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 SEPTEMBER 30, 2019

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)

 

 

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

 

 

 

 

 

 

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  ☒

 

The number of shares outstanding of the registrant’s only class of common stock as of November 1, 2019 was 46,938,027.

 

 

Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

TABLE OF CONTENTS

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2019

 

Special Note About Forward-Looking Statements 

 

 

 

Part I. FINANCIAL INFORMATION 

 

 

PAGE

Item 1. Financial Statements (unaudited)

 

 

Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018 

 

1

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018 

 

2

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2019 and 2018 

 

3

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 

 

4

Notes to Condensed Consolidated Financial Statements 

 

5

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 

 

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 

 

44

Item 3. Defaults Upon Senior Securities 

 

44

Item 4. Mine Safety Disclosures 

 

44

Item 5. Other Information 

 

44

Item 6. Exhibits 

 

45

Signatures 

 

46

 

 

 

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 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;

·

global, national and local economic and market conditions, specifically with respect to geopolitical uncertainty;

·

the impact of trade tariffs 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;

·

the timing for completion of the validation of the new construction at our ANP and IMS facilities; 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, 2018, 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)

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

 

2019

 

2018

 

 

 

(unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

85,611

 

$

86,337

 

Restricted cash

 

 

1,865

 

 

1,865

 

Short-term investments

 

 

12,666

 

 

2,831

 

Restricted short-term investments

 

 

2,290

 

 

2,290

 

Accounts receivable, net

 

 

45,255

 

 

52,163

 

Inventories

 

 

109,854

 

 

69,322

 

Income tax refunds and deposits

 

 

890

 

 

49

 

Prepaid expenses and other assets

 

 

10,472

 

 

5,485

 

Total current assets

 

 

268,903

 

 

220,342

 

 

 

 

 

 

 

 

 

Property, plant, and equipment, net

 

 

222,158

 

 

210,418

 

Finance lease right-of-use assets

 

 

896

 

 

 —

 

Operating lease right-of-use assets

 

 

19,463

 

 

 —

 

Goodwill and intangible assets, net

 

 

41,139

 

 

42,267

 

Other assets

 

 

12,331

 

 

9,918

 

Deferred tax assets

 

 

20,746

 

 

30,618

 

Total assets

 

$

585,636

 

$

513,563

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

75,137

 

$

87,418

 

Income taxes payable

 

 

1,400

 

 

1,187

 

Current portion of long-term debt

 

 

6,969

 

 

18,229

 

Current portion of operating lease liabilities

 

 

3,090

 

 

 —

 

Total current liabilities

 

 

86,596

 

 

106,834

 

 

 

 

 

 

 

 

 

Long-term reserve for income tax liabilities

 

 

415

 

 

415

 

Long-term debt, net of current portion

 

 

38,079

 

 

31,984

 

Long-term operating lease liabilities, net of current portion

 

 

16,940

 

 

 —

 

Deferred tax liabilities

 

 

976

 

 

1,031

 

Other long-term liabilities

 

 

8,977

 

 

8,940

 

Total liabilities

 

 

151,983

 

 

149,204

 

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; 52,399,044 and 47,199,907 shares issued and outstanding as of September 30, 2019 and 51,438,675 and 46,631,118 shares issued and outstanding as of December 31, 2018, respectively

 

 

 5

 

 

 5

 

Additional paid-in capital

 

 

361,705

 

 

344,434

 

Retained earnings

 

 

117,396

 

 

67,485

 

Accumulated other comprehensive loss

 

 

(5,848)

 

 

(4,013)

 

Treasury stock

 

 

(83,853)

 

 

(75,476)

 

Total Amphastar Pharmaceuticals, Inc. stockholders’ equity

 

 

389,405

 

 

332,435

 

Non-controlling interests

 

 

44,248

 

 

31,924

 

Total equity

 

 

433,653

 

 

364,359

 

Total liabilities and stockholders’ equity

 

