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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 MARCH 31, 2021

or

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

For the transition period from             to             

Commission file number 001-36509

AMPHASTAR PHARMACEUTICALS, INC.

(Exact name of Registrant as specified in its charter)

Delaware

 

33-0702205

(State or other jurisdiction of

incorporation or organization)

 

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

11570 6th Street

 

Rancho Cucamonga, CA

 

91730

(Address of principal executive offices)

(zip code)

(909) 980-9484

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No      

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

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

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

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

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

T

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

AMPH

The NASDAQ Stock Market LLC

The number of shares outstanding of the registrant’s only class of common stock as of May 3, 2021 was 47,635,351.

Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

TABLE OF CONTENTS

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2021

Special Note About Forward-Looking Statements

Part I. FINANCIAL INFORMATION

PAGE

Item 1. Financial Statements (unaudited)

Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020

1

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2021 and 2020

2

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2021 and 2020

3

Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2021 and 2020

4

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020

5

Notes to Condensed Consolidated Financial Statements

6

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

27

Item 3. Quantitative and Qualitative Disclosure about Market Risk

34

Item 4. Controls and Procedures

34

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

35

Item 1A. Risk Factors

35

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

38

Item 3. Defaults Upon Senior Securities

38

Item 4. Mine Safety Disclosures

38

Item 5. Other Information

39

Item 6. Exhibits

39

Signatures

40

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 impact of the COVID-19 pandemic and related responses of business and governments to the pandemic on our operations and personnel, and on commercial activity and demand across our business operations and results of operations;
interruptions to our manufacturing and production as a result of natural catastrophic events or other causes beyond our control such as power disruptions or widespread disease outbreaks, such as the COVID-19 pandemic;
global, national and local economic and market conditions, specifically with respect to geopolitical uncertainty, and the COVID-19 pandemic;

the timing and likelihood of U.S. Food and Drug Administration, or FDA, approvals and regulatory actions on our product candidates, manufacturing activities and product marketing activities;

our ability to advance product candidates in our platforms into successful and completed clinical trials and our subsequent ability to successfully commercialize our product candidates;

our ability to compete in the development and marketing of our products and product candidates;
our expectations regarding the business expansion plans for our Chinese subsidiary, ANP, including its restructuring;

the potential for adverse application of environmental, health and safety and other laws and regulations on our operations;

our expectations for market acceptance of our new products and proprietary drug delivery technologies, as well as those of our active pharmaceutical ingredient, or API, customers;

the potential for our marketed products to be withdrawn due to patient adverse events or deaths, or if we fail to secure FDA approval for products subject to the Prescription Drug Wrap-Up program;

our expectations in obtaining insurance coverage and adequate reimbursement for our products from third-party payers;

the amount of price concessions or exclusion of suppliers adversely affecting our business;

our ability to establish and maintain intellectual property protection for our products and our ability to successfully defend our intellectual property in cases of alleged infringement;

the implementation of our business strategies, product development strategies and technology utilization;

the potential for exposure to product liability claims;

future acquisitions, divestitures or investments, including the anticipated benefits of such acquisitions, divestitures or investments;

our ability to expand internationally;

economic and industry trends and trend analysis;

our ability to remain in compliance with laws and regulations that currently apply or become applicable to our business both in the United States and internationally;
the impact of trade tariffs, export or import restrictions, or other trade barriers;
the impact of Patient Protection and Affordable Care Act (as amended) and other legislative and regulatory healthcare reforms in the countries in which we operate including the potential for drug price controls;
the impact of global and domestic tax reforms, including the Tax Cuts and Jobs Act of 2017, or the Tax Act, as amended by the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act;

the timing for completion and the validation of the new construction at our ANP and Amphastar facilities;
the timing and extent of share buybacks; and

our financial performance expectations, including our expectations regarding our backlog, revenue, cost of revenue, gross profit or gross margin, operating expenses, including changes in research and development, sales and marketing and general and administrative expenses, and our ability to achieve and maintain future profitability.

Table of Contents

You should read this Quarterly Report and the documents that we reference elsewhere in this Quarterly Report completely and with the understanding that our actual results may differ materially from what we expect as expressed or implied by our forward-looking statements. In light of the significant risks and uncertainties to which our forward-looking statements are subject, you should not place undue reliance on or regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified timeframe, or at all. In particular, the extent of COVID-19’s impact on our business will depend on several factors, including the severity, duration and extent of the pandemic, all of which continue to evolve and remain uncertain at this time. We discuss many of these risks and uncertainties in greater detail in this Quarterly Report and in our Annual Report on Form 10-K for the year ended December 31, 2020, 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)

    

March 31, 

    

December 31, 

 

2021

2020

 

(unaudited)

ASSETS

Current assets:

Cash and cash equivalents

$

101,601

$

92,642

Restricted cash

235

1,865

Short-term investments

13,531

12,977

Restricted short-term investments

 

2,200

 

2,200

Accounts receivable, net

 

77,938

 

66,005

Inventories

 

97,110

 

96,831

Income tax refunds and deposits

 

800

 

385

Prepaid expenses and other assets

 

6,749

 

6,777

Total current assets

 

300,164

 

279,682

Property, plant, and equipment, net

 

253,265

 

260,055

Finance lease right-of-use assets

594

612

Operating lease right-of-use assets

19,280

20,042

Goodwill and intangible assets, net

 

40,243

 

40,615

Other assets

 

7,212

 

5,250

Deferred tax assets

 

24,980

 

24,980

Total assets

$

645,738

$

631,236

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable and accrued liabilities

$

108,545

$

95,504

Income taxes payable

 

2,676

 

1,077

Current portion of long-term debt

 

12,173

 

12,263

Current portion of operating lease liabilities

3,702

3,357

Total current liabilities

 

127,096

 

112,201

Long-term reserve for income tax liabilities

 

4,709

 

4,709

Long-term debt, net of current portion

 

32,334

 

34,186

Long-term operating lease liabilities, net of current portion

16,464

17,464

Deferred tax liabilities

 

755

 

741

Other long-term liabilities

 

13,420

 

13,212

Total liabilities

 

194,778

 

182,513

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; 55,184,000 and 47,718,003 shares issued and outstanding as of March 31, 2021 and 54,760,922 and 47,495,439 shares issued and outstanding as of December 31, 2020, respectively

 

6

 

5

Additional paid-in capital

 

413,926

 

410,061

Retained earnings

 

122,814

 

117,773

Accumulated other comprehensive loss

 

(5,642)

 

(3,721)

Treasury stock

 

(125,546)

 

(121,812)

Total Amphastar Pharmaceuticals, Inc. stockholders’ equity

 

405,558

 

402,306

Non-controlling interests

45,402

46,417

Total equity

450,960

448,723

Total liabilities and stockholders’ equity

$

645,738

$

631,236

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

 

March 31, 

    

2021

    

2020

 

Net revenues

$

103,020

$

84,688

Cost of revenues

 

58,074

 

47,865

Gross profit

 

44,946

 

36,823

Operating expenses:

Selling, distribution, and marketing

 

4,537

 

3,294

General and administrative

 

15,338

 

10,746

Research and development

 

14,765

 

15,303

Total operating expenses

 

34,640

 

29,343

Income from operations

 

10,306

 

7,480

Non-operating (expenses) income:

Interest income

 

161

 

153

Interest expense

 

(104)

 

(76)

Other expenses, net

 

(5,249)

 

(1,752)

Total non-operating (expenses) income, net

 

(5,192)

 

(1,675)

Income before income taxes

 

5,114

 

5,805

Income tax provision

 

1,155

 

2,280

Net income

$

3,959

$

3,525

Net loss attributable to non-controlling interests

$

(1,082)

$

(424)

Net income attributable to Amphastar Pharmaceuticals, Inc.

$

5,041

$

3,949

Net income per share attributable to Amphastar Pharmaceuticals, Inc. stockholders:

Basic

$

0.11

$

0.09

Diluted

$

0.10

$

0.08

Weighted-average shares used to compute net income per share attributable to Amphastar Pharmaceuticals, Inc. stockholders:

Basic

 

47,520

 

46,408

Diluted

 

49,518

 

48,248

See Accompanying Notes to Condensed Consolidated Financial Statements.

-2-

Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited; in thousands)

Three Months Ended

March 31, 

    

2021

    

2020

 

Net income attributable to Amphastar Pharmaceuticals, Inc.

$

5,041

$

3,949

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

Foreign currency translation adjustment

 

(1,921)

 

(774)

Total other comprehensive loss attributable to Amphastar Pharmaceuticals, Inc.

 

(1,921)

 

(774)

Total comprehensive income attributable to Amphastar Pharmaceuticals, Inc.

$

3,120

$

3,175

See Accompanying Notes to Condensed Consolidated Financial Statements.

-3-

Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited; in thousands, except share data)

Common Stock

Accumulated

Treasury Stock

Total

Additional

Other

Amphastar

Non-

Paid-in

Retained

Comprehensive

Stockholders'

controlling

Shares

Amount

Capital

Earnings

loss

Shares

Amount

Equity

Interest

Total

Balance as of December 31, 2020

 

54,760,922

$

5

$

410,061

$

117,773

$

(3,721)

 

(7,265,483)

$

(121,812)

$

402,306

$

46,417

$

448,723

Net income attributable to Amphastar Pharmaceuticals, Inc.

 

 

 

 

5,041

 

 

 

 

5,041

 

 

5,041

Other comprehensive loss attributable to Amphastar Pharmaceuticals, Inc.

 

 

 

 

 

(1,921)

 

 

 

(1,921)

 

 

(1,921)

Net loss attributable to non-controlling interest

(1,082)

(1,082)

Purchase of treasury stock

 

 

 

 

 

 

(204,698)

(3,783)

(3,783)

 

(3,783)

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

(49)

4,184

49

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

 

423,078

 

1

 

(853)

 

 

 

 

 

(852)

 

 

(852)

Share-based compensation expense

 

 

 

4,767

 

 

 

 

 

4,767

 

67

 

4,834

Balance as of March 31, 2021

 

55,184,000

$

6

$

413,926

$

122,814

$

(5,642)

 

(7,465,997)

$

(125,546)

$

405,558

$

45,402

$

450,960

Common Stock

Accumulated

Treasury Stock

Total

Additional

Other

Amphastar

Non-

Paid-in

Retained

Comprehensive

Stockholders'

controlling

Shares

Amount

Capital

Earnings

loss

Shares

Amount

Equity

Interest

Total

Balance as of December 31, 2019

 

52,495,483

$

5

$

367,305

$

116,370

$

(4,687)

 

(5,918,515)

$

(97,627)

$

381,366

$

46,162

$

427,528

Net income attributable to Amphastar Pharmaceuticals, Inc.

 

 

 

 

3,949

 

 

 

 

3,949

 

 

3,949

Other comprehensive loss attributable to Amphastar Pharmaceuticals, Inc.

 

 

 

 

 

(774)

 

 

 

(774)

 

 

(774)

Net loss attributable to non-controlling interest

(424)

(424)

Purchase of treasury stock

 

 

 

 

 

 

(647,246)

(10,950)

(10,950)

 

(10,950)

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

(84)

6,873

84

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

 

369,508

 

 

(1,238)

 

 

 

 

 

(1,238)

 

 

(1,238)

Share-based compensation expense

 

 

 

5,161

 

 

 

 

 

5,161

 

121

 

5,282

Balance as of March 31, 2020

 

52,864,991

$

5

$

371,144

$

120,319

$

(5,461)

 

(6,558,888)

$

(108,493)

$

377,514

$

45,859

$

423,373

See Accompanying Notes to Condensed Consolidated Financial Statements

-4-

Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)

Three Months Ended

March 31, 

    

2021

    

2020

 

Cash Flows From Operating Activities:

Net income

$

3,959

$

3,525

Reconciliation to net cash provided by operating activities:

Loss on disposal of assets

 

6

 

14

Depreciation of property, plant, and equipment

 

5,686

 

4,716

Amortization of product rights, trademarks, and patents

 

276

 

258

Operating lease right-of-use asset amortization

863

848

Share-based compensation expense

 

4,834

 

5,282

Changes in deferred taxes, net

 

 

1,638

Changes in operating assets and liabilities:

Accounts receivable, net

 

(12,078)

 

(12,487)

Inventories

 

(1,144)

 

2,241

Prepaid expenses and other assets

 

1,119

 

1,494

Income tax refunds, deposits, and payable, net

 

1,182

 

451

Operating lease liabilities

(754)

(824)

Accounts payable and accrued liabilities

 

18,876

 

(5,679)

Net cash provided by operating activities

 

22,825

 

1,477

Cash Flows From Investing Activities:

Purchases and construction of property, plant, and equipment

 

(7,618)

 

(8,006)

Sales of short-term investments

 

 

21

Purchase of short-term investments

(4,501)

(4,561)

Maturity of short-term investments

3,944

4,030

Payment of deposits and other assets

 

(520)

 

(206)

Net cash used in investing activities

 

(8,695)

 

(8,722)

Cash Flows From Financing Activities:

Proceeds from equity plans, net of withholding tax payments

 

(854)

 

(1,238)

Purchase of treasury stock

 

(3,783)

 

(10,950)

Proceeds from issuance of long-term debt

 

 

3,067

Principal payments on long-term debt

 

(2,002)

 

(2,328)

Net cash used in financing activities

 

(6,639)

 

(11,449)

Effect of exchange rate changes on cash

 

(162)

 

(146)

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

 

7,329

 

(18,840)

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

 

94,507

 

75,550

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

$

101,836

$

56,710

Noncash Investing and Financing Activities:

Capital expenditure included in accounts payable

$

6,238

$

5,840

Operating lease right-of-use assets

$

103

$

Equipment acquired under finance leases

$

74

$

Supplemental Disclosures of Cash Flow Information:

Interest paid, net of capitalized interest

$

508

$

559

Income taxes paid

$

30

$

209

See Accompanying Notes to Condensed Consolidated Financial Statements.

-5-

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. General

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

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2020 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, 2020. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles, or GAAP, have been condensed or omitted from the accompanying condensed consolidated financial statements. The accompanying year-end condensed consolidated balance sheet was derived from the audited financial statements. The accompanying interim financial statements are unaudited, but reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the Company’s consolidated financial position, results of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the periods presented. Unless otherwise noted, all such adjustments are of a normal, recurring nature. The Company’s results of operations, comprehensive income (loss) and cash flows for the interim periods are not necessarily indicative of the results of operations and cash flows that it may achieve in future periods.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries, and are prepared in accordance with United States generally accepted accounting principles, or GAAP. Certain prior period amounts have been reclassified within the investing activities of the statement of cash flows to conform to the current period presentation. 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, which are of a normal recurring nature, necessary to present fairly the consolidated financial position, results of operations, and cash flows of the Company.

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

In July 2018, the Company’s Chinese subsidiary, ANP, completed a private placement of its common equity interest to accredited investors and received approximately $56.3 million of cash proceeds, a portion of which was received in 2019. The Company has retained approximately 58% of the equity interest in ANP following the private placement and continues to consolidate the financial results of ANP with the Company’s results of operations. ANP’s net income after July 2, 2018, was attributed to the Company in accordance with the Company’s equity interest of approximately 58% in ANP.

-6-

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

COVID-19 Pandemic

The Company is subject to risks and uncertainties as a result of the ongoing novel coronavirus pandemic, or COVID-19. The complete extent of the impact of the COVID-19 pandemic on the Company’s business is highly uncertain and difficult to predict, as the information is constantly evolving. The Company considered the impact of COVID-19 on the assumptions and estimates used to determine the results reported and asset valuations as of March 31, 2021.

All of the Company’s production facilities continued to operate during the quarter as they had prior to the COVID-19 pandemic with very little change, other than for enhanced safety measures intended to prevent the spread of the virus.

It is not possible at this time to estimate the complete impact that COVID-19 could have on the Company’s business, including its customers and suppliers, as the impact will depend on future developments, which are highly uncertain and cannot be predicted. The Company will continue to monitor the impact of COVID-19 on all aspects of its business.

Use of Estimates

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

Foreign Currency

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

The Company’s French subsidiary, AFP, maintains its book of record in euros. ANP’s subsidiaries maintain their books of record in Chinese yuan. AUK’s subsidiary, IMS UK, maintains its book of record in British pounds. These local currencies have been determined to be the subsidiaries’ respective functional currencies. These books of record are translated into USD using average exchange rates during the period. Assets and liabilities are translated at the rate of exchange prevailing on the balance sheet date. Equity is translated at the prevailing rate of exchange at the date of the 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 months ended March 31, 2021 and 2020 were $1.5 million loss and $0.6 million loss, respectively.

Comprehensive Income (Loss)

For the three months ended March 31, 2021 and 2020, the Company included its foreign currency translation gain or loss as part of its comprehensive income (loss). No income tax expense (benefit) was allocated to other comprehensive income (loss) for the three months ended March 31, 2021 and 2020.

-7-

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Advertising Expense

Advertising expenses, primarily associated with Primatene Mist®, are recorded as they are incurred, except for expenses related to the development of a major commercial or media campaign, which are expensed in the period in which the commercial or campaign is first presented, and are reflected as a component of selling, distribution and marketing in the Company’s condensed consolidated statement of operations. For the three months ended March 31, 2021 and 2020, advertising expense was $2.2 million and $1.0 million, respectively.

Financial Instruments

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

Cash and Cash Equivalents

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

Short-Term Investments

Short-term investments as of March 31, 2021 and December 31, 2020 consisted of certificates of deposit and investment grade debt securities with original expiration dates within 12 months.

Restricted Cash

Restricted cash is collateral required for the Company to guarantee certain vendor payments in France. As of March 31, 2021 and December 31, 2020, the restricted cash balance was $0.2 million and $1.9 million, respectively.

Restricted Short-Term Investments

Restricted short-term investments consist of certificates of deposit that are collateral for standby letters of credit to qualify for workers’ compensation self-insurance. The certificates of deposit have original maturities greater than three months, but less than one year. As of March 31, 2021 and December 31, 2020, the balance of restricted short-term investments was $2.2 million.

Deferred Income Taxes

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

Recent Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board, or FASB, issued Accounting Standard Update, or ASU,

-8-

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

No. 2019-12 Simplifying the Accounting for Income Taxes (Topic 740). The amendment removes certain exceptions for performing intra-period tax allocations, recognizing deferred taxes for investment, and calculating income taxes in interim periods. The guidance also simplifies the accounting for franchise taxes, transactions that result in a step-up in the tax basis of goodwill, and the effect of enacted changes in tax laws or rates in interim periods. The guidance is effective for the Company’s interim and annual reporting periods during the year ended December 31, 2021. The adoption of this accounting guidance did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.

 

Note 3. Revenue Recognition

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

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

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

The Company’s payment terms vary by types and locations of customers and the products or services offered. Payment terms differ by jurisdiction and customers, but payment is generally required in a term ranging from 30 to 75 days from date of shipment or satisfaction of the performance obligation. For certain products or services and certain customer types, we may require payment before products are delivered or services are rendered to customers.

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

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

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

Provision for Chargebacks and Rebates

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

-9-

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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:

Three Months Ended

 

March 31, 

2021

2020

 

(in thousands)

 

Beginning balance

    

$

20,380

    

$

21,644

Provision for chargebacks and rebates

 

47,031

 

35,987

Credits and payments issued to third parties

 

(46,881)

 

(39,353)

Ending balance

$

20,530

$

18,278

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 March 31, 2021 and December 31, 2020, $16.4 million and $16.4 million were included in accounts receivable, net, on the condensed consolidated balance sheets, respectively. The remaining provision as of March 31, 2021 and December 31, 2020 of $4.1 million and $4.0 million, respectively, were included in accounts payable and accrued liabilities.

Accrual for Product Returns

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

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

Three Months Ended

 

March 31, 

2021

2020

 

(in thousands)

 

Beginning balance

    

$

14,204

    

$

10,339

Provision for product returns

 

3,233

 

3,099

Credits issued to third parties

 

(2,517)

 

(2,239)

Ending balance

$

14,920

$

11,199

-10-

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Of the provision for product returns as of March 31, 2021 and December 31, 2020, $10.7 million and $10.2 million, were included in accounts payable and accrued liabilities on the condensed consolidated balance sheets, respectively. The remaining provision as of March 31, 2021 and December 31, 2020 of $4.2 million and $4.0 million, respectively, were included in other long-term liabilities. For the three months ended March 31, 2021 and 2020, the Company’s aggregate product return rate was 1.4% and 1.1% of qualified sales, respectively.

Note 4. Income per Share Attributable to Amphastar Pharmaceuticals, Inc. Stockholders

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

For the three months ended March 31, 2021, options to purchase 1,899,833 shares of stock with a weighted-average exercise price of $20.85 per share, and the reallocation of net income attributable to non-controlling interests were excluded in the computation of diluted net income per share attributable to Amphastar Pharmaceuticals, Inc. stockholders because the effect would be anti-dilutive.

For the three months ended March 31, 2020, options to purchase 1,999,083 shares of stock with a weighted-average exercise price of $20.81 per share, and the reallocation of net income attributable to non-controlling interest were excluded in the computation of diluted net income per share attributable to Amphastar Pharmaceuticals, Inc. stockholders because the effect would be anti-dilutive.

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

Three Months Ended

March 31, 

2021

2020

(in thousands, except per share data)

Basic and dilutive numerator:

    

    

    

    

 

Net income attributable to Amphastar Pharmaceuticals, Inc.

$

5,041

$

3,949

Denominator:

Weighted-average shares outstanding — basic

 

47,520

 

46,408

Net effect of dilutive securities:

Incremental shares from equity awards

 

1,998

 

1,840

Weighted-average shares outstanding — diluted

 

49,518

 

48,248

Net income per share attributable to Amphastar Pharmaceuticals, Inc. stockholders — basic

$

0.11

$

0.09

Net income per share attributable to Amphastar Pharmaceuticals, Inc. stockholders — diluted

$

0.10

$

0.08

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

-11-

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 Primatene Mist®, glucagon, enoxaparin, naloxone, phytonadione, lidocaine, epinephrine, 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.

Selected financial information by reporting segment is presented below:

Three Months Ended

March 31, 

2021

2020

(in thousands)

Net revenues:

    

    

    

    

 

Finished pharmaceutical products

$

97,882

$

81,298

API

 

5,138

3,390

Total net revenues

 

103,020

 

84,688

Gross profit (loss):

Finished pharmaceutical products

 

45,286

 

38,810

API

 

(340)

(1,987)

Total gross profit

 

44,946

 

36,823

Operating expenses

 

34,640

 

29,343

Income from operations

 

10,306

 

7,480

Non-operating expense

 

(5,192)

 

(1,675)

Income before income taxes

$

5,114

$

5,805

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.

-12-

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Three Months Ended

March 31, 

2021

2020

(in thousands)

Finished pharmaceutical products net revenues:

    

    

    

    

 

Primatene Mist®

$

18,383

$

12,877

Epinephrine

15,578

3,990

Enoxaparin

10,658

9,168

Phytonadione

 

9,565

 

11,029

Lidocaine

9,071

10,657

Glucagon

7,984

Naloxone

6,341

8,875

Other finished pharmaceutical products

 

20,302

 

24,702

Total finished pharmaceutical products net revenues

$

97,882

$

81,298

The amount of depreciation and amortization expense included in cost of revenues, by reporting segments is presented below:

Three Months Ended

March 31, 

2021

2020

(in thousands)

Depreciation and amortization expense

    

    

    

    

 

Finished pharmaceutical products

$

1,435

$

1,464

API

 

1,048

 

582

Total depreciation and amortization expense

$

2,483

$

2,046

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

Net Revenue

Long-Lived Assets

 

Three Months Ended

 

March 31, 

March 31, 

December 31, 

2021

2020

2021

2020

 

(in thousands)

 

United States

    

$

99,170

    

$

81,065

    

$

125,861

    

$

129,401

China

 

1,121

228

 

97,847

 

98,538

France

 

2,729

3,395

 

49,431

 

52,770

Total

$

103,020

$

84,688

$

273,139

$

280,709

Note 6. Customer and Supplier Concentration

Customer Concentrations

Three large wholesale drug distributors, AmerisourceBergen Corporation, or AmerisourceBergen, Cardinal Health, Inc., or Cardinal, and McKesson Corporation, or McKesson, are all distributors of the Company’s products, as well as suppliers of a broad range of health care products. The Company considers these three customers to be its major customers, as each individually, and these customers collectively, represented a significant percentage of the Company’s net revenue for the three months ended March 31, 2021 and 2020 and accounts receivable as of March 31, 2021 and

-13-

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

December 31, 2020, respectively. The following table provides accounts receivable and net revenue information for these major customers:

% of Total Accounts

% of Net

Receivable

Revenue

Three Months Ended

March 31, 

December 31, 

March 31, 

    

2021

    

2020

    

2021

    

2020

    

AmerisourceBergen

 

14

%

9

%

25

%

24

%

McKesson

 

21

%

24

%

20

%

22

%

Cardinal Health

 

16

%

17

%

15

%

19

%

Supplier Concentrations

The Company depends on suppliers for raw materials, APIs, and other components that are subject to stringent 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.

Note 7. Fair Value Measurements

GAAP defines 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

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.

As of March 31, 2021, cash equivalents include money market accounts. Short-term investments consist of certificates of deposit as well as investment-grade corporate and municipal bonds with original expiration dates within 12 months. The certificates of deposit are carried at amortized cost in the Company’s condensed consolidated balance sheet, which approximates their fair value determined based on Level 2 inputs. The corporate and municipal bonds are classified as held-to-maturity and are carried at amortized cost net of allowance for credit losses, which approximates their fair value determined based on Level 2 inputs. The restrictions on restricted cash and short-term investments have a negligible effect on the fair value of these financial assets.

-14-

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The fair value of the Company’s financial assets and liabilities measured on a recurring basis as of March 31, 2021 and December 31, 2020, are as follows:

    

Total

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

(in thousands)

 

Cash equivalents - money market

$

76,536

$

76,536

$

$

Restricted cash - money market

235

235

Short-term investments - certificates of deposit

9,284

9,284

Restricted short-term investments - certificates of deposit

 

2,200

 

 

2,200

 

Corporate and municipal bonds

4,199

4,199

Interest rate swap liabilities related to variable rate loans

(723)

(723)

Fair value measurement as of March 31, 2021

$

91,731

$

76,771

$

14,960

$

Cash equivalents - money market

$

58,710

$

58,710

$

$

Restricted cash - money market

1,865

1,865

Short-term investments - certificates of deposit

9,089

9,089

Restricted short-term investments - certificates of deposit

 

2,200

 

 

2,200

 

Corporate and municipal bonds

3,855

3,855

Interest rate swap liabilities related to variable rate loans

(902)

(902)

Fair value measurement as of December 31, 2020

$

74,817

$

60,575

$

14,242

$

The Company does not hold any Level 3 instruments that are measured at fair value on a recurring basis.

Nonfinancial assets and liabilities are not measured at fair value on a recurring basis but are subject to fair value adjustments in certain circumstances. These items primarily include long-lived assets, goodwill, and intangible assets for which the fair value of assets is determined as part of the related impairment test. As of March 31, 2021 and December 31, 2020, there were no significant adjustments to fair value for nonfinancial assets or liabilities.