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Amphastar Pharmaceuticals, Inc. - Quarter Report: 2022 September (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2022

or

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

For the transition period from             to             

Commission file number 001-36509

AMPHASTAR PHARMACEUTICALS, INC.

(Exact name of Registrant as specified in its charter)

Delaware

 

33-0702205

(State or other jurisdiction of

incorporation or organization)

 

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

11570 6th Street

 

Rancho Cucamonga, CA

 

91730

(Address of principal executive offices)

(zip code)

(909) 980-9484

(Registrant’s telephone number, including area code)

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

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

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

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

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

T

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

AMPH

The NASDAQ Stock Market LLC

The number of shares outstanding of the registrant’s only class of common stock as of November 1, 2022 was 48,331,186.

Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

TABLE OF CONTENTS

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2022

Special Note About Forward-Looking Statements

Part I. FINANCIAL INFORMATION

PAGE

Item 1. Financial Statements (unaudited):

Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021

1

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2022 and 2021

2

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2022 and 2021

3

Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2022 and 2021

4

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021

6

Notes to Condensed Consolidated Financial Statements

7

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

28

Item 3. Quantitative and Qualitative Disclosure about Market Risk

39

Item 4. Controls and Procedures

39

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

40

Item 1A. Risk Factors

40

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

48

Item 3. Defaults Upon Senior Securities

48

Item 4. Mine Safety Disclosures

48

Item 5. Other Information

48

Item 6. Exhibits

49

Signatures

50

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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;
our business and operations in general, including: uncertainty regarding the magnitude, duration and geographic reach of the ongoing COVID-19 pandemic, adverse impacts of the Russia-Ukraine conflict and related macroeconomic conditions on our business, financial condition, operations, cash flows and liquidity;
our ability to successfully execute and maintain the activities and efforts related to the measures we have taken or may take in response to the COVID-19 pandemic and associated costs therewith;
our ability to attract, hire, and retain highly skilled personnel;
interruptions to our manufacturing and production as a result of natural catastrophic events or other causes beyond our control such as power disruptions or widespread disease outbreaks, such as the ongoing COVID-19 pandemic and the Russia-Ukraine conflict;
global, national and local economic and market conditions, specifically with respect to geopolitical uncertainty, including the Russia-Ukraine conflict, the ongoing COVID-19 pandemic, inflation and rising interest rates;
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;
cost and delays resulting from the extensive pharmaceutical regulations to which we are subject or delays in governmental processing time due to travel and work restrictions caused by the COVID-19 pandemic;
our ability to compete in the development and marketing of our products and product candidates;
our expectations regarding the business of our Chinese subsidiary, Amphastar Nanjing Pharmaceuticals, Ltd., or 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 effects of reforms in healthcare regulations and reductions in pharmaceutical pricing, reimbursement and coverage;
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;
variations in intellectual property laws, 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;
our ability to successfully bid for suitable acquisition targets or licensing opportunities, or to consummate and integrate acquisitions, divestitures or investments, including the anticipated benefits of such acquisitions, divestitures or investments;
our ability to expand internationally;
economic and industry trends and trend analysis;
our ability to remain in compliance with laws and regulations that currently apply or become applicable to our business both in the United States and internationally;
the impact of trade tariffs, export or import restrictions, or other trade barriers;
the impact of Patient Protection and Affordable Care Act (as amended) and other legislative and regulatory healthcare reforms in the countries in which we operate including the potential for drug price controls;
the timing for completion and the validation of the new construction at our ANP and Amphastar facilities;
the timing and extent of share buybacks; and
our financial performance expectations, including our expectations regarding our backlog, revenue, cost of revenue, gross profit or gross margin, operating expenses, including changes in research and development, sales and marketing and general and administrative expenses, and our ability to achieve and maintain future profitability.

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You should read this Quarterly Report and the documents that we reference elsewhere in this Quarterly Report completely and with the understanding that our actual results may differ materially from what we expect as expressed or implied by our forward-looking statements. In light of the significant risks and uncertainties to which our forward-looking statements are subject, you should not place undue reliance on or regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified timeframe, or at all. In particular, the extent of COVID-19’s ongoing impact on our business and the impacts of the ongoing Russia-Ukraine conflict, will depend on several factors, including the severity, duration and extent of the pandemic and the conflict, all of which continue to evolve and remain uncertain at this time. We discuss many of these risks and uncertainties in greater detail in this Quarterly Report and in our Annual Report on Form 10-K for the year ended December 31, 2021, particularly in Item 1A. “Risk Factors.” These forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report regardless of the time of delivery of this Quarterly Report, and such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Quarterly Report.

Unless expressly indicated or the context requires otherwise, references in this Quarterly Report to “Amphastar,” “the Company,” “we,” “our,” and “us” refer to Amphastar Pharmaceuticals, Inc. and our subsidiaries.

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

    

September 30, 

    

December 31, 

 

2022

2021

 

(unaudited)

ASSETS

Current assets:

Cash and cash equivalents

$

157,244

$

126,353

Restricted cash

235

235

Short-term investments

26,843

10,320

Restricted short-term investments

 

2,200

 

2,200

Accounts receivable, net

 

77,099

 

78,804

Inventories

 

103,250

 

92,807

Income tax refunds and deposits

 

11,365

 

126

Prepaid expenses and other assets

 

5,986

 

7,274

Total current assets

 

384,222

 

318,119

Property, plant, and equipment, net

 

232,741

 

244,244

Finance lease right-of-use assets

601

353

Operating lease right-of-use assets

26,456

26,894

Investment in unconsolidated affiliate

2,690

3,985

Goodwill and intangible assets, net

 

37,037

 

38,870

Other assets

 

20,549

 

16,665

Deferred tax assets

 

22,399

 

22,399

Total assets

$

726,695

$

671,529

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable and accrued liabilities

$

95,796

$

89,545

Income taxes payable

 

1,531

 

9,081

Current portion of long-term debt

 

1,680

 

2,202

Current portion of operating lease liabilities

3,183

2,982

Total current liabilities

 

102,190

 

103,810

Long-term reserve for income tax liabilities

 

6,531

 

6,531

Long-term debt, net of current portion and unamortized debt issuance costs

 

74,011

 

74,776

Long-term operating lease liabilities, net of current portion

24,366

24,703

Deferred tax liabilities

 

242

 

534

Other long-term liabilities

 

14,190

 

15,653

Total liabilities

 

221,530

 

226,007

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; 57,994,848 and 48,612,545 shares issued and outstanding as of September 30, 2022 and 56,440,202 and 47,714,912 shares issued and outstanding as of December 31, 2021, respectively

 

6

 

6

Additional paid-in capital

 

448,741

 

422,423

Retained earnings

 

237,810

 

180,337

Accumulated other comprehensive loss

 

(9,931)

 

(6,765)

Treasury stock

 

(171,461)

 

(150,479)

Total equity

505,165

445,522

Total liabilities and stockholders’ equity

$

726,695

$

671,529

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

Nine Months Ended

 

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

 

Net revenues

$

120,129

$

112,198

$

363,964

$

316,881

Cost of revenues

 

61,619

 

61,015

 

186,272

 

173,376

Gross profit

 

58,510

 

51,183

 

177,692

 

143,505

Operating expenses:

Selling, distribution, and marketing

 

4,784

 

4,745

 

16,059

13,411

General and administrative

 

11,984

 

10,910

 

34,433

40,813

Research and development

 

18,514

 

10,759

 

57,535

43,646

Total operating expenses

 

35,282

 

26,414

 

108,027

 

97,870

Income from operations

 

23,228

 

24,769

 

69,665

 

45,635

Non-operating income (expenses):

Interest income

 

331

 

141

 

741

444

Interest expense

 

(566)

 

(527)

 

(1,318)

(717)

Other income (expenses), net

 

(397)

 

13,263

 

5,692

11,615

Total non-operating income (expenses), net

 

(632)

 

12,877

 

5,115

 

11,342

Income before income taxes

 

22,596

 

37,646

 

74,780

 

56,977

Income tax provision

 

6,559

 

6,686

 

16,187

13,436

Income before equity in losses of unconsolidated affiliate

16,037

30,960

58,593

43,541

Equity in losses of unconsolidated affiliate

(163)

(1,120)

Net income

$

15,874

$

30,960

$

57,473

$

43,541

Net income attributable to non-controlling interests

$

$

1,412

$

$

1,185

Net income attributable to Amphastar Pharmaceuticals, Inc.

$

15,874

$

29,548

$

57,473

$

42,356

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

Basic

$

0.32

$

0.62

$

1.18

$

0.89

Diluted

$

0.30

$

0.59

$

1.09

$

0.85

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

Basic

 

48,904

 

48,022

 

48,635

 

47,758

Diluted

 

52,788

 

50,009

 

52,665

 

49,693

See Accompanying Notes to Condensed Consolidated Financial Statements.

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AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited; in thousands)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

 

Net income attributable to Amphastar Pharmaceuticals, Inc.

$

15,874

$

29,548

$

57,473

$

42,356

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

Reclassification of adjustment for amounts included in net income

(362)

(362)

Foreign currency translation adjustment

 

(1,222)

 

(984)

 

(3,166)

(2,194)

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

 

(1,222)

 

(1,346)

 

(3,166)

 

(2,556)

Total comprehensive income attributable to Amphastar Pharmaceuticals, Inc.

$

14,652

$

28,202

$

54,307

$

39,800

See Accompanying Notes to Condensed Consolidated Financial Statements.

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AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited; in thousands, except share data)

Common Stock

Accumulated

Treasury Stock

Total

Additional

Other

Amphastar

Non-

Paid-in

Retained

Comprehensive

Stockholders'

controlling

Shares

Amount

Capital

Earnings

loss

Shares

Amount

Equity

Interest

Total

Balance as of December 31, 2021

 

56,440,202

$

6

$

422,423

$

180,337

$

(6,765)

 

(8,725,290)

$

(150,479)

$

445,522

$

$

445,522

Net income attributable to Amphastar Pharmaceuticals, Inc.

 

 

 

 

24,253

 

 

 

 

24,253

 

 

24,253

Other comprehensive loss attributable to Amphastar Pharmaceuticals, Inc.

 

 

 

 

 

(480)

 

 

 

(480)

 

 

(480)

Purchase of treasury stock

 

 

 

 

 

 

(51,168)

(1,229)

(1,229)

 

(1,229)

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

(428)

33,231

428

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

 

1,055,200

 

 

6,437

 

 

 

 

 

6,437

 

 

6,437

Share-based compensation expense

 

 

 

5,022

 

 

 

 

 

5,022

 

 

5,022

Balance as of March 31, 2022

 

57,495,402

$

6

$

433,454

$

204,590

$

(7,245)

 

(8,743,227)

$

(151,280)

$

479,525

$

$

479,525

Net income attributable to Amphastar Pharmaceuticals, Inc.

 

 

 

 

17,346

 

 

 

 

17,346

 

 

17,346

Other comprehensive loss attributable to Amphastar Pharmaceuticals, Inc.

 

 

 

 

 

(1,464)

 

 

 

(1,464)

 

 

(1,464)

Purchase of treasury stock

 

 

 

 

 

 

(189,840)

(6,118)

(6,118)

 

(6,118)

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

 

 

(430)

 

 

 

29,019

430

 

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

 

400,935

 

 

5,783

 

 

 

 

 

5,783

 

 

5,783

Share-based compensation expense

 

 

 

4,235

 

 

 

 

 

4,235

 

 

4,235

Balance as of June 30, 2022

 

57,896,337

$

6

$

443,042

$

221,936

$

(8,709)

 

(8,904,048)

$

(156,968)

$

499,307

$

$

499,307

Net income attributable to Amphastar Pharmaceuticals, Inc.

 

 

 

 

15,874

 

 

 

 

15,874

 

 

15,874

Other comprehensive loss attributable to Amphastar Pharmaceuticals, Inc.

 

 

 

 

 

(1,222)

 

 

 

(1,222)

 

 

(1,222)

Purchase of treasury stock

 

 

 

 

 

 

(478,255)

(14,493)

(14,493)

 

(14,493)

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

 

98,511

 

 

1,400

 

 

 

 

 

1,400

 

 

1,400

Share-based compensation expense

 

 

 

4,299

 

 

 

 

 

4,299

 

 

4,299

Balance as of September 30, 2022

 

57,994,848

$

6

$

448,741

$

237,810

$

(9,931)

 

(9,382,303)

$

(171,461)

$

505,165

$

$

505,165

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AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited; in thousands, except share data)

Common Stock

Accumulated

Treasury Stock

Total

Additional

Other

Amphastar

Non-

Paid-in

Retained

Comprehensive

Stockholders'

controlling

Shares

Amount

Capital

Earnings

loss

Shares

Amount

Equity

Interest

Total

Balance as of December 31, 2020

 

54,760,922

$

5

$

410,061

$

117,773

$

(3,721)

 

(7,265,483)

$

(121,812)

$

402,306

$

46,417

$

448,723

Net income attributable to Amphastar Pharmaceuticals, Inc.

 

 

 

 

5,041

 

 

 

 

5,041

 

 

5,041

Other comprehensive loss attributable to Amphastar Pharmaceuticals, Inc.

 

 

 

 

 

(1,921)

 

 

 

(1,921)

 

 

(1,921)

Net loss attributable to non-controlling interest

(1,082)

(1,082)

Purchase of treasury stock

 

 

 

 

 

 

(204,698)

(3,783)

(3,783)

 

(3,783)

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

(49)

4,184

49

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

 

423,078

 

1

 

(853)

 

 

 

 

 

(852)

 

 

(852)

Share-based compensation expense

 

 

 

4,767

 

 

 

 

 

4,767

 

67

 

4,834

Balance as of March 31, 2021

 

55,184,000

$

6

$

413,926

$

122,814

$

(5,642)

 

(7,465,997)

$

(125,546)

$

405,558

$

45,402

$

450,960

Net income attributable to Amphastar Pharmaceuticals, Inc.

 

 

 

 

7,767

 

 

 

 

7,767

 

 

7,767

Other comprehensive income attributable to Amphastar Pharmaceuticals, Inc.

