Amphastar Pharmaceuticals, Inc.
Amphastar Pharmaceuticals, Inc. (Form: 10-Q, Received: 08/09/2016 06:12:52)

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, 2016

or

 

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

 

For the transition period from             to             

Commission file number 001-36509

 

 

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 6 th 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 electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes       No  

 

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

 

 

 

 

 

 

 

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

 

Smaller reporting company

 

 

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

 

The number of shares outstanding of the Registrant’s only class of common stock as of August 2, 2016 was 45,121,158.

 

 


 

Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

TABLE OF CONTENTS

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2016

 

Special Note About Forward-Looking Statements  

 

 

 

Part I. FINANCIAL INFORMATION  

 

 

PAGE

Item 1. Financial Statements (unaudited):  

 

 

Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015  

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2016 and 2015  

 

Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2016 and 2015  

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015  

 

Notes to Condensed Consolidated Financial Statements  

 

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

 

37 

Item 3. Quantitative and Qualitative Disclosure about Market Risk  

 

46 

Item 4. Controls and Procedures  

 

47 

Part II. OTHER INFORMATION  

Item 1. Legal Proceedings  

 

49 

Item 1A. Risk Factors  

 

49 

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

 

51 

Item 3. Defaults Upon Senior Securities  

 

51 

Item 4. Mine Safety Disclosures  

 

51 

Item 5. Other Information  

 

51 

Item 6. Exhibits  

 

51 

Signatures  

 

52 

 

 

 


 

Table of Contents

SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENT S

 

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,” “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 words. These statements relate to future events or our future financial performance or condition and involve known and unknown risks, uncertainties and other factors that could cause our actual results, levels of activity, performance or achievement to differ materially from those expressed or implied by these 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, including our enoxaparin product during and following termination of our profit sharing agreement with Actavis;

 

·

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;

 

·

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 from 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 or investments, including the anticipated benefits of such acquisitions 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;

 

·

our remediation efforts for a material weakness in our internal control over financial reporting; and

 

·

our financial performance expectations , including our expectations regarding our 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, 2015, 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. 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, unless the context indicates otherwise.

 

 

 

 


 

Table of Contents

PART I – FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEET S

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

 

2016

 

2015

 

 

 

(unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

66,660

 

$

66,074

 

Restricted cash and restricted short-term investments

 

 

1,390

 

 

1,285

 

Accounts receivable, net

 

 

23,128

 

 

33,233

 

Inventories, net

 

 

88,327

 

 

70,665

 

Income tax refund and deposits

 

 

56

 

 

238

 

Prepaid expenses and other assets

 

 

1,752

 

 

4,439

 

Total current assets

 

 

181,313

 

 

175,934

 

Property, plant, and equipment, net

 

 

148,647

 

 

142,161

 

Goodwill and intangible assets, net

 

 

43,298

 

 

39,901

 

Other assets

 

 

7,884

 

 

4,696

 

Deferred tax assets

 

 

27,444

 

 

27,444

 

 

 

 

 

 

 

 

 

Total assets

 

$

408,586

 

$

390,136

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

18,767

 

$

13,872

 

Accrued liabilities

 

 

11,174

 

 

16,732

 

Income taxes payable

 

 

6,652

 

 

3,076

 

Accrued payroll and related benefits

 

 

14,992

 

 

12,840

 

Current portion of product return accrual

 

 

1,517

 

 

1,858

 

Current portion of deferred revenue

 

 

1,661

 

 

643

 

Current portion of long-term debt and capital leases

 

 

10,904

 

 

10,934

 

Total current liabilities

 

 

65,667

 

 

59,955

 

 

 

 

 

 

 

 

 

Long-term product return accrual

 

 

1,026

 

 

763

 

Long-term reserve for income tax liabilities

 

 

497

 

 

497

 

Long-term deferred revenue

 

 

166

 

 

1,339

 

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

 

 

31,742

 

 

30,165

 

Other long-term liabilities

 

 

2,024

 

 

1,907

 

Total liabilities

 

 

101,122

 

 

94,626

 

Commitments and Contingencies:

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock: par value $.0001; authorized shares—20,000,000; no shares issued and outstanding

 

 

 

 

 

Common stock: par value $.0001; authorized shares—300,000,000; issued and outstanding shares—46,515,928 and 45,091,332 at June 30, 2016 and 45,960,206 and 45,198,491 at December 31, 2015, respectively