$

585,636

 

$

513,563

 

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

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2019

    

2018

    

2019

    

2018

 

Net revenues

 

$

80,137

 

$

75,543

 

$

238,974

 

$

204,976

 

Cost of revenues

 

 

44,885

 

 

46,283

 

 

140,432

 

 

132,680

 

Gross profit

 

 

35,252

 

 

29,260

 

 

98,542

 

 

72,296

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, distribution, and marketing

 

 

3,221

 

 

1,963

 

 

9,354

 

 

5,560

 

General and administrative

 

 

11,021

 

 

13,407

 

 

39,774

 

 

36,074

 

Research and development

 

 

18,606

 

 

11,340

 

 

49,209

 

 

40,830

 

Total operating expenses

 

 

32,848

 

 

26,710

 

 

98,337

 

 

82,464

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

 

2,404

 

 

2,550

 

 

205

 

 

(10,168)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-operating (expenses) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

450

 

 

105

 

 

741

 

 

335

 

Interest expense

 

 

(22)

 

 

(124)

 

 

(76)

 

 

(242)

 

Other (expenses) income, net

 

 

(1,250)

 

 

43

 

 

58,172

 

 

(440)

 

Total non-operating (expenses) income, net

 

 

(822)

 

 

24

 

 

58,837

 

 

(347)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

1,582

 

 

2,574

 

 

59,042

 

 

(10,515)

 

Income tax provision (benefit)

 

 

598

 

 

958

 

 

13,292

 

 

(2,137)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

984

 

$

1,616

 

$

45,750

 

$

(8,378)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to non-controlling interests

 

$

(326)

 

$

(773)

 

$

(4,215)

 

$

(773)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

1,310

 

$

2,389

 

$

49,965

 

$

(7,605)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.03

 

$

0.05

 

$

1.06

 

$

(0.16)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

0.03

 

$

0.05

 

$

1.00

 

$

(0.16)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

47,239

 

 

46,241

 

 

47,030

 

 

46,437

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

50,075

 

 

48,281

 

 

50,128

 

 

46,437

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 

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Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited; in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2019

    

2018

    

2019

    

2018

 

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

 

$

1,310

 

$

2,389

 

$

49,965

 

$

(7,605)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(1,625)

 

 

(410)

 

 

(1,835)

 

 

(1,476)

 

Total other comprehensive loss attributable to Amphastar Pharmaceuticals, Inc.

 

 

(1,625)

 

 

(410)

 

 

(1,835)

 

 

(1,476)

 

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

 

$

(315)

 

$

1,979

 

$

48,130

 

$

(9,081)

 

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)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 

 

 

    

2019

    

2018

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

Net income (loss)

 

$

45,750

 

$

(8,378)

 

Reconciliation to net cash provided by operating activities:

 

 

 

 

 

 

 

Loss on impairment and disposal of assets

 

 

869

 

 

390

 

Depreciation of property, plant, and equipment

 

 

12,527

 

 

10,414

 

Amortization of product rights, trademarks, and patents

 

 

777

 

 

1,722

 

Operating lease right-of-use asset amortization

 

 

2,188

 

 

 —

 

Share-based compensation expense

 

 

13,000

 

 

12,770

 

Changes in deferred taxes

 

 

9,872

 

 

 —

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

 

6,722

 

 

(7,856)

 

Inventories

 

 

(41,146)

 

 

(1,884)

 

Prepaid expenses and other assets

 

 

(3,607)

 

 

(429)

 

Income tax refund, deposits, and payable

 

 

(631)

 

 

1,193

 

Operating lease right-of-use assets and liabilities, net

 

 

(1,866)

 

 

 —

 

Accounts payable and accrued liabilities

 

 

(8,345)

 

 

20,732

 

Net cash provided by operating activities

 

 

36,110

 

 

28,674

 

 

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

Purchases and construction of property, plant, and equipment

 

 

(33,145)

 

 

(37,226)

 

Sale of intangible assets

 

 

 —

 

 

4,400

 

Purchase of short-term investments

 

 

(9,825)

 

 

(306)

 

Maturity of short-term investments

 

 

 —

 

 

91

 

Payment of deposits and other assets

 

 

(205)

 

 

(344)

 

Net cash used in investing activities

 

 

(43,175)

 

 

(33,385)

 

 

 

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

Proceeds from the private placement of ANP

 

 

18,298

 

 

26,202

 

Proceeds from equity plans, net of withholding tax payments

 

 

1,981

 

 

274

 

Purchase of treasury stock

 

 

(8,514)

 

 

(22,440)

 

Proceeds from borrowing under lines of credit

 

 

 —

 

 

347

 

Repayments under lines of credit

 

 

(347)

 

 

 —

 

Proceeds from issuance of long-term debt

 

 

 —

 

 

8,000

 

Principal payments on long-term debt

 

 

(4,819)

 

 

(4,297)

 

Net cash provided by financing activities

 

 

6,599

 

 

8,086

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

(260)

 

 

(235)

 

 

 

 

 

 

 

 

 

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

 

 

(726)

 

 

3,140

 

 

 

 

 

 

 

 

 

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

 

 

88,202

 

 

67,459

 

 

 

 

 

 

 

 

 

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

 

$

87,476

 

$

70,599

 

 

 

 

 

 

 

 

 

Noncash Investing and Financing Activities:

 

 

 

 

 

 

 

Capital expenditure included in accounts payable

 

$

5,279

 

$

5,051

 

Operating lease right-of-use assets

 

$

7,848

 

$

 —

 

Equipment acquired under finance leases

 

$

61

 

$

14

 

 

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

 

Interest paid, net of capitalized interest

 

$

1,874

 

$

1,728

 

Income taxes paid

 

$

4,189

 

$

163

 

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.  Business

 

Amphastar Pharmaceuticals, Inc., a Delaware corporation (together with its subsidiaries, “we,” “us,” “our” or 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.

 

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 (consisting only of normal recurring adjustments) necessary to present fairly the consolidated financial position, results of operations, and cash flows of the Company.

 

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, 2018, 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, 2018. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with 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.

 

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 Pharmaceutical 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, 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. While investors were initially required to complete their contributions in cash by December 31, 2018, ANP granted an extension to certain investors. Certain investors contributed their payments in Chinese yuan, which resulted in a difference in U.S. dollars, or USD, due to currency fluctuations subsequent to the execution of the placement agreement. A total of $56.3 million was received by ANP and the difference was expensed in the quarter ended March 31, 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

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Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

ANP with the Company’s results of operations. ANP’s net loss after July 2, 2018, was attributed to the Company in accordance with the Company’s equity interest of approximately 58% in ANP.

 

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 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. ANP’s other Chinese subsidiaries maintain their books of record in Chinese yuan. Its U.K. 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 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 nine months ended September 30, 2019, were $1.5 million loss and $1.7 million loss, respectively, and for the three and nine months ended September 30, 2018, were $0.2 million loss and $1.0 million loss, respectively.

 

Comprehensive Income (Loss)

 

For the three and nine months ended September 30, 2019 and 2018, 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 standby letters of credit and to qualify for workers’ compensation self-insurance and to guarantee certain vendor payments in France. As of September 30, 2019 and December 31, 2018, 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.

 

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Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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.

 

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 June 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standard Update, or 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. Available-for-sale debt securities with unrealized losses will be recorded through an allowance for credit losses. The ASU and the related clarifications subsequently issued by FASB will become 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 2018, the FASB issued ASU No. 2018-13 Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which removes, modifies, and adds certain disclosure requirements to ASC 820, Fair Value Measurement. The guidance is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2020. 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.

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Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

In August 2018, the FASB issued ASU No. 2018-14 Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans, which removes, modifies, and adds certain disclosure requirements to ASC 715-20, Defined Benefit Plans. The guidance is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2021. 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 October 2018, the FASB issued ASU No. 2018-17 Targeted Improvements to Related Party Guidance for Variable Interest Entities, which requires indirect interests held through related parties in common control arrangements be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. The guidance is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2020. Early adoption is permitted. 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 November 2018, the FASB issued ASU No. 2018-18 Clarifying the Interaction between Topic 808 and Topic 606, which requires transactions in collaborative arrangements to be accounted for under ASC 606, Revenue from Contracts with Customers, or ASC 606, if the counterparty is a customer for a good or service that is a distinct unit of account. The amendments also preclude entities from presenting consideration from transactions with a collaborator that is not a customer together with revenue recognized from contracts with customers. The guidance is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2020. Early adoption is permitted, including in any interim period.  The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements and related disclosures.

 

Note 3.  Revenue Recognition

 

In accordance with ASC 606, 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. 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 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.

 

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.

 

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

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Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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:

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 

 

 

 

2019

 

2018

 

 

 

(in thousands)

 

Beginning balance

    

$

22,423

    

$

18,470

 

Provision for chargebacks and rebates

 

 

94,548

 

 

88,797

 

Credits and payments issued to third parties

 

 

(97,324)

 

 

(86,892)

 

Ending balance

 

$

19,647

 

$

20,375

 

 

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 September 30, 2019 and December 31, 2018, $14.1 million and $12.0 million were included in accounts receivable, net, on the condensed consolidated balance sheets, respectively. The remaining provision of $5.5 million and $10.4 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 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. 

 

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Table of Contents

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:

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 

 

 

 

2019

 

2018

 

 

 

(in thousands)

 

Beginning balance

    

$

8,030

    

$

6,522

 

Provision for product returns

 

 

4,611

 

 

2,248

 

Credits issued to third parties

 

 

(3,945)

 

 

(1,995)

 

Ending balance

 

$

8,696

 

$

6,775

 

 

Of the provision of product returns as of September 30, 2019 and December 31, 2018, $5.7 million and $5.3 million were included in accounts payable and accrued liabilities on the condensed consolidated balance sheets, respectively. The remaining provision as of September 30, 2019 and December 31, 2018, of $3.0 million and $2.7 million was included in other long-term liabilities, respectively. For the nine months ended September 30, 2019 and 2018,  the Company’s aggregate product return rate was 0.9% and 1.3% of qualified sales, respectively.

 

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

 

Basic net income (loss) per share attributable to Amphastar Pharmaceuticals, Inc. shareholders is calculated based upon the weighted-average number of shares outstanding during the period. Diluted net income (loss) 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 2018 ANP Equity Incentive Plan, or the 2018 Plan.

 

For the three and nine months ended September 30, 2019, options to purchase 803,257 and 783,193 shares of stock, respectively, with a weighted-average exercise price of $21.99 per share and $22.02 per share, respectively, were excluded in the computation of diluted net income per common share attributable to Amphastar Pharmaceuticals, Inc.’s shareholders because the effect from the assumed exercise of these options would be anti-dilutive. Additionally, 3,648,932 options to purchase ANP stock were awarded to ANP employees, which represent approximately 2% of ANP’s total equity, were excluded in the computation of diluted net income per common share attributable to Amphastar Pharmaceuticals, Inc.’s shareholders because the effect from the assumed exercise of these options would be anti-dilutive.

 

For the three months ended September 30, 2018, options to purchase 1,273,884 shares of stock with a weighted-average exercise price of $20.46 per share were excluded in the computation of diluted net income per common share attributable to Amphastar Pharmaceuticals, Inc. shareholders because the effect from the assumed exercise of these options would be anti-dilutive.

 

As the Company reported a net loss for the nine months ended September 30, 2018, 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 nine months ended September 30, 2018, net loss per share were 10,646,602 stock options, 1,210,718 non-vested RSUs, and 60,854 shares issuable under the Company’s ESPP.

 

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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 (loss) per share attributable to Amphastar Pharmaceuticals, Inc. shareholders for each of the periods presented:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

 

2019

 

2018

 

2019

 

2018

 

 

 

(in thousands, except per share data)

 

Basic and dilutive numerator:

    

 

    

    

 

    

    

 

    

    

 

    

 

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

 

$

1,310

 

$

2,389

 

$

49,965

 

$

(7,605)

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding — basic

 

 

47,239

 

 

46,241

 

 

47,030

 

 

46,437

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Incremental shares from equity awards

 

 

2,836

 

 

2,040

 

 

3,098

 

 

 —

 

Weighted-average shares outstanding — diluted

 

 

50,075

 

 

48,281

 

 

50,128

 

 

46,437

 

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

 

$

0.03

 

$

0.05

 

$

1.06

 

$

(0.16)

 

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

 

$

0.03

 

$

0.05

 

$

1.00

 

$

(0.16)

 

 

 

Note 5.  Segment Reporting

 

The Company’s business is the development, manufacture, and marketing of pharmaceutical products. The Company has identified 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

·

API

 

The finished pharmaceutical products segment manufactures, markets and distributes enoxaparin, naloxone, phytonadione, lidocaine, medroxyprogesterone acetate,  Primatene® Mist, 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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Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Selected financial information by reporting segment is presented below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

 

2019

 

2018

 

2019

 

2018

 

 

 

(in thousands)

 

Net revenues:

    

 

    

    

 

    

    

 

    

    

 

    

 

Finished pharmaceutical products

 

$

75,729

 

$

71,767

 

$

224,003

 

$

188,125

 

API

 

 

4,408

 

 

3,776

 

 

14,971

 

 

16,851

 

Total net revenues

 

 

80,137

 

 

75,543

 

 

238,974

 

 

204,976

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

Finished pharmaceutical products

 

 

34,992

 

 

30,571

 

 

101,844

 

 

77,856

 

API

 

 

260

 

 

(1,311)

 

 

(3,302)

 

 

(5,560)

 

Total gross profit

 

 

35,252

 

 

29,260

 

 

98,542

 

 

72,296

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

32,848

 

 

26,710

 

 

98,337

 

 

82,464

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

 

2,404

 

 

2,550

 

 

205

 

 

(10,168)

 

Non-operating income (expense)

 

 

(822)

 

 

24

 

 

58,837

 

 

(347)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

$

1,582

 

$

2,574

 

$

59,042

 

$

(10,515)

 

 

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

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

 

2019

 

2018

 

2019

 

2018

 

 

 

(in thousands)

 

Finished pharmaceutical products net revenues:

    

 

    

    

 

    

    

 

 

    

 

    

 

Enoxaparin

 

$

9,573

 

$

18,564

 

$

33,895

 

$

34,286

 

Lidocaine

 

 

11,670

 

 

9,875

 

 

33,731

 

 

29,667

 

Phytonadione

 

 

10,916

 

 

8,968

 

 

33,477

 

 

28,955

 

Naloxone

 

 

10,613

 

 

9,432

 

 

25,810

 

 

29,492

 

Medroxyprogesterone

 

 

7,879

 

 

7,552

 

 

21,788

 

 

16,623

 

Epinephrine

 

 

3,756

 

 

1,881

 

 

9,574

 

 

8,791

 

Primatene® Mist

 

 

3,654

 

 

 —

 

 

9,063

 

 

 —

 

Other finished pharmaceutical products

 

 

17,668

 

 

15,495

 

 

56,665

 

 

40,311

 

Total finished pharmaceutical products net revenues

 

$

75,729

 

$

71,767

 

$

224,003

 

$

188,125

 

 

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Table of Contents

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

 

Nine Months Ended