 

 

 

 

 

711

 

 

 

711

 

 

711

Net income attributable to non-controlling interest

855

855

Purchase of treasury stock

 

 

 

 

 

 

(298,727)

(5,560)

(5,560)

 

(5,560)

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

 

 

(142)

 

 

 

12,064

142

 

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

 

552,209

 

 

7,247

 

 

 

 

 

7,247

 

 

7,247

Share-based compensation expense

 

 

 

6,270

 

 

 

 

 

6,270

 

(1,027)

 

5,243

Balance as of June 30, 2021

 

55,736,209

$

6

$

427,301

$

130,581

$

(4,931)

 

(7,752,660)

$

(130,964)

$

421,993

$

45,230

$

467,223

Net income attributable to Amphastar Pharmaceuticals, Inc.

 

 

 

 

29,548

 

 

 

 

29,548

 

 

29,548

Other comprehensive loss attributable to Amphastar Pharmaceuticals, Inc.

 

 

 

 

 

(984)

 

 

 

(984)

 

 

(984)

ANP restructuring (see Note 3)

(22,162)

448

(362)

(22,076)

(46,642)

(68,718)

Net income attributable to non-controlling interest

1,412

1,412

Purchase of treasury stock

 

 

 

 

 

 

(317,212)

(6,094)

(6,094)

 

(6,094)

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

 

 

(11)

 

 

 

900

11

 

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

 

315,413

 

 

3,869

 

 

 

 

 

3,869

 

 

3,869

Share-based compensation expense

 

 

 

3,920

 

 

 

 

 

3,920

 

 

3,920

Balance as of September 30, 2021

 

56,051,622

$

6

$

412,917

$

160,577

$

(6,277)

 

(8,068,972)

$

(137,047)

$

430,176

$

$

430,176

See Accompanying Notes to Condensed Consolidated Financial Statements.

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AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)

Nine Months Ended

September 30, 

    

2022

    

2021

Cash Flows From Operating Activities:

Net income

$

57,473

$

43,541

Reconciliation to net cash provided by operating activities:

(Gain) loss on disposal of assets

 

(52)

 

338

Gain on deconsolidation of subsidiary

(13,587)

(Gain) loss on interest rate swaps and foreign currency transactions, net

(1,124)

800

Depreciation of property, plant, and equipment

 

17,615

 

16,800

Amortization of product rights, trademarks, and patents

 

1,088

 

930

Operating lease right-of-use asset amortization

2,604

2,471

Equity in losses of unconsolidated affiliate

1,120

Share-based compensation expense

 

13,556

 

14,837

Changes in deferred taxes, net

 

 

5,170

Changes in operating assets and liabilities:

Accounts receivable, net

 

1,423

 

(14,166)

Inventories

 

(12,922)

 

(5,768)

Prepaid expenses and other assets

 

1,342

 

1,174

Income tax refunds, deposits, and payable, net

 

(18,789)

 

2,832

Operating lease liabilities

(2,303)

(2,529)

Accounts payable and accrued liabilities

 

12,924

 

4,710

Net cash provided by operating activities

 

73,955

 

57,553

Cash Flows From Investing Activities:

Purchases and construction of property, plant, and equipment

 

(17,724)

 

(20,578)

Proceeds from the sale of property, plant and equipment

 

421

 

Purchase of investments

(30,568)

(12,459)

Maturity of investments

15,465

17,423

Payment of deposits and other assets

 

(142)

 

(1,104)

Net cash used in investing activities

 

(32,548)

 

(16,718)

Cash Flows From Financing Activities:

ANP restructuring (see Note 3)

(53,592)

Proceeds from equity plans, net of withholding tax payments

 

13,620

 

10,264

Purchase of treasury stock

 

(21,840)

 

(15,437)

Settlement of ANP equity awards

(839)

Debt issuance costs

(404)

(1,430)

Repayments under lines of credit

 

 

(1,161)

Proceeds from issuance of long-term debt

 

 

70,000

Principal payments on long-term debt

 

(1,653)

 

(36,127)

Net cash used in financing activities

 

(10,277)

 

(28,322)

Effect of exchange rate changes on cash

 

(239)

(175)

Net increase in cash, cash equivalents, and restricted cash

 

30,891

 

12,338

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

 

126,588

94,507

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

$

157,479

$

106,845

Noncash Investing and Financing Activities:

Capital expenditure included in accounts payable

$

3,431

$

6,246

Operating lease right-of-use assets in exchange for operating lease liabilities

$

2,166

$

11,015

Equipment acquired under finance leases

$

453

$

107

Supplemental Disclosures of Cash Flow Information:

Interest paid, net of capitalized interest

$

1,960

$

1,868

Income taxes paid

$

35,166

$

5,480

See Accompanying Notes to Condensed Consolidated Financial Statements.

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Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. General

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

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2021 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, 2021. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with United States generally accepted accounting principles, or GAAP, have been condensed or omitted from the accompanying condensed consolidated financial statements. The accompanying year-end condensed consolidated balance sheet was derived from the audited financial statements. The accompanying interim financial statements are unaudited, but reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the Company’s consolidated financial position, results of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the periods presented. Unless otherwise noted, all such adjustments are of a normal, recurring nature. The Company’s results of operations, comprehensive income (loss) and cash flows for the interim periods are not necessarily indicative of the results of operations and cash flows that it may achieve in future periods.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries, and are prepared in accordance with GAAP. Certain prior period amounts have been reclassified within the operating activities of the condensed consolidated statements of cash flows to conform to the current period presentation. All intercompany activity has been eliminated in the preparation of the condensed consolidated financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, which are of a normal recurring nature, necessary to present fairly the consolidated financial position, results of operations, and cash flows of the Company.

The Company’s subsidiaries include: (1) International Medication Systems, Limited, or IMS, (2) Armstrong Pharmaceuticals, Inc., or Armstrong, (3) Amphastar Nanjing Pharmaceuticals Inc., or ANP, (4) Amphastar France Pharmaceuticals, S.A.S., or AFP, (5) Amphastar UK Ltd., or AUK, and (6) International Medication Systems (UK) Limited, or IMS UK.

Use of Estimates

The preparation of condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The principal accounting estimates include: determination of allowances for credit losses, fair value of financial instruments, allowance for discounts, provision for chargebacks and rebates, provision for product returns, adjustment of inventory to its net realizable values, impairment

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Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

of investments, long-lived and intangible assets and goodwill, accrual for workers’ compensation liabilities, litigation reserves, stock price volatility for share-based compensation expense, valuation allowances for deferred tax assets, and liabilities for uncertain income tax positions.

Foreign Currency

The functional currency of the Company, its domestic subsidiaries, its Chinese subsidiary, ANP, and its U.K. subsidiary, AUK, is the U.S. Dollar, or USD. ANP maintains its books of record in Chinese yuan. These books are remeasured into the functional currency, 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 condensed consolidated statements of operations.

The Company’s French subsidiary, AFP, maintains its book of record in euros. AUK’s subsidiary, IMS UK, maintains its book of record in British pounds. These local currencies have been determined to be the subsidiaries’ respective functional currencies. Activities in the statements of operations are translated to 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 were a $2.0 million loss and a $4.7 million loss for the three and nine months ended September 30, 2022, respectively. For the three and nine months ended September 30, 2021, the unrealized gains and losses of intercompany foreign currency transactions that are of a long-term investment nature were a $0.9 million loss and a $1.9 million loss, respectively.

Comprehensive Income

The Company’s comprehensive income includes its foreign currency translation gains and losses as well as its share of other comprehensive income from its equity method investment.

Advertising Expense

Advertising expenses, primarily associated with Primatene Mist®, are recorded as they are incurred, except for expenses related to the development of a major commercial or media campaign, which are expensed in the period in which the commercial or campaign is first presented, and are reflected as a component of selling, distribution and marketing in the Company’s condensed consolidated statements of operations. For the three and nine months ended September 30, 2022, advertising expenses were $1.6 million and $6.5 million, respectively. For the three and nine months ended September 30, 2021, advertising expenses were $2.3 million and $6.4 million, respectively.

Financial Instruments

The carrying amounts of cash and cash equivalents, short-term investments, restricted cash and short-term investments, accounts receivable, accounts payable, accrued expenses, and short-term borrowings approximate fair value due to the short maturity of these items. The majority of the Company’s long-term obligations consist of variable rate debt, and their carrying value approximates fair value as the stated borrowing rates are comparable to rates currently offered to the Company for instruments with similar maturities. The Company at times enters into interest rate swap contracts to manage its exposure to interest rate changes and its overall cost of long-term debt. The Company’s interest rate swap contracts exchange the variable interest rates for fixed interest rates. The Company’s interest rate swaps have not been

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Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

designated as hedging instruments and, therefore are recorded at their fair values at the end of each reporting period with changes in fair value recorded in other income (expenses) on the condensed consolidated statements of operations.

Cash and Cash Equivalents

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

Investments

Investments as of September 30, 2022 and December 31, 2021 consisted of certificates of deposit and investment grade corporate and municipal bonds with original maturity dates between three and fifteen months.

Restricted Cash

Restricted cash is collateral required for the Company to guarantee certain vendor payments in France. As of September 30, 2022 and December 31, 2021, the restricted cash balances were $0.2 million.

Restricted Short-Term Investments

Restricted short-term investments consist of certificates of deposit that are collateral for standby letters of credit to qualify for workers’ compensation self-insurance. The certificates of deposit have original maturities greater than three months, but less than one year. As of September 30, 2022 and December 31, 2021, the balance of restricted short-term investments was $2.2 million.

Deferred Income Taxes

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

Litigation, Commitments and Contingencies

Litigation, commitments and contingencies are accrued when management, after considering the facts and circumstances of each matter as then known to management, has determined it is probable a liability will be found to have been incurred and the amount of the loss can be reasonably estimated. When only a range of amounts is reasonably estimable and no amount within the range is more likely than another, the low end of the range is recorded. Legal fees are expensed as incurred. Due to the inherent uncertainties surrounding gain contingencies, the Company generally does not recognize potential gains until realized.

Recent Accounting Pronouncements

The Company does not believe that any recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the accompanying condensed consolidated financial statements.

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Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 3. ANP Restructuring

As a result of the ANP restructuring that was completed during the third quarter of 2021, and subsequent investments by other equity holders of Hanxin, the Company had a 14% noncontrolling investment in Hanxin as of September 30, 2022 that is accounted for as an equity method investment.

In addition to the retained noncontrolling investment in Hanxin, the Company maintains a seat on Hanxin’s board of directors, and Henry Zhang, a relative of Dr. Jack Zhang and Dr. Mary Luo, is an equity holder, general manager, and chairman of the board of directors of Hanxin. As a result, it was determined that the Company has significant influence over Hanxin and the retained noncontrolling investment in Hanxin is accounted for as an equity method investment.

Hanxin continues to be a related party after the restructuring.

Note 4. Revenue Recognition

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

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

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

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

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

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

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

Service revenues derived from research and development contracts is recognized over time based on progress toward satisfaction of the performance obligation. For each performance obligation satisfied over time, the Company assesses the proper method to be used for revenue recognition, either an input method to measure progress toward the satisfaction of services or an output method of determining the progress of completion of performance obligation. For the three and nine months ended September 30, 2022, revenues from research and development services at ANP were $0.8 million and $2.1 million, respectively. For the three and nine months ended September 30, 2021, revenues from research and development services at ANP were $2.6 million and $3.9 million, respectively.

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Table of Contents

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:

Nine Months Ended

 

September 30, 

2022

2021

 

(in thousands)

 

Beginning balance

    

$

20,167

    

$

20,380

Provision for chargebacks and rebates

 

147,899

 

151,174

Credits and payments issued to third parties

 

(144,233)

 

(154,143)

Ending balance

$

23,833

$

17,411

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 20 days to 60 days after the sale to wholesalers. Accounts receivable and/or accounts payable and accrued liabilities are reduced and/or increased by the chargebacks and rebate amounts depending on whether the Company has the right to offset with the customer.

Of the provision for chargebacks and rebates as of September 30, 2022 and December 31, 2021, $18.4 million and $15.6 million were included as a reduction to accounts receivable, net, on the condensed consolidated balance sheets, respectively. The remaining provision as of September 30, 2022 and December 31, 2021 of $5.4 million and $4.6 million, respectively, were included in accounts payable and accrued liabilities.

Accrual for Product Returns

The Company offers most customers the right to return qualified excess or expired inventory for partial credit; however, API product sales are generally non-returnable. The Company’s product returns primarily consist of the returns of expired products from sales made in prior periods. Returned products cannot be resold. At the time product revenue is recognized, the Company records an accrual for product returns estimated using the expected value method. The accrual is based, in part, upon the historical relationship of product returns to sales and customer contract terms. The Company also assesses other factors that could affect product returns including market conditions, product obsolescence, and 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

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Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Company analyzes these situations on a case-by-case basis and makes adjustments to the product return reserve as appropriate.

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

Nine Months Ended

 

September 30, 

2022

2021

 

(in thousands)

 

Beginning balance

    

$

21,677

    

$

14,204

Provision for product returns

 

3,086

 

11,714

Credits issued to third parties

 

(5,019)

 

(6,183)

Ending balance

$

19,744

$

19,735

Of the provision for product returns as of September 30, 2022 and December 31, 2021, $14.9 million and $16.0 million, were included in accounts payable and accrued liabilities on the condensed consolidated balance sheets, respectively. The remaining provision as of September 30, 2022 and December 31, 2021 of $4.8 million and $5.7 million, were included in other long-term liabilities, respectively. For the nine months ended September 30, 2022 and 2021, the Company’s aggregate product return rate was 1.4% and 1.7% of qualified sales, respectively.

Note 5. Income per Share Attributable to Amphastar Pharmaceuticals, Inc. Stockholders

Basic net income per share attributable to Amphastar Pharmaceuticals, Inc. stockholders is calculated based upon the weighted-average number of shares outstanding during the period. Diluted net income per share attributable to Amphastar Pharmaceuticals, Inc. stockholders gives effect to all potentially 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.

For the three and nine months ended September 30, 2022, options to purchase 704,483 shares of stock, with a weighted-average exercise price of $34.79 per share, were excluded in the computation of diluted net income per share attributable to Amphastar Pharmaceuticals, Inc. stockholders because the effect would be anti-dilutive.

For the three and nine months ended September 30, 2021, options to purchase 1,885,093 and 2,045,878 shares of stock, with a weighted-average exercise price of $20.86 per share and $20.74 per share, respectively, were excluded in the computation of diluted net income per share attributable to Amphastar Pharmaceuticals, Inc. stockholders because the effect would be anti-dilutive.

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Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

2022

2021

2022

2021

(in thousands, except per share data)

Basic and dilutive numerator:

    

    

    

    

    

    

    

    

 

Net income attributable to Amphastar Pharmaceuticals, Inc.

$

15,874

$

29,548

$

57,473

$

42,356

Denominator:

Weighted-average shares outstanding — basic

 

48,904

 

48,022

 

48,635

 

47,758

Net effect of dilutive securities:

Incremental shares from equity awards

 

3,884

 

1,987

 

4,030

 

1,935

Weighted-average shares outstanding — diluted

 

52,788

 

50,009

 

52,665

 

49,693

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

$

0.32

$

0.62

$

1.18

$

0.89

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

$

0.30

$

0.59

$

1.09

$

0.85

Note 6. 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
APIs

The finished pharmaceutical products segment manufactures, markets and distributes Primatene Mist®, glucagon, enoxaparin, naloxone, phytonadione, lidocaine, epinephrine, various critical and non-critical care drugs, as well as certain contract manufacturing and contract research revenues. The API segment manufactures and distributes recombinant human insulin API and porcine insulin API for external customers and internal product development.

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Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Selected financial information by reporting segment is presented below:

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

2022

2021

2022

2021

(in thousands)

Net revenues:

    

    

    

    

    

    

    

    

 

Finished pharmaceutical products

$

117,120

$

108,990

$

353,789

$

301,594

API

 

3,009

3,208

10,175

15,287

Total net revenues

 

120,129

 

112,198

 

363,964

 

316,881

Gross profit (loss):

Finished pharmaceutical products

 

61,439

 

54,602

 

185,462

 

149,502

API

 

(2,929)

(3,419)

(7,770)

(5,997)

Total gross profit

 

58,510

 

51,183

 

177,692

 

143,505

Operating expenses

 

35,282

 

26,414

 

108,027

 

97,870

Income from operations

 

23,228

 

24,769

 

69,665

 

45,635

Non-operating income (expenses)

 

(632)

 

12,877

 

5,115

 

11,342

Income before income taxes

$

22,596

$

37,646

$

74,780

$

56,977

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

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

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

2022

2021

2022

2021

(in thousands)

Finished pharmaceutical products net revenues:

    

    

    

    

    

    

    

 

Primatene Mist®

$

18,359

$

16,561

$

62,030

$

51,624

Epinephrine

19,502

13,892

52,777

38,662

Lidocaine

12,621

11,649

39,253

32,314

Phytonadione

 

13,978

 

11,591

 

37,834

31,577

Glucagon

14,224

12,189

37,003

32,304

Enoxaparin

7,983

8,034

27,138

28,020

Naloxone

6,818

8,028

21,424

20,994

Other finished pharmaceutical products

 

23,635

 

27,046

 

76,330

 

66,099

Total finished pharmaceutical products net revenues

$

117,120

$

108,990

$

353,789

$

301,594

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Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

2022

2021

2022

2021

(in thousands)

Depreciation and amortization expense

    

    

    

    

    

    

    

    

 

Finished pharmaceutical products

$

2,517

$

1,534

$

6,370

$

4,429

API

 

904

 

970

 

2,789

3,197

Total depreciation and amortization expense

$

3,421

$

2,504

$

9,159

$

7,626

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

Net Revenue

Long-Lived Assets

 

Three Months Ended

Nine Months Ended

 

September 30, 

September 30, 

September 30, 

December 31, 

2022

2021

2022

2021

2022

2021

 

(in thousands)

 

United States

    

$

117,780

    

$

107,829

    

$

355,680

    

$

302,192

    

$

134,847

    

$

134,731

China

 

719

2,554

2,418

4,801

 

88,422

 

91,876

France

 

1,630

1,815

5,866

9,888

 

36,529

 

44,884

Total

$

120,129

$

112,198

$

363,964

$

316,881

$

259,798

$

271,491

Note 7. Customer and Supplier Concentration

Customer Concentrations

Three large wholesale drug distributors, AmerisourceBergen Corporation, or AmerisourceBergen, Cardinal Health, Inc., or Cardinal, and McKesson Corporation, or McKesson, are all distributors of the Company’s products, as well as suppliers of a broad range of health care products. 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 nine months ended September 30, 2022 and 2021, and accounts receivable as of September 30, 2022 and December 31, 2021, 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

Nine Months Ended

 

September 30, 

December 31, 

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

    

2022

 

2021

 

AmerisourceBergen

 

14

%

13

%

23

%

25

%

23

%

24

%

McKesson

 

29

%

30

%

23

%

21

%

21

%

20

%

Cardinal Health

 

24

%

20

%

17

%

18

%

16

%

16

%

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

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Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

market its products, it could have a materially adverse effect on the Company’s business, financial condition, and results of operations.

Note 8. Fair Value Measurements

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

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

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

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

As of September 30, 2022, cash equivalents include money market accounts and municipal bonds with original maturities of less than three months. Investments consist of certificates of deposit as well as investment-grade corporate and municipal bonds with original maturity dates between three and twelve months. The certificates of deposit are carried at amortized cost in the Company’s condensed consolidated balance sheets, which approximates their fair value determined based on Level 2 inputs. The corporate and municipal bonds are classified as held-to-maturity and are carried at amortized cost net of allowance for credit losses, which approximates their fair value determined based on Level 2 inputs. The restrictions on restricted cash and investments have an immaterial effect on the fair value of these financial assets.

The fair value of the Company’s financial assets and liabilities measured on a recurring basis as of September 30, 2022 and December 31, 2021, are as follows:

    

Total

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

(in thousands)

 

Cash equivalents

$

130,130

$

130,130

$

$

Restricted cash

235

235

Short-term investments

4,600

4,600

Restricted short-term investments

 

2,200

 

 

2,200

 

Corporate and municipal bonds

23,089

23,089

Interest rate swap related to variable rate loans

6,508

6,508

Fair value measurement as of September 30, 2022

$

166,762

$

130,365

$

36,397

$

Cash equivalents

$

102,863

$

102,863

$

$

Restricted cash

235

235

Short-term investments

5,103

5,103

Restricted short-term investments

 

2,200

 

 

2,200

 

Corporate and municipal bonds

6,984

6,984

Interest rate swap related to variable rate loans

596

596

Fair value measurement as of December 31, 2021

$

117,981

$

103,098

$

14,883

$

-16-

Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Nonfinancial assets and liabilities are not measured at fair value on a recurring basis but are subject to fair value adjustments in certain circumstances. These items primarily include investments in unconsolidated affiliates, long-lived assets, goodwill, and intangible assets for which the fair value is determined as part of the related impairment test. As of September 30, 2022, and December 31, 2021, there were no significant adjustments to fair value for nonfinancial assets or liabilities.

The deferred compensation plan assets are valued using the cash surrender value of the life insurance policies and are not included in the table above.

Note 9. Investments

A summary of the Company’s investments that are classified as held-to-maturity are as follows:

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

    

Cost

    

Gains

    

Losses

    

Value

(in thousands)

Corporate bonds (due within 1 year)

$

20,978

$

$

(77)

$

20,901

Municipal bonds (due within 1 year)

2,194

(6)

2,188

Total investments as of September 30, 2022

$

23,172

$

$

(83)

$

23,089

Corporate bonds (due within 1 year)

$

2,481

$

$

(3)

$

2,478

Corporate bonds (due within 1 to 3 years)

1,248

(3)

1,245

Municipal bonds (due within 1 year)

3,263

(2)

3,261

Total investments as of December 31, 2021

$

6,992

$

$

(8)

$

6,984

At each reporting period, the Company evaluates securities for impairment when the fair value of the investment is less than its amortized cost. The Company evaluated the underlying credit quality and credit ratings of the issuers, noting neither a significant deterioration since purchase nor any other factors that would indicate a material credit loss.

The Company measures expected credit losses on held-to-maturity investments on a collective basis. All the Company’s held-to-maturity investments were considered to be one pool. The estimate for credit losses considers historical loss information that is adjusted for current conditions and reasonable and supportable forecasts. Expected credit losses on held-to-maturity investments were not material to the condensed consolidated financial statements.

Investment in unconsolidated affiliate

The Company accounts for its share of the earnings or losses of its unconsolidated affiliate (Hanxin) with a reporting lag of three months, as the financial statements of Hanxin are not completed on a basis that is sufficient for the Company to apply the equity method on a current basis. The Company’s share of Hanxin’s losses for the three and nine months ended September 30, 2022 was $0.2 million and $1.1 million, respectively, which was recorded in the “Equity in losses of unconsolidated affiliate” line on the condensed consolidated statements of operations.

In the second quarter of 2022, Hanxin entered into an agreement with certain of its shareholders, including certain shareholders who are related parties of the Company, to allow for the conversion of outstanding loans with those shareholders to equity. The conversion rate had not been set and none of the loans had been converted to equity as of September 30, 2022. Conversion of such loans would result in dilution of the Company’s direct ownership interest in Hanxin.

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 10. 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

$

7,806

$

4,814

$

2,992

Patents

 

12

 

486

359

 

127

Land-use rights

 

39

 

2,540

733

 

1,807

Subtotal

 

10

 

10,832

 

5,906

 

4,926

Indefinite-lived intangible assets

Trademark

 

*

 

29,225

 

 

29,225

Goodwill - Finished pharmaceutical products

 

*

 

2,886

 

 

2,886

Subtotal

 

*

 

32,111

 

 

32,111

As of September 30, 2022

 

*

$

42,943

$

5,906

$

37,037

Weighted-Average

Accumulated

 

    

Life (Years)

    

Original Cost

    

Amortization

    

Net Book Value

 

(in thousands)

 

Definite-lived intangible assets

IMS (UK) international product rights

10

$

9,445

$

5,116

$

4,329

Patents

 

12

 

486

340

 

146

Land-use rights

 

39

 

2,540

683

 

1,857

Subtotal

 

12

 

12,471

 

6,139

 

6,332

Indefinite-lived intangible assets

Trademark

 

*

 

29,225

 

 

29,225

Goodwill - Finished pharmaceutical products

 

*

 

3,313

 

 

3,313

Subtotal

 

*

 

32,538

 

 

32,538

As of December 31, 2021

 

*

$

45,009

$

6,139

$

38,870

*

Intangible assets with indefinite lives have an indeterminable average life.

Goodwill

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

September 30, 

December 31, 

 

2022

2021

 

(in thousands)

 

Beginning balance

    

$

3,313

    

$

3,940

ANP restructuring

(374)

Currency translation

 

(427)

 

(253)

Ending balance

$

2,886

$

3,313

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,

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Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

recorded at the allocated fair value of $29.2 million, which is its carrying value as of September 30, 2022.

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.

Note 11. Inventories

Inventories consist of the following:

September 30, 

December 31, 

 

2022

2021

 

(in thousands)

 

Raw materials and supplies

    

$

47,082

    

$

41,853

Work in process

 

38,560

 

33,298

Finished goods

 

17,608

 

17,656

Total inventories

$

103,250

$

92,807

Charges of $5.5 million and $14.1 million were included in the cost of revenues in the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2022, respectively, to adjust the Company’s inventory and related firm purchase commitments to their net realizable value. For the three and nine months ended September 30, 2021, charges of $6.1 million and $17.0 million were included in the cost of revenues, respectively, to adjust the Company’s inventory and related firm purchase commitments to their net realizable value.

For the three and nine months ended September 30, 2022, the losses on firm purchase commitments related to raw materials on order was $2.8 million and $9.2 million, respectively. Losses on firm purchase commitments related to raw materials on order were $2.3 million and $11.6 million for the three and nine months ended September 30, 2021, respectively.

Note 12. Property, Plant, and Equipment

Property, plant, and equipment consist of the following:

September 30, 

December 31, 

 

2022

2021

 

(in thousands)

 

Buildings

    

$

129,658

    

$

130,582

Leasehold improvements

 

31,548

 

29,221

Land

 

7,360

 

7,615

Machinery and equipment

 

204,288

 

207,883

Furniture, fixtures, and automobiles

 

28,622

 

27,376

Construction in progress

 

44,460

 

41,186

Total property, plant, and equipment

 

445,936

 

443,863

Less accumulated depreciation

 

(213,195)

 

(199,619)

Total property, plant, and equipment, net

$

232,741

$

244,244

-19-

Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 13. Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consisted of the following:

September 30, 

December 31, 

2022

2021

(in thousands)

Accrued customer fees and rebates

$

13,972

$

12,121

Accrued payroll and related benefits

26,872

23,256

Accrued product returns, current portion

14,853

16,028

Accrued loss on firm purchase commitments

7,450

7,133

Other accrued liabilities

12,686

8,793

Total accrued liabilities

 

75,833

 

67,331

Accounts payable

 

19,963

 

22,214

Total accounts payable and accrued liabilities

$

95,796

$

89,545

Note 14. Debt

Debt consists of the following:

September 30, 

December 31, 

 

2022

2021

 

(in thousands)

 

Term Loan

Term loan with Capital One N.A. due August 2026

$

68,250

$

69,563

Mortgage Loans

Mortgage payable with East West Bank due June 2027

8,231

8,353

Other Loans and Payment Obligations

French government loans due December 2026

240

269

Line of Credit Facilities

    

    

    

    

Line of credit facility with China Merchant Bank

Revolving line of credit facility with Capital One N.A. due August 2026

Equipment under Finance Leases

 

621

 

398

Total debt

 

77,342

 

78,583

Less current portion of long-term debt

 

1,680

 

2,202

Less: Loan issuance costs

1,651

1,605

Long-term debt, net of current portion and unamortized debt issuance costs

$

74,011

$

74,776

-20-

Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As of September 30, 2022, 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 the mortgage loan with East West Bank, as well as the term loan with Capital One N.A., the Company has entered into fixed interest rate swap contracts to exchange the variable interest rates for a fixed interest rates. The interest rate swap contracts are recorded at fair value in the other assets line in the condensed consolidated balance sheets. Gains from changes in the fair values of interest rate swaps were $2.0 million and $5.9 million for the three and nine months ended September 30, 2022, respectively.

Covenants

At September 30, 2022 and December 31, 2021, the Company was in compliance with all of its debt covenants.

Note 15. Income Taxes

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

Three Months Ended

Nine Months Ended

 

September 30, 

September 30, 

 

    

2022

    

2021

    

2022

    

2021

 

(in thousands)

 

Income before taxes

$

22,596

$

37,646

$

74,780

$

56,977

Income tax provision

6,559

 

6,686

16,187

 

13,436

Income before equity in losses of unconsolidated affiliate

$

16,037

$

30,960

$

58,593

$

43,541

Income tax provision as a percentage of income before income taxes

29.0

%

 

17.8

%

21.6

%

 

23.6

%

The change in the Company’s effective tax rate for the three and nine months ended September 30, 2022, was primarily due to differences in pre-tax income 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 income tax assets will be realized. Ultimately, realization depends on the existence of future taxable income. Management considers sources of taxable income such as future reversal of existing deferred taxable temporary differences, tax-planning strategies, and projected future taxable income.

The Company continues to record a full valuation allowance on AFP’s net deferred income tax assets and will continue to do so until AFP generates sufficient taxable income to realize its deferred income tax assets.

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 expense by an immaterial amount for the three and nine months ended September 30, 2022 and 2021.

Note 16. Stockholders' Equity

Share Buyback Program

Pursuant to the Company’s existing share buyback program, the Company purchased 478,255 and 719,263 shares of its common stock during the three and nine months ended September 30, 2022, for total consideration of $14.5 million and $21.8 million, respectively. The Company purchased 317,212 and 820,637 shares of its common stock during the three and nine months ended September 30, 2021, for total consideration of $6.1 million and $15.4 million, respectively.

-21-

Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In May 2022, the Company’s Board of Directors authorized a $25.0 million increase to the Company’s share buyback program and in November 2022, the Company’s Board of Directors authorized a $50.0 million increase to the Company’s share buyback program, which is expected to continue for an indefinite period of time. Since the inception of the program, the Company’s Board of Directors have authorized an aggregate of $235.0 million to the Company’s share buyback program. 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 condensed consolidated balance sheets.

Amended and Restated 2015 Equity Incentive Plan

As of September 30, 2022, the Company reserved an aggregate of 6,499,678 shares of common stock for future issuance under the Amended and Restated 2015 Equity Incentive Plan, or the 2015 Plan, including 1,192,873 shares, which were reserved in January 2022 pursuant to the evergreen provision in the 2015 Plan.

2014 Employee Stock Purchase Plan

As of September 30, 2022, the Company has issued 1,039,832 shares of common stock under the ESPP, and 960,168 shares of its common stock remain available for issuance under the ESPP.

In May 2022, the Company issued 85,376 shares at a weighted-average purchase price of $16.88 per share under the ESPP. For the three and nine months ended September 30, 2022, the Company recorded ESPP expense of $0.2 million and $0.6 million, respectively. For the three and nine months ended September 30, 2021, the Company recorded ESPP expense of $0.2 million and $0.5 million, respectively.

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 ESPP 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. Compensation cost for all share-based payments granted with service-based graded vesting schedules is recognized using the straight-line method over the requisite service period.

The weighted-averages for key assumptions used in determining the fair value of options granted during the three and nine months ended September 30, 2022 and 2021, are as follows:

Three Months Ended

Nine Months Ended

 

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

 

Average volatility

 

42.7

%  

41.4

%  

41.0

%

42.1

%

Average risk-free interest rate

 

2.9

%  

1.1

%  

2.3

%

1.2

%

Weighted-average expected life in years

 

6.3

6.3

6.1

6.1

Dividend yield rate

 

%  

%  

%

%

-22-

Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A summary of option activity for the nine months ended September 30, 2022, 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, 2021

8,455,721

$

15.67

 

    

    

    

Options granted

 

792,441

34.35

Options exercised

 

(1,156,664)

14.70

Options cancelled

 

(91,251)

19.56

Options expired

 

(5,614)

13.79

Outstanding as of September 30, 2022

 

7,994,633

$

17.62

5.17

88,639

Exercisable as of September 30, 2022

 

5,614,323

$

15.65

3.86

69,885

Vested and expected to vest as of September 30, 2022

7,788,485

$

17.45

5.07

87,242

(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 September 30, 2022.

For the three and nine months ended September 30, 2022, the Company recorded an expense of $2.0 million and $6.5 million, respectively, related to stock options granted under all plans. For the three and nine months ended September 30, 2021, the Company recorded an expense of $1.9 million and $6.2 million, respectively, related to stock options granted under all plans.

Information relating to option grants and exercises is as follows:

Three Months Ended

Nine Months Ended

 

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

 

(in thousands, except per share data)

 

Weighted-average grant date fair value per option share

$

14.40

$

8.00

$

14.75

$

7.62

Intrinsic value of options exercised

 

1,421

 

2,176

 

20,131

 

5,292

Cash received from options exercised

 

1,483

 

3,953

 

18,402

 

12,122

Total fair value of the options vested during the period

 

167

 

112

 

8,157

 

8,162

A summary of the status of the Company’s non-vested options as of September 30, 2022, and changes during the nine months ended September 30, 2022, is presented below:

    

    

Weighted-Average

 

Grant Date

 

Options

Fair Value

 

Non-vested as of December 31, 2021

2,848,934

$

6.95

Options granted

 

792,441

 

14.75

Options vested

 

(1,169,814)

 

6.97

Options forfeited

 

(91,251)

 

8.41

Non-vested as of September 30, 2022

 

2,380,310

 

9.48

As of September 30, 2022, there was $16.1 million of total unrecognized compensation cost, net of forfeitures, related to non-vested stock option based compensation arrangements granted under all plans. The cost is expected to be recognized over a weighted-average period of 2.7 years and will be adjusted for future changes in estimated forfeitures.

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Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 nine months ended September 30, 2022, the Company recorded total expenses of $2.0 million and $6.4 million, respectively, related to RSU awards granted under all plans. During the three and nine months ended September 30, 2021, the Company recorded expenses of $1.9 million and $6.2 million, respectively, related to RSU awards granted under all plans.

As of September 30, 2022, there was $17.1 million of total unrecognized compensation cost, net of forfeitures, related to non-vested RSU-based compensation arrangements granted under all plans. The cost is expected to be recognized over a weighted-average period of 2.7 years and will be adjusted for future changes in estimated forfeitures.

Information relating to RSU grants and deliveries is as follows:

Total Fair Market

 

Total RSUs

Value of RSUs

 

    

Issued

    

Issued(1)

 

(in thousands)

 

RSUs outstanding at December 31, 2021

 

1,184,842

RSUs granted

 

339,397

$

11,675

RSUs forfeited

 

(39,119)

RSUs vested(2)

 

(477,274)

RSUs outstanding at September 30, 2022

 

1,007,846

(1)The total fair market value is derived from the number of RSUs granted times the current stock price on the date of grant.
(2)Of the vested RSUs, 181,271 shares of common stock were surrendered to fulfill tax withholding obligations.

The 2018 ANP Equity Incentive Plan

In December 2018, ANP’s board of directors approved the 2018 Plan, which was set to expire in December 2023. The 2018 Plan permitted the grant of stock options and other equity awards in ANP shares to ANP employees.

During the second quarter of 2021, in connection with the ANP restructuring, the 2018 Plan was terminated.

At the time the 2018 Plan was terminated, the number of stock options outstanding under the 2018 Plan was 5,018,880. As part of the termination, ANP cash settled 4,091,080 stock options, of which 1,944,771 stock options were vested and 2,146,309 stock options were unvested, for $0.8 million, which approximated the fair value of these awards at the time of settlement. The cash settlement of these awards was recorded as a reduction in equity.

For the remaining 927,800 stock option awards that were outstanding under the 2018 Plan at the time the 2018 Plan was terminated, of which 56,925 stock options were vested and 870,875 were unvested, the Company cancelled these awards and issued replacement awards under the 2015 Plan. The modified awards vest over periods ranging from 1 to 2 years and have a 10-year contractual term. The cancellation and replacement of the awards was accounted for as a modification in accordance with ASC 718.

As a result of the modification, the cost to the Company was $2.3 million, of which $1.8 million was recorded as share-based compensation within general and administrative expenses in the condensed consolidated statement of operations

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Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

for the nine months ended September 30, 2021, and the remaining $0.5 million is being recognized over the vesting period of the modified awards.

Share-based Compensation Expense

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

Three Months Ended

Nine Months Ended

 

September 30, 

September 30, 

2022

2021

2022

 

2021

 

(in thousands)

 

Cost of revenues

    

$

915

    

$

889

    

$

3,238

    

$

2,967

Operating expenses:

Selling, distribution, and marketing

 

178

 

164

 

540

 

438

General and administrative

 

2,810

 

2,533

 

8,389

 

10,069

Research and development

 

396

 

333

 

1,389

 

1,363

Total share-based compensation

$

4,299

$

3,919

$

13,556

$

14,837

Note 17. 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 nine months ended September 30, 2022 were approximately $0.5 million and $1.6 million, respectively, compared to the prior year expense of $0.5 million and $1.5 million for the three and nine months ended September 30, 2021, respectively.

Defined Benefit Pension Plan

The Company’s subsidiary, AFP, has an obligation associated with a defined-benefit plan for its eligible employees. 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 2.5% and 1.0% as of September 30, 2022 and December 31, 2021, respectively. The liability is included in other long-term liabilities in the accompanying condensed consolidated balance sheets. The plan is currently unfunded, and the benefit obligation under the plan was $2.5 million and $2.6 million at September 30, 2022 and December 31, 2021, respectively. The Company recorded an immaterial amount of expense under the plan for the three and nine months ended September 30, 2022 and 2021.

Non-qualified Deferred Compensation Plan

In December 2019, the Company established a non-qualified deferred compensation plan. The plan allows certain eligible participants to defer a portion of their cash compensation and provides a matching contribution at the discretion of the Company. The plan obligations are payable upon retirement, termination of employment and/or certain other times in a lump-sum distribution or in installments, as elected by the participant in accordance with the plan. Participants can allocate their deferred compensation amongst various investment options with earnings accruing to the participant. The

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Company has established a Rabbi Trust to fund the plan obligations and to hold the plan assets. Eligible participants began contributing to the plan in January 2020. The plan assets were valued at approximately $3.5 million as of September 30, 2022 and December 31, 2021, respectively. The plan liabilities were valued at approximately $3.6 million as of September 30, 2022, and December 31, 2021, respectively. The plan assets and liabilities are included in other long-term assets and other long-term liabilities, respectively, on the Company’s condensed consolidated balance sheets.

Note 18. Commitments and Contingencies

Purchase Commitments

As of September 30, 2022, the Company has entered into commitments to purchase equipment and raw materials for an aggregate amount of approximately $70.5 million. The Company anticipates that most of these commitments with a remaining term in excess of one year will be fulfilled in 2023.

Note 19. Related Party Transactions

In April 2022, the Company’s Chinese subsidiary, ANP, entered into a contract manufacturing agreement with Hanxin, a related party, whereby Hanxin will develop several active pharmaceutical ingredients and finished products for the Chinese market and will engage ANP to manufacture the products on a cost-plus basis. Hanxin will commit to purchase certain quantities from ANP subject to the terms and conditions set forth in the agreement, including Hanxin filing for and obtaining any required marketing authorizations.

During the three and nine months ended September 30, 2022, the Company recognized $0.3 million of revenue from manufacturing services provided to Hanxin. Receivables from Hanxin as of September 30, 2022 were $0.1 million.

In July 2022, the Company entered into a three-year contract research agreement with Hanxin, a related party, whereby Hanxin will develop Recombinant Human Insulin Research Cell Banks, or RCBs, for the Company and license the RCBs to the Company subject to a fully paid, exclusive, perpetual, transferable, sub-licensable worldwide license. The RCBs will be used by the Company to make Master Cell Banks for one of its product candidates. Per the terms of the agreement with Hanxin, all title to the RCBs developed, prepared and produced by Hanxin in conducting research and development will belong to the Company. The Company will also own any confidential and proprietary information, technology regarding development and manufacturing of the RCBs, which shall include engineering, scientific and practical information and formula, research data, design, and procedures and others to develop and manufacture the RCBs, in use or developed by Hanxin. The total cost of the agreement to the Company shall not exceed approximately $2.2 million, with payments adjusted based on the then current exchange rates. Any additional work or changes to the scope of work requested by the Company will be charged by Hanxin to the Company on a cost plus basis, plus any applicable taxes.

During the three and nine months ended September 30, 2022, the Company paid $0.2 million under this agreement and has accrued an additional $0.2 million payable to Hanxin as of September 30, 2022.

Note 20. Litigation

Regadenoson (0.4 mg/5 mL, 0.08 mg/mL) Patent Litigation

On February 25, 2020, Astellas US LLC, Astellas Pharma US, Inc., and Gilead Sciences, Inc. (collectively, “Astellas-Gilead”) filed a Complaint in the United States District Court for the District of Delaware against IMS for infringement of U.S. Patent Nos. 8,106,183 (the “‘183 patent”), RE47,301 (the “‘301 patent”), and 8,524,883 (the “‘883 patent”) (collectively, “Astellas-Gilead Patents”) with regard to IMS’s ANDA No. 214,252 for approval to manufacture and sell 0.4 mg/5 mL (0.08 mg/mL) intravenous solution of Regadenoson. On March 4, 2020, IMS filed its Answer and Counterclaims. On March 30, 2020, the Court issued an Order allowing the Company to join pending consolidated

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

litigation with five other generic Regadenoson ANDA filers involving similar claims. The Company’s 30-month FDA stay expired August 10, 2022. On January 26, 2022, the Company and Astellas-Gilead reached an agreement to resolve the lawsuit. The parties submitted, and the Court granted on January 27, 2022, a Motion to Dismiss Without Prejudice for Astellas-Gilead’s complaint of infringement against IMS. Under the terms of the agreement, the Company received $5.4 million from Astellas constituting saved litigation expenses. The Company recorded the settlement amount in the other income (expenses) line in its condensed consolidated statement of operations for the nine months ended September 30, 2022.

Other Litigation

The Company is also subject to various other claims, arbitrations, investigations, and lawsuits from time to time arising in the ordinary course of business. In addition, third parties may, from time to time, assert claims against the Company in the forms of letters and other communications.

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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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, 2021, particularly in Item 1A. “Risk Factors”.

Overview

We are a bio-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.

We are currently developing a portfolio of generic abbreviated new drug applications, or ANDAs, biosimilar insulin product candidates and proprietary product candidates, which are in various stages of development and target a variety of indications. Three of the ANDAs and one new drug application, or NDA, are currently on file with the FDA.

Our largest products by net revenues currently include Primatene Mist®, epinephrine, glucagon, phytonadione, lidocaine, and enoxaparin sodium injection. In April 2022, the FDA granted approval of our ganirelix acetate injection 250mg/0.5mL prefilled syringe, which we launched in June 2022. In July 2022, the FDA granted approval of our vasopressin injection, USP 20 Units/mL, 1 mL single dose vial, which we launched in August 2022. In May 2022, the FDA granted approval of our regadenoson injection, 0.08mg/mL, 5mL, single dose prefilled syringe. The timing of the launch of this product is subject to a confidential settlement agreement with the product’s innovator.

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, API, and other components for our products.

In 2021, we completed the restructuring of our Chinese subsidiary, ANP, resulting in the reduction of ANP’s ownership of Hanxin Pharmaceutical Technology Co., Ltd, or Hanxin to 14%, see Note 3 to the condensed consolidated financial statements. As a result of the restructuring, we determined that we have significant influence over Hanxin and as such the retained non-controlling investment in Hanxin is accounted for as an equity method investment. Hanxin continues to be a related party subsequent to the restructuring.

COVID-19 Pandemic

The ongoing COVID-19 pandemic and the resulting containment measures that have been in effect from time to time in various countries and territories since early 2020 have had, and are expected to continue to have, a number of substantial negative impacts on businesses around the world and on global, regional, and national economies, including widespread disruptions in supply chains for a wide variety of products and resulting increases in the prices of many goods and services. Currently, our production facilities in all of our locations continue to operate as they had before the COVID-19 pandemic with few changes, other than for enhanced safety measures intended to prevent the spread of the virus.

Some of our ongoing clinical trials experienced short-term interruptions in the recruitment of patients due to the COVID-19 pandemic, as hospitals prioritized their resources towards the COVID-19 pandemic and governments imposed travel restrictions. Some clinical trials experienced increased expenses due to new protocols to protect participants from COVID-19. Additionally, certain suppliers had difficulties meeting their delivery commitments, and we are experiencing

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longer lead time for components. For example, in the first quarter of 2022, increases in COVID-19 cases in Shanghai, China, led to shutdowns and delays at the ports in Shanghai, which led to temporary delays in shipping certain APIs and starting materials. Future shutdowns could have an adverse impact on our operations. However, the extent of the impact of any future shutdown or delay is highly uncertain and difficult to predict.

It is not possible at this time to estimate the complete impact that COVID-19 could have on our business, including our customers and suppliers, as the effects will depend on future developments, which are highly uncertain and cannot be predicted. Infections may resurge or become more widespread, including due to new variants and the limitation on our ability to travel and timely sell and distribute our products, as well as any closures or supply disruptions, may be prolonged for extended periods, all of which would have a negative impact on our business, financial condition and operating results.

Even after the COVID-19 pandemic has subsided, we may continue to experience an adverse impact on our business due to the continued global economic impact of the COVID-19 pandemic. We cannot anticipate all of the ways in which health epidemics such as COVID-19 could adversely impact our business. See the “Risk Factors” section for further discussion of the possible impact of the COVID-19 pandemic on our business.

Trends and Uncertainties

The Russia-Ukraine conflict and resulting sanctions and other actions against Russia have led to uncertainty and disruption in the global economy. Although the conflict has not had a direct material adverse impact on our revenues or other financial results, one of our insulin API customers in Western Europe, that previously brought our product and resold it into Russia, has not purchased from us this year. We are closely monitoring the events of the Russian-Ukraine conflict and its impact on Europe and throughout the rest of the world. It is not clear at this time how long the conflict will endure, or if it will escalate further, which could further compound the adverse impact to the global economy and consequently affect our results of operations.

Certain other worldwide events and macroeconomic factors, such as international trade relations, new legislation and regulations, taxation or monetary policy changes, political and civil unrest, and inflationary pressures, among other factors, also increase volatility in the global economy. For example, the United States has recently experienced historically high levels of inflation. According to the U.S. Department of Labor, the annual inflation rate for the United States was approximately 7.0% for 2021 and has increased to 8.3% as of September 2022. The existence of inflation in the United States, and global economy has and may continue to result in higher interest rates and capital costs, increased costs of labor, weakening exchange rates and other similar effects.

See the section “Risk Factors” for further discussion of the possible impact of the Russia-Ukraine conflict and other macroeconomic factors on our business.

Business Segments

As of September 30, 2022, 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 Primatene Mist®, epinephrine, glucagon, phytonadione, lidocaine, enoxaparin, naloxone, as well as various other critical and non-critical care drugs. The API segment manufactures and 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.”

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Results of Operations

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

Net revenues

Three Months Ended

 

September 30, 

Change

    

2022

    

2021

    

Dollars

    

%

 

(in thousands)

 

Net revenues

Finished pharmaceutical products

$

117,120

$

108,990

$

8,130

7

%

API

 

3,009

 

3,208

 

(199)

 

(6)

%

Total net revenues

$

120,129

$

112,198

$

7,931

 

7

%

Cost of revenues

Finished pharmaceutical products

$

55,681

$

54,388

$

1,293

 

2

%

API

 

5,938

 

6,627

 

(689)

 

(10)

%

Total cost of revenues

$

61,619

$

61,015

$

604

 

1

%

Gross profit

$

58,510

$

51,183

$

7,327

14

%

as % of net revenues

 

49

%  

 

46

%  

The increase in net revenues of the finished pharmaceutical products for the three months ended September 30, 2022 was due to the following changes:

Three Months Ended

 

September 30, 

Change

    

2022

    

2021

    

Dollars

    

%

 

(in thousands)

 

Finished pharmaceutical products net revenues

Epinephrine

$

19,502

$

13,892

$

5,610

40

%

Primatene Mist®

18,359

16,561

1,798

11

%

Glucagon

14,224

12,189

2,035

17

%

Phytonadione

13,978

11,591

2,387

21

%

Lidocaine

12,621

11,649

972

8

%

Enoxaparin

7,983

8,034

(51)

(1)

%

Naloxone

6,818

8,028

(1,210)

(15)

%

Other finished pharmaceutical products

 

23,635

 

27,046

 

(3,411)

 

(13)

%

Total finished pharmaceutical products net revenues

$

117,120

$

108,990

$

8,130

 

7

%

Sales of epinephrine in the third quarter of 2022 increased $3.3 million due to an increase in average selling price, with the remainder of the increase due to increased unit volume, resulting from higher demand arising from competitor shortages. With the continued success of our advertising campaign, Primatene Mist® sales continued to grow in the third quarter of 2022, primarily due to increased unit volumes. The increase in sales of phytonadione was due to an increase in unit volumes, contributing $1.4 million to sales, and a higher average selling price, which contributed $1.0 million to the increase in sales. Glucagon sales increased due to an increase in inventory levels which allowed us to fill orders for the back to school season. The increase in lidocaine was primarily due to an increase in units for the injectable version. The decrease in naloxone was primary due to lower average selling price. The decrease in other finished pharmaceutical products was primarily due to lower unit volumes of atropine and calcium chloride, largely due to competitors returning to their normal distribution levels. This was partially offset by an increase in unit volume for dextrose, which was in high demand due to competitor shortages during the quarter, as well as the launch of ganirelix, which we launched in June 2022, and vasopressin, which we launched in August 2022.

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We anticipate that sales of naloxone and enoxaparin will continue to fluctuate in the future as a result of changing levels of competition. Sales of epinephrine and other finished pharmaceutical products will fluctuate depending on the ability of our competitors to supply the market.

Sales of API primarily depend on the timing of customer purchases. In May 2021, we amended the Supply Agreement with MannKind Corporation, or MannKind, whereby MannKind’s aggregate total commitment of RHI API under the Supply Agreement was modified and extended for an additional year through 2027, which timeframe would have previously lapsed after calendar year 2026. MannKind agreed to pay us an amendment fee of $2.0 million. We received the first payment of the amendment fee of $1.0 million in June 2021 which we recognized in net revenues during the year ended December 31, 2021. The remaining $1.0 million of the amendment fee was received in January 2022 and relates to the amendments to the 2022 supply level and has been and will continue to be recognized ratably to net revenues throughout the remainder of 2022. We anticipate that sales of API will continue to fluctuate and may decrease due to the inherent uncertainties related to sales to MannKind pursuant to our supply agreement with them. In addition, most of our API sales are denominated in euros, and the fluctuation in the value of euros versus the U.S. dollar has had, and may 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. However, during the third quarter of 2022, we experienced a backlog of approximately $6.5 million for various products, partially as a result of competitor shortages, labor shortages and supplier constraints. We are currently working on resolving backlog related issues and believe that we will be able to reduce the backlog in the near future. 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 increase in sales of epinephrine, Primatene Mist®, phytonadione and glucagon, as well as the launches of ganirelix and vasopressin this year, which are higher-margin products, helped increase our gross margins for the three months ended September 30, 2022.

These increases in gross margins were partially offset by overall increase in labor cost, as well as an increase in the cost for heparin raw material, which is used as the starting material for enoxaparin.

We are experiencing increased costs for labor and certain purchased components. Additionally, the cost of heparin may fluctuate, which could put downward pressure on our gross margins. However, we believe that this trend will be offset by increased sales of our higher-margin products, including Primatene Mist®, glucagon, ganirelix and vasopressin, as well as planned launches in 2023.

Selling, distribution and marketing, and general and administrative

Three Months Ended

 

September 30, 

Change

2022

2021

Dollars

%

 

(in thousands)

 

Selling, distribution, and marketing

    

$

4,784

    

$

4,745

    

$

39

    

1

%

General and administrative

$

11,984

$

10,910

$

1,074

 

10

%

The increase in general and administrative expense was primarily due to an increase in legal and compensation expenses.

We expect that selling, distribution and marketing expenses will continue to increase due to the increase in marketing expenditures for Primatene Mist®. Legal fees may fluctuate from period to period due to the timing of patent challenges and other litigation matters.

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Research and development

Three Months Ended

 

September 30, 

Change

    

2022

    

2021

    

Dollars

    

%

 

(in thousands)

 

Salaries and personnel-related expenses

$

6,217

$

5,934

$

283

 

5

%

Clinical trials

 

2,726

 

234

 

2,492

 

1,065

%

FDA fees

 

29

 

109

 

(80)

 

(73)

%

Materials and supplies

 

5,217

 

205

 

5,012

 

2,445

%

Depreciation

 

2,473

 

2,546

 

(73)

 

(3)

%

Other expenses

 

1,852

 

1,731

 

121

 

7

%

Total research and development expenses

$

18,514

$

10,759

$

7,755

72

%

The increase in research and development expenses is primarily due to an increase expenditures for materials and supplies as a result of in an increase in expenditures on raw materials and components for our AMP-018 and insulin product candidates, as well as an increase in clinical trial expense primarily due to external studies related to our insulin and inhalation product candidate pipeline. This was partially offset by a decrease in expenses in China due to the ANP restructuring in 2021.

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.

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 insulin and inhalation product candidates. These expenditures will include costs of APIs developed internally as well as APIs 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. Over the past year, some of our ongoing clinical trials experienced short term interruptions in the recruitment of patients due to the COVID-19 pandemic, as hospitals prioritized their resources towards the COVID-19 pandemic and government imposed travel restrictions. These conditions may in turn delay spending and delay the results of these trials. Additionally, some clinical trials experienced increased expenses due to new protocols to protect participants from COVID-19.

Other income (expenses), net

Three Months Ended

 

September 30, 

Change

2022

2021

Dollars

%

 

(in thousands)

 

Other income (expenses), net

    

$

(397)

    

$

13,263

    

$

(13,660)

    

NM

During the third quarter of 2021, we completed the restructuring of ANP, whereby our ownership interest in ANP increased to 100% and ANP’s ownership interest in Hanxin was reduced to approximately 14%. As a result of the loss in control over Hanxin, we deconsolidated Hanxin and recorded a $13.6 million gain on deconsolidation. For more information regarding our ANP restructuring, see Note 3 to the condensed consolidated financial statements.

Income tax provision

Three Months Ended

 

September 30, 

Change

    

2022

    

2021

    

Dollars

    

%

 

(in thousands)

 

Income tax provision

$

6,559

$

6,686

$

(127)

(2)

%

Effective tax rate

29

%  

 

18

%  

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Our effective tax rate for the three months ended September 30, 2022 increased in comparison to the three months ended September 30, 2021, primarily due to differences in pre-tax income positions and timing of discrete tax items. For more information regarding our income taxes, see Note 15 to the condensed consolidated financial statements.

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

Net revenues

Nine Months Ended

 

September 30, 

Change

    

2022

    

2021

    

Dollars

    

%

 

(in thousands)

 

Net revenues

Finished pharmaceutical products

$

353,789

$

301,594

$

52,195

 

17

%

API

 

10,175

 

15,287

 

(5,112)

 

(33)

%

Total net revenues

$

363,964

$

316,881

$

47,083

 

15

%

Cost of revenues

Finished pharmaceutical products

$

168,327

$

152,092

$

16,235

 

11

%

API

 

17,945

 

21,284

 

(3,339)

 

(16)

%

Total cost of revenues

$

186,272

$

173,376

$

12,896

 

7

%

Gross profit

$

177,692

$

143,505

$

34,187

24

%

as % of net revenues

 

49

%  

 

45

%  

The increase in net revenues of the finished pharmaceutical products for the nine months ended September 30, 2022, was due to the following changes:

Nine Months Ended

 

September 30, 

Change

    

2022

    

2021

    

Dollars

    

%

 

(in thousands)

 

Finished pharmaceutical products net revenues

Primatene Mist®

$

62,030

$

51,624

$

10,406

20

%

Epinephrine

52,777

38,662

14,115

37

%

Lidocaine

39,253

32,314

6,939

21

%

Phytonadione

37,834

31,577

6,257

20

%

Glucagon

37,003

32,304

4,699

15

%

Enoxaparin

27,138

28,020

(882)

(3)

%

Naloxone

21,424

20,994

430

2

%

Other finished pharmaceutical products

 

76,330

 

66,099

 

10,231

 

15

%

Total finished pharmaceutical products net revenues

$

353,789

$

301,594

$

52,195

 

17

%

Primatene Mist® sales continued to grow in 2022, as a result of increased unit volumes, which was primarily a result of the continued success of our advertising campaign. The increase in sales of epinephrine and lidocaine was primarily due to an increase in unit volumes, arising from high demand due to competitor shortages. The increase in sales of phytonadione was due to an increase in unit volumes, contributing $2.2 million in sales, and a higher average selling price, which contributed $4.1 million to the increase in sales. The increase in sales of glucagon was primarily due to an increase in unit volumes as the prior year period did not include a full year of sales due to glucagon’s launch in the first quarter of 2021. The increase in sales of naloxone was primarily due an increase in unit volumes contributing $2.5 million, which was partially offset by a decrease in average selling price, which caused a decline of $2.1 million. The increase in other finished pharmaceutical products was primarily due to higher unit volumes of calcium chloride, dextrose and sodium bicarbonate, which were in high demand due to competitor shortages, as well as the launch of ganirelix and vasopressin in June 2022 and August 2022, respectively.

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We anticipate that sales of naloxone and enoxaparin will continue to fluctuate in the future as a result of changing levels of competition. Sales of epinephrine and other finished pharmaceutical products will fluctuate depending on the ability of our competitors to supply the market.

Sales of API primarily depend on the timing of customer purchases. In May 2021, we amended the Supply Agreement with MannKind Corporation, whereby MannKind’s aggregate total commitment of RHI API under the Supply Agreement was modified and extended for an additional year through 2027, which timeframe would have previously lapsed after calendar year 2026. MannKind has agreed to pay us an amendment fee of $2.0 million. We received the first payment of the amendment fee of $1.0 million in June 2021 which we recognized in net revenues during the year ended December 31, 2021. The remaining $1.0 million of the amendment fee was received in January 2022 and relates to the amendments to the 2022 supply level and has been and will continue to be recognized ratably to net revenues throughout the remainder of 2022. We anticipate that sales of API will continue to fluctuate and may decrease due to the inherent uncertainties related to sales to MannKind pursuant to our supply agreement with them. In addition, most of our API sales are denominated in euros, and the fluctuation in the value of euros versus the U.S. dollar has had, and may 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. However, during the third quarter of 2022, we experienced a backlog of approximately $6.5 million for various products, partially brought on by competitor shortages, labor shortages and supplier constraints. We are currently working on resolving these issues and believe that we will be able to reduce the backlog in the near future. 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 increase in sales of Primatene Mist®, epinephrine and glucagon, which are higher-margin products, helped increase our gross margins for the nine months ended September 30, 2022. These increases in gross margins were partially offset by overall increase in labor cost, as well as an increase in the cost for heparin raw material, which is used as the starting material for enoxaparin.

We are experiencing increased costs for labor and certain purchased components. Additionally, the cost of heparin may fluctuate, which could put downward pressure on our gross margins. However, we believe that this trend will be offset by increased sales of our higher-margin products, including Primatene Mist®, glucagon, vasopressin and ganirelix.

Selling, distribution and marketing, and general and administrative

Nine Months Ended

    

 

September 30, 

Change

    

2022

    

2021

    

Dollars

    

%

 

(in thousands)

 

Selling, distribution, and marketing

$

16,059

$

13,411

$

2,648

    

20

%

General and administrative

$

34,433

$

40,813

$

(6,380)

 

(16)

%

The increase in selling, distribution and marketing expenses was primarily due to increased freight expenses. The decrease in general and administrative expense was primarily due to a decrease in legal expenses and a decrease in expenses in China due to the ANP restructuring in 2021.

We expect that selling, distribution and marketing expenses will continue to increase due to the increase in marketing expenditures for Primatene Mist®. Legal fees may fluctuate from period to period due to the timing of patent challenges and other litigation matters.

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Research and development

Nine Months Ended

 

September 30, 

Change

    

2022

    

2021

    

Dollars

    

%

 

(in thousands)

 

Salaries and personnel-related expenses

$

18,767

$

20,538

$

(1,771)

 

(9)

%

Clinical trials

 

3,905

 

2,575

 

1,330

 

52

%

FDA fees

 

86

 

189

 

(103)

 

(54)

%

Materials and supplies

 

21,747

 

5,816

 

15,931

 

274

%

Depreciation

 

7,647

 

8,439

 

(792)

 

(9)

%

Other expenses

 

5,383

 

6,089

 

(706)

 

(12)

%

Total research and development expenses

$

57,535

$

43,646

$

13,889

32

%

The increase in research and development expenses is primarily due to an increase in materials and supplies as a result of in an increase in expenditures on raw materials and components for our AMP-018 and insulin products. Additionally, clinical trial expense increased due to external studies related to our insulin and inhalation product pipeline.

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.

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 insulin and inhalation product candidates. These expenditures will include costs of APIs developed internally as well as APIs 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. Over the past year, some of our ongoing clinical trials experienced short term interruptions in the recruitment of patients due to the COVID-19 pandemic, as hospitals prioritized their resources towards the COVID-19 pandemic and government imposed travel restrictions. These conditions may in turn delay spending and delay the results of these trials. Additionally, some clinical trials experienced increased expenses due to new protocols to protect participants from COVID-19.

Other income (expenses), net

Nine Months Ended

 

September 30, 

Change

    

2022

    

2021

    

Dollars

    

%

 

(in thousands)

 

Other income (expenses), net

$

5,692

$

11,615

$

(5,923)

    

NM

In January 2022, we received a settlement of $5.4 million in connection with the Regadenoson patent litigation. For more information regarding our litigation matters, see Note 19 to the condensed consolidated financial statements. In the third quarter of 2021, we completed the restructuring of ANP, whereby our ownership interest in ANP increased to 100% and ANP’s ownership interest in Hanxin and its subsidiaries was reduced to approximately 14%. As a result of the loss in control over Hanxin, we deconsolidated Hanxin and recorded a $13.6 million gain on deconsolidation. For more information regarding our ANP restructuring, see Note 3 to the condensed consolidated financial statements.

Income tax provision

Nine Months Ended

 

September 30, 

Change

    

2022

    

2021

    

Dollars

    

%

 

(in thousands)

 

Income tax provision

$

16,187

$

13,436

$

2,751

20

%

Effective tax rate

 

22

%  

 

24

%  

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Our effective tax rate for the nine months ended September 30, 2022 decreased in comparison to the nine months ended September 30, 2021, primarily due to differences in pre-tax income positions and timing of discrete tax items. For more information regarding our income taxes, see Note 15 to the condensed consolidated financial statements.

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 and China, including a significant increase in capital expenditures throughout the remainder of 2022. We plan to fund this facility expansion with cash flows from operations. 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 September 30, 2022, our foreign subsidiaries collectively held $15.3 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 from the date of filing of this Quarterly Report on Form 10-Q. We expect additional cash flows to be generated in the longer term from future 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, debt securities, depositary shares, warrants, subscription rights, purchase contracts, or units. 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 $67.7 million to $282.0 million at September 30, 2022, compared to $214.3 million at December 31, 2021.

Cash Flows from Operations

The following table summarizes our cash flows used in operating, investing, and financing activities for the nine months ended September 30, 2022 and 2021:

Nine Months Ended September 30, 

 

    

2022

2021

 

(in thousands) 

 

Statement of Cash Flow Data:

Net cash provided by (used in)

Operating activities

$

73,955

$

57,553

Investing activities

 

(32,548)

 

(16,718)

Financing activities

 

(10,277)

 

(28,322)

Effect of exchange rate changes on cash

 

(239)

 

(175)

Net increase in cash, cash equivalents, and restricted cash

$

30,891

$

12,338

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Sources and Use of Cash

Operating Activities

Net cash provided by operating activities was $74.0 million for the nine months ended September 30, 2022, which included net income of $57.5 million. Non-cash items comprised primarily of $21.3 million of depreciation and amortization and $13.6 million of share-based compensation expense.

Additionally, for the nine months ended September 30, 2022, there was a net cash outflow from changes in operating assets and liabilities of $18.3 million, which resulted from an increase in inventories, as the company increased purchases of certain raw materials and components, which was partially offset by an increase in accounts payable and accrued liabilities. Accounts payable and accrued liabilities increased primarily due to the timing of payments.

Net cash provided by operating activities was $57.6 million for the nine months ended September 30, 2021, which included net income of $43.5 million. Non-cash items comprised primarily of $20.2 million of depreciation and amortization, and $14.8 million of share-based compensation expense and a $13.6 million gain relating to the deconsolidation of Hanxin and its subsidiaries as result of the ANP restructuring during the third quarter of 2021. Additionally, for the nine months ended September 30, 2021, there was a net cash outflow from changes in operating assets and liabilities of $13.7 million, which resulted from an increase in accounts receivable as well as an increase in inventories, which was partially offset by an increase in accounts payable and accrued liabilities. Accounts payable and accrued liabilities increased primarily due to the timing of payments. The increase in accounts receivable was due to both increases in sales and the timing of sales.

Investing Activities

Net cash used in investing activities was $32.5 million for the nine months ended September 30, 2022, primarily as a result of $17.7 million in purchases of property, plant, and equipment, which included $11.1 million incurred in the United States, $0.9 million in France, and $5.7 million in China. Additionally, net cash outflows from short-term investing activities during the period was $15.1 million.

Net cash used in investing activities was $16.7 million for the nine months ended September 30, 2021, primarily as a result of $20.6 million in purchases of property, plant, and equipment, which included $11.0 million incurred in the United States, $0.6 million in France, and $9.0 million in China, offset by, increase in cash of $5.0 million relating to short-term investments.

Financing Activities

Net cash used in financing activities was $10.3 million for the nine months ended September 30, 2022, primarily as a result of purchases of $21.8 million of treasury stock, which was partially offset by $13.6 million in net proceeds from the settlement of share-based compensation awards under our equity plan. Additionally, we also made $1.7 million in principal payments on our long-term debt.

Net cash used in financing activities was $28.3 million for the nine months ended September 30, 2021, primarily as a result of $54.0 million in payments relating to the purchase of additional ANP ownership interest in connection with the ANP restructuring completed during the third quarter of 2021 (see Note 3 to the condensed consolidated financial statements). We borrowed $70.0 million in connection with a credit agreement with Capital One N.A., which was partially offset by $37.3 million in principle payments of our long-term debt and lines of credit. We used $15.4 million to purchase treasury stock and received $10.3 million in net proceeds from the settlement of share-based compensation awards under our equity plans.

Indebtedness

For more information regarding our outstanding indebtedness, see “Part I – Item 1. Financial Statements – Notes to Condensed Consolidated Financial Statements – Debt”.

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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, 2021. There have been no material changes to our critical accounting policies as compared to the critical accounting policies as described in our Annual Report on Form 10-K for the year ended December 31, 2021.

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements, see “Part I – Item 1. Financial Statements – Notes to Condensed 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

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 May 17 through May 25, 2022, our IMS facility in South El Monte, California was subject to routine cGMP inspection by the FDA. The inspection included a review of compliance with FDA regulations relating to Good Manufacturing Practices. The inspection resulted in one observation on Form 483. We responded to that observation. We believe that our response to the observation will satisfy the requirements of the FDA and that no significant further actions will be necessary.

From May 17, 2022 to June 30, 2022, five of our clinical trial sites were subject to pre-approval biomonitoring inspections by the FDA. The inspections included a review of the clinical trial data to support one of our pending applications. Each inspection resulted in no Form 483 findings. No further actions will be necessary.

On June 21, 2022, our IMS facility in South El Monte, California was subject to routine inspection by the DEA. The inspection included a review of manufacture, storage and handling of our controlled substances. The inspection resulted in no findings. No further actions will be necessary.

From July 18 through July 21, 2022, our Amphastar facility in Rancho Cucamonga, California was subject to a remote pre-approval inspection by the FDA. The inspection included a review of the analytical clinical trial sample testing data to support one of our pending applications. 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

Except for the broad, ongoing effects of the COVID-19 pandemic as a result of its negative impact on the global economy and financial markets and the impacts of the ongoing Russian invasion of Ukraine, there have been no material changes in market risk from the information provided in our Annual Report on Form 10-K for the year ended December 31, 2021. We are exposed to market risk in the ordinary course of business. 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).

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 September 30, 2022, 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 Condensed 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, 2021, filed with the Securities and Exchange Commission on March 11, 2022.

Our business may be adversely affected by the ongoing COVID-19 pandemic and the related challenging macroeconomic conditions globally.

The ongoing COVID-19 pandemic, including the emergence of variants, has continued to impact worldwide economic activity and financial markets. While four vaccines have received regulatory approval or Emergency Use Authorization from the FDA, the COVID-19 pandemic remains a challenge to our business until it is abated. Mass and rapid production of the vaccines, for example, has placed increased pressure on the availability of supplies that are also used in our products, such as glass vials and needles. The COVID-19 pandemic may also disrupt the operations of our customers, suppliers and partners for an indefinite period of time, including as a result of travel restrictions and/or business shutdowns, all of which could negatively impact our business and results of operations, including cash flows. Disruptions to our manufacturing partners and suppliers could result in disruption to the production of our products and failure to satisfy demand. For example, China has adopted and continues to rely upon a “zero-COVID” policy pursuant to which it has declared a number of total and partial lockdowns in cities throughout China adversely affecting supply chains worldwide. While these measures may be relaxed or revised in some areas, there is no guarantee these measures will not be reinstated or resumed due to additional variants of COVID-19 or the inability or ineffectiveness of public health measures to limit the further spread of COVID-19. More generally, the ongoing COVID-19 pandemic could continue to adversely affect economies and financial markets globally and nationally, including inflationary pressures and changes in interest rates, which could decrease spending and adversely affect demand for our products and harm our business and results of operations. To the extent macroeconomic uncertainty persists or the COVID-19 pandemic or macroeconomic conditions worsen, we may experience a continuing adverse effect on the demand for some of our products. The degree of impact of the COVID-19 pandemic and the related challenging macroeconomic conditions globally on our business will depend on several factors, such as the duration and the extent of the pandemic, as well as actions taken by governments, businesses, and consumers in response to the pandemic and the challenging macroeconomic conditions globally, all of which continue to evolve and remain uncertain at this time.

As a result of the consequences of the COVID-19 pandemic, FDA has issued various COVID-19 related guidance documents applicable to biopharmaceutical manufacturers and clinical trial sponsors. For example, in March 2020, the FDA issued a guidance, which the FDA subsequently updated, on conducting clinical trials during the pandemic, which describes a number of considerations for sponsors of clinical trials impacted by the pandemic, including the requirement to include in the clinical trial report contingency measures implemented to manage the clinical trial, among others. The FDA also issued a guidance on good manufacturing practice considerations for responding to COVID-19 infection in employees in drug products manufacturing, and a guidance on review timelines for applicant responses to Complete Response Letters when a facility assessment is needed during the COVID-19 public health emergency. These and future guidance documents and regulatory requirements, including future legislation, may require us to develop and implement new policies and procedures, make significant adjustments to our clinical trials, or increase the amount time and resources needed for regulatory compliance, which may impact our clinical development plans and timelines.

Some of our ongoing clinical trials have experienced short term interruptions in the recruitment of patients due to the COVID-19 pandemic, as hospitals prioritized their resources toward the COVID-19 pandemic and governments imposed travel restrictions. Additionally, protocols at certain clinical sites have changed which could slow down the pace of clinical trials while also increasing their cost. These conditions may in turn delay spending and delay the results of these

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trials. Additionally, certain suppliers delayed shipments to us in 2021 and throughout 2022. These delays may have been caused by manufacturing disruptions due to the COVID-19 pandemic. For example, in the first quarter of 2022, increases in COVID-19 cases in Shanghai, China, led to shutdowns and delays at the ports in Shanghai, which led to temporary delays in shipping certain APIs and starting materials. Future shutdowns could have an adverse impact on our operations. However, the extent of the impact of any future shutdown or delay is highly uncertain and difficult to predict. Shanghai’s delays did not ultimately cause delays in our manufacturing, but future delays could cause manufacturing disruptions at our factories.

Any of the negative impacts of the ongoing COVID-19 pandemic and the related challenging macroeconomic conditions, including, among others, those described above, alone or in combination with others, may have a material adverse effect on our business and operations, results of operations, financial condition, and cash flows. It is not possible at this time to estimate the complete impact that the COVID-19 pandemic and the related challenging economic conditions could have on our business, as the impact will depend on future developments, which are highly uncertain and cannot be predicted. Macroeconomic conditions may continue to worsen leading to changes in monetary policy and other responses from governmental bodies, infections may resurge or become more widespread and the limitation on our ability to travel and timely sell and distribute our products, as well as any closures or supply disruptions, may be enacted or extended for longer periods of time, each of which alone or in combination with others, would have a negative impact on our business, financial condition and operating results. We will continue to monitor the impact of the COVID-19 pandemic and the related challenging macroeconomic conditions on all aspects of our business.

Because a portion of our manufacturing takes place in China, a significant disruption in the construction or operation of our manufacturing facility in China, political unrest in China, tariffs, impact of outbreaks of health epidemics, such as the COVID-19 pandemic, or changes in social, political, trade, health, economic, environmental, or climate-related conditions or in laws, regulations and policies governing foreign trade could materially and adversely affect our business, financial condition and results of operations.

We currently manufacture the starting material for Amphadase® and enoxaparin as well as the APIs for isoproterenol and nitroprusside at our manufacturing facility in China, and we plan to use this facility to manufacture several of the APIs for products in our pipeline. Additionally, we intend to continue to invest in the expansion of this manufacturing facility. Our manufacturing facility and operations in China involve significant risks, including:

disruptions in the construction of the manufacturing facility;
interruptions to our operations in China or the inability of our manufacturing facility to produce adequate quantities of raw materials or APIs to meet our needs as a result of natural catastrophic events or other causes beyond our control such as power disruptions or widespread disease outbreaks, including the recent outbreaks that impact animal-derived products, such as the importation of pig-derived crude heparin from countries impacted by the African swine flu, and the ongoing COVID-19 pandemic, which has resulted in and may in the future result in, business closures, transportation restrictions, import and export complications, and otherwise cause shortages in the supply of raw materials or cause disruptions in our manufacturing capability;
product supply disruptions and increased costs as a result of heightened exposure to changes in the policies of the Chinese government, political unrest or unstable economic conditions in China, including China’s ongoing commitment to a “zero COVID” policy;
the imposition of additional tariffs, export controls or other trade barriers as a result of changes in social, political, and economic conditions or in laws, regulations, and policies governing foreign trade, including U.S. and foreign export controls such as new U.S. controls preventing the export of a wide-range of items to Russia and new controls impacting the ability to send certain products and technology including chips and chip-related technology and software to China without an export license and the addition of new China-based entities to certain U.S. restricted party lists such as the Entity List and Unverified List, trade sanctions and import laws and regulations, the tariffs previously implemented and additional tariffs that have been proposed by the U.S. government on various imports from China and by the Chinese government on certain U.S. goods, the scope and duration of which, if implemented, remain uncertain;

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the nationalization or other expropriation of private enterprises or intellectual property by the Chinese government, which could result in the total loss of our investment in China; and
interruptions to our manufacturing or business operations resulting from geo-political actions, including war and terrorism such as the war in Ukraine, natural disasters including earthquakes, typhoons, floods, and fires, or outbreaks of health epidemics, or outbreaks in livestock or animals that impact or restrict importation, use, or distribution of animal-derived products.

Any of these matters could materially and adversely affect our business and results of operations. These interruptions or failures could impair our ability to operate our business, impede the commercialization of our product candidates or delay the introduction of new products, impact our product quality, or impair our competitive position.

We are actively monitoring and assessing the ongoing impact of the COVID-19 pandemic on our business. This includes evaluating the impact on our employees, suppliers, and logistics providers as well as evaluating governmental actions being taken to curtail the spread of the virus. For example, in the first quarter of 2022, increases in COVID-19 cases in Shanghai, China, led to shutdowns and delays at the ports in Shanghai. However, the extent of any future shutdown or delay is highly uncertain and difficult to predict. Any material adverse effect on our employees, suppliers, and logistics providers could have a material adverse effect on our manufacturing operations in China or the supply of raw materials or APIs originating from China.

Our business may be affected by new sanctions and export controls targeting Russia and other responses to Russia's invasion of Ukraine.

As a result of Russia's invasion of Ukraine, the U.S., the U.K. and the EU governments, among others, have developed coordinated sanctions and export-control measure packages.

Based on the public statements to date, these packages include:

comprehensive financial sanctions against major Russian banks (including SWIFT cut off);

additional designations of Russian individuals with significant business interests and government connections;

designations of individuals and entities involved in Russian military activities; and

enhanced export controls and trade sanctions targeting Russia's imports of a wide range of goods as a whole, including potentially tighter controls on exports and reexports of items previously subject to only a low level of control, stricter licensing policy with respect to issuing export licenses, and/or increased use of “end-use” controls to block or impose licensing requirements on exports.

We currently sell APIs indirectly to Russian customers. The imposition of enhanced export controls and economic sanctions on transactions with Russia and Russian entities by the U.S., the U.K., and/or the EU could prevent us from selling our products to Russian customers. In addition, even if a Russian entity is not formally subject to sanctions, customers of such Russian entity may decide to reevaluate, or cancel projects with such entity, and such actions could have a similar impact on us as if sanctions were applied directly as described above. Depending on the extent and breadth of new sanctions or export controls that may be imposed against Russia, it is possible that our business, results of operations and financial condition could be adversely affected.

Our business and operations have been impacted in the past, and may be impacted in the future, in the event of system breach or failure.

We, our collaborators, third-party providers, distributors, customers and other contractors utilize information technology systems and networks to transmit, store and otherwise process electronic data in connection with our business activities, including our supply chain processes, operations and communications. This includes our clinical data and business proprietary information, Electronic Data Interchange, or EDI, on purchase orders, invoices, chargebacks, etc. We, and

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others on our behalf, also collect, transmit, store and otherwise process certain data relating to individuals, including about our personnel, business partners, and others, which may be subject to applicable data protection, security and privacy laws and regulations that require adoption of minimum information security standards. The cost of compliance with applicable data protection, security and privacy laws and regulations have increased and may increase in the future.

Despite our implementation of security measures to protect the confidentiality, integrity, and availability of the systems, networks and data within our control from various threats (e.g., cyber-attacks, system breaches, malware, viruses, hacking, fraudulent use, social engineering attacks, phishing attacks, ransomware attacks, credential-stuffing attacks, denial-of-service attacks, unauthorized access, insider threats, accidental disclosures, intellectual property theft and economic espionage, exploitable vulnerabilities, defects or bugs in our or our third-party providers’ systems, natural disasters, war, terrorism, telecommunications and electrical outages, breakdowns, damage, interruptions), we have experienced and may continue to experience cyber-attacks of varying degrees from time to time. For example, in the first quarter of 2022, our Chinese subsidiary, ANP, was subject to a security incident that resulted in a temporary disruptions to some of their internal computer systems. We are currently working with ANP to improve and add additional security measures to their systems and networks. We have incurred costs to respond to the ANP incident. In addition, in the second quarter of 2020, we were subject to a security incident that resulted in a temporary disruption to some of our internal computer systems. In response to this incident, we engaged a third-party forensic expert to investigate, and determined that cyber criminals illegally obtained certain personal information of certain current and former employees. We notified affected individuals and regulators, as we deemed was required or appropriate. We have incurred cost to respond to this incident, and we expect to continue to incur cost to support our efforts to enhance our security measures. Our systems and networks and the systems and networks of third parties that support us and our services may be breached or disrupted due to these threats. The size and complexity of our systems may make them potentially vulnerable to breakdown or interruption, whether due to computer viruses or other causes, which may result in loss of data or the impairment of production and other supply chain processes, adversely affecting our business.

Techniques used to sabotage or obtain unauthorized access to systems and networks are constantly evolving and, in some instances, are not identified until or after they are launched against a target. We and our third-party providers may be unable to anticipate these techniques, discover threats and react in a timely manner, or implement adequate preventative or mitigating measures. Further, system breaches, malware, ransomware, computer hacking, and insider threats have become more prevalent. For example, companies have experienced an increase in phishing and social engineering attacks from third parties in connection with working remotely as a result of the ongoing COVID-19 pandemic. We and our third-party providers who may be operating in remote work environments may have increased security risks, due to increased use of home Wi-Fi networks and virtual private networks, as well as increased disbursement of physical machines. Also, due to political uncertainty and military actions associated with Russia’s invasion of Ukraine, we and our third-party providers are vulnerable to heightened risks of cyber threats and cyber-attacks from or affiliated with nation-state actors, including attacks that could materially disrupt our systems and operations, supply chain, and ability to produce, sell and distribute our products and services. While we implement security measures designed to reduce these risks, there is no guarantee that these measures will be adequate to safeguard all systems and networks. Any failure to maintain performance, reliability, security and availability of our systems and networks may result in accidental or unlawful destruction, damage, loss, unavailability, alteration, impairment, misuse, unauthorized disclosure of, or unauthorized access to our data, including personal information.

In addition, potential legal, regulatory, contractual, financial, operational, and reputational harm may arise from the accidental or unlawful destruction, damage, loss, unavailability, alteration, impairment, misuse, unauthorized disclosure of, or unauthorized access to our systems, networks or data, including data which is transmitted, stored or otherwise processed by us or by collaborators, third-party providers, distributors and other contractors on our behalf. For example:

The accidental or unlawful loss, unavailability or alteration of clinical trial data from completed or ongoing clinical trials for any of our product candidates could affect our ability to operate, result in delays in our development and regulatory approval efforts, and significantly increase our costs to recover or reproduce the data.
Any security incident may require costly response and remediation efforts, trigger notification obligations under breach notification laws or contractual notification requirements, result in litigation or adverse regulatory action arising from or related to such an incident or event, damage our reputation, and result in significant additional

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expense to implement further data protection measures. Integrating the systems and data of any acquired entity may increase these risks due to unforeseen threats and vulnerabilities.
Similarly, any security incident experienced by our collaborators, third-party providers, distributors and other contractors may hinder our product development, supply chain, other business operations, or our regulatory and contractual obligations to others and could also give rise to litigation or adverse regulatory action.

In an effort to ensure appropriate oversight of cyber security issues and risks, management now updates the Board of Directors on cyber security matters on a quarterly basis, and the Board of Directors has assigned oversight of cyber security to the Audit Committee. Additionally, the Company has a security training and compliance program, which employees with access to information technology, must complete annually or more often, if deemed necessary or appropriate.

There can be no assurance that we will be successful in preventing security incidents nor that we will be successful in mitigating their effects, despite the implementation of security measures for systems, networks and data within our control. Similarly, there can be no assurance that our collaborators, third-party providers, distributors and other contractors will be successful in protecting our data on their systems or in protecting other systems upon which we may rely. Furthermore, breach notification laws are not consistent among jurisdictions, and compliance and other measures in the event of a security incident could result in a substantial cost and diversion of resources and distract management and technical personnel in efforts to investigate or correct the security incident, address and eliminate vulnerabilities and prevent future security incidents, and remediate the security incident, which repairing systems and responding to claims of damages for actual or asserted contract breaches. Any such security incident could have a material adverse effect on our business and prospects.

Although we maintain cyber insurance coverage that may cover certain of our losses in connection with a security incident, we cannot be certain our insurance coverage will be adequate for losses actually incurred, that insurance will continue to be available to us on commercially reasonable terms (if at all) or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, or denials of coverage, could have a material adverse effect on our business, including our financial condition, results of operations and reputation.

Complying with laws in the U.S., Europe, and other jurisdictions that impose restrictive regulations addressing the collection, use, and other processing of personal information may be expensive, and failure to comply with such laws and regulations could cause substantial harm to our business.

We also must comply with data protection, security and privacy requirements. Compliance with laws, rules and regulations regarding privacy, security and protection of personal information, including about our personnel, business partners, and others, could result in higher compliance and technology costs for us. Significant fines, penalties, damages and harm to our global reputation and our brand could result from actual or perceived non-compliance.

We collect, process, use, store, transmit and transfer personal information from individuals located in the EU in connection with our business. The collection, processing, storage, transmission, transfer and use of personal information in the EU are governed by the provisions of the General Data Protection Regulation ((EU) 2016/679), or the GDPR. This legislation imposes requirements relating to having legal bases for processing personal information relating to identifiable individuals and transferring such information outside of the European Economic Area, to third countries that have not been found to provide adequate protection to such personal information, including to the U.S., providing details to those individuals regarding the processing of their personal information, keeping personal information secure, having data processing agreements with third parties who process personal information, responding to individuals’ requests to exercise their rights in respect of their personal information, reporting security breaches involving personal information to the competent national data protection authority and affected individuals, appointing data protection officers, conducting data protection impact assessments and record-keeping. The GDPR imposes significant responsibilities and liabilities in relation to personal information that we process, and we may be required to put in place additional mechanisms designed to comply with the GDPR. Failure to comply with the requirements of the GDPR and related national data protection laws of the member states of the EU may result in

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investigations, substantial fines up to the greater of €20 million or 4% of annual global turnover, civil claims, and damages being brought against us, which could have a material adverse effect on our business, financial condition and results of operations.

While the GDPR applies uniformly across the EU, each EU member State is permitted to issue nation-specific data protection legislation, which has created inconsistencies on a country-by country basis. Further, the United Kingdom’s exit from the EU, often referred to as Brexit, and ongoing developments in the United Kingdom have created further uncertainty with regard to the regulation of data protection and privacy in the United Kingdom. The United Kingdom has implemented legislation that substantially implements the GDPR, and the European Commission and issued an adequacy decision under the GDPR and the Law Enforcement Directive on June 28, 2021, pursuant to which personal information generally may be transferred from the EU to the United Kingdom without restriction; however, this adequacy decision is subject to a four-year “sunset” period, after which the European Commission’s adequacy decision may be renewed. During that period, the European Commission will monitor the legal situation in the United Kingdom and may intervene at any time with respect to its adequacy decision. The United Kingdom’s adequacy determination therefore is subject to future uncertainty and may be subject to modification or revocation in the future, with the United Kingdom potentially being considered an inadequate third country under the GDPR and transfers of personal information from the European Economic Area to the United Kingdom will require a transfer mechanism. Furthermore, there will be increasing scope for divergence in application, interpretation and enforcement of the data protection law as between the United Kingdom and European Economic Area.

In addition, U.S. states are adopting new laws or amending existing laws, requiring attention to frequently changing regulatory requirements related to personal information. For example, California enacted the California Consumer Privacy Act, or the CCPA, on June 28, 2018, which took effect on January 1, 2020 and has been dubbed the first “GDPR-like” law in the United States. The CCPA gives California residents, among other things, expanded rights to access and require deletion of their personal information, opt out of certain personal information sharing, and receive detailed information about how their personal information is used. The CCPA also provides for civil penalties for violations, as well as a private right of action for certain data breaches that may increase data breach litigation. The CCPA will be expanded substantially on January 1, 2023 when the California Privacy Rights Act of 2020, or the CPRA, which was approved by California voters in November 2020, becomes fully operative. The CPRA will, among other things, give consumers the ability to limit use of information deemed to be sensitive, establish the California Privacy Protection Agency to implement and enforce the CPRA and impose administrative fines. Aspects of the CCPA and CPRA, and their interpretation and enforcement remain uncertain. The potential effects of the CCPA and CPRA are far-reaching and may require us to modify our data processing practices and policies and to incur substantial costs and expenses in an effort to comply.

The CCPA and CPRA could mark the beginning of a trend toward more stringent data protection, security and privacy legislation in the U.S. The CCPA has prompted a number of proposals for federal and state privacy legislation. For example, in March 2021, Virginia enacted the Virginia Consumer Data Protection Act, or CDPA, a comprehensive privacy statute that becomes effective on January 1, 2023 and shares similarities with the CCPA and the CPRA, but also imposes security and assessment requirements for businesses. In addition, on July 7, 2021, Colorado enacted the Colorado Privacy Act, or CPA, which closely resembles the CDPA. Also, in March 2022, Utah enacted the Utah Consumer Privacy Act, which becomes effective on December 31, 2023, and in May 2022, Connecticut enacted the Act Concerning Personal Data and Online Monitoring, which becomes effective on July 1, 2023, both of which differ from the CPRA, CDPA and CPA. These new state privacy laws will be enforced by the respective states’ Attorney General and/or district attorneys. Similar laws have been proposed in other states and at the federal level, reflecting a trend toward more stringent data protection, security and privacy legislation in the U.S. The enactment of such laws could have potentially conflicting requirements that would make compliance challenging.

We may also publicly post privacy policies and other documentation regarding our collection, use, storage, transmission, transfer and other processing of personal information. Although we endeavor to comply with our public policies and documentation, we may at times fail to do so or be alleged to have failed to do so. Moreover, despite our efforts, we may not be successful in achieving compliance if our employees or contractors fail to comply with our published policies and documentation. Such failures can subject us to potential regulatory action if they are found to be deceptive, unfair or misrepresentative of our actual practices.

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Additionally, other jurisdictions are considering new or expanded laws or regulations relating to privacy, security and data protection. With these laws, regulations and other obligations relating to privacy, security and data protection imposing new and relatively burdensome obligations, which may be inconsistent between jurisdictions or in conflict with each other due to differing applications and interpretations, and with substantial uncertainty over further interpretation and application of these and other obligations, we may face challenges in addressing their requirements, putting in place additional compliance mechanisms and making necessary changes to our policies, contracts and practices, and may incur significant costs and expenses in an effort to do so. Additionally, if we or third parties we work with, such as our third-party providers, violate applicable laws or regulations or our policies, such violations may also put our data at risk and could in turn have an adverse effect on our business. Any failure or perceived failure by us or our service providers to comply with our applicable policies or notices relating to privacy, security or data protection, our contractual or other obligations to third parties, or any of our other legal obligations relating to privacy, security or data protection, may result in public criticism, governmental investigations or enforcement actions, litigation, claims and other proceedings, and could result in significant fines, penalties, and other liability. Additionally, defending against any claims, litigation, regulatory proceedings, or other proceedings can be costly, time-consuming and may require significant financial and personnel resources. Therefore, even if we are successful in defending against any such actions or proceedings that may be brought against us, our business may be impaired, and we may suffer reputational and other harm.

The Affordable Care Act and certain legislation and regulatory proposals may increase our costs of compliance and negatively impact our profitability over time.

In March 2010, former President Barack Obama signed the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, which we refer to collectively as the Affordable Care Act. The Affordable Care Act made extensive changes to the delivery of health care in the United States. We expect that the rebates, discounts, taxes and other costs resulting from the Affordable Care Act over time will have a negative effect on our expenses and profitability in the future. Furthermore, the Independent Payment Advisory Board created by the Affordable Care Act to reduce the per capita rate of growth in Medicare spending could potentially limit access to certain treatments or mandate price controls for our products. Moreover, expanded government investigative authority and increased disclosure obligations may increase the cost of compliance with new regulations and programs.

Since its enactment, there have been judicial and Congressional challenges to certain aspects of the Affordable Care Act, or ACA. In June 2021, the United States Supreme Court held that Texas and other challengers had no legal standing to challenge the ACA, dismissing the case without specifically ruling on the constitutionality of the ACA. Accordingly, the ACA remains in effect in its current form. It is unclear how this Supreme Court decision, future litigation, or healthcare measures promulgated by the Biden administration will impact our business, financial condition and results of operations. Complying with any new legislation or changes in healthcare regulation could be time-intensive and expensive, resulting in material adverse effect on our business.

In addition, there have been a number of other legislative and regulatory proposals aimed at changing the pharmaceutical industry. For example, in November 2013, Congress passed the Drug Quality and Security Act, or the DQSA. The DQSA establishes federal pedigree tracking standards requiring drugs to be labeled and tracked at the lot level, preempts state drug pedigree requirements, and will eventually require all supply-chain stakeholders to participate in an electronic, interoperable prescription drug track and trace system. The DQSA also establishes new requirements for drug wholesale distributors and third party logistics providers, including licensing requirements in states that had not previously licensed such entities. As a result of these and other new proposals, we may determine to change our current manner of operation, provide additional benefits or change our contract arrangements, any of which could have a material adverse effect on our business, financial condition and results of operations.

Former President Barack Obama also signed into law the Food and Drug Administration Safety and Innovation Act. The law and related agreements make several significant changes to the FFDCA and FDA’s processes for reviewing marketing applications that could have a significant impact on the pharmaceutical industry, including, among other things, the following:

reauthorizes the Prescription Drug User Fee Act, which increases the amount of associated user fees, and, for certain types of applications, increases the expected time frame for FDA review of NDAs;

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permanently reauthorizes and makes some revisions to the Best Pharmaceuticals for Children Act and the Pediatric Research Equity Act, which provide for pediatric exclusivity and mandated pediatric assessments for certain types of applications, respectively;

revises certain standards and requirements for FDA inspections of manufacturing facilities and the importation of drug products from foreign countries;

creates incentives for the development of certain antibiotic drug products;

modifies the standards for accelerated approval of certain new medical treatments;

expands the reporting requirements for potential and actual drug shortages;

requires the FDA to issue a report on, among other things, ensuring the safety of prescription drugs that have the potential for abuse;

requires the FDA to hold a public meeting regarding the potential rescheduling of drug products containing hydrocodone, which was held in October 2012; and

requires electronic submission of certain marketing applications following the issuance of final FDA regulations.

The full impact of new laws and regulations and changes to any existing regulations by the Biden administration is uncertain; however, we anticipate that it will have an adverse effect on our results of operations.

There has been heightened governmental scrutiny recently over the manner in which drug manufacturers set prices for their marketed products, which has resulted in several congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drug products. For example, under the American Rescue Plan Act of 2021, effective January 1, 2024, the statutory cap on Medicaid Drug Rebate Program rebates that manufacturers pay to state Medicaid programs will be eliminated. Elimination of this cap may require pharmaceutical manufacturers to pay more in rebates than it receives on the sale of products, which could have a material impact on our business. In July 2021, the Biden administration released an executive order, “Promoting Competition in the American Economy,” with multiple provisions aimed at increasing competition for prescription drugs. In August 2022, Congress passed the Inflation Reduction Act of 2022, which includes prescription drug provisions that have significant implications for the pharmaceutical industry and Medicare beneficiaries, including allowing the federal government to negotiate a maximum fair price for certain high-priced single source Medicare drugs, imposing penalties and excise tax for manufacturers that fail to comply with the drug price negotiation requirements, requiring inflation rebates for all Medicare Part B and Part D drugs, with limited exceptions, if their drug prices increase faster than inflation, and redesigning Medicare Part D to reduce out-of-pocket prescription drug costs for beneficiaries, among other changes. The impact of these legislative, executive, and administrative actions and any future healthcare measures and agency rules implemented by the Biden administration on us and the pharmaceutical industry as a whole is unclear. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability, or commercialize our approved products.

At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. For example, in September 2020, the Governor of California signed legislation that brings California one step closer to establishing its own generic drug label, which could have significant impact on the generic drug industry and generic drug pricing. A number of states are also

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considering or have recently enacted state drug price transparency and reporting laws that could substantially increase our compliance burdens and expose us to greater liability under such state laws.

Additionally, we encounter similar regulatory and legislative issues in most other countries. In the European Union, or EU, and some other international markets, the government provides health care at low cost to consumers and regulates pharmaceutical prices, patient eligibility or reimbursement levels to control costs for the government-sponsored health care system. This international system of price regulations may lead to inconsistent prices.

If significant additional reforms are made to the U.S. health care system, or to the health care systems of other markets in which we operate, those reforms could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline.

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

 

July 1 – July 31, 2022

 

40,357

 

$

35.12

40,357

 

August 1 – August 31, 2022

 

145,994

32.01

 

145,994

 

September 1 – September 30, 2022

 

291,904

28.76

 

291,904

 

(1)As of September 30, 2022, $11.7 million remained available for repurchase under such program. On November 7, 2022, we announced that our Board of Directors authorized an increase of $50.0 million to our share buyback program. The share buyback program does not have an expiration date.

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*

Contract Research Agreement by and between Amphastar Pharmaceuticals, Inc. and Nanjing Hanxin Pharmaceutical Technology Co., Ltd, dated July 5, 2022.

31.1

Certification pursuant to Rule 13a-14(a) or 15d-14a of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of pursuant to Rule 13a-14(a) or 15d-14a of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1#

Certification of Principal 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 Principal 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 - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definitions Linkbase Document

104

Cover Page Interactive File (Formatted as Inline XBRL and contained in Exhibit 101)

#

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.

*

Certain confidential information contained in this Exhibit was omitted by means of marking such portions with brackets because the identified confidential information (i) is not material and (ii) would be competitively harmful if publicly disclosed.

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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: November 8, 2022

AMPHASTAR PHARMACEUTICALS, INC.
(Registrant)

By:

/s/ WILLIAM J. PETERS

William J. Peters

Chief Financial Officer
(Principal Financial and Accounting Officer)

Date: November 8, 2022

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