 

 

5

 

 

5

 

Additional paid-in capital

 

 

258,786

 

 

247,829

 

Retained earnings

 

 

69,707

 

 

60,323

 

Accumulated other comprehensive loss

 

 

(2,690)

 

 

(2,475)

 

Treasury stock

 

 

(18,344)

 

 

(10,172)

 

Total stockholders’ equity

 

 

307,464

 

 

295,510

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

408,586

 

$

390,136

 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

- 1 -


 

Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATION S

(Unaudited; in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

Net revenues

 

$

68,033

 

$

53,853

 

$

127,399

 

$

110,739

 

Cost of revenues

 

 

36,319

 

 

40,535

 

 

70,783

 

 

84,141

 

Gross profit

 

 

31,714

 

 

13,318

 

 

56,616

 

 

26,598

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, distribution, and marketing

 

 

1,332

 

 

1,470

 

 

2,684

 

 

2,992

 

General and administrative

 

 

9,458

 

 

11,308

 

 

20,328

 

 

23,759

 

Research and development

 

 

10,480

 

 

10,726

 

 

18,868

 

 

17,294

 

Impairment of long-lived assets

 

 

114

 

 

74

 

 

331

 

 

74

 

Total operating expenses

 

 

21,384

 

 

23,578

 

 

42,211

 

 

44,119

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

 

10,330

 

 

(10,260)

 

 

14,405

 

 

(17,521)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-operating income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

50

 

 

65

 

 

124

 

 

157

 

Interest expense

 

 

(305)

 

 

(210)

 

 

(689)

 

 

(551)

 

Other income (expense), net

 

 

(323)

 

 

176

 

 

(272)

 

 

1,489

 

Total non-operating income (expense), net

 

 

(578)

 

 

31

 

 

(837)

 

 

1,095

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

9,752

 

 

(10,229)

 

 

13,568

 

 

(16,426)

 

Income tax expense (benefit)

 

 

2,857

 

 

(3,582)

 

 

4,184

 

 

(9,114)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

6,895

 

$

(6,647)

 

$

9,384

 

$

(7,312)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.15

 

$

(0.15)

 

$

0.21

 

$

(0.16)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

0.15

 

$

(0.15)

 

$

0.21

 

$

(0.16)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

44,957

 

 

44,849

 

 

44,999

 

 

44,725

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

45,968

 

 

44,849

 

 

45,712

 

 

44,725

 

 

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, 

 

 

    

2016

    

2015

    

2016

    

2015

 

Net income (loss)

 

$

6,895

 

$

(6,647)

 

$

9,384

 

$

(7,312)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(651)

 

 

513

 

 

(215)

 

 

(2,480)

 

Total accumulated other comprehensive income (loss)

 

 

(651)

 

 

513

 

 

(215)

 

 

(2,480)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

$

6,244

 

$

(6,134)

 

$

9,169

 

$

(9,792)

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

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Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW S

(Unaudited; in thousands)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 

 

 

    

2016

    

2015

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

Net income (loss)

 

$

9,384

 

$

(7,312)

 

Reconciliation to net cash provided by operating activities:

 

 

 

 

 

 

 

Impairment of long-lived assets

 

 

331

 

 

74

 

Loss (gain) on disposal of property, plant, and equipment

 

 

598

 

 

(9)

 

Depreciation of property, plant, and equipment

 

 

5,995

 

 

5,632

 

Amortization of product rights, trademarks, and patents

 

 

1,050

 

 

979

 

Imputed interest accretion

 

 

36

 

 

56

 

Employee share-based compensation expense

 

 

7,234

 

 

5,757

 

Non-employee share-based compensation expense

 

 

815

 

 

173

 

Reserve for income tax liabilities

 

 

 —

 

 

16

 

Changes in deferred taxes

 

 

 —

 

 

(3,547)

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

 

10,164

 

 

2,450

 

Inventories, net

 

 

(17,352)

 

 

564

 

Income tax refund and deposits

 

 

185

 

 

 —

 

Prepaid expenses and other assets

 

 

3,175

 

 

(4,989)

 

Income taxes payable

 

 

3,574

 

 

(387)

 

Accounts payable and accrued liabilities

 

 

(1,933)

 

 

4,384

 

Net cash provided by operating activities

 

 

23,256

 

 

3,841

 

 

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

Acquisition of business

 

 

(4,761)

 

 

 —

 

Purchases of property, plant, and equipment

 

 

(8,457)

 

 

(6,740)

 

Capitalized labor, overhead, and interest on self-constructed assets

 

 

(887)

 

 

(875)

 

Proceeds from the sale of property, plant and equipment

 

 

 —

 

 

33

 

Decrease (increase) in restricted cash

 

 

(105)

 

 

210

 

Deposits and other assets, net

 

 

(3,216)

 

 

(1,392)

 

Net cash used in investing activities

 

 

(17,426)

 

 

(8,764)

 

 

 

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

Repurchase of common stock

 

 

(1,242)

 

 

(741)

 

Net proceeds from equity plans

 

 

4,168

 

 

10,723

 

Purchase of treasury stock

 

 

(8,190)

 

 

(2,715)

 

Proceeds from issuance of long-term debt

 

 

6,607

 

 

6,786

 

Principal payments on long-term debt

 

 

(6,414)

 

 

(2,524)

 

Net cash provided by (used in) financing activities

 

 

(5,071)

 

 

11,529

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

(173)

 

 

29

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 

586

 

 

6,635

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

66,074

 

 

67,828

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

66,660

 

$

74,463

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Table of Contents

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 

 

 

    

2016

    

2015

 

Noncash Investing and Financing Activities:

 

 

 

 

 

 

 

Equipment acquired under capital leases

 

$

1,237

 

$

150

 

 

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

 

Interest paid

 

$

947

 

$

897

 

Income taxes paid

 

$

553

 

$

 —

 

 

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)

 

1.  Genera l

 

Amphastar Pharmaceuticals, Inc., a California corporation, was incorporated on February 29, 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 once they are 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, 201 5, and the notes thereto as filed with the Securities and Exchange Commission in the Company’s A nnual Report on Form 10-K for the year ended December 31, 2015. 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.

 

2.  Summary of Significant Accounting Policies

 

Basis of Presentation

 

All significant intercompany activity has been eliminated in the preparation of the condensed consolidated financial statements. The unaudited condensed consolidated financial statements have been prepared in accordance with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X. Some information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles, or GAAP, have been condensed or omitted pursuant to those rules and regulations. 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 condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries: International Medication Systems, Limited, or IMS; Armstrong Pharmaceuticals, Inc., or Armstrong; Amphastar Nanjing Pharmaceuticals Co., Ltd., or ANP; Nanjing Letop Fine Chemistry Co., Ltd., or Letop, and Amphastar France Pharmaceuticals, S.A.S., or AFP.

 

Use of Estimates

 

The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the 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, liabilities for product returns, reserves for

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

excess or unsellable inventory, 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, fair market values of the Company’s common stock, valuation allowances for deferred tax assets, and liabilities for uncertain income tax positions.

 

Foreign Currency

 

The functional currency of the Company and its domestic and Chinese subsidiary, ANP 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 exchange gains and losses are reflected in the Company’s statement of operations. 

 

The Company’s French subsidiary, AFP, maintains its books of record in Euros, which is the local currency in France and has been determined to be its functional currency. These books 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 comprehensive income (loss). 

 

Additionally, 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 , 201 6 and 2015 , the Company included its foreign currency translation adjustment as part of its comprehensive income (loss). 

 

Financial Instruments

 

The carrying amounts of cash and cash equivalents, short-term investments, accounts receivable, accounts payable, accrued expenses, and short-term borrowings approximate fair value due to the short maturity of these items. A 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. However, the Company has one fixed-rate, long-term mortgage for which the carrying value differs from the fair value and is not remeasured on a recurring basis (see Note 1 2 ).

 

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. The Company has adopted the with-and-without methodology for determining when excess tax benefits from the exercise of share ‑based awards are realized. Under the with-and-without methodology, current year operating loss deductions and prior-year operating loss carryforwards are deemed to be utilized prior to the utilization of current-year excess tax benefits from share ‑based awards.

 

Business Combinations

 

Business combinations are accounted for in accordance with Accounting Standards Codification, or ASC 805, Business Combinations, 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

- 7 -


 

Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 are costs the Company incurs to effect a business combination. The Company accounts for acquisition-related costs as expenses in the periods in which the costs are incurred.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board, or FASB, issued an accounting standards update that creates a single source of revenue guidance for companies in all industries. The new standard provides guidance for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to their customers, unless the contracts are within the scope of other accounting standards. It also provides a model for the measurement and recognition of gains and losses on the sale of certain nonfinancial assets. This guidance must be adopted using either a full retrospective approach for all periods presented or a modified retrospective approach and will be effective for fiscal years beginning after December 15, 2017, which will be the Company's fiscal 2018. The Company has not yet evaluated the potential impact of adopting the guidance on the Company's consolidated financial statements.

 

In August 2014, the FASB issued an accounting standards update that will require management to evaluate if there is substantial doubt about the Company’s ability to continue as a going concern and, if so, to disclose this in both interim and annual reporting periods.  This guidance will become effective for the Company’s annual filing for the period ending December 31, 2016, and interim periods thereafter, and allows for early adoption.  The Company does not expect the adoption of the guidance will have a material impact on the Company’s consolidated financial statements.

 

In July 2015, the FASB issued an accounting standards update which requires entities to measure most inventories at the lower of cost or net realizable value, or NRV, thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. Under the new guidance, inventory is measured at the lower of cost or net realizable value, which eliminates the need to determine replacement cost and evaluate whether it is above the ceiling (NRV) or below the floor (NRV less a normal profit margin). The guidance defines NRV as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance is effective for annual periods beginning after December 15, 2016, and interim periods therein. The standard will be effective for the Company for the first quarter of the Company’s fiscal 2017.  Early application is permitted. The new guidance must be applied prospectively.  The Company does not believe the adoption of this accounting guidance will have a material impact on the Company’s consolidated financial statements and related disclosures.

 

In November 2015, the FASB issued an accounting standards update to the balance sheet classification of deferred taxes.  Under existing standards, deferred taxes for each tax-paying jurisdiction are presented as a net current asset or liability and net long-term asset or liability. To simplify presentation, the new guidance will require that all deferred tax assets and liabilities, along with related valuation allowances, be classified as long-term on the balance sheet. As a result, each tax-paying jurisdiction will now only have one net long-term deferred tax asset or liability. The new guidance does not change the existing requirement that prohibits offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. The guidance is effective for annual periods beginning after December 15, 2016, and interim periods therein. Early adoption is permitted. The new guidance may be applied prospectively or retrospectively. The Company has elected to adopt the guidance early and apply the guidance prospectively, therefore, prior periods were not retrospectively adjusted. The reclassification of the Company’s deferred tax assets and liabilities does not have any impact to the Company’s net income or cash flow, thus the adoption of the guidance does not have a material impact on the Company’s consolidated financial statements.

 

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Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In February 2016, the FASB issued an accounting standards update that is aimed at making leasing activities more transparent and comparable, and requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. This guidance 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 currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements and related disclosures.

 

In March 2016, the FASB issued an accounting standards update that is aimed to improve the employee share-based payment accounting.  The standard update simplifies the accounting for employee share-based payments and involves several aspects of the accounting for share-based transactions, including the potential timing of expenses, the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2016, and interim periods therein. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements and related disclosures.

 

In June 2016, the FASB issued an accounting standards update that is aimed to provide financial statement users with more decision-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 guidance is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2020. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements and related disclosures.

 

3.  Business Acquisition and Product Acquisitions

 

Acquisition of fourteen injectable products from Hikma Pharmaceuticals PLC

 

In March 2016, the Company acquired fourteen abbreviated new drug applications, or ANDAs, representing eleven different injectable chemical entities from Hikma Pharmaceuticals PLC for $4.0 million.  The Company plans to transfer the manufacturing of these products to its facilities in California, which will require FDA approval before the products can be launched. The Company has concluded that this transaction will be accounted for as a business combination in accordance with ASC 805.

 

The Company’s accounting for this acquisition is preliminary.  The fair value estimates for the $4.0 million assets acquired, which the Company allocated as intangible assets, were based upon preliminary calculations and valuations, and the Company’s estimates and assumptions are subject to change as the Company obtains additional information for its estimates during the measurement period (up to one year from the acquisition date). 

 

Acquisition of Nanjing Letop Medical Technology Co. Ltd.

 

In January 2016, the Company’s Chinese subsidiary, ANP, acquired Nanjing Letop Medical Technology Co. Ltd., for $0.8 million. The Company recognized $0.4 million of goodwill, which represents the difference between the purchase price and the fair value of Letop’s net assets at acquisition. Letop had previously supplied ANP with intermediates used in making various active pharmaceutical ingredients. In March 2016, this subsidiary was renamed Nanjing Letop Fine Chemistry Co., Ltd. The Company has concluded that this transaction will be accounted for as a business combination in accordance with ASC 805.

 

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Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company’s accounting for this acquisition is preliminary.  The fair value estimates for the $1.4 million assets acquired, which excludes the $0.4 million of goodwill and the $1.0 million of liabilities assumed, were based upon preliminary calculations and valuations, and the Company’s estimates and assumptions are subject to change as the Company obtains additional information for its estimates during the measurement period (up to one year from the acquisition date). 

 

Acquisition of Merck’s API Manufacturing Business

 

On April 30, 2014, the Company completed the acquisition of the Merck Sharpe & Dohme’s API manufacturing business in Éragny-sur-Epte, France, or the Merck API Transaction, which manufactures porcine insulin API and recombinant human insulin API, or RHI API. The purchase price of the transaction totaled €24.8 million, or $34.4 million on April 30, 2014 , subject to certain customary post ‑closing adjustments and currency exchange fluctuations. The terms of the purchase include multiple payments over four years as follows (see Note 1 2 ):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

 

 

Euros

 

Dollars

 

 

 

(in thousands)

 

At Closing, April 2014

    

13,252

    

$

18,352

 

December 2014

 

 

4,899

 

 

5,989

 

December 2015

 

 

3,186

 

 

3,483

 

December 2016

 

 

3,186

 

 

3,538

 

December 2017

 

 

500

 

 

555

 

 

 

25,023

 

$

31,917

 

 

In order to facilitate the acquisition, the Company established a subsidiary in France, AFP. The Company is continuing the current site manufacturing activities, which consist of the manufacturing of porcine insulin API and RHI API. As part of the transaction, the Company has entered into various additional agreements, including various supply agreements, as well as the assignment and/or licensing of patents under which Merck was operating at this facility. In addition, certain existing customer agreements have been assigned to AFP.

 

4.  Revenue Recognition

 

Generally, revenue is recognized at the time of product delivery to the Company’s customers. In some cases, revenue is recognized at the time of shipment when stipulated by the terms of the sale agreements. The Company also records profit-sharing revenue stemming from a distribution agreement with Actavis, Inc., or Actavis. This distribution agreement is in the process of being terminated (see Note 16). Profit-sharing revenue is recognized at the time Actavis sells the products to its customers. 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 Company does not recognize product revenue unless the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) transfer of title has occurred, (iii) the price to the customer is fixed or determinable, and (iv) collection is reasonably assured. Furthermore, the Company does not recognize revenue until all customer acceptance requirements have been met. The Company estimates and records reductions to revenue for discounts, product returns, and pricing adjustments, such as wholesaler chargebacks, 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 deliverables.

 

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Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Provision for Wholesaler Chargebacks

 

The provision for chargebacks is a significant estimate used in the recognition of revenue. As part of its sales terms with wholesale customers, 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 at the time wholesalers resell them under the Company’s various contractual arrangements with third parties such as hospitals and group purchasing organizations. The Company estimates chargebacks at the time of sale to wholesalers based on wholesaler inventory stocking levels, historic chargeback rates, and current contract pricing.

 

The provision for chargebacks is reflected in net revenues and a reduction to accounts receivable.  The following table is an analysis of the chargeback provision:

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

Beginning balance

    

$

15,217

    

$

11,872

 

Provision related to sales made in the current period

 

 

69,549

 

 

80,390

 

Credits issued to third parties

 

 

(72,965)

 

 

(80,957)

 

Ending balance

 

$

11,801

 

$

11,305

 

 

Changes in chargeback provision from period to period are primarily dependent on the Company’s sales to its wholesalers, the level of inventory held by the wholesalers, and on the wholesaler’s customer mix. 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 makes adjustments when it believes that the actual chargebacks may differ from the estimates. The settlement of chargebacks generally occurs within 30 days after the sale to wholesalers.

 

Accrual for Product Returns

 

The Company offers most customers the right to return qualified excess or expired inventory for partial credit; however, products sold to Actavis are 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 estimated returns. 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 in net revenues.  The following table is an analysis of product return liability:

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

Beginning balance

    

$

2,621

    

$

2,408

 

Provision for product returns

 

 

637

 

 

1,179

 

Credits issued to third parties

 

 

(715)

 

 

(977)

 

Ending balance

 

$

2,543

 

$

2,610

 

 

For the six months ended June 30, 2016 and 2015 ,   the Company’s aggregate product return rate was 1.1% and 1.1 %   of qualified sales, respectively.

 

5.  Income (loss) per Share

 

Basic income (loss) per share is calculated based upon the weighted-average number of shares outstanding during the period and contingently issuable shares such as fully vested deferred stock units, or DSUs, and in 2015, such equity was issued as restricted stock units, or RSUs (such RSUs and DSUs are collectively referred to herein as RSUs), in addition to shares expected to be issued under the Company’s employee stock purchase plan, or ESPP, as of the date all necessary conditions for issuance have been met. Diluted income per share gives effect to all potential dilutive shares outstanding during the period, such as stock options, nonvested RSUs and shares issuable under the Company’s ESPP.

 

For the three and six months ended June 30, 2016, options to purchase 6,827,011 shares of stock with a weighted-average exercise price of $18.16 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.

 

As the Company reported a net loss for the three and six months ended June 30, 2015 , the diluted net loss per share, as reported, is equal to the basic net loss per share since the effect of the assumed exercise of stock options vesting of nonvested RSUs and issuance of common shares under the Company’s ESPP are anti-dilutive. Total stock options, nonvested RSUs, and shares issuable under the Company’s ESPP, excluded from the three and six months ended June 30, 2015 , net loss per share were 12,550,398,   896,693 , and 165,167, respectively.

 

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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 for each of the periods presented:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(in thousands, except per share data)

 

Basic and dilutive numerator:

    

 

    

    

 

    

    

 

    

    

 

    

 

Net income (loss)

 

$

6,895

 

$

(6,647)

 

$

9,384

 

$

(7,312)

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares outstanding

 

 

44,957

 

 

44,849

 

 

44,999

 

 

44,725

 

Weighted-average shares outstanding — basic

 

 

44,957

 

 

44,849

 

 

44,999

 

 

44,725

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Incremental shares from equity awards

 

 

1,011

 

 

 —

 

 

713

 

 

 —

 

Weighted-average shares outstanding — diluted

 

 

45,968

 

 

44,849

 

 

45,712

 

 

44,725

 

Net income (loss) per share — basic

 

$

0.15

 

$

(0.15)

 

$

0.21

 

$

(0.16)

 

Net income (loss) per share — diluted

 

$

0.15

 

$

(0.15)

 

$

0.21

 

$

(0.16)

 

 

 

6.  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, Cortrosyn ® , Amphadase ® , naloxone, lidocaine jelly, as well as various other critical and non-critical care drugs.  The API segment manufactures and distributes RHI and porcine insulin. The Company also uses RHI for 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

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(in thousands)

 

Net revenues:

    

 

    

    

 

    

    

 

    

    

 

    

 

Finished pharmaceutical products

 

$

63,756

 

$

50,075

 

$

122,310

 

$

100,947

 

API

 

 

4,277

 

 

3,778

 

 

5,089

 

 

9,792

 

Total net revenues

 

 

68,033

 

 

53,853

 

 

127,399

 

 

110,739

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

Finished pharmaceutical products

 

 

30,598

 

 

12,634

 

 

56,422

 

 

25,487

 

API

 

 

1,116

 

 

684

 

 

194

 

 

1,111

 

Total gross profit

 

 

31,714

 

 

13,318

 

 

56,616

 

 

26,598

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

21,384

 

 

23,578

 

 

42,211

 

 

44,119

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

 

10,330

 

 

(10,260)

 

 

14,405

 

 

(17,521)

 

Non-operating income (expenses)

 

 

(578)

 

 

31

 

 

(837)

 

 

1,095

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

$

9,752

 

$

(10,229)

 

$

13,568

 

$

(16,426)

 

 

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.

 

Prior to the Merck API Transaction on April 30, 2014, Merck notified the Company of several environmental items that were not in alignment with Merck’s own internal policies and procedures.  None of these items were in violation of any French environmental law or regulation. The Company has assessed the nature of the remedial actions to be undertaken and since April 30, 2014, recorded the related expenses of €0.6 million as incurred in cost of sales within the API segment.  Based on the letter of understanding signed in conjunction with the acquisition on April 30, 2014, the Company and Merck further entered into an agreement on May 11, 2016, pursuant to which Merck shall reimburse the Company for the costs to complete the remedial actions up to €6.0 million. Accordingly, in the three months and six months ended June 30, 2016, the Company recorded the reimbursement of €0.6 million for the expenses already incurred as a reduction of cost of sales within the API segment.

 

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, 

 

 

 

2016

 

2015

 

2016

 

2015

 

2016

 

2015

 

 

 

(in thousands)

 

U.S.

    

$

67,550

    

$

52,757

    

$

126,089

    

$

105,717

    

$

101,430

    

$

100,404

 

China

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

33,835

 

 

28,547

 

France

 

 

483

 

 

1,096

 

 

1,310

 

 

5,022

 

 

13,382

 

 

13,210

 

Total

 

$

68,033

 

$

53,853

 

$

127,399

 

$

110,739

 

$

148,647

 

$

142,161

 

 

 

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Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

7.  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. Actavis has exclusive marketing rights of the Company’s enoxaparin product to the U.S. retail pharmacy market (see Note 16). MannKind Corporation began buying RHI API from the Company in December 2014. The Company considers these five   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 , 201 6 and 201 5, and accounts receivable as of June 30, 2016 and December 31, 201 5 .  The following table provides accounts receivable and net revenues information for these major customers:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% of Total Accounts

 

% of Net

 

 

 

 

Receivable

 

Revenue

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

 

June 30,

 

December 31, 

 

June 30, 

 

June 30, 

 

 

 

    

2016

    

2015

    

2016

    

2015

    

2016

 

2015

 

 

Actavis, Inc. (1)

 

8

%

12

%  

18

%

21

%  

20

%

22

%

 

AmerisourceBergen

 

12

%

12

%  

20

%

18

%  

19

%

17

%

 

Cardinal Health

 

19

%

20

%  

20

%

17

%  

20

%

17

%

 

MannKind Corporation

 

17

%

13

%  

6

%

5

%

3

%

8

%

 

McKesson

 

18

%

21

%  

19

%

23

%  

20

%

21

%

 


(1)

The distribution agreement with Actavis is in the process of being terminated (see Note 16).

 

Supplier Concentrations

 

The Company depends on suppliers for raw materials, active pharmaceutical ingredients, and other components that are subject to stringent U.S. Food and Drug Administration, or FDA, requirements. Some of these materials may only be available from one or a limited number of sources. Establishing additional or replacement suppliers for these materials may take a substantial period of time, as suppliers must be approved by the FDA. Furthermore, a significant portion of raw materials may only be available from foreign sources. If the Company is unable to secure, on a timely basis, sufficient quantities of the materials it depends on to manufacture and market its products, it could have a materially adverse effect on the Company’s business, financial condition, and results of operations.

 

8.  Fair Value Measurements

 

The accounting standards of the Financial Accounting Standards Board, or FASB, define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability at the measurement date (an exit price). These standards also establish a hierarchy that prioritizes observable and unobservable inputs used in measuring fair value of an asset or liability, as described below:

 

·

Level 1  – Inputs to measure fair value are based on quoted prices (unadjusted) in active markets on identical assets or liabilities;

 

·

Level 2 – Inputs to measure fair value are based on the following: a) quoted prices in active markets on similar assets or liabilities, b) quoted prices for identical or similar instruments in inactive markets, or c) observable (other than quoted prices) or collaborated observable market data used in a pricing model from which the fair value is derived; and

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Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

·

Level 3  – Inputs to measure fair value are unobservable and the assets or liabilities have little, if any, market activity; these inputs reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities based on best information available in the circumstances.

 

The Company measures fair value based on the prices that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

 

The Company classifies its cash equivalents and short-term investments as Level 1 assets, as they are valued on a recurring basis using quoted market prices with no valuation adjustments applied. The Company does not hold any Level 2 or Level 3 instruments that are measured for fair value on a recurring basis.

 

The fair values of the Company’s financial assets and liabilities measured on a recurring basis, as of June 30, 2016 and December 31, 201 5 , are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices in

 

 

 

 

 

 

 

 

 

 

 

 

Active Markets

 

Significant Other

 

Significant Other

 

 

 

 

 

 

for Identical

 

Observable

 

Unobservable

 

 

 

 

 

 

Assets

 

Inputs

 

Inputs

 

 

    

Total

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

 

 

(in thousands)

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market accounts

 

$

37,592

 

$

37,592

 

$

 

$

 

Restricted short-term investments: