocaine

 

 

10,010

 

 

9,334

 

 

19,792

 

 

17,622

 

Enoxaparin

 

 

8,715

 

 

8,288

 

 

15,722

 

 

18,698

 

Medroxyprogesterone

 

 

6,365

 

 

 —

 

 

9,071

 

 

 —

 

Epinephrine

 

 

3,687

 

 

10,648

 

 

6,910

 

 

20,222

 

Other finished pharmaceutical products

 

 

12,525

 

 

15,231

 

 

24,816

 

 

24,067

 

Total finished pharmaceutical products net revenues

 

$

63,241

 

$

63,765

 

$

116,358

 

$

119,699

 

 

Discontinuation of epinephrine injection, USP vial product

 

In February 2017, the U.S. Food and Drug Administration, or FDA, requested the Company to discontinue the manufacturing and distribution of its epinephrine injection, USP vial product, which had been marketed under the “grandfather” exception to the FDA’s “Prescription Drug Wrap-Up” program. The Company discontinued selling this product in the second quarter of 2017. For the year ended December 31, 2017, the Company recognized $17.8 million in net revenues for the sale of this product.

 

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Net revenues and carrying values of long-lived assets of enterprises by geographic regions are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Revenue

 

Long-Lived Assets

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

 

 

 

 

 

 

June 30, 

 

June 30, 

 

June 30, 

 

December 31, 

 

 

 

2018

 

2017

 

2018

 

2017

 

2018

 

2017

 

 

 

(in thousands)

 

United States

    

$

68,560

    

$

63,799

    

$

121,664

    

$

119,729

    

$

113,554

    

$

110,235

 

China

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

47,068

 

 

41,078

 

France

 

 

2,480

 

 

1,388

 

 

7,769

 

 

2,128

 

 

37,619

 

 

34,026

 

United Kingdom

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total

 

$

71,040

 

$

65,187

 

$

129,433

 

$

121,857

 

$

198,241

 

$

185,339

 

 

 

Note 6.  Customer and Supplier Concentration

 

Customer Concentrations

 

Three large wholesale drug distributors, AmerisourceBergen Corporation, or AmerisourceBergen, Cardinal Health, Inc., or Cardinal, and McKesson Corporation, or McKesson, are all distributors of the Company’s products as well as suppliers of a broad range of health care products. The Company considers these three customers to be its major customers, as each individually, and these customers collectively, represented a significant percentage of the Company’s net revenue for the three and six months ended June 30, 2018 and 2017, and accounts receivable as of June 30, 2018 and December 31, 2017, respectively. The following table provides accounts receivable and net revenue information for these major customers: