Amphastar Pharmaceuticals, Inc. - Quarter Report: 2019 June (Form 10-Q)

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

The NASDAQ Stock Market LLC

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, 2019

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

For the transition period from to

Commission file number 001-36509

AMPHASTAR PHARMACEUTICALS, INC.

(Exact name of Registrant as specified in its charter)

Delaware

33-0702205

(State or other jurisdiction of

incorporation or organization)

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


11570 6th Street
Rancho Cucamonga, CA		91730
(Address of principal executive offices)		(zip code)

(909) 980-9484

(Registrant’s telephone number, including area code)

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

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.

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

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

The number of shares outstanding of the registrant’s only class of common stock as of August 2, 2019 was 47,226,496.

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AMPHASTAR PHARMACEUTICALS, INC.

TABLE OF CONTENTS

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

Special Note About Forward-Looking Statements


Part I. FINANCIAL INFORMATION
		PAGE
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018		1
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2019 and 2018		2
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2019 and 2018		3
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018		4
Notes to Condensed Consolidated Financial Statements		5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
Item 3. Quantitative and Qualitative Disclosure about Market Risk		40
Item 4. Controls and Procedures		41
Part II. OTHER INFORMATION
Item 1. Legal Proceedings		42
Item 1A. Risk Factors		42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		43
Item 3. Defaults Upon Senior Securities		43
Item 4. Mine Safety Disclosures		43
Item 5. Other Information		43
Item 6. Exhibits		44
Signatures		45

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SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

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

our expectations regarding the sales and marketing of our products;

our expectations regarding our manufacturing and production and the integrity of our supply chain for our products, including the risks associated with our single source suppliers;

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

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

our ability to compete in the development and marketing of our products and product candidates;

our expectations regarding the business expansion plans for our Chinese subsidiary, ANP;

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

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

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

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

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

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

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

the potential for exposure to product liability claims;

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

our ability to expand internationally;

economic and industry trends and trend analysis;

our ability to remain in compliance with laws and regulations that currently apply or become applicable to our business both in the United States and internationally;

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

the impact of trade tariffs or other trade barriers;

the impact of Patient Protection and Affordable Care Act (as amended) and other legislative and regulatory healthcare reforms in the countries in which we operate including the potential for drug price controls;

the impact of global and domestic tax reforms, including the Tax Cuts and Jobs Act of 2017, or the Tax Act;

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

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

You should read this Quarterly Report and the documents that we reference elsewhere in this Quarterly Report completely and with the understanding that our actual results may differ materially from what we expect as expressed or implied by our forward-looking statements. In light of the significant risks and uncertainties to which our forward-looking statements are subject, you should not place undue reliance on or regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified timeframe, or at all. We discuss many of these risks and uncertainties in greater detail in this Quarterly Report and in our Annual Report on Form 10-K for the year ended December 31, 2018, particularly in Item 1A. “Risk Factors.” These forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report regardless of the time of delivery of this Quarterly Report, and such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Quarterly Report.

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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.

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	June 30,		December 31,
	2019		2018
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	120,373	$	86,337
Restricted cash		1,865		1,865
Short-term investments		2,836		2,831
Restricted short-term investments		2,290		2,290
Accounts receivable, net		48,823		52,163
Inventories		99,232		69,322
Income tax refunds and deposits		226		49
Prepaid expenses and other assets		8,489		5,485
Total current assets		284,134		220,342

Property, plant, and equipment, net		220,060		210,418
Finance lease right-of-use assets		985		—
Operating lease right-of-use assets		20,143		—
Goodwill and intangible assets, net		41,718		42,267
Other assets		13,515		9,918
Deferred tax assets		20,746		30,618
Total assets	$	601,301	$	513,563

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	88,171	$	87,418
Income taxes payable		3,150		1,187
Current portion of long-term debt		6,941		18,229
Current portion of operating lease liabilities		2,737		—
Total current liabilities		100,999		106,834

Long-term reserve for income tax liabilities		415		415
Long-term debt, net of current portion		39,793		31,984
Long-term operating lease liabilities, net of current portion		17,754		—
Deferred tax liabilities		1,025		1,031
Other long-term liabilities		9,027		8,940
Total liabilities		169,013		149,204
Commitments and contingencies:
Stockholders’ equity:
Preferred stock: par value $0.0001; 20,000,000 shares authorized; no shares issued and outstanding		—		—
Common stock: par value $0.0001; 300,000,000 shares authorized; 52,212,760 and 47,217,675 shares issued and outstanding as of June 30, 2019 and 51,438,675 and 46,631,118 shares issued and outstanding as of December 31, 2018, respectively		5		5
Additional paid-in capital		355,436		344,434
Retained earnings		116,086		67,485
Accumulated other comprehensive loss		(4,223)		(4,013)
Treasury stock		(79,459)		(75,476)
Total Amphastar Pharmaceuticals, Inc. stockholders’ equity		387,845		332,435
Non-controlling interests		44,443		31,924
Total equity		432,288		364,359
Total liabilities and stockholders’ equity	$	601,301	$	513,563

See Accompanying Notes to Condensed Consolidated Financial Statements.

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AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; in thousands, except per share data)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Net revenues	$	79,047	$	71,040	$	158,837	$	129,433
Cost of revenues		46,660		44,976		95,547		86,397
Gross profit		32,387		26,064		63,290		43,036

Operating expenses:
Selling, distribution, and marketing		2,992		1,876		6,133		3,597
General and administrative		12,426		11,669		28,753		22,667
Research and development		15,996		15,460		30,603		29,490
Total operating expenses		31,414		29,005		65,489		55,754

Income (loss) from operations		973		(2,941)		(2,199)		(12,718)

Non-operating income (expenses):
Interest income		143		106		291		230
Interest expense		(24)		(100)		(54)		(118)
Other income (expenses), net		60,001		(1,265)		59,422		(483)
Total non-operating income (expenses), net		60,120		(1,259)		59,659		(371)

Income (loss) before income taxes		61,093		(4,200)		57,460		(13,089)
Income tax provision (benefit)		14,173		(1,347)		12,694		(3,095)

Net income (loss)	$	46,920	$	(2,853)	$	44,766	$	(9,994)

Net loss attributable to non-controlling interests	$	(867)	$	—	$	(3,889)	$	—

Net income (loss) attributable to Amphastar Pharmaceuticals, Inc.	$	47,787	$	(2,853)	$	48,655	$	(9,994)

Net income (loss) per share attributable to Amphastar Pharmaceuticals, Inc. shareholders:
Basic	$	1.01	$	(0.06)	$	1.04	$	(0.21)

Diluted	$	0.96	$	(0.06)	$	0.97	$	(0.21)

Weighted-average shares used to compute net income (loss) per share attributable to Amphastar Pharmaceuticals, Inc. shareholders:
Basic		47,107		46,557		46,925		46,535

Diluted		49,894		46,557		50,155		46,535

See Accompanying Notes to Condensed Consolidated Financial Statements.

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AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited; in thousands)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Net income (loss) attributable to Amphastar Pharmaceuticals, Inc.	$	47,787	$	(2,853)	$	48,655	$	(9,994)

Other comprehensive loss attributable to Amphastar Pharmaceuticals, Inc., net of income taxes
Foreign currency translation adjustment		(97)		(2,256)		(210)		(1,066)
Total other comprehensive loss attributable to Amphastar Pharmaceuticals, Inc.		(97)		(2,256)		(210)		(1,066)

Total comprehensive income (loss) attributable to Amphastar Pharmaceuticals, Inc.	$	47,690	$	(5,109)	$	48,445	$	(11,060)

See Accompanying Notes to Condensed Consolidated Financial Statements.

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AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)


	Six Months Ended
	June 30,
	2019		2018
Cash Flows From Operating Activities:
Net income (loss)	$	44,766	$	(9,994)
Reconciliation to net cash provided by (used in) operating activities:
Loss on impairment and disposal of assets		850		743
Depreciation of property, plant, and equipment		8,311		6,513
Amortization of product rights, trademarks, and patents		526		1,451
Operating lease right-of-use asset amortization		1,390		—
Share-based compensation expense		8,706		8,862
Changes in deferred taxes		9,872		—
Changes in operating assets and liabilities:
Accounts receivable, net		1,700		(5,221)
Inventories		(30,012)		1,625
Prepaid expenses and other assets		(1,221)		1,715
Income tax refund, deposits, and payable		1,784		(3,209)
Operating lease right-of-use assets and liabilities, net		(1,297)		—
Accounts payable and accrued liabilities		2,738		10,408
Net cash provided by operating activities		48,113		12,893

Cash Flows From Investing Activities:
Purchases and construction of property, plant, and equipment		(24,467)		(24,591)
Sale of intangible assets		—		4,400
Purchase of short-term investments		—		(204)
Payment of deposits and other assets		(86)		(114)
Net cash used in investing activities		(24,553)		(20,509)

Cash Flows From Financing Activities:
Proceeds from the private placement of ANP		18,298		—
Equity related tax payments, net of proceeds from equity plans		(157)		(294)
Purchase of treasury stock		(4,088)		(14,850)
Proceeds from borrowing under lines of credit		—		260
Repayments under lines of credit		(347)		—
Proceeds from issuance of long-term debt		—		8,000
Principal payments on long-term debt		(3,219)		(2,834)
Net cash provided by (used in) financing activities		10,487		(9,718)

Effect of exchange rate changes on cash		(11)		(190)

Net increase (decrease) in cash, cash equivalents, and restricted cash		34,036		(17,524)

Cash, cash equivalents, and restricted cash at beginning of period		88,202		67,459

Cash, cash equivalents, and restricted cash at end of period	$	122,238	$	49,935

Noncash Investing and Financing Activities:
Capital expenditure included in accounts payable	$	6,631	$	5,840
Operating lease right-of-use assets	$	7,671	$	—
Equipment acquired under finance leases	$	61	$	14

Supplemental Disclosures of Cash Flow Information:
Interest paid, net of capitalized interest	$	1,277	$	1,078
Income taxes paid	$	1,147	$	149

See Accompanying Notes to Condensed Consolidated Financial Statements.

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. General

Amphastar Pharmaceuticals, Inc., a California corporation, was incorporated in February 1996 and merged with and into Amphastar Pharmaceuticals, Inc., a Delaware corporation, in July 2004 (together with its subsidiaries, hereinafter referred to as the “Company”). The Company is a specialty pharmaceutical company that 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 are 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, 2018, and the notes thereto as filed with the Securities and Exchange Commission, or SEC, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles, or GAAP, have been condensed or omitted from the accompanying condensed consolidated financial statements. The accompanying year-end condensed consolidated balance sheet was derived from the audited financial statements. The accompanying interim financial statements are unaudited, but reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the Company’s consolidated financial position, results of operations, comprehensive income (loss) and cash flows for the periods presented. Unless otherwise noted, all such adjustments are of a normal, recurring nature. The Company’s results of operations, comprehensive income (loss) and cash flows for the interim periods are not necessarily indicative of the results of operations and cash flows that it may achieve in future periods.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

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

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

In July 2018, the Company’s Chinese subsidiary, ANP, completed a private placement of its common equity interest to accredited investors for aggregate gross proceeds of approximately $57 million. While investors were initially required to complete their contributions in cash by December 31, 2018, ANP granted an extension to certain investors. Certain investors contributed their payments in Chinese yuan, which resulted in a difference in U.S. dollars, or USD, due to currency fluctuations subsequent to the execution of the placement agreement. A total of $56.3 million was received by ANP and the difference that was received in USD was expensed in the quarter ended March 31, 2019. The Company has retained approximately 58% of the equity interest in ANP following the private placement and continues to consolidate

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

In 2018, the Company identified certain errors in its accounting primarily related to the depreciation of certain leasehold improvements within property, plant and equipment. The errors were not material to any of the Company’s prior period annual financial statements. However, for comparative purposes, the Company has revised the prior period consolidated financial statements included herein. As a result, the net loss for the three months ended June 30, 2018 increased by $0.1 million. The errors did not result in a change to the basic or diluted net loss per share for the three months ended June 30, 2018. The net loss for the six months ended June 30, 2018, did not materially change as a result of the error. However, the error resulted in a change to the basic and diluted net loss per share for the six months ended June 30, 2018 by $0.01 and $0.01, respectively. The balances of property, plant, and equipment, net and retained earnings as of June 30, 2018, were reduced by $4.7 million and $3.6 million, respectively. The error did not result in a change to the net cash provided by operating activities in the Company’s consolidated statement of cash flows for the six months ended June 30, 2018.

Use of Estimates

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

Foreign Currency

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

The Company’s French subsidiary, AFP, maintains its book of record in euros. Its other Chinese subsidiaries maintain their books of record in Chinese yuan. Its U.K. subsidiary, IMS UK, maintains its book of record in British pounds. These local currencies have been determined to be the subsidiaries’ respective functional currencies. These books of record are translated into USD using average exchange rates during the period. Assets and liabilities are translated at the rate of exchange prevailing on the balance sheet date. Equity is translated at the prevailing rate of exchange at the date of the equity transactions. Translation adjustments are reflected in stockholders’ equity and are included as a component of other accumulated comprehensive income (loss). The unrealized gains or losses of intercompany foreign currency transactions that are of a long-term investment nature are reported in other accumulated comprehensive income (loss). The unrealized gains and losses of intercompany foreign currency transactions that are of a long-term investment nature for the three and six months ended June 30, 2019, were $0.4 million loss and $0.2 million gain, respectively, and for the three and six months ended June 30, 2018, were $1.7 million loss and $0.8 million loss, respectively.

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

Comprehensive Income (Loss)

For the three and six months ended June 30, 2019 and 2018, the Company included its foreign currency translation gain or loss as part of its comprehensive income (loss).

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Restricted Cash and Short-Term Investments

Restricted cash and short-term investments are collateral required for the Company to effect standby letters of credit and to qualify for workers’ compensation self-insurance and to guarantee certain vendor payments in France. As of June 30, 2019 and December 31, 2018, restricted cash and short-term investments include $1.9 million in cash and $2.3 million in certificates of deposit, respectively. The certificates of deposit have original maturities greater than three months and are classified as short-term investments.

Financial Instruments

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

Deferred Income Taxes

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

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standard Update, or ASU, No. 2016-13 Financial Instruments – Credit Losses, which is aimed at providing financial statement users with more useful information about the expected credit losses on financial instruments and other commitments to extend credit. The standard update changes the impairment model for financial assets measured at amortized cost, requiring presentation at the net amount expected to be collected. The measurement of expected credit losses requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Available-for-sale debt securities with unrealized losses will be recorded through an allowance for credit losses. The ASU and the related clarifications subsequently issued by FASB will become effective for the Company’s interim and annual reporting periods during the year ending December 31, 2020. Early adoption is permitted for interim or annual periods after December 31, 2019. The Company will be required to apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company does not believe the adoption of this accounting guidance will have a material impact on its consolidated financial statements and related disclosures.

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

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2017. The Company currently does not believe that the adoption of this accounting guidance will have a material impact on its consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU No. 2018-13 Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which removes, modifies, and adds certain disclosure requirements to ASC 820, Fair Value Measurement. The guidance is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2020. Early adoption is permitted. The Company does not believe that the adoption of this accounting guidance will have a material impact on its consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU No. 2018-14 Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans, which removes, modifies, and adds certain disclosure requirements to ASC 715-20, Defined Benefit Plans. The guidance is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2021. Early adoption is permitted. The Company does not believe that the adoption of this accounting guidance will have a material impact on its consolidated financial statements and related disclosures.

In October 2018, the FASB issued ASU No. 2018-17 Targeted Improvements to Related Party Guidance for Variable Interest Entities, which requires indirect interests held through related parties in common control arrangements be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. The guidance is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2020. Early adoption is permitted. The Company currently does not believe that the adoption of this accounting guidance will have a material impact on its consolidated financial statements and related disclosures.

In November 2018, the FASB issued ASU No. 2018-18 Clarifying the Interaction between Topic 808 and Topic 606, which requires transactions in collaborative arrangements to be accounted for under ASC 606, Revenue from Contracts with Customers, or ASC 606, if the counterparty is a customer for a good or service that is a distinct unit of account. The amendments also preclude entities from presenting consideration from transactions with a collaborator that is not a customer together with revenue recognized from contracts with customers. The guidance is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2020. Early adoption is permitted, including in any interim period. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements and related disclosures.

Note 3. Revenue Recognition

In accordance with ASC 606, revenue is recognized at the time that the Company’s customers obtain control of the promised goods.

Generally, revenue is recognized at the time of product delivery to the Company’s customers. In some cases, revenue is recognized at the time of shipment when stipulated by the terms of the sale agreements. Revenues derived from contract manufacturing services are recognized when third-party products are shipped to customers, and after the customer has accepted test samples of the products to be shipped.

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

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

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Provision for Chargebacks and Rebates

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

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


	Six Months Ended
	June 30,
	2019		2018
	(in thousands)
Beginning balance	$	22,423	$	18,470
Provision for chargebacks and rebates		58,001		55,372
Credits and payments issued to third parties		(61,704)		(55,999)
Ending balance	$	18,720	$	17,843

Changes in the chargeback provision from period to period are primarily dependent on the Company’s sales to its wholesalers, the level of inventory held by wholesalers, and the wholesalers’ customer mix. Changes in the rebate provision from period to period are primarily dependent on retailer’s and other indirect customers’ purchases. The approach that the Company uses to estimate chargebacks has been consistently applied for all periods presented. Variations in estimates have been historically small. The Company continually monitors the provision for chargebacks and rebates and makes adjustments when it believes that the actual chargebacks and rebates may differ from the estimates. The settlement of chargebacks and rebates generally occurs within 30 days to 60 days after the sale to wholesalers. Accounts receivable and/or accounts payable and accrued liabilities are reduced and/or increased by the chargebacks and rebate amounts depending on whether the Company has the right to offset with the customer. Of the provision for chargebacks and rebates as of June 30, 2019 and December 31, 2018, $11.5 million and $12.0 million were included in accounts receivable, net, on the condensed consolidated balance sheets, respectively. The remaining provision of $7.2 million and $10.4 million were included in accounts payable and accrued liabilities, respectively.

Accrual for Product Returns

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	Six Months Ended
	June 30,
	2019		2018
	(in thousands)
Beginning balance	$	8,030	$	6,522
Provision for product returns		3,654		917
Credits issued to third parties		(2,243)		(865)
Ending balance	$	9,441	$	6,574

Of the provision of product returns as of June 30, 2019 and December 31, 2018, $6.6 million and $5.3 million were included in accounts payable and accrued liabilities on the condensed consolidated balance sheets, respectively. The remaining provision as of June 30, 2019 and December 31, 2018, of $2.8 million and $2.7 million was included in other long-term liabilities, respectively. For the six months ended June 30, 2019 and 2018, the Company’s aggregate product return rate was 1.5% and 1.3% of qualified sales, respectively.

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

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

For the three and six months ended June 30, 2019, options to purchase 783,001 and 762,937 shares of stock, respectively, with a weighted-average exercise price of $21.98 per share and $22.00 per share, respectively, were excluded in the computation of diluted net income per common share attributable to Amphastar Pharmaceuticals, Inc.’s shareholders because the effect from the assumed exercise of these options would be anti-dilutive. Additionally, 3,648,932 options to purchase ANP stock were awarded to ANP employees, which represent approximately 2% of ANP’s total equity, were excluded in the computation of diluted net income per common share attributable to Amphastar Pharmaceuticals, Inc.’s shareholders because the effect from the assumed exercise of these options would be anti-dilutive.

As the Company reported a net loss for the three and six months ended June 30, 2018, the diluted net loss per share attributable to Amphastar Pharmaceuticals, Inc. shareholders, as reported, equals the basic net loss per share attributable to Amphastar Pharmaceuticals, Inc. shareholders since the effect of the assumed exercise of stock options, vesting of non-vested RSUs, and issuance of common shares under the Company’s ESPP are anti-dilutive. Total stock options, non-vested RSUs, and shares issuable under the Company’s ESPP excluded from the three and six months ended June 30, 2018, net loss per share were 11,649,241 stock options, 1,232,237 non-vested RSUs, and 60,854 shares issuable under the Company’s ESPP.

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
	(in thousands, except per share data)
Basic and dilutive numerator:
Net income (loss) attributable to Amphastar Pharmaceuticals, Inc.	$	47,787	$	(2,853)	$	48,655	$	(9,994)
Denominator:
Weighted-average shares outstanding — basic		47,107		46,557		46,925		46,535

Net effect of dilutive securities:
Incremental shares from equity awards		2,787		—		3,230		—
Weighted-average shares outstanding — diluted		49,894		46,557		50,155		46,535
Net income (loss) per share attributable to Amphastar Pharmaceuticals, Inc. shareholders — basic	$	1.01	$	(0.06)	$	1.04	$	(0.21)
Net income (loss) per share attributable to Amphastar Pharmaceuticals, Inc. shareholders — diluted	$	0.96	$	(0.06)	$	0.97	$	(0.21)

Note 5. Segment Reporting

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

Finished pharmaceutical products

API

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

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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,
	2019		2018		2019		2018
	(in thousands)
Net revenues:
Finished pharmaceutical products	$	73,735	$	63,241	$	148,274	$	116,358
API		5,312		7,799		10,563		13,075
Total net revenues		79,047		71,040		158,837		129,433

Gross profit:
Finished pharmaceutical products		34,540		27,649		66,852		47,285
API		(2,153)		(1,585)		(3,562)		(4,249)
Total gross profit		32,387		26,064		63,290		43,036

Operating expenses		31,414		29,005		65,489		55,754

Income (loss) from operations		973		(2,941)		(2,199)		(12,718)
Non-operating income (expense)		60,120		(1,259)		59,659		(371)

Income (loss) before income taxes	$	61,093	$	(4,200)	$	57,460	$	(13,089)

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

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
	(in thousands)
Finished pharmaceutical products net revenues:
Enoxaparin	$	9,838	$	8,715	$	24,322	$	15,722
Phytonadione		12,441		10,806		22,561		19,987
Lidocaine		10,082		10,010		22,061		19,792
Naloxone		7,833		11,133		15,197		20,060
Medroxyprogesterone		6,696		6,365		13,909		9,071
Epinephrine		3,139		3,687		5,818		6,910
Primatene® Mist		2,512		—		5,409		—
Other finished pharmaceutical products		21,194		12,525		38,997		24,816
Total finished pharmaceutical products net revenues	$	73,735	$	63,241	$	148,274	$	116,358

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	Net Revenue								Long-Lived Assets
	Three Months Ended				Six Months Ended
	June 30,				June 30,				June 30,		December 31,
	2019		2018		2019		2018		2019		2018
	(in thousands)
United States	$	74,781	$	68,560	$	151,238	$	121,664	$	106,803	$	109,331
China		984		—		984		—		68,620		58,059
France		3,282		2,480		6,615		7,769		44,637		43,028
United Kingdom		—		—		—		—		—		—
Total	$	79,047	$	71,040	$	158,837	$	129,433	$	220,060	$	210,418

Note 6. Customer and Supplier Concentration

Customer Concentrations

Three large wholesale drug distributors, AmerisourceBergen Corporation, or AmerisourceBergen, Cardinal Health, Inc., or Cardinal, and McKesson Corporation, or McKesson, are all distributors of the Company’s products as well as suppliers of a broad range of health care products. The Company considers these three customers to be its major customers, as each individually, and these customers collectively, represented a significant percentage of the Company’s net revenue for the three and six months ended June 30, 2019 and 2018, and accounts receivable as of June 30, 2019 and December 31, 2018, 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				Six Months Ended
	June 30,		December 31,		June 30,				June 30,
	2019		2018		2019		2018		2019		2018
McKesson	28	%	28	%	25	%	25	%	27	%	26	%
Cardinal Health	20	%	21	%	21	%	20	%	23	%	21	%
AmerisourceBergen	12	%	19	%	25	%	27	%	23	%	26	%

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.

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 7. Fair Value Measurements

The accounting standards of the 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

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 June 30, 2019, cash equivalents include money market accounts. Short-term investments consist of certificates of deposit with original expiration dates within 12 months. These certificates of deposit are carried at amortized cost in the Company’s consolidated balance sheet, 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.

The Company does not hold any significant Level 2 or Level 3 instruments that are measured for 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 June 30, 2019 and December 31, 2018, there were no adjustments to fair value for nonfinancial assets or liabilities.

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 8. Goodwill and Intangible Assets

The table below shows the weighted-average life, original cost, accumulated amortization, and net book value by major intangible asset classification:


	Weighted-Average			Accumulated
	Life (Years)	Original Cost		Amortization		Net Book Value
	(in thousands)
Definite-lived intangible assets
IMS (UK) international product rights	10		8,880		2,590		6,290
Patents	12		486		234		252
Land-use rights	39		2,540		519		2,021
Other intangible assets	4		69		69		—
Subtotal	13		11,975		3,412		8,563
Indefinite-lived intangible assets
Trademark	*		29,225		—		29,225
Goodwill - Finished pharmaceutical products	*		3,930		—		3,930
Subtotal	*		33,155		—		33,155
As of June 30, 2019	*	$	45,130	$	3,412	$	41,718


	Weighted-Average			Accumulated
	Life (Years)	Original Cost		Amortization		Net Book Value
	(in thousands)
Definite-lived intangible assets
Cortrosyn® product rights	12	$	27,134	$	27,134	$	—
IMS (UK) international product rights	10		8,911		2,153		6,758
Patents	12		486		213		273
Land-use rights	39		2,540		486		2,054
Other intangible assets	4		69		63		6
Subtotal	12		39,140		30,049		9,091
Indefinite-lived intangible assets
Trademark	*		29,225		—		29,225
Goodwill - Finished pharmaceutical products	*		3,951		—		3,951
Subtotal	*		33,176		—		33,176
As of December 31, 2018	*	$	72,316	$	30,049	$	42,267

*Intangible assets with indefinite lives have an indeterminable average life.

Sale of Fourteen Injectable ANDAs

In February 2017, the Company sold the 14 ANDAs it acquired in March 2016 from Hikma Pharmaceuticals, Inc. to an unrelated party. The consideration included a purchase price of $6.4 million of which $1.0 million was received upon closing, $1.0 million was received in the second quarter of 2017 and the remaining $4.4 million was received in January 2018. In addition to the purchase price, the purchaser agreed to pay the Company a royalty fee equal to 2% of net sales derived from purchaser’s sales of the products for the period from February 2017 through February 2027. The Company has not recognized any royalty fee revenue. In 2017, the Company recognized a gain of $2.6 million within operating (income) expenses on its consolidated statement of operations.

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Goodwill

The changes in the carrying amounts of goodwill were as follows:


	June 30,		December 31,
	2019		2018
	(in thousands)
Beginning balance	$	3,951	$	4,461
Currency translation		(21)		(510)
Ending balance	$	3,930	$	3,951

Primatene® Trademark

In January 2009, the Company acquired the exclusive rights to the trademark, domain name, website and domestic marketing, distribution and selling rights related to Primatene® Mist, an over-the-counter bronchodilator product, recorded at the allocated fair value of $29.2 million, which is its carrying value as of June 30, 2019.

The trademark was determined to have an indefinite life. In determining its indefinite life, the Company considered the following: the expected use of the intangible; the longevity of the brand; the legal, regulatory and contractual provisions that affect their maximum useful life; the Company’s ability to renew or extend the asset’s legal or contractual life without substantial costs; effects of the regulatory environment; expected changes in distribution channels; maintenance expenditures required to obtain the expected future cash flows from the asset; and considerations for obsolescence, demand, competition and other economic factors.

As a result of environmental concerns about chlorofluorocarbons, or CFCs, the FDA required the CFC formulation of Primatene® Mist to be phased out on December 31, 2011.

In 2013, the Company filed a new drug application, or NDA, for Primatene® Mist, which utilizes a non-CFC propellant. In November 2018, the FDA granted over-the-counter approval of the NDA for Primatene® Mist, and the Company re-launched this product in December 2018.

Note 9. Inventories

Inventories consist of the following:


	June 30,		December 31,
	2019		2018
	(in thousands)
Raw materials and supplies	$	45,633	$	30,153
Work in process		36,224		30,272
Finished goods		17,375		8,897
Total inventories	$	99,232	$	69,322

Charges totaling $2.5 million and $5.7 million were included in the cost of revenues in the Company’s consolidated statements of operations for the three and six months ended June 30, 2019, respectively, to adjust the Company’s inventory and related firm inventory purchase commitments to their net realizable value. For the three and six months ended June 30, 2018, charges totaling $1.2 million and $3.1 million were included in the cost of revenues, respectively, to adjust the Company’s inventory and related firm inventory purchase commitments to their net realizable value.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 10. Property, Plant, and Equipment

Property, plant, and equipment consist of the following:


	June 30,		December 31,
	2019		2018
	(in thousands)
Buildings	$	97,340	$	96,287
Leasehold improvements		29,211		26,755
Land		7,619		7,628
Machinery and equipment		151,457		143,299
Furniture, fixtures, and automobiles		19,982		19,151
Construction in progress		70,716		66,390
Total property, plant, and equipment		376,325		359,510
Less accumulated depreciation		(156,265)		(149,092)
Total property, plant, and equipment, net	$	220,060	$	210,418

Note 11. Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consisted of the following:


	June 30,		December 31,
	2019		2018
	(in thousands)
Accrued customer fees and rebates	$	11,455	$	15,215
Accrued payroll and related benefits		20,357		19,430
Accrued product returns, current portion		6,644		5,349
Reserve for net loss on firm purchase commitments		3,403		5,355
Other accrued liabilities		14,850		10,746
Total accrued liabilities		56,709		56,095
Accounts payable		31,462		31,323
Total accounts payable and accrued liabilities	$	88,171	$	87,418

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 12. Debt

Debt consists of the following:


	June 30,		December 31,
	2019		2018
	(in thousands)
Loans with East West Bank

Equipment loan paid off January 2019	$	—	$	128
Line of credit facility due December 2020		—		—
Mortgage payable due February 2021		3,446		3,491
Equipment loan due June 2021		2,449		3,061
Equipment loan due December 2022		7,000		8,000
Line of credit facility due February 2024		—		—
Mortgage payable due October 2026		3,432		3,463
Mortgage payable due June 2027		8,732		8,801

Loans with Cathay Bank

Line of credit facility due May 2020		—		—
Mortgage payable due August 2027		7,540		7,627
Acquisition loan due June 2024		11,979		13,025

Loans with Bank of Nanjing
Working capital loan paid off June 2019		—		347

Loans with Seine-Normandie Water Agency

French government loan due June 2020		26		55
French government loan due July 2021		176		172
French government loans due December 2026		438		436

Payment Obligation to Merck		558		552

Equipment under Finance Leases		958		—
Equipment under Capital Leases		—		1,055
Total debt		46,734		50,213
Less current portion of long-term debt		6,941		18,229
Long-term debt, net of current portion	$	39,793	$	31,984

As of June 30, 2019, the fair value of the loans listed above approximated their carrying amount. The interest rate used in the fair value estimation was determined to be a Level 2 input. For certain loans with East West Bank, the Company has entered into fixed interest rate swap contracts to exchange the variable interest rates for fixed interest rates over the life of certain debt instruments without the exchange of the underlying notional debt amount. The interest rate swap contracts do not qualify for hedge accounting and are recorded at fair value based on Level 2 inputs. These swap contracts had an aggregate fair value of $0.4 million and $0.2 million as of June 30, 2019 and December 31, 2018, respectively. The change in fair value is recorded in other income (expense) in the Company’s condensed consolidated statement of operations.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Acquisition loan – Due June 2024

In July 2019, the Company amended the acquisition loan relating to the AFP acquisition. The amendment was effective in June 2019. Under the amended loan agreement, the maturity date was extended to June 2024. The acquisition loan bears a variable interest rate at the prime rate as published by The Wall Street Journal, with a minimum interest rate of 5.00%. Beginning in August 2019, and through the maturity date, the Company must make monthly payments of principal and interest based on the then outstanding amount of the loan amortized over a 60-month period.

Covenants

At June 30, 2019 and December 31, 2018, the Company was in compliance with its debt covenants, which include a minimum current ratio, minimum debt service coverage, minimum tangible net worth, maximum debt-to-effective-tangible-net-worth ratio, and minimum deposit requirement computed on a consolidated basis. The profitability-related covenants for loans with Cathay Bank were not effective as of June 30, 2019 or December 31, 2018. Such covenants will become effective as of December 31, 2019.

Note 13. Income Taxes

The following table sets forth the Company’s income tax provision (benefit) for the periods indicated:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
	(in thousands)
Income (loss) before taxes	$	61,093		$	(4,200)		$	57,460		$	(13,089)
Income tax provision (benefit)		14,173			(1,347)			12,694			(3,095)
Net income (loss)	$	46,920		$	(2,853)		$	44,766		$	(9,994)
Income tax provision (benefit) as a percentage of loss before income taxes		23.2	%		32.1	%		22.1	%		23.6	%

The decrease in the Company’s effective tax rate for the three and six months ended June 30, 2019, was primarily due to differences in pre-tax income (loss) positions and timing of discrete tax items.

Valuation Allowance

In assessing the need for a valuation allowance, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. Ultimately, the realization of deferred tax assets depends on the existence of future taxable income. Management considers sources of taxable income such as income in prior carryback periods, future reversal of existing deferred taxable temporary differences, tax-planning strategies, and projected future taxable income.

The Company has discontinued recognizing AFP’s income tax benefits by recording a full valuation allowance until it is determined that it is more likely than not that AFP will generate sufficient taxable income to realize its deferred income tax assets.

In 2019, for purposes of computing its annual effective tax rate, the Company did not benefit from its losses in the states where it files separately. This increased the Company’s income tax provision by an immaterial amount during the three and six months ended June 30, 2019.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 14. Stockholders' Equity

The changes in stockholders’ equity for the three and six months ended June 30, 2019 and 2018 consisted of the following:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
	(in thousands)
Stockholders’ equity beginning balance	$	380,266	$	323,616	$	364,359	$	333,736
Beginning balance adjustment as a result of the adoption of new accounting standards		—		—		(54)		582
Net income (loss) attributable to Amphastar Pharmaceuticals, Inc.		47,787		(2,853)		48,655		(9,994)
Other comprehensive income (loss) attributable to Amphastar Pharmaceuticals, Inc.		(97)		(2,256)		(210)		(1,066)
Net proceeds from the private placement of ANP		—		—		18,966		—
Net loss attributable to non-controlling interests		(867)		—		(3,889)		—
Net proceeds from equity plans, net of withholding tax payments		2,240		1,499		(157)		(294)
Share-based compensation expense		4,032		4,196		8,706		8,862
Purchase of treasury stock		(1,073)		(7,226)		(4,088)		(14,850)
Stockholders’ equity ending balance	$	432,288	$	316,976	$	432,288	$	316,976

Share Buyback Program

Pursuant to the Company’s existing share buyback program, the Company purchased 50,980 and 196,459 shares of its common stock during the three and six months ended June 30, 2019, for total consideration of $1.1 million and $4.1 million, respectively. The Company purchased 430,137 and 837,741 shares of its common stock during the three and six months ended June 30, 2018, for total consideration of $7.2 million and $14.8 million, respectively.

In May 2019, the Company’s Board of Directors authorized an increase of $20.0 million to the Company’s share buyback program, which is expected to continue for an indefinite period of time. The primary goal of the program is to offset dilution created by the Company’s equity compensation programs.

Purchases are made through open market and private block transactions pursuant to Rule 10b5-1 plans, privately negotiated transactions or other means as determined by the Company’s management and in accordance with the requirements of the SEC and applicable laws. The timing and actual number of treasury share purchases will depend on a variety of factors including price, corporate and regulatory requirements, and other conditions. These treasury share purchases are accounted for under the cost method and are included as a component of treasury stock in the Company’s consolidated balance sheets.

The 2015 Equity Incentive Plan

As of June 30, 2019, the Company reserved an aggregate of 6,137,364 shares of common stock for future issuance under the 2015 Equity Incentive Plan, or the 2015 Plan, including 1,165,778 shares which were reserved in January 2019 pursuant to the evergreen provision in the 2015 Plan.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Share-Based Award Activity and Balances (excluding the ANP Equity Plan)

The Company accounts for share-based compensation payments in accordance with ASC 718, which requires measurement and recognition of compensation expense at fair value for all share-based payment awards made to employees and directors. Under these standards, the fair value of option awards and the option components of the Employee Stock Purchase Plan awards are estimated at the grant date using the Black-Scholes option-pricing model. The fair value of RSUs is estimated at the grant date using the Company’s common share price. Prior to the adoption of ASU No. 2018-07, Improvements to Non-employees Share-Based Payment Accounting, non-vested stock options held by non-employees were revalued at each balance sheet date. As a result of the Company’s early adoption of the guidance in July 2018, stock options held by non-employees are no longer revalued after grant. The portion that is ultimately expected to vest is amortized and recognized in compensation expense on a straight-line basis over the requisite service period, generally from the grant date to the vesting date.

The weighted-averages for key assumptions used in determining the fair value of options granted during the three and six months ended June 30, 2019 and 2018, are as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Average volatility	43.4	%	41.7	%	42.5	%	39.9	%
Risk-free interest rate	2.0	%	2.8	%	2.4	%	2.7	%
Weighted-average expected life in years	5.0		4.9		5.7		5.7
Dividend yield rate	—	%	—	%	—	%	—	%

A summary of option activity for the six months ended June 30, 2019, is presented below:


				Weighted-Average
		Weighted-Average		Remaining	Aggregate
		Exercise		Contractual	Intrinsic
	Options	Price		Term (Years)	Value(1)
					(in thousands)
Outstanding as of December 31, 2018	10,105,565	$	14.69
Options granted	1,033,268		20.96
Options exercised	(1,074,413)		15.60
Options cancelled	(5,219)		18.90
Options expired	(2,325)		14.65
Outstanding as of June 30, 2019	10,056,876	$	15.23	5.16	$	59,792
Exercisable as of June 30, 2019	7,311,977	$	14.18	4.13	$	50,760

⁽¹⁾

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the estimated fair value of the Company’s common stock for those awards that have an exercise price below the estimated fair value at June 30, 2019.

For the three and six months ended June 30, 2019, the Company recorded expenses of $1.8 million and $4.2 million, respectively, related to stock options granted. For the three and six months ended June 30, 2018, the Company recorded expenses of $2.0 million and $4.6 million, respectively, related to stock options granted under all plans.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Information relating to option grants and exercises is as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
	(in thousands, except per share data)
Weighted-average grant date fair value per option share	$	8.17	$	6.53	$	8.46	$	7.79
Intrinsic value of options exercised		452		277		5,822		1,338
Cash received from options exercised		1,108		650		5,047		2,511
Total fair value of the options vested during the year		388		1,383		7,502		7,790

A summary of the status of the Company’s non-vested options as of June 30, 2019, and changes during the six months ended June 30, 2019, is presented below:


		Weighted-Average
		Grant Date
	Options	Fair Value
Non-vested as of December 31, 2018	3,279,026	$	5.47
Options granted	1,033,268		8.46
Options vested	(1,562,176)		4.80
Options forfeited	(5,219)		8.12
Non-vested as of June 30, 2019	2,744,899		6.97

As of June 30, 2019, there was $15.2 million of total unrecognized compensation cost, net of forfeitures, related to non-vested stock option based compensation arrangements granted. The cost is expected to be recognized over a weighted-average period of 2.5 years and will be adjusted for future changes in estimated forfeitures.

Restricted Stock Units

The Company grants restricted stock units, or RSUs, to certain employees and members of the Board of Directors with a vesting period of up to five years. The grantee receives one share of common stock at a specified future date for each RSU awarded. The RSUs may not be sold or otherwise transferred until certificates of common stock have been issued, recorded, and delivered to the participant. The RSUs do not have any voting or dividend rights prior to the issuance of certificates of the underlying common stock. The share-based expense associated with these grants was based on the Company’s common stock fair value at the time of grant and is amortized over the requisite service period, which generally is the vesting period using the straight-line method. During the three and six months ended June 30, 2019, the Company recorded expenses of $2.0 million and $4.1 million, respectively, related to RSU awards granted. During the three and six months ended June 30, 2018, the Company recorded expenses of $2.0 million and $3.9 million, respectively, related to RSU awards granted.

As of June 30, 2019, there was $16.5 million of total unrecognized compensation cost, net of forfeitures, related to non-vested RSU-based compensation arrangements granted. The cost is expected to be recognized over a weighted-average period of 2.5 years and will be adjusted for future changes in estimated forfeitures.

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Information relating to RSU grants and deliveries is as follows:


		Total Fair Market
		Value of RSUs
		Issued
	Total RSUs	as
	Issued	Compensation(1)
		(in thousands)
RSUs outstanding at December 31, 2018	1,206,661
RSUs granted	431,697	$	8,733
RSUs forfeited	(2,976)
RSUs vested(2)	(530,506)
RSUs outstanding at June 30, 2019	1,104,876

⁽¹⁾

The total fair market value is derived from the number of RSUs granted times the stock price on the date of grant.

⁽²⁾

Of the vested RSUs, 233,539 shares of common stock were surrendered to fulfill tax withholding obligations.

The Company recorded share-based compensation expense and it is included in the Company’s consolidated statement of operations as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
	(in thousands)
Cost of revenues	$	959	$	981	$	2,238	$	2,141
Operating expenses:
Selling, distribution, and marketing		95		104		189		211
General and administrative		2,648		2,743		5,439		5,636
Research and development		330		368		840		874
Total share-based compensation	$	4,032	$	4,196	$	8,706	$	8,862

The 2018 ANP Equity Incentive Plan

In December 2018, ANP’s board of directors approved the 2018 Plan, which is set to expire in December 2023. The 2018 Plan permits the grant of stock options and other equity awards in ANP shares to ANP employees. In June 2019, ANP issued 3,648,932 stock options to its employees under the 2018 Plan all of which were still outstanding at June 30, 2019. The options vest over a period of approximately four years and have up to a 10 year contractual term. The total fair value of the options awarded was $2.1 million. For the three and six months ended June 30, 2019, the Company recorded an immaterial amount of expense related to stock options issued by ANP under the 2018 Plan.

Note 15. Employee Benefits

401(k) Plan

The Company has a defined contribution 401(k) plan, or the Plan, whereby eligible employees voluntarily contribute up to a defined percentage of their annual compensation. The Company matches contributions at a rate of 50% on the first 6% of employee contributions, and pays the administrative costs of the Plan. Total employer contributions for the three and six months ended June 30, 2019 were approximately $0.4 million and $0.7 million, respectively, compared to the prior year expense of $0.3 million and $0.6 million for the three and six months ended June 30, 2018, respectively.

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Defined Benefit Pension Plan

In connection with the AFP acquisition, the Company assumed an obligation associated with a defined-benefit plan for eligible employees of AFP. This plan provides benefits to the employees from the date of retirement and is based on the employee’s length of time employed by the Company. The calculation is based on a statistical calculation combining a number of factors that include the employee’s age, length of service, and AFP employee turnover rate.

The liability under the plan is based on a discount rate of 0.9% and 1.70% as of June 30, 2019 and December 31, 2018, respectively. The liability is included in accrued liabilities in the accompanying consolidated balance sheets. The plan is currently unfunded, and the benefit obligation under the plan was $2.2 million and $2.2 million at June 30, 2019 and December 31, 2018, respectively. The Company recorded an immaterial amount of expense under the plan for the three months ended June 30, 2019, and $0.1 million for the six months ended June 30, 2019. The Company recorded an immaterial amount of expense under the plan for the three months ended June 30, 2018, and $0.1 million for the six months ended June 30, 2018.

Note 16. Commitments and Contingencies

Lease Liabilities

On January 1, 2019, the Company adopted ASC 842, which resulted in the recognition of right-of-use, or ROU, assets of approximately $13.9 million and related lease liabilities in the consolidated balance sheets of approximately $14.1 million related to its operating lease commitments. ROU assets represent the Company’s right to control an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of its leases do not provide an implicit rate, the Company used its incremental borrowing rate based on the information available at the commencement date in determining the discount rate used to present value the lease payments. The Company leases real and personal property, in the normal course of business, under various non-cancelable operating leases. The Company, at its option, can renew a substantial portion of its leases, at the market rate, for various renewal periods ranging from one to six years.

The components of lease costs for the three and six months ended June 30, 2019 were as follows:


	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2019		2019
	(in thousands)
Operating lease costs	$	902	$	1,790

Short-term lease costs		177		307

Finance lease costs
Amortization of right-of-use assets		88		171
Interest on lease liabilities		12		24
Total finance lease costs	$	100	$	195

Total lease costs	$	1,179	$	2,292

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Other information to leases are as follows:


	Six Months Ended
	June 30,
	2019
Supplemental cash flow information	(in thousands, except lease term and discount rate)
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	1,648
Operating cash flows from finance leases		24
Financing cash flows from finance leases		171


Right-of use assets obtained in exchange for lease liabilities
Operating leases		7,663
Finance leases		61

Weighted-average remaining lease term (years)
Operating leases		8.4
Finance leases		2.9

Weighted-average discount rate
Operating leases		5.9	%
Finance leases		4.6	%

Future minimum rental payments under operating leases that have initial or remaining non-cancelable lease terms in excess of 12 months as of June 30, 2019, are as follows:


		Operating		Finance
		Leases		Leases		Total
		(in thousands)
2019	(excluding the Six Months Ended June 30, 2019)	$	1,844	$	163	$	2,007
2020			4,111		375		4,486
2021			4,335		298		4,633
2022			3,651		175		3,826
2023			2,429		14		2,443
Thereafter			10,167		6		10,173
Total lease payments		$	26,537	$	1,031	$	27,568
Less: interest			6,046		73		6,119
Total		$	20,491	$	958	$	21,449

Purchase Commitments

As of June 30, 2019, the Company has entered into commitments to purchase equipment and raw materials for an aggregate amount of approximately $55.1 million. The Company anticipates that most of these commitments with remaining terms in excess of one year will be fulfilled by 2020.

In accordance with certain agreements between ANP and the Chinese government, in January 2010 and November 2012,

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

the Company acquired certain land-use rights for $1.2 million and $1.3 million, respectively. As required by these agreements, the Company committed to spend approximately $15.0 million in the related land development, which primarily includes the construction of fixed assets according to a specific timetable. As of June 30, 2019, the Company has spent $8.3 million on such construction. The Company anticipates that this spending commitment will be met by the end of 2019.

Note 17. Related-Party Transactions

ANP Private Placement

As discussed in footnote 2, in July 2018, ANP completed a private placement of its common equity interest and received approximately $56.3 million of cash proceeds. In connection with the private placement, all of the executive officers of the Company, Stephen Shohet, Howard Lee, and Richard Koo, directors of the Company, and certain employees of ANP entered into subscription agreements (each, a “Subscription Agreement”) for the indirect investment in ANP. These Subscription Agreements were transacted either through an investment in Amphastar Cayman, a Cayman Islands limited liability company, or Qianqia, or Zhongpan, Chinese partnerships. The aggregate gross proceeds received from management and directors were approximately $29.7 million.

Note 18. Litigation

Momenta/Sandoz Enoxaparin Patent and Antitrust Litigation

In September 2011, Momenta Pharmaceuticals, Inc., or Momenta, a Boston‑based pharmaceutical company, and Sandoz Inc., or Sandoz, the generic division of Novartis, initiated litigation against the Company for alleged patent infringement of two patents related to testing methods for batch release of enoxaparin, which the Company refers to as the “’886 patent” and the “’466 patent.” The lawsuit was filed in the United States District Court for the District of Massachusetts, or the Massachusetts District Court.

On September 17, 2015, the Company initiated a lawsuit by filing a complaint in the California District Court against Momenta and Sandoz, or the Defendants. The Company’s complaint generally asserts that Defendants have engaged in certain types of illegal, monopolistic, and anticompetitive conduct giving rise to various causes of action against them.

On May 20, 2019, the Company and the Plaintiffs entered into a Settlement Agreement to fully settle the patent litigation and antitrust litigation. The Settlement Agreement was contingent upon the District Court’s granting a Joint Motion to Vacate the Patent Judgment and thereafter, the Plaintiffs’ payment of $59.9 Million to the Company. On June 18, 2019, the parties filed a Joint Motion to Vacate the Patent Judgment with the District Court, and on the same day, the District Court granted such motion. Accordingly, on June 19, 2019, the parties filed Joint Stipulations with the District Court to dismiss the patent litigation and the antitrust litigation, each of which is self-executing and effective upon filing pursuant to the Federal Rules of Civil Procedure 41(a)(1)(A)(ii). Furthermore, on June 26, 2019, the Federal Circuit issued an Order and a Mandate dismissing the appeal of the patent litigation. On June 27, 2019, pursuant to the Settlement Agreement, the Plaintiffs paid the Company $59.9 Million. The Company is not entitled to future rights or royalties related to this settlement. Accordingly, the Company recorded the settlement amount as other income (expenses), in its condensed consolidated statements of operations.

False Claims Act Litigation

In January 2009, the Company filed a qui tam complaint in the U.S. District Court for the Central District of California, or the California District Court, alleging that Aventis Pharma S.A., or Aventis, through its acquisition of a patent through false and misleading statements to the U.S. Patent and Trademark Office, as well as through false and misleading statements to the FDA, overcharged the federal and state governments for its Lovenox® product. If the Company is

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

successful in this litigation, it could be entitled to a portion of any damage award that the government ultimately may recover from Aventis. In October 2011, the California District Court unsealed the Company’s complaint.

On February 28, 2014, Aventis filed a motion for summary judgment on the issue of the adequacy of the Company’s notice letter to the government, and the California District Court denied Aventis’ motion for summary judgment in a final order it issued on May 12, 2014. On June 9, 2014, at Aventis’ request, the California District Court issued an order certifying for appeal its order denying Aventis’ motion for summary judgment. On June 9, 2014, Aventis filed with the United States Court of Appeals for the Ninth Circuit, or the Ninth Circuit, a petition for permission to appeal the California District Court’s denial of Aventis’ motion for summary judgment, and the Company filed an opposition to Aventis’ petition on June 19, 2014. On August 22, 2014, the Ninth Circuit granted Aventis’ petition. The parties filed their respective appeal briefs with the Ninth Circuit. On November 10, 2016, the Ninth Circuit heard oral argument on the appeal.

The California District Court set an evidentiary hearing for July 7, 2014 on the “original source” issue, a key element under the False Claims Act. The evidentiary hearing was conducted as scheduled, from July 7, 2014 through July 10, 2014. On July 13, 2015, the California District Court issued a ruling concluding that the Company is not an original source under the False Claims Act, and entered final judgment dismissing the case for lack of subject matter jurisdiction.

On July 20, 2015, the Company filed with the Ninth Circuit a notice of appeal of the California District Court’s dismissal of the case, and Aventis filed a notice of cross-appeal on August 5, 2015. On November 12, 2015, Aventis filed a pleading asking that the California District Court impose various monetary penalties and fines against the Company, including disgorgement of enoxaparin revenues and attorneys’ fees expended by Aventis in this action, based on Aventis’ allegations that the Company engaged in sanctionable conduct. On November 23, 2015, the California District Court issued an order setting forth a procedure for sanctions proceedings as to the Company as well as its outside counsel. On December 24, 2015, the Company filed a pleading with the California District Court opposing the imposition of sanctions, and on January 20, 2016, Aventis filed a response pleading further pressing for the imposition of sanctions. On May 4, 2016, the California District Court issued three orders requesting that the Company and its outside counsel file a document showing cause as to why sanctions should not be imposed and to set up a conference call with the parties and the Court to discuss whether any discovery and/or a hearing is necessary. On June 13, 2016, the Company and its outside counsel each filed responses to the Court’s order to show cause as to why sanctions should not be imposed. On July 21, 2016, Aventis filed a response contending that the Court should impose sanctions. On February 10, 2017, the Court held a show cause hearing regarding the potential imposition of sanctions and took the matter under submission. On September 18, 2017, the District Court issued its decision that no sanctions will be imposed on either the Company or its counsel.

On March 28, 2016, the Company filed its opening brief with the Ninth Circuit Court of Appeals setting forth detailed arguments as to why the False Claims Act litigation should not have been dismissed by the California District Court. On June 20, 2016, Aventis filed its principal brief in the appeal, responding to the Company’s arguments regarding dismissal of the False Claims Act litigation, and setting forth Aventis’ argument that it should be awarded attorneys’ fees and expenses. On September 19, 2016, the Company filed its reply brief to Aventis’ principal brief. On October 3, 2016, Aventis filed its reply brief in support of its cross-appeal of the District Court’s denial of attorneys’ fees. On November 10, 2016, the Ninth Circuit heard oral argument on the appeals.

On May 11, 2017, the Ninth Circuit issued an opinion affirming the California District Court’s dismissal of the action for lack of subject matter jurisdiction; dismissing as moot Aventis’ appeal of the District Court’s denial of its motion for summary judgment on the issue of the adequacy of the Company’s notice letter to the government; reversing the District Court’s denial of Aventis’ motion for attorneys’ fees; and remanding the case to the District Court for resolution of the attorneys’ fees issue. On July 14, 2017, Aventis filed an application with the District Court for entitlement to attorneys’ fees and expenses. On November 20, 2017, the District Court issued its order granting Aventis’ application for fees, stating that it would refer the matter to a magistrate judge for a report and recommendation regarding the amount of the award to be made. On November 21, 2017, the District Court referred the matter to a magistrate judge.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

On August 7, 2018, Aventis filed its Application for Fees and Expenses. On November 26, 2018, the Company filed its Opposition to Aventis’ Application for Fees and Expenses. On February 12, 2019, following further briefing on the attorneys’ fee issue, the District Court approved of the parties’ consent for the Magistrate Judge to conduct all further proceedings in this matter at the district court level, including determining the amount of attorneys’ fees to be awarded and entering a final judgment. The Magistrate Judge held a hearing on the Application on May 8, 2019. At the May 8, 2019 hearing, the Magistrate Judge did not rule on the Application, but indicated that a written opinion on this Application for Fees and Expenses would be forthcoming. The Company intends to continue to vigorously defend against any imposition of attorneys’ fees and expenses in this case.

Epinephrine Injection, 0.1 mg/mL Litigation

On June 28, 2018, Belcher Pharmaceuticals, LLC, or Belcher, initiated a lawsuit by filing a complaint against IMS for infringement of U.S. Patent No. 9,283,197 (the “‘197 Patent”), with regard to IMS’s New Drug Application No. 211363, filed under 21 U.S.C. § 355(b)(2) of the Hatch-Waxman Act, for FDA approval to manufacture and sell 0.1 mg/mL epinephrine injections. On July 20, 2018, the Company filed a motion to dismiss Belcher’s complaint for patent infringement under Federal Rule of Civil Procedure 12(b)(6). On March 31, 2019, the Court denied the Company’s motion to dismiss. On April 15, 2019, the Company filed its Answer and Counterclaims. On April 24, 2019, the Court entered the Parties’ Joint Stipulation to stay the litigation until after Belcher’s June 2019 trial with Hospira, Inc. regarding the ‘197 patent. Belcher’s trial with Hospira regarding the ‘197 patent concluded in June 2019 but the Court has not yet ruled on the outcome of this trial. Thus, on July 3, 2019, the Parties filed a Joint Stipulation to stay the litigation pending the Court’s ruling on the outcome of Belcher’s trial with Hospira. The Company intends to vigorously defend this lawsuit.

Vasopressin (20 units/mL) Patent Litigation

On December 20, 2018, Par Pharmaceutical, Inc., Par Sterile Products, LLC and Endo Par Innovation Company (collectively, “Par”) initiated a patent lawsuit by filing a Complaint against the Company for infringement of U.S. Patent Nos. 9,375,478 (“the ‘478 Patent”), 9,687,526 (“the ‘526 Patent”), 9,744,209 (“the ‘209 Patent”), 9,744,239 (“the ‘239 Patent”), 9,750,785 (“the ‘785 Patent”) and 9,937,223 (“the ‘223 Patent”) (collectively, “Par Patents”) with regard to the Company’s Abbreviated New Drug Application No. 211,857 for FDA approval to manufacture and sell Vasopressin (20 units/ mL). The Company filed its Answer to this Complaint on February 19, 2019. On April 18, 2019, the Court held a scheduling conference and entered a Scheduling Order. Trial is scheduled for January 2021. The Company intends to vigorously defend this patent lawsuit.

Other Litigation

The Company is also subject to various other claims and lawsuits from time to time arising in the ordinary course of business.

The Company records a provision for contingent losses when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In the opinion of management, the ultimate resolution of any such matters is not expected to have a material adverse effect on its financial position, results of operations, or cash flows; however, the results of litigation and claims are inherently unpredictable and the Company’s view of these matters may change in the future. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources, and other factors.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 19. Subsequent Events

Supply Agreement with MannKind Corporation

In August 2019, the Company amended the Supply Agreement with MannKind Corporation, or MannKind, whereby MannKind’s aggregate total commitment of RHI API under the Supply Agreement was not reduced; however, the annual minimum purchase commitments of RHI API under the Supply Agreement were modified and extended for an additional two years through 2026, which timeframe would have previously lapsed after calendar year 2024. MannKind has agreed to pay the Company an amendment fee of $2.75 million, with $1.5 million due in September 2019, and the remaining balance due in December 2019.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion and analysis of the consolidated operating results, financial condition, liquidity and cash flows of our company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the “Condensed Consolidated Financial Statements” and the related notes thereto included in this Quarterly Report on Form 10-Q, or Quarterly Report. This discussion contains forward-looking statements that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements. These risks, uncertainties, and other factors include, among others, those identified under the “Special Note About Forward-Looking Statements,” above and described in greater detail elsewhere in this Quarterly Report and in our Annual Report on Form 10-K for the year ended December 31, 2018, particularly in Item 1A. “Risk Factors”.

Overview

We are a specialty pharmaceutical company that focuses primarily on developing, manufacturing, marketing and selling technically challenging generic and proprietary injectable, inhalation and intranasal products as well as insulin API products. We currently manufacture and sell over 20 products. In November 2018, the FDA granted over-the-counter approval for our NDA for Primatene® Mist in a new CFC-free formulation.

We are currently developing a portfolio of 15 generic abbreviated new drug applications, or ANDAs, three biosimilar product candidates and four proprietary product candidates, which are in various stages of development and target a variety of indications. Four of the ANDAs and one of the NDAs are currently on file with the FDA.

Our largest products by net revenues currently include enoxaparin sodium injection, naloxone hydrochloride injection, lidocaine jelly and sterile solution, phytonadione, medroxyprogesterone acetate, and Primatene® Mist. We launched Primatene® Mist in the fourth quarter of 2018.

To complement our internal growth and expertise, we have made several strategic acquisitions of companies, products and technologies. These acquisitions collectively have strengthened our core injectable and inhalation product technology infrastructure by providing additional manufacturing, marketing, and research and development capabilities including the ability to manufacture raw materials, APIs and other components for our products.

Included in these acquisitions are marketing authorizations for 33 products in the UK, Ireland, Australia, and New Zealand, representing 11 different injectable chemical entities, from UCB Pharma GmbH. We are in the process of transferring the manufacturing of these products to our facilities in California, which will require approvals from the UK Medicines and Healthcare products Regulatory Agency before we can relaunch the products.

In July 2018, our Chinese subsidiary, ANP, completed a private placement of its common equity interest and received approximately $56.3 million of cash proceeds. We have retained approximately 58% of the equity interest in ANP following the private placement. ANP’s net income or loss after July 2, 2018, is attributed to us in accordance with our equity interest of approximately 58% in ANP.

On May 20, 2019, we entered into a settlement relating to the enoxaparin patent litigation with Momenta Pharmaceuticals, Inc. and Sandoz Inc. For more information regarding the enoxaparin patent litigation, see “Part I – Item 1. Financial Statements – Notes to Condensed Consolidated Financial Statements – Litigation.” Pursuant to the settlement agreement, the plaintiffs paid us $59.9 Million on June 27, 2019.

Business Segments

As of June 30, 2019, our performance is assessed and resources are allocated based on the following two reportable segments: (1) finished pharmaceutical products and (2) API products. The finished pharmaceutical products segment manufactures, markets, and distributes enoxaparin, naloxone, phytonadione, lidocaine, medroxyprogesterone acetate, Primatene® Mist, as well as various other critical and non-critical care drugs. The API segment manufactures and

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distributes RHI API and porcine insulin API for external customers and internal product development. Information reported herein is consistent with how it is reviewed and evaluated by our chief operating decision maker. Factors used to identify our segments include markets, customers and products.

For more information regarding our segments, see “Part I – Item 1. Financial Statements – Notes to Condensed Consolidated Financial Statements – Segment Reporting.”

Results of Operations

Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018

Net revenues


	Three Months Ended
	June 30,						Change
	2019			2018			Dollars		%
	(in thousands)
Net revenues
Finished pharmaceutical products	$	73,735		$	63,241		$	10,494	17	%
API		5,312			7,799			(2,487)	(32)	%
Total net revenues	$	79,047		$	71,040		$	8,007	11	%
Cost of revenues
Finished pharmaceutical products	$	39,195		$	35,592		$	3,603	10	%
API		7,465			9,384			(1,919)	(20)	%
Total cost of revenues	$	46,660		$	44,976		$	1,684	4	%
Gross profit	$	32,387		$	26,064		$	6,323	24	%
as % of net revenues		41	%		37	%

The increase in net revenues of finished pharmaceutical products for the three months ended June 30, 2019 was primarily due to the following changes:


	Three Months Ended
	June 30,				Change
	2019		2018		Dollars		%
	(in thousands)
Finished pharmaceutical products net revenues
Phytonadione	$	12,441	$	10,806	$	1,635	15	%
Lidocaine		10,082		10,010		72	1	%
Enoxaparin		9,838		8,715		1,123	13	%
Naloxone		7,833		11,133		(3,300)	(30)	%
Medroxyprogesterone		6,696		6,365		331	5	%
Epinephrine		3,139		3,687		(548)	(15)	%
Primatene® Mist		2,512		—		2,512	N/A
Other finished pharmaceutical products		21,194		12,525		8,669	69	%
Total finished pharmaceutical products net revenues	$	73,735	$	63,241	$	10,494	17	%

The increase in sales of enoxaparin during the second quarter of 2019 was primarily driven by higher average selling prices due to a price increase and a change in customer mix, which resulted in an increase of $4.7 million. This was partially offset by a decrease in unit volume of $3.6 million. The increase in sales of phytonadione was primarily driven by a higher average selling price. The decrease in sales of naloxone was primarily driven by lower unit volumes. Other finished pharmaceutical products sales increased primarily due to higher unit sales volumes of Cortrosyn®, atropine, calcium chloride and dextrose which were in high demand due to market shortages. Sales of isoproterenol, which we launched in the third quarter of 2018, also contributed to the increase in other finished pharmaceutical sales.

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We anticipate that sales of naloxone, enoxaparin, and medroxyprogesterone will continue to fluctuate in the future as a result of competition.

Sales of API decreased primarily due to the timing of customer purchases.

We anticipate that sales of API will continue to fluctuate and may decrease due to the inherent uncertainties related to sales to MannKind Corporation, or MannKind. In addition, most of our API sales are denominated in euros, and the fluctuation in the value of the euro versus the U.S. dollar has had, and will continue to have, an impact on API sales revenues in the near term.

A significant portion of our customer shipments in any period relate to orders received and shipped in the same period, generally resulting in low product backlog relative to total shipments at any time. We had no significant backlog as of June 30, 2019. Historically, our backlog has not been a meaningful indicator in any given period of our ability to achieve any particular level of overall revenue or financial performance.

Gross margins

The launch of Primatene® Mist and an increase in sales of medroxyprogesterone and Cortrosyn®, which are higher margin products, as well as the higher average selling price of enoxaparin, helped increase our gross margins for the second quarter of 2019. Gross margins for Primatene® Mist were magnified by the use of API and components which were expensed to pre-launch inventory in prior years.

In 2018, we received FDA approval of our ANDA supplement for the manufacture of semi-purified heparin at ANP, and the manufacture of heparin sodium at IMS. The cost of heparin, which is the starting material for enoxaparin, has increased and is expected to increase further, putting downward pressure on our gross margins. However, we believe that this trend will be offset by sales of our higher-margin products, such as medroxyprogesterone isoproterenol, and Primatene® Mist, which were launched over the past two years.

Selling, distribution and marketing, and general and administrative


	Three Months Ended
	June 30,				Change
	2019		2018		Dollars		%
	(in thousands)
Selling, distribution, and marketing	$	2,992	$	1,876	$	1,116	59	%
General and administrative	$	12,426	$	11,669	$	757	6	%

The increase in selling, distribution, and marketing expenses was primarily due to marketing expenses related to Primatene® Mist and increased freight costs. The increase in general and administrative expense was primarily due to increased legal expenses. For more information regarding the enoxaparin patent litigation, see “Part I – Item 1. Financial Statements –Notes to Condensed Consolidated Financial Statements – Litigation.”

We expect that selling, distribution and marketing expenses will increase due to the increase in marketing expenditures for Primatene® Mist. We expect that general and administrative expenses will increase on an annual basis due to increased costs associated with ongoing compliance with public company reporting obligations and an increase in legal fees associated with patent challenges.

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Research and development


	Three Months Ended
	June 30,				Change
	2019		2018		Dollars		%
	(in thousands)
Salaries and personnel-related expenses	$	6,237	$	4,920	$	1,317	27	%
Pre-launch inventory		143		835		(692)	(83)	%
Clinical trials		1,530		1,218		312	26	%
FDA fees		104		235		(131)	(56)	%
Testing, operating and lab supplies		3,878		5,558		(1,680)	(30)	%
Depreciation		2,147		1,630		517	32	%
Other expenses		1,957		1,064		893	84	%
Total research and development expenses	$	15,996	$	15,460	$	536	3	%

Research and development costs consist primarily of costs associated with the research and development of our product candidates including the cost of developing APIs. We expense research and development costs as incurred.

Salaries and personnel-related expenses as well as depreciation expense increased during the second quarter of 2019 primarily due to the expansion of our ANP facility. Clinical trial expense increased due to external studies related to our generic product pipeline. These increases were partially offset by a decrease in pre-launch inventory compared to the same period last year relating to the production of Primatene® Mist in anticipation for the launch at the end of 2018.

We have made, and expect to continue to make, substantial investments in research and development to expand our product portfolio and grow our business. We expect that research and development expenses will increase on an annual basis due to increased clinical trial costs related to our biosimilar and inhalation product candidates. These expenditures will include costs of APIs developed internally and purchased externally, the cost of purchasing reference listed drugs and the costs of performing the clinical trials. As we undertake new and challenging research and development projects, we anticipate that the associated costs will increase significantly over the next several quarters and years.

Other income (expenses), net


	Three Months Ended
	June 30,				Change
	2019		2018		Dollars		%
	(in thousands)
Other income (expenses), net	$	60,001	$	(1,265)	$	61,266	NM

In June 2019, we recognized a gain of $59.9 million relating to our settlement of the enoxaparin patent litigation with Momenta Pharmaceuticals, Inc. and Sandoz Inc. For more information regarding litigation matters, see “Part I – Item 1. Financial Statements –Notes to Condensed Consolidated Financial Statements – Litigation.”

Income tax provision (benefit)


	Three Months Ended
	June 30,						Change
	2019			2018			Dollars		%
	(in thousands)
Income tax provision (benefit)	$	14,173		$	(1,347)		$	15,520	NM
Effective tax rate		23	%		32	%

The difference in income tax provision (benefit) was primarily due to differences in pre-tax income (loss) positions and timing of discrete tax items.

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Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018

Net revenues


	Six Months Ended
	June 30,						Change
	2019			2018			Dollars		%
	(in thousands)
Net revenues
Finished pharmaceutical products	$	148,274		$	116,358		$	31,916	27	%
API		10,563			13,075			(2,512)	(19)	%
Total net revenues	$	158,837		$	129,433		$	29,404	23	%
Cost of revenues
Finished pharmaceutical products	$	81,422		$	69,073		$	12,349	18	%
API		14,125			17,324			(3,199)	(18)	%
Total cost of revenues	$	95,547		$	86,397		$	9,150	11	%
Gross profit	$	63,290		$	43,036		$	20,254	47	%
as % of net revenues		40	%		33	%

The increase in net revenues of the finished pharmaceutical products for the six months ended June 30, 2019, was primarily due to the following changes:


	Six Months Ended
	June 30,				Change
	2019		2018		Dollars		%
	(in thousands)
Finished pharmaceutical products net revenues
Enoxaparin	$	24,322	$	15,722	$	8,600	55	%
Phytonadione		22,561		19,987		2,574	13	%
Lidocaine		22,061		19,792		2,269	11	%
Naloxone		15,197		20,060		(4,863)	(24)	%
Medroxyprogesterone		13,909		9,071		4,838	53	%
Epinephrine		5,818		6,910		(1,092)	(16)	%
Primatene® Mist		5,409		—		5,409	N/A
Other finished pharmaceutical products		38,997		24,816		14,181	57	%
Total finished pharmaceutical products net revenues	$	148,274	$	116,358	$	31,916	27	%

The increase in sales of enoxaparin during the first half of 2019 was primarily driven by higher average selling prices due to a price increase and a change in customer mix, which resulted in an increase of $9.8 million, and was partially offset by a decrease in unit volume of $1.2 million. The increase in sales of phytonadione was primarily driven by a higher average selling price. $1.4 million of the increase in sales of lidocaine was due to higher unit volumes, while the remainder was due to higher average selling prices. The decrease in sales of naloxone was primarily driven by lower unit volumes. The increase in sales of medroxyprogesterone was due to increased unit sales as it was launched in the first quarter of 2018. Therefore, the prior year did not have a full quarter of sales during the first quarter of 2018. Other finished pharmaceutical products sales increased primarily due to higher unit sales volumes of Cortrosyn®, atropine, sodium bicarbonate and dextrose which were in high demand due to market shortages. Sales of isoproterenol which we launched in the third quarter of 2018, also contributed to the increase in other finished pharmaceutical sales.

We anticipate that sales of naloxone, enoxaparin, and medroxyprogesterone will continue to fluctuate in the future as a result of competition.

Sales of API decreased primarily due to the timing of customer purchases.

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We anticipate that sales of API will continue to fluctuate and may decrease due to the inherent uncertainties related to sales to MannKind. In addition, most of our API sales are denominated in euros, and the fluctuation in the value of the euros versus the U.S. dollar has had, and will continue to have, an impact on API sales revenues in the near term.

Gross margins

The launch of Primatene® Mist and an increase in sales of medroxyprogesterone and Cortrosyn®, which are higher margin products, as well as the higher average selling price of enoxaparin, helped increase our gross margins for the first half of 2019. Gross margins for Primatene® Mist were magnified by the use of API and components which were expensed to pre-launch inventory in prior years.

In 2018, we received FDA approval of our ANDA supplement for the manufacture of semi-purified heparin at ANP, and the manufacture of heparin sodium at IMS. The cost of heparin, which is the starting material for enoxaparin, has increased and is expected to increase further, putting downward pressure on our gross margins. However, we believe that this trend will be offset by sales of our higher-margin products, such as medroxyprogesterone, isoproterenol, and Primatene® Mist, which were launched over the past two years.

Selling, distribution and marketing, and general and administrative


	Six Months Ended
	June 30,				Change
	2019		2018		Dollars		%
	(in thousands)
Selling, distribution, and marketing	$	6,133	$	3,597	$	2,536	71	%
General and administrative	$	28,753	$	22,667	$	6,086	27	%

The increase in selling, distribution, and marketing expenses was primarily due to marketing expenses related to Primatene® Mist and increased freight costs. The increase in general and administrative expense was primarily due to increased legal expenses (see Note 18 to the condensed consolidated financial statements for more information regarding litigation matters).

We expect that selling, distribution and marketing expenses will increase due to the increase in marketing expenditure for Primatene® Mist. We expect that general and administrative expenses will increase on an annual basis due to increased costs associated with ongoing compliance with public company reporting obligations and an increase in legal fees associated with patent challenges.

Research and development


	Six Months Ended
	June 30,				Change
	2019		2018		Dollars		%
	(in thousands)
Salaries and personnel-related expenses	$	12,642	$	9,685	$	2,957	31	%
Pre-launch inventory		158		1,573		(1,415)	(90)	%
Clinical trials		3,233		2,026		1,207	60	%
FDA fees		404		1,461		(1,057)	(72)	%
Testing, operating and lab supplies		6,450		8,967		(2,517)	(28)	%
Depreciation		4,275		2,941		1,334	45	%
Other expenses		3,441		2,837		604	21	%
Total research and development expenses	$	30,603	$	29,490	$	1,113	4	%

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Research and development costs consist primarily of costs associated with the research and development of our product candidates. We expense research and development costs as incurred.

Salaries and personnel-related expenses as well as depreciation expense increased during the first half of 2019 primarily due to the expansion of our ANP facility. Clinical trial expense increased due to external studies related to our generic product pipeline. These increases were partially offset by a decrease in pre-launch inventory compared to the same period last year relating to the production of Primatene® Mist in anticipation for the launch at the end of 2018. FDA fees decreased for the period, as we filed an NDA and ANDA for products we currently market or previously marketed under the grandfather exception in 2018.

Other income (expenses), net


	Six Months Ended
	June 30,				Change
	2019		2018		Dollars		%
	(in thousands)
Other income (expenses), net	$	59,422	$	(483)	$	59,905	NM

In June 2019, we recognized a gain of $59.9 million relating to our settlement of the enoxaparin patent litigation with Momenta Pharmaceuticals, Inc. and Sandoz Inc. For more information regarding the enoxaparin patent litigation, see “Part I – Item 1. Financial Statements –Notes to Condensed Consolidated Financial Statements – Litigation.”

Income tax provision (benefit)


	Six Months Ended
	June 30,						Change
	2019			2018			Dollars		%
	(in thousands)
Income tax provision (benefit)	$	12,694		$	(3,095)		$	15,789	NM
Effective tax rate		22	%		24	%

The difference in income tax provision (benefit) was primarily due to differences in pre-tax income (loss) positions and timing of discrete tax items.

Liquidity and Capital Resources

Cash Requirements and Sources

We need capital resources to maintain and expand our business. We expect our cash requirements to increase significantly in the foreseeable future as we sponsor clinical trials for, seek regulatory approvals of, and develop, manufacture and market our current development‑stage product candidates and pursue strategic acquisitions of businesses or assets. Our future capital expenditures include projects to upgrade, expand, and improve our manufacturing facilities in the United States, China, and France. Our cash obligations include the principal and interest payments due on our existing loans and lease payments, as described below and throughout this Quarterly Report. As of June 30, 2019, our foreign subsidiaries collectively held $38.7 million in cash and cash equivalents. Cash or cash equivalents held at foreign subsidiaries are not available to fund the parent company’s operations in the United States. We believe that our cash reserves, operating cash flows, and borrowing availability under our credit facilities will be sufficient to fund our operations for at least the next 12 months. We expect additional cash flows to be generated in the longer term from future

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product introductions, although there can be no assurance as to the receipt of regulatory approval for any product candidates that we are developing or the timing of any product introductions, which could be lengthy or ultimately unsuccessful.

We maintain a shelf registration statement on Form S-3 pursuant to which we may, from time to time, sell up to an aggregate of $250 million of our common stock, preferred stock, depositary shares, warrants, units, or debt securities. If we require or elect to seek additional capital through debt or equity financing in the future, we may not be able to raise capital on terms acceptable to us or at all. To the extent we raise additional capital through the sale of equity or convertible debt securities, the issuance of such securities will result in dilution to our stockholders. If we are required and unable to raise additional capital when desired, our business, operating results and financial condition may be adversely affected.

Working capital increased by $69.6 million to $183.1 million at June 30, 2019, compared to $113.5 million at December 31, 2018 as a result of the $59.9 million settlement received relating to the enoxaparin patent litigation with Momenta Pharmaceuticals, Inc. and Sandoz Inc. For more information regarding the enoxaparin patent litigation, see “Part I – Item 1. Financial Statements –Notes to Condensed Consolidated Financial Statements – Litigation.”

Cash Flows from Operations

The following table summarizes our cash flows used in operating, investing, and financing activities for the six months ended June 30, 2019 and 2018:


	Six Months Ended June 30,
	2019		2018
	(in thousands)
Statement of Cash Flow Data:
Net cash provided by (used in)
Operating activities	$	48,113	$	12,893
Investing activities		(24,553)		(20,509)
Financing activities		10,487		(9,718)
Effect of exchange rate changes on cash		(11)		(190)
Net increase (decrease) in cash, cash equivalents, and restricted cash	$	34,036	$	(17,524)

Sources and Use of Cash

Operating Activities

Net cash provided by operating activities was $48.1 million for the six months ended June 30, 2019, which included net income of $44.8 million. Non-cash items were primarily comprised of $8.8 million of depreciation and amortization, and $8.7 million of share-based compensation expense.

Additionally, there was a net cash outflow from changes in operating assets and liabilities of $15.0 million which resulted from the increase in accounts receivable and inventory partially offset by an increase in accounts payable and accrued liabilities. The increase in accounts receivable was due to the timing of sales in the quarter. The increase in inventory was partially due to increased purchases of raw materials and production of finished goods resulting in a net increase of $24.9 million of enoxaparin and a net increase of $6.3 million of Primatene® Mist inventory. These trends were partially offset by a decrease in API at AFP. Tax related items increased as a result of the receipt of the $59.9 million relating to the litigation settlement with Momenta Pharmaceuticals, Inc. and Sandoz Inc. Accounts payable and accrued liabilities increased primarily due to the timing of payments.

Net cash provided by operating activities was $12.9 million for the six months ended June 30, 2018, which included net loss of $10.0 million. Non-cash items were primarily comprised of $8.0 million of depreciation and amortization, and $8.9 million of share-based compensation expense. Operating assets and liabilities changed primarily due to the timing

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of sales and purchases activities in the normal course of business and the timing of the related cash receipts and disbursements.

Investing Activities

Net cash used in investing activities was $24.6 million for the six months ended June 30, 2019, primarily as a result of $24.5 million in purchases of property, plant, and equipment, which included $6.0 million incurred in the United States, $4.3 million in France, and $14.2 million in China.

Net cash used in investing activities was $20.5 million for the six months ended June 30, 2018, primarily as a result of $24.6 million in purchases of property, machinery, and equipment, which included $8.4 million incurred in the United States, $7.0 million in France, and $9.2 million in China. The cash used was partially offset by the $4.4 million receipt of the remaining consideration of the sale of the various ANDAs in February 2017.

Financing Activities

Net cash provided by financing activities was $10.5 million for the six months ended June 30, 2019, primarily as a result of the receipt of $18.3 million for ANP private placement, which was partially offset by $4.1 million used to purchase treasury stock, and $0.2 million of net proceeds used to settle share-based compensation awards under our equity plans. Additionally, we made $3.6 million in principal payments on our long-term debt and lines of credit.

Net cash used in financing activities was $9.7 million for the six months ended June 30, 2018, primarily as a result of $14.9 million used to purchase treasury stock. Additionally, we made $2.8 million in principal payments on our long-term debt, and drew down $8.0 million on the equipment line of credit from East West Bank, which is due December 2022.

Indebtedness

For more information regarding our outstanding indebtedness, see Note 12 of Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Contractual Obligations

There have been no material changes outside the ordinary course of our business in the contractual obligations disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018, except that our outstanding debt obligations have changed as follows:


	June 30,		December 31,
	2019		2018		Change
	(in thousands)
Short-term debt and current portion of long-term debt	$	6,941	$	18,229	$	(11,288)
Long-term debt		39,793		31,984		7,809
Total debt	$	46,734	$	50,213	$	(3,479)

As of June 30, 2019, we had $45.0 million in unused borrowing capacity under revolving lines of credit with Cathay Bank and East West Bank.

Critical Accounting Policies

The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the notes to the financial statements. Some of those judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions or conditions. A summary of our critical accounting policies is presented in Part II, Item 7, of our Annual Report on Form 10-K for the year ended December 31, 2018.

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There were no material changes to our critical accounting policies during the three and six months ended June 30, 2019, other than the adoption of ASC 2016-02, Leases, or ASC 2016-02, using the alternative transition method. The adoption of ASC 2016-02 did not have a material impact on the Company’s condensed consolidated financial statements. The results for the reporting period beginning after January 1, 2019, are presented in accordance with the new standard, although comparative information has not been restated and continues to be reported under the accounting standards and policies in effect for those periods.

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements, see “Part I – Item 1. Financial Statements – Notes to Consolidated Financial Statements – Summary of Significant Accounting Policies.”

Off-Balance Sheet Arrangements

We do not have any relationships or financial partnerships with unconsolidated entities, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts.

Government Regulation

The 340(B) Public Health Services drug pricing program provides drugs at reduced rates to certain qualifying customers. As of January 1, 2019, the program provided for increased discounts for certain products we sell, including Cortrosyn®.

Our products and facilities are subject to regulation by a number of federal and state governmental agencies. The FDA, in particular, maintains oversight of the formulation, manufacture, distribution, packaging, and labeling of all of our products. The Drug Enforcement Administration, or DEA, maintains oversight over our products that are considered controlled substances.

From February 5, 2019 through February 12, 2019, our Amphastar facility in Rancho Cucamonga, California was subject to a preapproval inspection by the FDA. The inspection included a review of our corrective actions taken from the previous cGMP inspection in March 2017, as well as review of data to support our pending applications. The inspections resulted in multiple observations on Form 483. We fully responded to those observations on March 6, 2019. We believe that our responses to the observations will satisfy the requirements of the FDA and that no significant further actions will be necessary.

From February 25 through March 1, 2019, our IMS facility in South El Monte, California was subject to a preapproval inspection by the FDA. The inspection included a review of our corrective actions taken from the 2017 inspection as well as review of data to support our pending applications. The inspection resulted in multiple observations on Form 483. We responded to those observations on March 22, 2019. We believe that our responses to the observations will satisfy the requirements of the FDA and that no significant further actions will be necessary.

From July 23 through July 25, 2019, our Amphastar facility in Rancho Cucamonga, California was subject to a routine, post-marketing adverse drug experience reporting inspection, or PADE, by the FDA. The inspection included a review of our processes for collecting, reviewing, investigating and reporting post-marketing adverse drug experiences reported through various sources. The inspection resulted in no Form 483 findings. No further actions will be necessary.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The following discussion provides forward-looking quantitative and qualitative information about our potential exposure to market risk. Market risk represents the potential loss arising from adverse changes in the value of financial instruments. The risk of loss is assessed based on the likelihood of adverse changes in fair values, cash flows or future earnings. We are exposed to market risk for changes in the market values of our investments (Investment Risk), the impact of interest rate changes (Interest Rate Risk), and the impact of foreign currency exchange changes (Foreign Currency Exchange Risk).

Investment Risk

We regularly review the carrying value of our investments and identify and recognize losses, for income statement purposes, when events and circumstances indicate that any declines in the fair values of such investments below our accounting basis are other than temporary. As of June 30, 2019, we did not have any such investments. We do not enter into investments for trading or speculative purposes.

As of June 30, 2019, we had $35.1 million deposited in seven banks located in China, $2.8 million deposited in one bank located in France, and $0.9 million deposited in one bank located in the United Kingdom. We also maintained $75.3 million in cash equivalents that include money market accounts, as of June 30, 2019. The remaining amounts of our cash equivalent as of June 30, 2019, are in non-interest bearing accounts.

Interest Rate Risk

Our primary exposure to market risk is interest‑rate‑sensitive investments and credit facilities, which are affected by changes in the general level of U.S. interest rates. Due to the nature of our short-term investments, we believe that we are not subject to any material interest rate risk with respect to our short-term investments.

As of June 30, 2019, we had $46.7 million in long-term debt and finance leases outstanding. Of this amount, $12.0 million had variable interest rates which were not locked-in through fixed interest rate swap contracts. The debt with variable interest rate exposure had a weighted-average interest rate of 5.5% at June 30, 2019. An increase in the index underlying these rates of 1% (100 basis points) would increase our annual interest expense on the debt with variable interest rate exposure by approximately $0.1 million per year.

Foreign Currency Exchange Risk

Our finished pharmaceutical products are primarily sold in the U.S. domestic market, and have little exposure to foreign currency price fluctuations. However, as a result of our acquisition of the API manufacturing business in Éragny-sur-Epte, France, we are exposed to market risk related to changes in foreign currency exchange rates. Specifically, our insulin sales contracts are frequently denominated in euros, which are subject to fluctuations relative to the USD.

Our Chinese subsidiary, 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 our statement of operations.

Our French subsidiary, AFP, maintains its books of record in euros. Our U.K. subsidiary, IMS UK, maintains its books of record in British pounds. The results of operations are translated to USD at the 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 exchange rate 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).

We are also exposed to the potential earnings effects from intercompany foreign currency assets and liabilities that arise from normal trade receivables and payables and other intercompany loans.

We do not undertake hedging transactions to cover our foreign currency exposure. As of June 30, 2019, a 10%

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unfavorable change in the exchange rate of the U.S. dollar strengthening against the foreign currencies to which we have exposure would result in approximately $2.0 million reduction of foreign currency gains, and approximately $3.9 million reduction in other comprehensive income.

As of June 30, 2019, our foreign subsidiaries had cash balances denominated in foreign currencies of $7.2 million.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, our principal executive and principal financial officers, respectively, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that as of such date, our disclosure controls and procedures were effective (a) to ensure that information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (b) to include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).

Inherent Limitations of Internal Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management overriding of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

For information regarding legal proceedings, see “Part I – Item 1. Financial Statements – Notes to Consolidated Financial Statements – Litigation.”

ITEM 1A. RISK FACTORS

Except as noted below, there were no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission on March 15, 2019.

Some of our products are marketed without FDA approval and may be subject to enforcement actions by the FDA.

A number of our prescription products are marketed without FDA approval. These products, like many other prescription drugs on the market that the FDA has not formally evaluated as being effective, contain active ingredients that were first marketed prior to the enactment of the Federal Food, Drug and Cosmetic Act, or FFDCA. The FDA has assessed these products in a program known as the “Prescription Drug Wrap-Up” and has stated that these drugs cannot be lawfully marketed unless they comply with certain “grandfather” exceptions to the definition of “new drug” in the FFDCA. These exceptions have been strictly construed by FDA and by the courts, and the FDA has stated that it is unlikely that any of the unapproved prescription drugs on the market, including certain of our drugs, qualify for the exceptions. At any time, the FDA may require that some or all of our unapproved prescription drugs be submitted for approval and may direct us to recall these products and/or cease marketing the products until they are approved. The FDA may also take enforcement actions based on our marketing of these unapproved products, including but not limited to the issuance of an untitled letter or a warning letter, and a judicial action seeking an injunction, product seizure and/or civil or criminal penalties. The enforcement posture could change at any time and our ability to market such drugs could terminate with little or no notice. Moreover, if our competitors seek and obtain approval and market FDA-approved prescription products that compete against our unapproved prescription products, we would be subject to a higher likelihood that the FDA may seek to take action against our unapproved products. Such competitors have brought and may bring claims against us alleging unfair competition or related claims.

As a result of our meetings with the FDA in 2009, we decided to discontinue all of our products that were subject to the Prescription Drug Wrap-Up program, with the exception of epinephrine in vial form. These products were all produced at our subsidiary, IMS. During the third quarter of 2010, the FDA requested that we reintroduce several of the withdrawn products to cope with a drug shortage, while we prepared and filed applications for approval of the products. Between August and October, 2010, we reintroduced atropine, morphine, dextrose, and epinephrine prefilled syringes.

In February 2017, the FDA requested that we discontinue the manufacturing and distribution of our epinephrine injection, USP vial product, which had been marketed under the “grandfather” exception to the FDA’s Prescription Drug Wrap-Up program. We discontinued selling this product in the second quarter of 2017.

For the years ended December 31, 2018, 2017, and 2016, we recorded net revenues of $26.4 million, $22.0 million, and $17.4 million, respectively, from our unapproved products. For the six months ended June 30, 2019 and 2018, we recorded net revenues of $8.9 million and $7.2 million, respectively, from our unapproved products. Our unapproved products currently on the market include: atropine, morphine, dextrose and epinephrine prefilled syringes. We have filed three ANDAs and one NDA with respect to our remaining unapproved products in order to mitigate all risk associated with the marketing of unapproved drug products. Prior to the approval of our ANDA and NDA submissions, we continue to operate in compliance with the FDA Compliance Policy Guide, CPG Sec. 440.100 Marketed New Drugs Without Approved NDAs and ANDAs.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(c)Issuer Purchases of Equity Securities

The table below provides information with respect to repurchases of our common stock:


				Total Number of Shares	Maximum Number of
		Average		Purchased as Part of	Shares that May Yet Be
	Total Number of Shares	Price Paid		Publicly Announced Plans	Purchased Under the Plans
Period	Purchased (1)	per Share		or Programs	or Programs
April 1 – April 30, 2019	50,980	$	21.01	50,980	—
May 1 – May 31, 2019	—		—	—	—
June 1 – June 30, 2019	—		—	—	—

⁽¹⁾

During the second quarter of 2019, we repurchased shares of our common stock as part of the share buyback program authorized by our Board of Directors on May 7, 2018 and May 6, 2019. As of June 30, 2019, $20.0 million remained available under such program.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

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ITEM 6. EXHIBITS



Exhibit No.		Description
10.1		Ninth Amendment to the Acquisition Loan, dated July 19, 2019 between Amphastar Pharmaceuticals, Inc. and Cathay Bank

10.2*		Fifth Amendment to the Supply Agreement by and between MannKind Corporation and Amphastar Pharmaceuticals, Inc., dated August 2, 2019

31.1		Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1#		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2#		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definitions Linkbase Document

#The information in Exhibits 32.1 and 32.2 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that section, nor shall they be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act (including this Report), unless the Registrant specifically incorporates the foregoing information into those documents by reference.

*Portions of this exhibit (indicated by asterisks) have been redacted in compliance with Regulation S-K Item 601(b)(10).

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	AMPHASTAR PHARMACEUTICALS, INC. (Registrant)
By:	/s/ JACK Y. ZHANG
	Jack Y. Zhang
	Chief Executive Officer (Principal Executive Officer)

Date: August 9, 2019

	AMPHASTAR PHARMACEUTICALS, INC. (Registrant)
By:	/s/ WILLIAM J. PETERS
	William J. Peters
	Chief Financial Officer (Principal Financial and Accounting Officer)

Date: August 9, 2019

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