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~~JUNE 30, ~~2017~~2019

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

For the transition period from to

Commission file number 001-36509

AMPHASTAR PHARMACEUTICALS, INC.

(Exact name of Registrant as specified in its charter)

Delaware

33-0702205

(State or other jurisdiction of

incorporation or organization)

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


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

(909) 980-9484

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the ~~Registrant~~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~~registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒☒ No ◻ ◻



Indicate by check mark whether the ~~Registrant (1)~~registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the ~~Registrant~~registrant was required to submit ~~and post~~ such files). Yes ☒☒ No ◻◻



Indicate by check mark whether the ~~Registrant~~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	◻ ~~(Do not check if a smaller reporting company)~~	Smaller reporting company	◻
			
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the ~~Registrant~~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~~registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ◻ No ☒

The number of shares outstanding of the ~~Registrant’s~~registrant’s only class of common stock as of ~~November~~August 2, ~~2017~~2019 was ~~45,975,746.~~47,226,496.

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AMPHASTAR PHARMACEUTICALS, INC.

TABLE OF CONTENTS

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED ~~SEPTEMBER~~JUNE 30, ~~2017~~2019

Special Note About Forward-Looking Statements


Part I. FINANCIAL INFORMATION
		PAGE
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018		1
Condensed Consolidated Statements of Operations for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018		2
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018		3
Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018		4
Notes to Condensed Consolidated Financial Statements		5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		3730
Item 3. Quantitative and Qualitative Disclosure about Market Risk		4640
Item 4. Controls and Procedures		4741
Part II. OTHER INFORMATION
Item 1. Legal Proceedings		4842
Item 1A. Risk Factors		4842
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		4943
Item 3. Defaults Upon Senior Securities		4943
Item 4. Mine Safety Disclosures		4943
Item 5. Other Information		4943
Item 6. Exhibits		5044
Signatures		5145

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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, including our enoxaparin product following termination of our profit sharing agreement with Actavis;~~products;

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

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

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

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

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

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

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

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

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

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

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

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

the potential for exposure to product liability claims;

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

our ability to expand internationally;

economic and industry trends and trend analysis;

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

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

the impact of trade tariffs or other trade barriers;

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

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

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

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

You should read this Quarterly Report and the documents that we reference elsewhere in this Quarterly Report completely and with the understanding that our actual results may differ materially from what we expect as expressed or implied by our forward-looking statements. In light of the significant risks and uncertainties to which our forward-looking statements are subject, you should not place undue reliance on or regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified timeframe, or at all. We discuss many of these risks and uncertainties in greater detail in this Quarterly Report and in our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2018, particularly in Item 1A. “Risk Factors.” These forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report regardless of the time of delivery of this Quarterly Report, and such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Quarterly Report.

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

Table of Contents

PART I.I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	September 30,		December 31,		June 30,		December 31,
	2017		2016		2019		2018
	(unaudited)				(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	66,920	$	72,354	$	120,373	$	86,337
Restricted cash						1,865		1,865
Short-term investments		2,522		527		2,836		2,831
Restricted short-term investments		4,155		1,390		2,290		2,290
Accounts receivable, net		24,152		26,777		48,823		52,163
Inventories		69,640		79,754		99,232		69,322
Income tax refunds and deposits		443		22		226		49
Prepaid expenses and other assets		8,660		3,272		8,489		5,485
Total current assets		176,492		184,096		284,134		220,342

Property, plant, and equipment, net		173,046		152,944		220,060		210,418
Finance lease right-of-use assets						985		—
Operating lease right-of-use assets						20,143		—
Goodwill and intangible assets, net		45,731		50,307		41,718		42,267
Other assets		10,623		9,390		13,515		9,918
Deferred tax assets		31,874		31,001		20,746		30,618

Total assets	$	437,766	$	427,738	$	601,301	$	513,563

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	9,590	$	16,196
Accrued liabilities		16,421		15,703
Accounts payable and accrued liabilities					$	88,171	$	87,418
Income taxes payable		4,181		7,705		3,150		1,187
Accrued payroll and related benefits		17,344		13,847
Current portion of product return accrual		3,649		1,800
Current portion of long-term debt and capital leases		6,212		5,366
Current portion of long-term debt						6,941		18,229
Current portion of operating lease liabilities						2,737		—
Total current liabilities		57,397		60,617		100,999		106,834

Long-term product return accrual		1,865		1,343
Long-term reserve for income tax liabilities		845		845		415		415
Long-term deferred revenue		1,215		97
Long-term debt and capital leases, net of current portion		42,232		32,356
Long-term debt, net of current portion						39,793		31,984
Long-term operating lease liabilities, net of current portion						17,754		—
Deferred tax liabilities		1,586		1,455		1,025		1,031
Other long-term liabilities		1,971		1,770		9,027		8,940
Total liabilities		107,111		98,483		169,013		149,204
Commitments and contingencies:
Stockholders’ equity:
Preferred stock: par value $0.0001; 20,000,000 shares authorized; no shares issued and outstanding		—		—		—		—
Common stock: par value $0.0001; 300,000,000 shares authorized; 48,991,134 and 45,896,393 shares issued and outstanding as of September 30, 2017 and 47,765,149 and 46,248,622 shares issued and outstanding as of December 31, 2016, respectively		5		5
Common stock: par value $0.0001; 300,000,000 shares authorized; 52,212,760 and 47,217,675 shares issued and outstanding as of June 30, 2019 and 51,438,675 and 46,631,118 shares issued and outstanding as of December 31, 2018, respectively						5		5
Additional paid-in capital		303,208		283,123		355,436		344,434
Retained earnings		74,767		70,855		116,086		67,485
Accumulated other comprehensive loss		(2,595)		(4,696)		(4,223)		(4,013)
Treasury stock		(44,730)		(20,032)		(79,459)		(75,476)
Total stockholders’ equity		330,655		329,255

Total Amphastar Pharmaceuticals, Inc. stockholders’ equity						387,845		332,435
Non-controlling interests						44,443		31,924
Total equity						432,288		364,359
Total liabilities and stockholders’ equity	$	437,766	$	427,738	$	601,301	$	513,563

See Accompanying Notes to Condensed Consolidated Financial Statements.

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AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; in thousands, except per share data)


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2017		2016		2017		2016		2019		2018		2019		2018
Net revenues	$	57,916	$	64,223	$	179,773	$	191,622	$	79,047	$	71,040	$	158,837	$	129,433
Cost of revenues		37,275		36,611		109,557		107,394		46,660		44,976		95,547		86,397
Gross profit		20,641		27,612		70,216		84,228		32,387		26,064		63,290		43,036

Operating (income) expenses:
Operating expenses:
Selling, distribution, and marketing		1,756		1,291		4,831		3,975		2,992		1,876		6,133		3,597
General and administrative		11,665		10,801		35,237		31,129		12,426		11,669		28,753		22,667
Research and development		10,040		9,723		32,022		28,922		15,996		15,460		30,603		29,490
Gain on sale of intangible assets		—		—		(2,643)		—
Total operating expenses		23,461		21,815		69,447		64,026		31,414		29,005		65,489		55,754

Income (loss) from operations		(2,820)		5,797		769		20,202		973		(2,941)		(2,199)		(12,718)

Non-operating income (expense):
Non-operating income (expenses):										��
Interest income		124		63		302		187		143		106		291		230
Interest expense		(264)		(281)		(692)		(970)		(24)		(100)		(54)		(118)
Other income, net		969		422		2,307		150
Total non-operating income (expense), net		829		204		1,917		(633)
Other income (expenses), net										60,001		(1,265)		59,422		(483)
Total non-operating income (expenses), net										60,120		(1,259)		59,659		(371)

Income (loss) before income taxes		(1,991)		6,001		2,686		19,569		61,093		(4,200)		57,460		(13,089)
Income tax expense (benefit)		(2,166)		2,111		(354)		6,295
Income tax provision (benefit)										14,173		(1,347)		12,694		(3,095)

Net income	$	175	$	3,890	$	3,040	$	13,274
Net income (loss)									$	46,920	$	(2,853)	$	44,766	$	(9,994)

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

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

Net income (loss) per share attributable to Amphastar Pharmaceuticals, Inc. shareholders:
Basic	$	0.00	$	0.09	$	0.07	$	0.29	$	1.01	$	(0.06)	$	1.04	$	(0.21)

Diluted	$	0.00	$	0.08	$	0.06	$	0.29	$	0.96	$	(0.06)	$	0.97	$	(0.21)

Weighted-average shares used to compute net income per share:
Weighted-average shares used to compute net income (loss) per share attributable to Amphastar Pharmaceuticals, Inc. shareholders:
Basic		46,101		45,398		46,065		45,132		47,107		46,557		46,925		46,535

Diluted		48,215		47,953		48,046		46,365		49,894		46,557		50,155		46,535

See Accompanying Notes to Condensed Consolidated Financial Statements.

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AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited; in thousands)

Three Months Ended

Nine Months Ended

September 30,

September 30,


2017

2016

2017

2016

Net income

$
175

$
3,890

$
3,040

$
13,274

Other comprehensive income (loss), net of income taxes

Foreign currency translation adjustment

625

109

2,101

(106)

Total other comprehensive income (loss)

625

109

2,101

(106)

Total comprehensive income

$
800

$
3,999

$
5,141

$
13,168


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

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

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

See Accompanying Notes to Condensed Consolidated Financial Statements.

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AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)


	Nine Months Ended				Six Months Ended
	September 30,				June 30,
	2017		2016		2019		2018
Cash Flows From Operating Activities:
Net income	$	3,040	$	13,274
Reconciliation to net cash provided by operating activities:
Loss (gain) on disposal and impairment of long-lived assets		(2,283)		994
Net income (loss)					$	44,766	$	(9,994)
Reconciliation to net cash provided by (used in) operating activities:
Loss on impairment and disposal of assets						850		743
Depreciation of property, plant, and equipment		9,376		9,009		8,311		6,513
Amortization of product rights, trademarks, and patents		2,139		1,751		526		1,451
Operating lease right-of-use asset amortization						1,390		—
Share-based compensation expense		12,905		11,604		8,706		8,862
Changes in deferred taxes						9,872		—
Changes in operating assets and liabilities:
Accounts receivable, net		2,909		6,756		1,700		(5,221)
Inventories		12,382		(19,477)		(30,012)		1,625
Prepaid expenses and other assets		(3,791)		173		(1,221)		1,715
Income tax refund, deposits, and payable		(5,213)		3,215		1,784		(3,209)
Operating lease right-of-use assets and liabilities, net						(1,297)		—
Accounts payable and accrued liabilities		(2,020)		(2,745)		2,738		10,408
Net cash provided by operating activities		29,444		24,554		48,113		12,893

Cash Flows From Investing Activities:
Business Acquisitions		—		(12,461)
Purchases and construction of property, plant, and equipment		(24,981)		(16,045)		(24,467)		(24,591)
Sale of intangible assets		2,000		—		—		4,400
Purchase of short-term investments		(5,645)		(2,270)		—		(204)
Maturity of short-term investments		3,650		1,414
Changes in restricted short-term investments		(2,765)		(105)
Payment of deposits and other assets		(885)		(2,921)		(86)		(114)
Net cash used in investing activities		(28,626)		(32,388)		(24,553)		(20,509)

Cash Flows From Financing Activities:
Net proceeds from equity plans		7,255		17,157
Proceeds from the private placement of ANP						18,298		—
Equity related tax payments, net of proceeds from equity plans						(157)		(294)
Purchase of treasury stock		(24,773)		(8,986)		(4,088)		(14,850)
Proceeds from borrowing under lines of credit						—		260
Repayments under lines of credit						(347)		—
Proceeds from issuance of long-term debt		18,983		10,198		—		8,000
Principal payments on long-term debt		(8,381)		(9,968)		(3,219)		(2,834)
Net cash provided by (used in) financing activities		(6,916)		8,401		10,487		(9,718)

Effect of exchange rate changes on cash		664		(43)		(11)		(190)

Net increase (decrease) in cash and cash equivalents		(5,434)		524
Net increase (decrease) in cash, cash equivalents, and restricted cash						34,036		(17,524)

Cash and cash equivalents at beginning of period		72,354		66,074
Cash, cash equivalents, and restricted cash at beginning of period						88,202		67,459

Cash and cash equivalents at end of period	$	66,920	$	66,598
Cash, cash equivalents, and restricted cash at end of period					$	122,238	$	49,935

Noncash Investing and Financing Activities:
Equipment acquired under capital leases	$	—	$	1,263
Capital expenditure included in accounts payable					$	6,631	$	5,840
Operating lease right-of-use assets					$	7,671	$	—
Equipment acquired under finance leases					$	61	$	14

Supplemental Disclosures of Cash Flow Information:
Interest paid, net of capitalized interest	$	1,334	$	1,381	$	1,277	$	1,078
Income taxes paid	$	4,876	$	3,263	$	1,147	$	149

See Accompanying Notes to Condensed Consolidated Financial Statements.

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. General

Amphastar Pharmaceuticals, Inc., a California corporation, was incorporated onin February ~~29,~~ 1996 and merged with and into Amphastar Pharmaceuticals, Inc., a Delaware corporation, in July 2004 (together with its subsidiaries, hereinafter referred to as ~~“the Company”~~the “Company”). The Company is a specialty pharmaceutical company that ~~primarily~~ develops, manufactures, markets, and sells generic and proprietary injectable, inhalation, and intranasal products, including products with high technical barriers to market entry. Additionally, the Company sells insulin active pharmaceutical ingredient, or API, products. Most of the Company’s products are used in hospital or urgent care clinical settings and are primarily contracted and distributed through group purchasing organizations and drug wholesalers. The Company’s insulin API products are sold to other pharmaceutical companies for use in their own products and are being used by the Company in the development of injectable finished pharmaceutical products. The Company’s inhalation products ~~will be~~are primarily distributed through drug ~~retailers if they are approved and brought to market.~~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, ~~2016,~~2018, and the notes thereto as filed with the Securities and Exchange Commission, or SEC, in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2018. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles, or GAAP, have been condensed or omitted from the accompanying condensed consolidated financial statements. The accompanying year-end condensed consolidated balance sheet was derived from the audited financial statements. The accompanying interim financial statements are unaudited, but reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the Company’s consolidated financial position, results of operations, comprehensive income (loss) and cash flows for the periods presented. Unless otherwise noted, all such adjustments are of a normal, recurring nature. The Company’s results of operations, comprehensive income (loss) and cash flows for the interim periods are not necessarily indicative of the results of operations and cash flows that it may achieve in future periods.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The unaudited condensed consolidated financial statements include the accounts of the Company and its ~~wholly-owned~~ subsidiaries, and are prepared in accordance with the requirements of the SEC for interim reporting. Certain amounts in the prior period condensed consolidated statements of operations and statement of cash flows have been reclassified to conform to the current quarter presentation.United States GAAP, or GAAP. All ~~significant~~ intercompany activity has been eliminated in the preparation of the condensed consolidated financial statements. Effective January 1, 2017, the Company prospectively adopted certain requirements of Auditing Standards Update, or ASU, No. 2016-09 to classify cash flows related to excess tax benefits in operating activities without adjusting prior periods. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the consolidated financial position, results of operations, and cash flows of the Company.

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

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

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

Use of Estimates

The preparation of condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual

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~~AMPHASTAR PHARMACEUTICALS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

results could differ from those estimates. The principal accounting estimates ~~include:~~include determination of allowances for doubtful accounts and discounts, provision for chargebacks and rebates, provision for product returns, adjustment of inventory to their net realizable values, impairment of long-lived and intangible assets and goodwill, self-insured claims, workers’ compensation liabilities, litigation reserves, stock price volatilities for share-based compensation expense, valuation allowances for deferred tax assets, and liabilities for uncertain income tax positions.

Foreign Currency

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

The Company’s French subsidiary, AFP, maintains its ~~books~~book of record in ~~Euros.~~euros. Its other Chinese ~~subsidiary, Letop,~~subsidiaries maintain ~~its~~their books of record in Chinese ~~Yuan.~~yuan. Its U.K. subsidiary, IMS UK, maintains its ~~books~~book of record in ~~Great Britain Pounds.~~British pounds. These local currencies have been determined to be the subsidiaries’ respective functional currencies. These books of record are translated into USD using average exchange rates during the period. Assets and liabilities are translated at the rate of exchange prevailing on the balance sheet date. Equity is translated at the prevailing rate of exchange at the date of the equity transactions. Translation adjustments are reflected in stockholders’ equity and are included as a component of other accumulated comprehensive income (loss). The unrealized gains or losses of intercompany foreign currency transactions that are of a long-term investment nature are reported in other accumulated comprehensive income (loss). The unrealized gains and losses of intercompany foreign currency transactions that are of a long-term investment nature for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019, were ~~a $1.1~~$0.4 million ~~gain~~loss and ~~a $3.8~~$0.2 million gain, respectively, and for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018, were ~~a $0.3~~$1.7 million ~~gain~~loss and ~~a $0.6~~$0.8 million ~~gain,~~loss, respectively.

~~Additionally, the~~The Company does not undertake hedging transactions to cover its foreign currency exposure.

Comprehensive Income ~~(loss)~~(Loss)

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, the Company included its foreign currency translation gain or loss as part of its comprehensive income (loss).

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Restricted Cash and Short-Term Investments

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

Financial Instruments

The carrying amounts of cash and cash equivalents, short-term investments, restricted cash and short-term investments, accounts receivable, accounts payable, accrued expenses, and short-term borrowings approximate fair value due to the short maturity of these items. AThe majority of the Company’s long-term obligations consist of variable rate debt, and their carrying value approximates fair value as the stated borrowing rates are comparable to rates currently offered to the Company for instruments with similar maturities. ~~However, the Company has one fixed-rate, long-term mortgage for which the carrying value differs from the fair value and is not remeasured on a recurring basis (see Note 12).~~ The Company at times enters into fixed interest rate swap contracts to exchange the variable interest rates for fixed interest rates without the exchange of the underlying notional debt amounts. Such interest rate swap contracts are recorded at their fair values.

Deferred Income Taxes

The Company utilizes the liability method of accounting for income taxes, under which deferred taxes are determined based on the temporary differences between the financial statements and the tax basis of assets and liabilities using

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~~AMPHASTAR PHARMACEUTICALS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

enacted tax rates. A valuation allowance is recorded when it is more likely than not that the deferred tax assets will not be realized.

~~Business Combinations~~

If an acquired set of activities and assets is capable of being operated as a business consisting of inputs and processes from the viewpoint of a market participant, the asset acquired and liabilities assumed are a business. Business combinations are accounted for using the acquisition method of accounting, which requires an acquirer to recognize the assets acquired and the liabilities assumed at the acquisition date measured at their fair values as of that date. Fair value determinations are based on discounted cash flow analyses or other valuation techniques. In determining the fair value of the assets acquired and liabilities assumed in a material acquisition, the Company may utilize appraisals from third party valuation firms to determine fair values of some or all of the assets acquired and liabilities assumed, or may complete some or all of the valuations internally. In either case, the Company takes full responsibility for the determination of the fair value of the assets acquired and liabilities assumed. The value of goodwill reflects the excess of the fair value of the consideration conveyed to the seller over the fair value of the net assets received.

Acquisition-related costs that the Company incurs to effect a business combination are expensed in the periods in which the costs are incurred. When the operations of the acquired businesses were not material to the Company’s condensed consolidated financial statements, no pro forma presentations were disclosed.

Recent Accounting Pronouncements

In ~~May 2014,~~June 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standard Update, or ~~ASU, No. 2014-09~~ ~~Revenue from Contracts with Customers~~, which creates a single source of revenue guidance for companies in all industries. Subsequently, the FASB issued multiple updates. The new standard provides guidance for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to their customers, unless the contracts are within the scope of other accounting standards. It also provides a model for the measurement and recognition of gains and losses on the sale of certain nonfinancial assets. The guidance also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required regarding customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). Based on ASU No. 2015-14 ~~Deferral of the Effective Date~~, issued in August 2015, this guidance will be effective for the Company beginning in the first quarter of 2018, including interim periods within the year. The Company expects to adopt the standard in 2018 using the modified retrospective transition method. The majority of the Company’s revenue relates to sale of pharmaceutical products to various customers, and the adoption of the new standard is not expected to have a material impact on these transactions. The Company is continuing to evaluate the impact of all transactions.

~~In February 2016, the FASB issued ASU No. 2016-02~~ ~~Leases~~, that is aimed at making leasing activities more transparent and comparable, and which requires substantially all leases be recognized by lessees on their balance sheets as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. This guidance will become effective for the Company’s interim and annual reporting periods during the year ending December 31, 2019, and all annual and interim reporting periods thereafter. Early adoption is permitted. The Company is required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements for the reporting periods in which the guidance is adopted. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements and related disclosures.

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~~AMPHASTAR PHARMACEUTICALS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

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

~~In August 2016, the FASB issued ASU No. 2016-15~~ ~~Classification of Certain Cash Receipts and Cash Payments~~, which is aimed at addressing certain issues regarding classifications of certain cash receipts and cash payments on the statement of cash flows where diversity in practice was identified. The guidance is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2018. Early adoption is permitted. The Company will be required to apply the guidance retrospectively in the first interim and each annual period in which the guidance is adopted. The Company does not believe that the adoption of this accounting guidance will have a material impact on the Company’s consolidated financial statements and related disclosures.

~~In October 2016, the FASB issued ASU No. 2016-16~~ ~~Intra-Entity Transfers of Assets Other Than Inventory~~, which requires an entity to recognize the income tax consequences of intra-entity transfer of an asset other than inventory when the transfer occurs. The guidance is effective for the Company's interim and annual reporting periods during the year ending December 31, 2018. Early adoption is permitted as of the beginning of an annual reporting period for which financial statements, interim or annual, have not been issued. The amendments will be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements and related disclosures.

~~In November 2016, the FASB issued ASU No. 2016-18~~ ~~Statement of Cash Flows: Restricted Cash~~, which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, the Company will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The guidance is effective for the Company's interim and annual reporting periods during the year ending December 31, 2018. Early adoption is permitted, including adoption in an interim period. The amendments will be applied using a retrospective transition method to each period presented. The Company will be required to apply the guidance retrospectively when adopted. The Company does not believe that the adoption of this accounting guidance will have a material impact on its consolidated financial statements and related disclosures.

~~In January 2017, the FASB issued ASU No. 2017-01~~ ~~Clarifying the Definition of a Business~~, which provides guidance to assist entities with evaluating when a set of transferred assets and activities is a business. Under the updated guidance, a set is not a business if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar assets. If the threshold is not met, the update requires that, to be a business, the set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. The definition of outputs was also aligned with Accounting Standard Codification, or ASC, 606 by focusing on revenue-generating activities. The guidance is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2018, and prospectively applicable to any transactions occurring within the period of adoption. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements and related disclosures.

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~~AMPHASTAR PHARMACEUTICALS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

In ~~May 2017,~~August 2018, the FASB issued ASU No. ~~2017-09~~2018-13 ~~Scope of Modification Accounting~~Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, ~~that clarifies when changes~~which removes, modifies, and adds certain disclosure requirements to ~~the terms or conditions of a share-based payment award must be accounted for as modifications.~~ASC 820, Fair Value Measurement. The ~~new~~ guidance is effective for the Company’s interim and annual reporting periods during the year ending December 31, ~~2018, and applied prospectively to awards modified on or after the adoption date.~~2020. Early adoption is permitted. The Company does not believe that the adoption of this accounting guidance will have a material impact on its consolidated financial statements and related disclosures.

In August ~~2017,~~2018, the FASB issued ASU No. ~~2017-12~~2018-14 ~~Targeted Improvements~~Disclosure Framework – Changes to ~~Accounting~~the Disclosure Requirements for ~~Hedging Activities~~Defined Benefit Plans, which ~~amends the hedge accounting model in~~removes, modifies, and adds certain disclosure requirements to ASC ~~815 to enable entities to better portray the economics of their risk management activities in the financial statements and enhance the transparency and understandability of hedge results.~~715-20, Defined Benefit Plans. The ~~amendments also simplify the application of hedge accounting in certain situations. The new~~ guidance is effective for the Company’s interim and annual reporting periods during the year ending December 31, ~~2019.~~2021. Early adoption is permitted. The Company does not believe that the adoption of this accounting guidance will have a material impact on its consolidated financial statements and related disclosures.

~~Note~~In October 2018, the FASB issued ASU No. 2018-17 ~~3. Business Acquisitions~~Targeted Improvements to Related Party Guidance for Variable Interest Entities, which requires indirect interests held through related parties in common control arrangements be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. The guidance is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2020. Early adoption is permitted. The Company currently does not believe that the adoption of this accounting guidance will have a material impact on its consolidated financial statements and related disclosures.

~~Acquisition~~In November 2018, the FASB issued ASU No. 2018-18 Clarifying the Interaction between Topic 808 and Topic 606, which requires transactions in collaborative arrangements to be accounted for under ASC 606, Revenue from Contracts with Customers, or ASC 606, if the counterparty is a customer for a good or service that is a distinct unit of ~~International Medication Systems (UK) Limited~~account. The amendments also preclude entities from ~~UCB PHARMA GmbH~~

~~In August 2016,~~presenting consideration from transactions with a collaborator that is not a customer together with revenue recognized from contracts with customers. The guidance is effective for the Company’s ~~UK subsidiary, AUK, acquired IMS UK, a UK-based subsidiary of UCB PHARMA GmbH,~~interim and annual reporting periods during the year ending December 31, 2020. Early adoption is permitted, including ~~its trademarks, assets related to the products, as well as marketing authorizations for 33 products~~ in ~~the UK, Ireland, Australia, and New Zealand, representing 11 different injectable chemical entities. The Company paid $7.7 million in cash as consideration for the transaction.~~any interim period. The Company is incurrently evaluating the ~~process~~impact that the adoption of ~~transferring the manufacturing of the purchased products to~~this guidance will have on its ~~facilities in California. The transfer will require approval of the UK Medicines~~consolidated financial statements and ~~Healthcare products Regulatory Agency and other~~ related ~~regulatory agencies before the products can be sold by the Company. The transaction is accounted for as a business combination in accordance with ASC 805.~~

The fair values of the assets acquired and liabilities assumed include marketing authorizations of $9.2 million, manufacturing equipment of $0.1 million, and deferred tax liability of $1.6 million. The acquired marketing authorizations intangible assets are subject to a straight-line amortization over a useful life of approximately 10 years.

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~~AMPHASTAR PHARMACEUTICALS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~Acquisition of fourteen injectable products from Hikma Pharmaceuticals PLC~~

In March 2016, the Company acquired 14 abbreviated new drug application, or ANDAs, representing 11 different injectable chemical entities from Hikma Pharmaceuticals PLC, or Hikma, for $4.0 million. This transaction was accounted for as a business combination in accordance with ASC 805. The ANDAs had an estimated fair value of $4.0 million, and were subject to a straight-line amortization over a useful life of approximately 15 years.

~~In February 2017, the Company sold these products to an unrelated party (see Note 9).~~

~~Acquisition of Nanjing Letop Medical Technology Co. Ltd.~~

In January 2016, the Company’s Chinese subsidiary, ANP, acquired Nanjing Letop Medical Technology Co. Ltd. for $1.7 million consisting of $0.8 million in cash and a deposit of $0.9 million that ANP had previously paid to Letop and which was effectively eliminated upon the consummation of the transaction. The Company accounted for this transaction as a business combination in accordance with ASC 805. The Company recognized $1.4 million of acquired assets, $0.1 million of assumed liabilities, and $0.4 million of goodwill. Letop had previously supplied ANP with intermediates used in making various active pharmaceutical ingredients. In March 2016, the acquired subsidiary was renamed Nanjing Letop Fine Chemistry Co., Ltd.

~~Acquisition of Merck’s API Manufacturing Business~~

On April 30, 2014, the Company completed the acquisition of the Merck Sharpe & Dohme’s API manufacturing business in Éragny-sur-Epte, France, or the Merck API Transaction, which manufactures porcine insulin API and recombinant human insulin API, or RHI API. The purchase price of the transaction totaled €24.8 million, or $34.4 million on April 30, 2014, subject to certain customary post‑closing adjustments and currency exchange rate fluctuations. The terms of the purchase include multiple payments over four years as follows (see Note 12):

U.S.

Euros

Dollars

(in thousands)

At Closing, April 2014

€
13,252

$
18,352

December 2014

4,899

5,989

December 2015

3,186

3,483

December 2016

3,186

3,427

December 2017

500

591

€
25,023

$
31,842

In order to facilitate the acquisition, the Company established AFP in France. The Company is continuing the current site manufacturing activities, which consist of the manufacturing of porcine insulin API and RHI API. As part of the transaction, the Company has entered into various additional agreements, including various supply agreements, as well as the assignment and/or licensing of patents under which Merck was operating at this facility. In addition, certain existing customer agreements have been assigned to AFP. Currently, the Company is in the process of transferring the manufacturing of starting material for RHI API from Merck to AFP. This process will require capital expenditures at AFP and is expected to take up to two years to complete.

Note 4.3. Revenue Recognition

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

Generally, revenue is recognized at the time of product delivery to the Company’s customers. In some cases, revenue is recognized at the time of shipment when stipulated by the terms of the sale agreements. Revenues derived from contract manufacturing services are recognized when third-party products are shipped to customers, and after the customer has accepted test samples of the products to be shipped. ~~On June 30, 2016, the Company and Actavis, Inc., or Actavis,~~

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~~AMPHASTAR PHARMACEUTICALS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~amended the distribution agreement, which terminated the agreement in December 2016. Profit-sharing revenue under this agreement was recognized at the time Actavis sold the products to its customers.~~

The Company ~~does not recognize product~~only records revenue ~~unless the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) transfer of title has occurred, (iii) the price~~ to the ~~customer~~extent that it is ~~fixed or determinable,~~probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved, by estimating and ~~(iv) collection is reasonably assured. Furthermore, the Company does not recognize revenue until all customer acceptance requirements have been met. The Company estimates and records~~recording reductions to revenue for discounts, product returns, and pricing adjustments, such as wholesaler chargebacks and retailer rebates, in the same period that the related revenue is recorded.

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

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Provision for ~~Wholesaler~~ Chargebacks and Rebates

The provision for chargebacks and rebates is a significant estimate used in the recognition of revenue. ~~As part of its~~Wholesaler chargebacks relate to sales terms ~~with wholesale customers,~~under which the Company agrees to reimburse wholesalers for differences between the gross sales prices at which the Company sells its products to wholesalers ~~or list prices,~~ and the actual prices of such products ~~at the time~~that wholesalers resell ~~them~~ under the Company’s various contractual arrangements with third parties such as ~~retailers,~~ hospitals and group purchasing ~~organizations.~~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 settlement of chargebacks generally occurs within 30 days after the sale to wholesalers.~~

The provision for chargebacks and rebates is reflected inas a component of net revenues. ~~Accounts receivable and/or accrued liabilities are also reduced and/or increased by the chargebacks amount depending on whether the Company has the right of offset with the customer.~~ The following table is an analysis of the chargeback and rebate provision:


	Nine Months Ended				Six Months Ended
	September 30,				June 30,
	2017		2016		2019		2018
	(in thousands)				(in thousands)
Beginning balance	$	37,820	$	15,217	$	22,423	$	18,470
Provision for chargebacks		115,824		105,772
Credits issued to third parties		(144,142)		(110,073)
Provision for chargebacks and rebates						58,001		55,372
Credits and payments issued to third parties						(61,704)		(55,999)
Ending balance	$	9,502	$	10,916	$	18,720	$	17,843

Changes in the chargeback provision from period to period are primarily dependent on the Company’s sales to its wholesalers, the level of inventory held by ~~the~~ wholesalers, and on the ~~wholesaler’s~~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 ~~chargeback provision has decreased in the nine months ended September 30, 2017, primarily due to a decrease in the list price of enoxaparin in the first half of 2017. 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. ~~Chargeback provisions~~The settlement of chargebacks and rebates generally occurs within 30 days to 60 days after the sale to wholesalers. Accounts receivable and/or accounts payable and accrued liabilities are reduced and/or increased by the chargebacks and rebate amounts depending on whether the Company has the right to offset with the customer. Of the provision for chargebacks and rebates as of ~~September~~June 30, ~~2017~~2019 and ~~2016 are~~December 31, 2018, $11.5 million and $12.0 million were included ~~as a reduction to account receivables.~~in accounts receivable, net, on the condensed consolidated balance sheets, respectively. The remaining provision of $7.2 million and $10.4 million were included in accounts payable and accrued liabilities, respectively.

Accrual for Product Returns

The Company offers most customers the right to return qualified excess or expired inventory for partial credit; however, ~~products sold to Actavis and~~ 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 ~~returns.~~using the expected value method. The accrual is based, in part, upon the

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~~AMPHASTAR PHARMACEUTICALS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

historical relationship of product returns to sales and customer contract terms. The Company also assesses other factors that could affect product returns including market conditions, product obsolescence, and the introduction of new competition. Although these factors do not normally give the Company’s customers the right to return products outside of the regular return policy, the Company realizes that such factors could ultimately lead to increased returns. The Company analyzes these situations on a case-by-case basis and makes adjustments to the product return reserve as appropriate.

~~If the available information is not sufficient to estimate a reasonable product return accrual, revenues from the sales~~-9-

Table of the new product would not be recognized until the product is consumed by the end customer or rights of return granted under the return policy have expired. As of September 30, 2017 and December 31, 2016, cumulative sales of approximately $1.1 million and $0.5 million, respectively, for one of the Company’s products were not recognized in revenues, due to insufficient information available to estimate a reasonable product return accrual.Contents

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	Nine Months Ended				Six Months Ended
	September 30,				June 30,
	2017		2016		2019		2018
	(in thousands)				(in thousands)
Beginning balance	$	3,143	$	2,621	$	8,030	$	6,522
Provision for product returns		4,196		958		3,654		917
Credits issued to third parties		(1,825)		(873)		(2,243)		(865)
Ending balance	$	5,514	$	2,706	$	9,441	$	6,574

Of the provision of product returns as of June 30, 2019 and December 31, 2018, $6.6 million and $5.3 million were included in accounts payable and accrued liabilities on the condensed consolidated balance sheets, respectively. The remaining provision as of June 30, 2019 and December 31, 2018, of $2.8 million and $2.7 million was included in other long-term liabilities, respectively. For the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018, the Company’s aggregate product return rate was ~~1.2%~~1.5% and ~~1.1%~~1.3% of qualified sales, respectively.

Note 5.4. Income (Loss) per Share Attributable to Amphastar Pharmaceuticals, Inc. Shareholders

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

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, options to purchase ~~1,162,850~~783,001 and ~~2,424,430~~762,937 shares of stock, respectively, with a weighted-average exercise price of ~~$27.87~~$21.98 per share and ~~$21.93~~$22.00 per share, respectively, were excluded in the computation of diluted net income per common share attributable to Amphastar Pharmaceuticals, Inc.’s shareholders because the effect from the assumed exercise of these options would be anti-dilutive. Additionally, 3,648,932 options to purchase ANP stock were awarded to ANP employees, which represent approximately 2% of ANP’s total equity, were excluded in the computation of diluted net income per common share attributable to Amphastar Pharmaceuticals, Inc.’s shareholders because the effect from the assumed exercise of these options would be anti-dilutive.

~~For~~As the Company reported a net loss for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016, options to purchase 1,357,154 and 4,510,729 shares of stock with a weighted-average exercise price of $29.31~~2018, the diluted net loss per share ~~and $19.84 per shares, respectively, were excluded in~~attributable to Amphastar Pharmaceuticals, Inc. shareholders, as reported, equals the ~~computation of diluted~~basic net ~~income~~loss per share ~~because~~attributable to Amphastar Pharmaceuticals, Inc. shareholders since the effect ~~from~~of the assumed exercise of ~~these~~stock options, ~~would be~~vesting of non-vested RSUs, and issuance of common shares under the Company’s ESPP are anti-dilutive. Total stock options, non-vested RSUs, and shares issuable under the Company’s ESPP excluded from the three and six months ended June 30, 2018, net loss per share were 11,649,241 stock options, 1,232,237 non-vested RSUs, and 60,854 shares issuable under the Company’s ESPP.

-~~12-~~10-

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2017		2016		2017		2016		2019		2018		2019		2018
	(in thousands, except per share data)								(in thousands, except per share data)
Basic and dilutive numerator:
Net income	$	175	$	3,890	$	3,040	$	13,274
Net income (loss) attributable to Amphastar Pharmaceuticals, Inc.									$	47,787	$	(2,853)	$	48,655	$	(9,994)
Denominator:
Weighted-average shares outstanding — basic		46,101		45,398		46,065		45,132		47,107		46,557		46,925		46,535

Net effect of dilutive securities:
Incremental shares from equity awards		2,114		2,555		1,981		1,233		2,787		—		3,230		—
Weighted-average shares outstanding — diluted		48,215		47,953		48,046		46,365		49,894		46,557		50,155		46,535
Net income per share — basic	$	0.00	$	0.09	$	0.07	$	0.29
Net income per share — diluted	$	0.00	$	0.08	$	0.06	$	0.29
Net income (loss) per share attributable to Amphastar Pharmaceuticals, Inc. shareholders — basic									$	1.01	$	(0.06)	$	1.04	$	(0.21)
Net income (loss) per share attributable to Amphastar Pharmaceuticals, Inc. shareholders — diluted									$	0.96	$	(0.06)	$	0.97	$	(0.21)

Note 6.5. Segment Reporting

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

~~Active pharmaceutical ingredients, or~~ API

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

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Selected financial information by reporting segment is presented below:


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2017		2016		2017		2016		2019		2018		2019		2018
	(in thousands)								(in thousands)
Net revenues:
Finished pharmaceutical products	$	54,455	$	59,058	$	174,154	$	181,368	$	73,735	$	63,241	$	148,274	$	116,358
API		3,461		5,165		5,619		10,254		5,312		7,799		10,563		13,075
Total net revenues		57,916		64,223		179,773		191,622		79,047		71,040		158,837		129,433
												��
Gross profit:
Finished pharmaceutical products		21,310		28,621		74,486		85,042		34,540		27,649		66,852		47,285
API		(669)		(1,009)		(4,270)		(814)		(2,153)		(1,585)		(3,562)		(4,249)
Total gross profit		20,641		27,612		70,216		84,228		32,387		26,064		63,290		43,036

Operating expenses		23,461		21,815		69,447		64,026		31,414		29,005		65,489		55,754

Income (loss) from operations		(2,820)		5,797		769		20,202		973		(2,941)		(2,199)		(12,718)
Non-operating income (expenses)		829		204		1,917		(633)
Non-operating income (expense)										60,120		(1,259)		59,659		(371)

Income (loss) before income taxes	$	(1,991)	$	6,001	$	2,686	$	19,569	$	61,093	$	(4,200)	$	57,460	$	(13,089)

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

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


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2017		2016		2017		2016		2019		2018		2019		2018
	(in thousands)								(in thousands)
Finished pharmaceutical products net revenues:
Enoxaparin	$	6,549	$	15,363	$	25,247	$	51,049	$	9,838	$	8,715	$	24,322	$	15,722
Phytonadione										12,441		10,806		22,561		19,987
Lidocaine										10,082		10,010		22,061		19,792
Naloxone		12,709		12,407		33,909		38,222		7,833		11,133		15,197		20,060
Lidocaine		9,596		8,279		27,218		26,378
Phytonadione		9,352		8,667		27,242		23,555
Medroxyprogesterone										6,696		6,365		13,909		9,071
Epinephrine		2,027		5,303		22,249		14,921		3,139		3,687		5,818		6,910
Primatene® Mist										2,512		—		5,409		—
Other finished pharmaceutical products		14,222		9,039		38,289		27,243		21,194		12,525		38,997		24,816
Total finished pharmaceutical products net revenues	$	54,455	$	59,058	$	174,154	$	181,368	$	73,735	$	63,241	$	148,274	$	116,358

~~Discontinuation of epinephrine injection, USP vial product~~

In February 2017, the U.S. Food and Drug Administration, or FDA, requested the Company to discontinue the manufacturing and distribution of its epinephrine injection, USP vial product, which has been marketed under the “grandfather” exception to the FDA’s “Prescription Drug Wrap-Up” program. The Company discontinued selling this product in the second quarter of 2017. For the year ended December 31, 2016, the Company recognized $18.6 million in net revenues for the sale of this product. A charge of $3.3 million was included in the cost of revenues in its consolidated statements of operations for the year ended December 31, 2016 to adjust the related inventory and firm purchase commitments to their net realizable value due to the anticipated discontinuation of the product.

-~~14-~~12-

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	Net Revenue								Long-Lived Assets				Net Revenue								Long-Lived Assets
	Three Months Ended				Nine Months Ended								Three Months Ended				Six Months Ended
	September 30,				September 30,				September 30,		December 31,		June 30,				June 30,				June 30,		December 31,
	2017		2016		2017		2016		2017		2016		2019		2018		2019		2018		2019		2018
	(in thousands)												(in thousands)
United States	$	55,346	$	62,691	$	175,075	$	188,865	$	105,311	$	104,110	$	74,781	$	68,560	$	151,238	$	121,664	$	106,803	$	109,331
China		—		—		—		—		39,639		35,085		984		—		984		—		68,620		58,059
France		2,570		1,532		4,698		2,757		28,004		13,659		3,282		2,480		6,615		7,769		44,637		43,028
United Kingdom		—		—		—		—		92		90		—		—		—		—		—		—
Total	$	57,916	$	64,223	$	179,773	$	191,622	$	173,046	$	152,944	$	79,047	$	71,040	$	158,837	$	129,433	$	220,060	$	210,418

Note 7.6. Customer and Supplier Concentration

Customer Concentrations

Three large wholesale drug distributors, AmerisourceBergen Corporation, or AmerisourceBergen, Cardinal Health, Inc., or Cardinal, and McKesson Corporation, or McKesson, are all distributors of the Company’s products as well as suppliers of a broad range of health care products. ~~Actavis had exclusive marketing rights of the Company’s enoxaparin product to the U.S. retail pharmacy market until December 2016.~~ The Company considers these ~~four~~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~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, and accounts receivable as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively. The following table provides accounts receivable and net revenue information for these major customers:

% of Total Accounts

% of Net

Receivable

Revenue

Three Months Ended

Nine Months Ended

September 30,

December 31,

September 30,

September 30,


2017

2016

2017

2016

2017

2016

Actavis(1)

—

1
%
—

16
%
—

19
%

AmerisourceBergen

12
%
30
%
24
%
19
%
27
%
19
%

Cardinal Health

23
%
28
%
25
%
19
%
25
%
20
%

McKesson

27
%
19
%
27
%
21
%
27
%
20
%

⁽¹⁾

~~The agreement with Actavis was terminated in December 2016.~~


	% of Total Accounts				% of Net
	Receivable				Revenue
					Three Months Ended				Six Months Ended
	June 30,		December 31,		June 30,				June 30,
	2019		2018		2019		2018		2019		2018
McKesson	28	%	28	%	25	%	25	%	27	%	26	%
Cardinal Health	20	%	21	%	21	%	20	%	23	%	21	%
AmerisourceBergen	12	%	19	%	25	%	27	%	23	%	26	%

Supplier Concentrations

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

-~~15-~~13-

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 8.7. Fair Value Measurements

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

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

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

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

~~The fair values of the Company’s cash equivalents, short-term investments, and restricted short-term investments approximate their respective carrying amounts.~~

As of ~~September~~June 30, ~~2017 and December 31, 2016,~~2019, cash equivalents include money market ~~accounts and money market funds.~~accounts. Short-term investments consist of ~~certificate~~certificates of ~~deposits and held-to-maturity municipal bonds~~deposit with original ~~maturities greater than three~~expiration dates within 12 months. ~~The municipal bonds~~These certificates of deposit are carried at amortized cost in the Company’s consolidated balance sheet, which approximates their fair value determined based on Level 2 inputs. The ~~Company does not intend to~~restrictions on restricted cash and ~~will not be required to sell the investments before recovery of their amortized cost basis. Restricted~~ short-term investments ~~consist of certificates of deposits with original maturities great than three months. The restrictions placed on the certificate of deposit accounts~~ have a negligible effect on the fair value of these financial ~~assets; these funds are restricted to meet the Company’s obligation for workers’ compensation claims and performance bonds.~~assets.

The Company does not hold any significant Level 2 or Level 3 instruments that are measured for fair value on a recurring basis.

Nonfinancial assets and liabilities are not measured at fair value on a recurring basis but are subject to fair value adjustments in certain circumstances. These items primarily include long-lived assets, goodwill, and intangible assets for which the fair value of assets is determined as part of the related impairment test. As of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, there were no ~~significant~~ adjustments to fair value for nonfinancial assets or liabilities.

-~~16-~~14-

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 9.8. Goodwill and Intangible Assets

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


	Weighted-Average			Accumulated				Weighted-Average			Accumulated
	Life (Years)	Original Cost		Amortization		Net Book Value		Life (Years)	Original Cost		Amortization		Net Book Value
	(in thousands)							(in thousands)
Definite-lived intangible assets
Cortrosyn® product rights	12	$	27,134	$	25,797	$	1,337
IMS (UK) international product rights(1)	10		9,371		1,093		8,278
IMS (UK) international product rights								10		8,880		2,590		6,290
Patents	12		486		160		326	12		486		234		252
Land-use rights	39		2,540		403		2,137	39		2,540		519		2,021
Other intangible assets	4		69		42		27	4		69		69		—
Subtotal	12		39,600		27,495		12,105	13		11,975		3,412		8,563
Indefinite-lived intangible assets
Trademark	*		29,225		—		29,225	*		29,225		—		29,225
Goodwill - Finished pharmaceutical products	*		4,401		—		4,401	*		3,930		—		3,930
Subtotal	*		33,626		—		33,626	*		33,155		—		33,155
As of September 30, 2017	*	$	73,226	$	27,495	$	45,731
As of June 30, 2019								*	$	45,130	$	3,412	$	41,718


	Weighted-Average			Accumulated				Weighted-Average			Accumulated
	Life (Years)	Original Cost		Amortization		Net Book Value		Life (Years)	Original Cost		Amortization		Net Book Value
	(in thousands)							(in thousands)
Definite-lived intangible assets
Cortrosyn® product rights	12	$	27,134	$	24,461	$	2,673
Cortrosyn® product rights								12	$	27,134	$	27,134	$	—
IMS (UK) international product rights~~(1)~~	10		8,632		359		8,273	10		8,911		2,153		6,758
Acquired ANDAs(2)	15		4,000		222		3,778
Patents	10		293		137		156	12		486		213		273
Land-use rights	39		2,540		354		2,186	39		2,540		486		2,054
Other intangible assets	1		574		534		40	4		69		63		6
Subtotal	12		43,173		26,067		17,106	12		39,140		30,049		9,091
Indefinite-lived intangible assets
Trademark	*		29,225		—		29,225	*		29,225		—		29,225
Goodwill - Finished pharmaceutical products	*		3,976		—		3,976	*		3,951		—		3,951
Subtotal	*		33,201		—		33,201	*		33,176		—		33,176
As of December 31, 2016	*	$	76,374	$	26,067	$	50,307
As of December 31, 2018								*	$	72,316	$	30,049	$	42,267

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

~~(1)~~In August 2016, the Company acquired International Medication Systems (UK) Limited from UCB PHARMA GmbH for $7.7 million. The fair value of the marketing authorization was $9.2 million as of the acquisition date (see Note 3).

~~(2)In February 2017, the Company sold the 14 ANDAs it had acquired from Hikma to an unrelated party for $6.4 million.~~

Sale of Fourteen Injectable ANDAs

In February 2017, the Company sold the 14 ANDAs it acquired in March 2016 from Hikma Pharmaceuticals, Inc. to an unrelated party. The consideration included a purchase price of $6.4 million of which ~~the amount of~~ $1.0 million was received upon closing, $1.0 million was received in the second quarter of 2017 and the remaining $4.4 million ~~will be paid upon certain milestones. If the purchaser is not able to achieve these milestones by December 31, 2017, the purchaser will pay the remaining payments within 30 days of December 31, 2017.~~was received in January 2018. In addition to the purchase price, the purchaser agreed to pay the Company a royalty fee equal to 2% of net sales derived from purchaser’s sales of the products for the period from February 2017 through February 2027. The Company has not recognized any royalty ~~fees. The~~fee revenue. In 2017, the Company ~~is also subject to~~recognized a gain of $2.6 million within operating (income) expenses on its consolidated statement of operations.

-~~17-~~15-

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

certain indemnification liability payable to the purchaser, which is limited up to $0.6 million. The Company recognized a gain of $2.6 million within operating (income) expenses on its condensed consolidated statement of operations for the nine months ended September 30, 2017, and a receivable of $4.4 million in current other assets on its condensed consolidated balance sheet as of September 30, 2017.

Goodwill

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


	September 30,		December 31,		June 30,		December 31,
	2017		2016		2019		2018
	(in thousands)				(in thousands)
Beginning balance	$	3,976	$	3,726	$	3,951	$	4,461
Goodwill related to acquisition of business		—		391
Currency translation and other adjustments		425		(141)
Currency translation						(21)		(510)
Ending balance	$	4,401	$	3,976	$	3,930	$	3,951

Primatene® Trademark

In January 2009, the Company acquired the exclusive rights to the trademark, domain name, website and domestic marketing, distribution and selling rights related to Primatene® Mist, an over-the-counter bronchodilator product, ~~which are~~ recorded at the allocated fair value of $29.2 million, which is its carrying value as of ~~September~~June 30, ~~2017.~~2019.

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

As a result of environmental concerns about ~~Chlorofluorocarbons,~~chlorofluorocarbons, or CFCs, the FDA ~~issued a final ruling on January 16, 2009 that~~ required the CFC ~~formulation of its Primatene~~® ~~Mist product to be phased out by December 31, 2011. The former~~ formulation of Primatene® Mist ~~contained CFCs as a propellant; however, the Company intends~~ to ~~use the trademark for a future version of Primatene~~® ~~that utilizes hydrofluoroalkane, or HFA, as a propellant.~~be phased out on December 31, 2011.

In 2013, the Company filed a new drug application, or NDA, for Primatene® Mist, ~~and received~~which utilizes a ~~Prescription Drug User Fee Act date set for May 2014.~~non-CFC propellant. In ~~May 2014, the Company received a complete response letter, or CRL, from~~November 2018, the FDA which required additional non-clinical information, label revisions and follow-up studies (label comprehension, behavioral/human factors and actual use) to assess consumers’ ability to use the device correctly to supportgranted over-the-counter approval of the ~~product in the over-the-counter setting. The Company met with the FDA in October 2014 to discuss preliminary data results and to clarify the FDA requirements~~NDA for further studies. The Company received further advice regarding its ongoing studies from the FDA in January 2016 and subsequently completed the process of generating the remaining data required by the CRL and plans to submit human factor studies accordingly. The Company submitted a responsive NDA amendment in June 2016 and received another CRL from the FDA in December 2016, which requires additional packaging and label revisions and follow-up studies to assess consumers’ ability to use the device correctly to support approval of the product in the over-the-counter setting. The Company intends to continue to work with the FDA during the post-action phase to address their concerns in the CRL and bring Primatene® Mist, ~~back to~~and the ~~over-the-counter market. However, there can be no guarantee that any future amendment to the Company’s NDA will result~~Company re-launched this product in ~~timely approval of Primatene~~® ~~Mist or approval at all.~~December 2018.

~~Based on~~Note 9. Inventories

Inventories consist of the following:


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

Charges totaling $2.5 million and $5.7 million were included in the cost of revenues in the Company’s ~~filed version~~consolidated statements of ~~Primatene~~® ~~Mist,~~operations for the ~~long history~~three and six months ended June 30, 2019, respectively, to adjust the Company’s inventory and related firm inventory purchase commitments to their net realizable value. For the three and six months ended June 30, 2018, charges totaling $1.2 million and $3.1 million were included in the cost of revenues, respectively, to adjust the ~~Primatene~~® ~~trademark (marketed since~~Company’s inventory and related firm inventory purchase commitments to their net realizable value.

-~~18-~~16-

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1963), and the Company’s perpetual rights to the trademark, the nature of the CRL received in December 2016, the plan that the HFA version will be marketed under the same trademark if approved by the FDA, and other factors previously considered, the trademark continues to have an indefinite useful life, and an impairment charge is not required based on the Company’s qualitative assessment as of September 30, 2017.

Note 10. ~~Inventories~~

~~Inventories consist of the following:~~

September 30,

December 31,

2017

2016

(in thousands)

Raw materials and supplies

$
22,008

$
36,209

Work in process

24,780

22,266

Finished goods

22,852

21,279

Total inventories

$
69,640

$
79,754

A charge of $2.2 million and $7.3 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, 2017, respectively, to adjust inventory to their net realizable value, including a $2.0 million and $4.9 million charge in the three and nine months ended September 30, 2017, respectively, related to enoxaparin inventory as a result of a decrease in the forecasted average selling price.

~~Note~~ ~~11.~~ Property, Plant, and Equipment

Property, plant, and equipment consist of the following:


	September 30,		December 31,		June 30,		December 31,
	2017		2016		2019		2018
	(in thousands)				(in thousands)
Buildings	$	87,313	$	85,283	$	97,340	$	96,287
Leasehold improvements		29,807		24,619		29,211		26,755
Land		7,092		6,857		7,619		7,628
Machinery and equipment		116,777		111,041		151,457		143,299
Furniture, fixtures, and automobiles		15,679		15,113		19,982		19,151
Construction in progress		46,759		32,044		70,716		66,390
Total property, plant, and equipment		303,427		274,957		376,325		359,510
Less accumulated depreciation		(130,381)		(122,013)		(156,265)		(149,092)
Total property, plant, and equipment, net	$	173,046	$	152,944	$	220,060	$	210,418

AsNote 11. Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consisted of ~~September 30, 2017 and December 31, 2016,~~ the ~~Company had $2.3 million and $2.6 million, respectively, in capitalized manufacturing equipment that is intended to be used specifically for the manufacture of Primatene~~® ~~Mist. The Company will continue to monitor developments with the FDA as it relates to its Primatene~~® ~~Mist indefinite lived intangible assets in determining if there is an impairment of these related fixed assets (see Note 9).~~following:


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

-~~19-~~17-

Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 12. Debt

Debt consists of the following:

September 30,

December 31,

2017

2016

(in thousands)

Loans with East West Bank







Equipment loan paid off April 2017

$
—

$
433

Line of credit facility due December 2018

—

—

Equipment loan due January 2019

2,053

3,208

Mortgage payable due February 2021

3,598

3,660

Equipment loan due June 2021

4,592

2,882

Equipment line of credit due December 2022

—

—

Mortgage payable due October 2026

3,539

3,582

Mortgage payable due June 2027

8,968

—

Loans with Cathay Bank

Line of credit facility due May 2018

—

—

Acquisition loan due April 2019

15,580

17,079

Mortgage payable due August 2027

7,836

4,367

Loans with Seine-Normandie Water Agency

French government loan 1 due March 2018

17

30

French government loan 2 due June 2020

83

99

French government loan 3 due July 2021

233

262

Payment Obligation to Merck

585

506

Equipment under Capital Leases

1,360

1,614

Total debt and capital leases

48,444

37,722

Less current portion of long-term debt and capital leases

6,212

5,366

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

$
42,232

$
32,356


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

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

Loans with Cathay Bank

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

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

Loans with Seine-Normandie Water Agency

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

Payment Obligation to Merck		558		552

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

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

~~Equipment Loan—Paid off April 2017~~

In March 2012, the Company entered into an $8.0 million revolving credit facility. In March 2013, the Company converted the outstanding principal balance of $4.9 million into an equipment loan. Borrowings under the facility were secured by equipment. Borrowings under the facility bore a variable interest rate at the prime rate as published by ~~The Wall Street Journal, plus 0.25%, with a minimum interest rate of 3.50%. In April 2017, the Company repaid all outstanding amounts due under this loan.~~

~~Line of Credit Facility—Due December 2018~~

~~In March 2012, the Company entered into a $10.0 million line of credit facility, which bears a variable interest rate at the prime rate as published by~~ ~~The Wall Street Journal. Borrowings under the facility are secured by inventory and accounts~~

-~~20-~~18-

Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~receivable. This facility matured in March 2016.~~

Acquisition loan – Due June 2024

In ~~March 2016, the facility was amended to increase the line of credit to $15.0 million and to extend the maturity date to September 2017. In May 2017,~~July 2019, the Company amended the ~~facility~~acquisition loan relating to ~~extend~~the AFP acquisition. The amendment was effective in June 2019. Under the amended loan agreement, the maturity date was extended to ~~December 2018. As of September 30, 2017, the Company did not have any amounts outstanding under this facility.~~

~~Equipment Loan—Due January 2019~~

~~In July 2013, the Company entered into an $8.0 million line of credit facility.~~

~~In January 2015, the Company drew down $6.2 million from the line of credit facility. Subsequently, the facility was converted into a term equipment~~June 2024. The acquisition loan with an outstanding principal balance of $6.2 million and a maturity date of January 2019. Borrowings under the facility are secured by equipment. As of September 30, 2017, the fair value of the loan approximates its book value. The interest rate used in the fair value estimation was determined to be a Level 2 input. The Company has entered into a fixed interest rate swap contract on this facility to exchange the variable interest rate for a fixed interest rate of 4.48% over the life of the facility without the exchange of the underlying notional debt amount. The interest rate swap contract does not qualify for hedge accounting and is recorded at fair value for an immaterial amount based on Level 2 inputs.

~~Mortgage Payable—Due February 2021~~

The Company refinanced the mortgage term loan in January 2016, which had an outstanding principal balance of $3.7 million at December 31, 2015, and a maturity date of February 2021. The refinanced loan is payable in monthly installments with a final balloon payment of $3.3 million. The refinanced loan is secured by one of the buildings at the Company’s Rancho Cucamonga, California, headquarters complex. The refinanced loan has a variable interest rate at the prime rate as published by ~~The Wall Street Journal~~. As of September 30, 2017, the fair value of the loan approximates its book value. The interest rate used in the fair value estimation was determined to be a Level 2 input. The Company has entered into a fixed interest rate swap contract on this loan to exchange the variable interest rate for a fixed interest rate of 4.39% over the life of the loan without the exchange of the underlying notional debt amount. The interest rate swap contract does not qualify for hedge accounting, and is recorded at fair value for an immaterial amount based on Level 2 inputs.

~~Equipment Loan—Due June 2021~~

~~In March 2016, the Company entered into a $5.0 million equipment credit facility.~~

In May 2017, the Company converted the outstanding balance of $5.0 million into a term equipment loan which matures in June 2021. Borrowings under the loan are secured by equipment. The loan bears a variable interest rate at the prime rate as published by ~~The Wall Street Journal~~. As of September 30, 2017, the fair value of the loan approximates its book value. The interest rate used in the fair value estimation was determined to be a Level 2 input. The Company has entered into a fixed interest rate swap contract on this facility to exchange the variable interest rate for a fixed interest rate of 4.86% over the life of the facility without the exchange of the underlying notional debt amount. The interest rate swap contract does not qualify for hedge accounting and is recorded at fair value for an immaterial amount based on Level 2 inputs.

~~Equipment Credit Line—Due December 2022~~

In June 2017, the Company entered into an $8.0 million equipment credit line with an 18-month draw down period. Interest payments are due monthly through December 2018 at the prime rate as published by ~~The Wall Street Journal. After the draw down period, the outstanding principal balance converts into a 48-month term loan which bears a variable interest rate at the prime rate as published by~~ ~~The Wall Street Journal. The loan matures in December 2022, and the~~

-~~21-~~

~~Table of Contents~~

~~AMPHASTAR PHARMACEUTICALS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~principal and interest payments are due monthly. Borrowings under the facility are secured by equipment. As of September 30, 2017, the Company did not have any amounts outstanding under this facility.~~

~~Mortgage Payable—Due October 2026~~

~~In September 2006, the Company entered into a mortgage term loan in the principal amount of $2.8 million, which matured in September 2016.~~

The Company refinanced the mortgage term loan in September 2016, which increased the principal amount to $3.6 million and extended the maturity date to October 2026. The refinanced loan is payable in monthly installments with a final balloon payment of $2.9 million. The refinanced loan was secured by one of the buildings at the Company’s Rancho Cucamonga, California, headquarters complex. The refinanced loan bears a variable interest rate at the one-month LIBOR rate plus 2.75%. As of September 30, 2017, the fair value of the loan approximates its book value. The interest rate used in the fair value estimation was determined to be a Level 2 input. Subsequently, the Company entered into a fixed interest rate swap contract on this loan to exchange the variable interest rate for a fixed interest rate of 4.15% until October 2021 without the exchange of the underlying notional debt amount. The interest rate swap contract does not qualify for hedge accounting, and is recorded at fair value for an immaterial amount based on Level 2 inputs.

~~Mortgage Payable—Due June 2027~~

In May 2017, the Company entered into a mortgage term loan in the principal amount of $9.0 million, which matures in June 2027. The loan is payable in monthly installments with a final balloon payment of $7.4 million plus interest. The loan is secured by one of the buildings at the Company’s Rancho Cucamonga, California, headquarters complex and two buildings at the Company’s Chino, California, facility. The loan bears a variable interest rate at the one-month LIBOR rate plus 2.5%. As of September 30, 2017, the fair value of the loan approximates its book value. The interest rate used in the fair value estimation was determined to be a Level 2 input. The Company entered into a fixed interest rate swap contract on this loan to exchange the variable interest rate for a fixed interest rate of 4.79% until June 2024 without the exchange of the underlying notional debt amount. The interest rate swap contract does not qualify for hedge accounting, and is recorded at fair value of approximately $0.2 million based on Level 2 inputs.

~~Loans with Cathay Bank~~

~~Line of Credit Facility—Due May 2018~~

In April 2012, the Company entered into a $20.0 million revolving line of credit facility. Borrowings under the facility are secured by inventory, accounts receivable, and intangibles held by the Company. The facility bears a variable interest rate at the prime rate as published by ~~The Wall Street Journal~~ with a minimum interest rate of 4.00%. In June 2016, the Company amended the facility to extend the maturity date from May 2016 to May 2018. As of September 30, 2017, the Company did not have any amounts outstanding under this facility.

~~Acquisition Loan with Cathay Bank—Due April 2019~~

~~On April 22, 2014, in conjunction with the Merck API Transaction, the Company entered into a secured term loan with Cathay Bank as lender. The principal amount of the loan is $21.9 million and~~ bears a variable interest rate at the prime rate as published by The Wall Street Journal, with a minimum interest rate of ~~4.00%~~5.00%. Beginning ~~on June 1, 2014,~~in August 2019, and through the maturity date, ~~April 22, 2019,~~ the Company must make monthly payments of principal and interest based on the then outstanding amount of the loan amortized over a ~~120‑month~~60-month period. On April 22, 2019, all amounts outstanding under the loan become due and payable, which would be approximately $12.0 million based upon an interest rate of 4.00%. The loan is secured by 65% of the issued and outstanding shares of stock in AFP and certain assets of the Company, including accounts receivable, inventory, certain investment property, goods, deposit accounts, and general

-~~22-~~

~~Table of Contents~~

~~AMPHASTAR PHARMACEUTICALS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

intangibles but not including the Company’s equipment and real property. As of September 30, 2017, the fair value of the loan approximates its book value. The interest rate used in the fair value estimation was determined to be a Level 2 input.

The loan includes customary restrictions on, among other things, the Company’s ability to incur additional indebtedness, pay dividends in cash or make other distributions in cash, make certain investments, create liens, sell assets, and make loans. The loan also includes customary events of defaults, the occurrence and continuation of any of which provide Cathay Bank the right to exercise remedies against the Company and the collateral securing the loan. These events of default include, among other things, the Company’s failure to pay any amounts due under the loan, the Company’s insolvency, the occurrence of any default under certain other indebtedness or material agreements, and a final judgment against the Company that is not discharged in 30 days.

~~Mortgage Payable—Due August 2027~~

In April 2014, the Company refinanced the mortgage term loan, which had a principal balance outstanding of $4.6 million. The loan was payable in monthly installments with a final balloon payment of $3.9 million. The loan was secured by the building at the Company’s Canton, Massachusetts location, and bore interest at a fixed rate of 5.42% and was to have matured in April 2021.

In August 2017, the Company refinanced the mortgage term loan, with a principal balance outstanding of $7.9 million. The loan is payable in monthly installments and is secured by the building at the Company’s Canton, Massachusetts location. The loan bears interest at a fixed rate of 4.70% for the first five years of the loan, thereafter; the loan bears a variable interest rate at the prime rate as published by ~~The Wall Street Journal~~ ~~and matures in June 2027. As of September 30, 2017, the fair value of the loan approximates its book value. The interest rate used in the fair value estimation was determined to be a Level 2 input.~~

~~Loans with Seine-Normandie Water Agency~~

In January 2015, the Company entered into three French government loans with the Seine-Normandie water agency in the aggregate amount of €0.6 million, or $0.7 million, subject to currency exchange fluctuations. The life of the loans range between three to six years, and includes annual equal payments and bears no interest over the life of the loans.

As of September 30, 2017, the payment obligation had an aggregate book value of €0.3 million, or $0.3 million, subject to currency exchange rate fluctuations, which approximates fair value. The fair value of the payment obligation was determined by using the interest rate associated with the Company’s acquisition loan with Cathay Bank that bears a variable interest rate at the prime rate as published by ~~The Wall Street Journal, with a minimum interest rate of 4.00%. Such interest rate is deemed to be a Level 2 input for measuring fair value.~~

~~Payment Obligation to Merck~~

~~Merck—Due December 2017~~

On April 30, 2014, in conjunction with the Merck API Transaction, the Company entered into a commitment obligation with Merck, in the principal amount of €11.6 million, or $16.0 million, subject to currency exchange rate fluctuations. The terms of the purchase price include annual payments over four years and bear a fixed interest rate of 3.00%. As of September 30, 2017, the payment obligation had a balance of €0.5 million, or $0.6 million, which approximates fair value. The fair value of the payment obligation was determined by using the interest rate associated with the Company’s acquisition loan with Cathay Bank that bears a variable interest rate at the prime rate as published by ~~The Wall Street Journal, with a minimum interest rate of 4.00%. Such interest rate is deemed to be a Level 2 input for measuring fair value.~~

-~~23-~~

~~Table of Contents~~

~~AMPHASTAR PHARMACEUTICALS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Covenants

At ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, the Company was in compliance with its debt covenants, which include a minimum current ratio, minimum debt service coverage, minimum tangible net worth, maximum debt-to-effective-tangible-net-worth ratio, and minimum deposit requirement computed on a consolidated basis.

~~Equipment under Capital Leases~~

The ~~Company entered into leases~~profitability-related covenants for ~~certain equipment under capital leasing arrangements, which will expire at various times through 2021. The cost~~loans with Cathay Bank were not effective as of ~~equipment under capital leases was $1.6 million and $2.0 million at September~~June 30, ~~2017 and~~2019 or December 31, ~~2016, respectively.~~

~~The accumulated depreciation~~2018. Such covenants will become effective as of ~~equipment under capital leases was $0.1 million and $0.2 million at September 30, 2017 and~~ December 31, ~~2016, respectively. Depreciation of assets recorded under capital leases is included in depreciation expense in the accompanying consolidated financial statements.~~2019.

Note 13. Income Taxes

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

Three Months Ended

Nine Months Ended

September 30,

September 30,


2017

2016

2017

2016

(in thousands)

Income (loss) before taxes

$
(1,991)

$
6,001

$
2,686

$
19,569

Income tax expense (benefit)

(2,166)

2,111

(354)

6,295

Net income

$
175

$
3,890

$
3,040

$
13,274

Income tax provision as a percentage of income before income taxes

108.8
%

35.2
%

(13.2)
%

32.2
%


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

The ~~Company has a full valuation allowance against its French deferred tax assets; however, a tax benefit is included~~decrease in the ~~annual~~Company’s effective tax rate computation due to the French entity reporting a year-to-date foreign exchange gain in other comprehensive income. The Company calculates an estimated annual effective income tax rate based upon its forecasted income. This estimated effective tax rate factors in various permanent differences, including domestic deductions, the impact of foreign operations, and various credits, as well as discrete tax items recognized during each period. Duringfor the three and ~~nine~~six months ended ~~September~~June 30, ~~2017, the Company recognized~~2019, was primarily due to differences in pre-tax income (loss) positions and timing of discrete tax benefits of $1.3 million and $1.4 million, respectively. During the three and nine months ended September 30, 2016, the Company recognized discrete tax benefits of $0.3 million and $0.3 million, respectively.items.

Effective January 1, 2017, the Company adopted ASU 2016-09, under which, differences between the tax deduction for share-based awards and the related compensation expenses recognized under ASC 718 are prospectively accounted for as a component of the provision for income taxes. In addition, ASU 2016-09 eliminated the requirement that excess tax benefits from share-based compensation reduce taxes payable prior to being recognized in the financial statements. As a result of the adoption of ASU 2016-09, the cumulative excess benefits of stock compensation of $0.9 million that was not previously recognized was established on the balance sheet resulting in an increase in deferred tax assets and retained earnings.

The Company’s income tax return for the 2015 tax year is currently under examination by the Internal Revenue Service. There are differing interpretations of tax laws and regulations and, as a result, significant disputes may arise with tax authorities involving issues of timing and amount of deductions and allocations of income. Resolution of uncertain tax positions may have an impact on the results of operations for that period.

-~~24-~~

~~Table of Contents~~

~~AMPHASTAR PHARMACEUTICALS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Valuation Allowance

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

~~In 2015, the~~The Company ~~assessed the realizability of the deferred~~has discontinued recognizing AFP’s income tax ~~assets of AFP and~~benefits by recording a full valuation allowance until it is determined that it ~~was not~~is more likely than not that ~~the net~~AFP will generate sufficient taxable income to realize its deferred income tax ~~assets~~assets.

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

-19-

Table of ~~$0.9 million as of December 31, 2015, and continues to maintain a full valuation allowance on all AFP deferred tax assets.~~Contents

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 14. ~~Stockholders’~~Stockholders' Equity

~~A summary of the~~The changes in stockholders’ equity for the ~~nine~~three and six months ended ~~September~~June 30, ~~2017,~~2019 and 2018 consisted of the following:

Nine Months Ended

September 30,

2017

(in thousands)

Stockholders’ equity as of December 31, 2016

$
329,255

Beginning balance adjustment to retained earnings as a result of the adoption of ASU 2016-09

872

Adjusted stockholders’ equity as of January 1, 2017

330,127

Net income

3,040

Other comprehensive income

2,101

Net proceeds from equity plans

7,255

Share-based compensation expense

12,905

Purchase of treasury stock

(24,773)

Stockholders’ equity as of September 30, 2017

$
330,655


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

~~2014 Employee Stock Purchase Plan~~

In June 2014, the Company adopted the Employee Stock Purchase Plan, or ESPP, in connection with its initial public offering. A total of 2,000,000 shares of common stock are reserved for issuance under this plan. The Company’s ESPP permits eligible employees to purchase common stock at a discount through payroll deductions during defined offering periods. Under the ESPP, the Company may specify offerings with durations of not more than 27 months, and may specify shorter purchase periods within each offering. Each offering will have one or more purchase dates on which shares of its common stock will be purchased for employees participating in the offering. An offering may be terminated under certain circumstances. The price at which the stock is purchased is equal 85% of the lower of the fair market value of the common stock at the beginning of an offering period or on the date of purchase.

~~As of September 30, 2017, the Company has issued 320,623 shares of common stock under the ESPP and 1,679,377 shares of its common stock remained available for issuance.~~

~~For the three and nine months ended September 30, 2017~~, ~~the Company recorded ESPP expense of $0.1 million and $0.4 million, respectively~~. ~~For the three and nine months ended September 30, 2016~~, ~~the Company recorded ESPP expense of $0.1 million and $0.4 million, respectively~~.

-~~25-~~

~~Table of Contents~~

~~AMPHASTAR PHARMACEUTICALS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Share Buyback Program

~~On November 6, 2014,~~Pursuant to the Company’s ~~Board of Directors authorized a $10.0 million~~existing share buyback program, ~~which was completed in December 2015. On November 10, 2015,~~ the ~~Company’s Board~~Company purchased 50,980 and 196,459 shares of ~~Directors authorized an additional $10.0~~its common stock during the three and six months ended June 30, 2019, for total consideration of $1.1 million toand $4.1 million, respectively. The Company purchased 430,137 and 837,741 shares of its common stock during the ~~Company’s share buyback program, which was completed in December 2016. On November 7, 2016,~~three and six months ended June 30, 2018, for total consideration of $7.2 million and $14.8 million, respectively.

In May 2019, the Company’s Board of Directors authorized an increase of ~~$20.0 million to the Company’s share buyback program, which was completed in August 2017. On August 7, 2017, the Company’s Board of Directors authorized an additional~~ $20.0 million to the Company’s share buyback program, which is expected to continue for an indefinite period of time. The primary goal of the program is to offset dilution created by the Company’s equity compensation programs.

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

Pursuant to the Company’s share buyback program, the Company purchased 472,379 and 1,584,661 shares of its common stock during the three and nine months ended September 30, 2017, for total consideration of $7.6 million and $24.8 million, respectively. The ~~Company purchased 46,333 and 710,833 shares of its common stock during the three and nine months ended September 30, 2016, for total consideration of $0.8 million and $9.0 million, respectively.~~

2015 Equity Incentive Plan

In March 2015, the Board of Directors adopted the Company’s 2015 Equity Incentive Plan, or the 2015 Plan, which was approved by the Company’s stockholders in May 2015 and is set to expire in March 2025. The 2015 Plan is designed to meet the needs of a publicly traded company, including the requirements for granting “performance based compensation” under Section 162(m) of the Internal Revenue Code. The 2015 Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights, performance units, performance shares, and other stock or cash awards to employees of the Company and its subsidiaries, members of the Board of Directors and consultants.

The Company initially reserved 5,000,000 shares of common stock for issuance under the 2015 Plan. This number will be increased by the number of shares available for issuance under the Company’s prior equity incentive plans or arrangements that are not subject to options or other awards, plus the number of shares of common stock related to options or other awards granted under the Company’s prior equity incentive plans or arrangements that are repurchased, forfeited, expired, or cancelled on or after the effective date of the 2015 Plan. The 2015 Plan also contains an “evergreen provision” that allows for an annual increase in the number of shares available for issuance on January 1 of each year during the 10 year term of the 2015 Plan, beginning January 1, 2016. The annual increase in the number of shares shall be the lessor of (i) 3,000,000 shares, (ii) two and one-half percent (2.5%) of the outstanding shares on the last day of the immediately preceding fiscal year, or (iii) such number of shares as determined by the Board of Directors. As of ~~the effective date, there were 5,300,296 shares available for grant under the 2015 Plan.~~

~~In January 2017, an additional 1,156,216 shares were reserved under the 2015 Plan pursuant to the evergreen provision. As of September~~June 30, ~~2017,~~2019, the Company reserved an aggregate of ~~3,469,873~~6,137,364 shares of common stock for future issuance under the 2015 Equity Incentive Plan, or the 2015 Plan, including 1,165,778 shares which were reserved in January 2019 pursuant to the evergreen provision in the 2015 Plan.

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

The weighted-averages for key assumptions used in determining the fair value of options granted during the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, are as follows:


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2017		2016		2017		2016		2019		2018		2019		2018
Average volatility	36.9	%	31.9	%	37.0	%	30.4	%	43.4	%	41.7	%	42.5	%	39.9	%
Risk-free interest rate	2.0	%	1.3	%	2.1	%	1.5	%	2.0	%	2.8	%	2.4	%	2.7	%
Weighted-average expected life in years	6.3		6.3		5.5		5.5		5.0		4.9		5.7		5.7
Dividend yield rate	—	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%

A summary of option activity ~~under all plans~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, is presented below:


				Weighted-Average						Weighted-Average
		Weighted-Average		Remaining	Aggregate			Weighted-Average		Remaining	Aggregate
		Exercise		Contractual	Intrinsic			Exercise		Contractual	Intrinsic
	Options	Price		Term (Years)	Value(1)		Options	Price		Term (Years)	Value(1)
					(in thousands)						(in thousands)
Outstanding as of December 31, 2016	12,530,297	$	14.57
Outstanding as of December 31, 2018							10,105,565	$	14.69
Options granted	1,815,813		14.23				1,033,268		20.96
Options exercised	(1,134,259)		11.60				(1,074,413)		15.60
Options cancelled	(44,473)		13.57				(5,219)		18.90
Options expired	(118,378)		25.48				(2,325)		14.65
Outstanding as of September 30, 2017	13,049,000	$	14.69	4.49	$	53,235
Exercisable as of September 30, 2017	8,683,400	$	15.22	3.05	$	34,772
Outstanding as of June 30, 2019							10,056,876	$	15.23	5.16	$	59,792
Exercisable as of June 30, 2019							7,311,977	$	14.18	4.13	$	50,760

⁽¹⁾

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the estimated fair value of the Company’s common stock for those awards that have an exercise price below the estimated fair value at ~~September~~June 30, ~~2017.~~2019.

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019, the Company recorded expenses of $1.9.8 million and $5$4.9.2 million, respectively, related to stock options ~~granted to employees under all plans and expenses of $0.2 million and $0.5 million, respectively, related to stock options granted to the Board of Directors under all plans.~~granted. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018, the Company recorded expenses of $~~1.8~~2.0 million and ~~$6.2~~$4.6 million, respectively, related to stock options granted ~~to employees under all plans and expenses of $0.1 million and $0.5 million, respectively, related to stock options granted to the Board of Directors~~ under all plans.

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Information relating to option grants and exercises is as follows:


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2017		2016		2017		2016		2019		2018		2019		2018
	(in thousands, except per share data)								(in thousands, except per share data)
Weighted-average grant date fair value per option share	$	6.23	$	6.34	$	4.95	$	3.42	$	8.17	$	6.53	$	8.46	$	7.79
Intrinsic value of options exercised		1,668		4,998		4,730		5,980		452		277		5,822		1,338
Cash received from options exercises		782		14,331		9,521		17,584
Cash received from options exercised										1,108		650		5,047		2,511
Total fair value of the options vested during the year		779		2,688		6,984		7,948		388		1,383		7,502		7,790

A summary of the status of the Company’s non-vested options as of ~~September~~June 30, ~~2017,~~2019, and changes during the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, is presented below:


		Weighted-Average			Weighted-Average
		Grant Date			Grant Date
	Options	Fair Value		Options	Fair Value
Non-vested as of December 31, 2016	4,592,187	$	3.61
Non-vested as of December 31, 2018				3,279,026	$	5.47
Options granted	1,815,813		4.95	1,033,268		8.46
Options vested	(1,997,927)		3.50	(1,562,176)		4.80
Options forfeited	(44,473)		4.71	(5,219)		8.12
Non-vested as of September 30, 2017	4,365,600		4.21
Non-vested as of June 30, 2019				2,744,899		6.97

As of ~~September~~June 30, ~~2017,~~2019, there was ~~$12.9~~$15.2 million of total unrecognized compensation cost, net of forfeitures, related to non-vested stock option based compensation arrangements ~~granted under all plans.~~granted. The cost is expected to be recognized over a weighted-average period of ~~2.3~~2.5 years and will be adjusted for future changes in estimated forfeitures.

~~Deferred Stock Units/~~Restricted Stock Units

~~Beginning in 2007, the~~The Company ~~granted deferred~~grants restricted stock units, or ~~DSUs,~~RSUs, to certain employees and members of the Board of Directors with a vesting period of up to five ~~years, and commencing in 2015, such equity was issued as restricted stock units, or RSUs (such RSUs and DSUs are collectively referred to herein as RSUs).~~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~~six months ended ~~September~~June 30, ~~2017,~~2019, the Company recorded expenses of ~~$1.7~~$2.0 million and ~~$5.4~~$4.1 million, respectively, related to RSU awards granted ~~to employees under all plans and expenses of $0.2 million and $0.5 million, respectively, related to RSU awards granted to the Board of Directors~~. During the three and ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2018, the Company recorded expenses of ~~$1.4~~$2.0 million and $3.9 million, respectively, related to RSU awards ~~granted to employees under all plans and expenses of $0.2 million and $0.5 million, respectively, related to RSU awards granted to the Board of Directors.~~granted.

As of ~~September~~June 30, ~~2017,~~2019, there was ~~$14.2~~$16.5 million of total unrecognized compensation cost, net of forfeitures, related to non-vested RSU-based compensation arrangements ~~granted under all plans.~~granted. The cost is expected to be recognized over a weighted-average period of ~~2.4~~2.5 years and will be adjusted for future changes in estimated forfeitures.

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Information relating to RSU grants and deliveries is as follows:

Total Fair Market

Value of RSUs

Issued

Total RSUs

Issued

Compensation(1)

Issued

Compensation(1)

(in thousands)

RSUs outstanding at December 31, 2016

1,215,786

RSUs outstanding at December 31, 2018

1,206,661

RSUs granted

676,482

9,298

431,697

8,733

RSUs forfeited

(13,302)

(2,976)

RSUs vested(2)

(484,739)

(530,506)

RSUs outstanding at September 30, 2017

1,394,227

RSUs outstanding at June 30, 2019

1,104,876

⁽¹⁾

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

⁽²⁾

Of the vested RSUs, ~~184,341~~233,539 shares of common stock were surrendered to ~~fulfil~~fulfill tax withholding obligations.

~~Equity Awards to Consultants and Advisory Board Members~~

The Company pays certain consultants and advisory board members in the form of share-based awards. Such share-based compensation expense is recorded over the service period based on the estimated fair market value of the equity award at the date services are performed or upon completion of services. During the three and nine months ended September 30, 2017, the Company recorded expenses of $0.1 million and $0.3 million, respectively, in relation to such share-based compensation. During the three months ended September 30, 2016, the Company recorded an immaterial amount of expense in relation to such share-based compensation. During the nine months ended September 30, 2016, the Company recorded an expense of approximately $0.1 million in relation to such share-based compensation.

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


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2017		2016		2017		2016		2019		2018		2019		2018
	(in thousands)								(in thousands)
Cost of revenues	$	815	$	675	$	2,843	$	2,245	$	959	$	981	$	2,238	$	2,141
Operating expenses:
Selling, distribution, and marketing		88		45		237		176		95		104		189		211
General and administrative		2,947		2,593		8,715		8,339		2,648		2,743		5,439		5,636
Research and development		306		242		1,110		844		330		368		840		874
Total share-based compensation	$	4,156	$	3,555	$	12,905	$	11,604	$	4,032	$	4,196	$	8,706	$	8,862

The 2018 ANP Equity Incentive Plan

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

Note 15. Employee Benefits

401(k) Plan

The Company has a defined contribution 401(k) plan, or the Plan, whereby eligible employees voluntarily contribute up to a defined percentage of their annual compensation. The Company matches contributions at a rate of 50% on the first 6% of employee contributions, and pays the administrative costs of the Plan. ~~Employer contributions vest over four years.~~ Total employer contributions for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019 were approximately ~~$0.3~~$0.4 million and ~~$0.8~~$0.7 million, respectively, compared to the prior year expense of $0.3 million and ~~$0.7~~$0.6 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2018, respectively.

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Defined Benefit Pension Plan

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

The liability under the plan is based on a discount rate of ~~1.60%~~0.9% and ~~1.75%~~1.70% as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively. The liability is included in accrued liabilities in the accompanying consolidated balance sheets. The plan is currently unfunded, and the benefit obligation under the plan was ~~$1.9~~$2.2 million and ~~$1.7~~$2.2 million at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively. The Company recorded an immaterial amount of expense under the plan for the three months ended ~~September~~June 30, ~~2017,~~2019, and $0.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2019. The Company recorded an immaterial amount of expense under the plan for the three months ended ~~September~~June 30, ~~2016,~~2018, and $0.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2018.

Note 16. Commitments and Contingencies

~~Supply Agreement with MannKind Corporation~~Lease Liabilities

On ~~July 31, 2014,~~January 1, 2019, the Company ~~entered into a supply agreement with MannKind Corporation,~~adopted ASC 842, which resulted in the recognition of right-of-use, or ~~MannKind, or~~ROU, assets of approximately $13.9 million and related lease liabilities in the ~~Supply Agreement, pursuant~~consolidated balance sheets of approximately $14.1 million related to ~~which~~its operating lease commitments. ROU assets represent the Company’s right to control an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of its leases do not provide an implicit rate, the Company ~~agreed~~used its incremental borrowing rate based on the information available at the commencement date in determining the discount rate used to ~~manufacture for and supply to MannKind certain quantities of RHI API for use in MannKind’s product Afrezza~~®~~. Under~~present value the Supply Agreement, MannKind agreed to purchase annual minimum quantities of RHI API in an aggregate amount of approximately €120.1 million, or approximately $146.0 million, over five years from calendar years 2015 through 2019. Specifically, the minimum annual purchase commitment was approximately €27.1 million in 2015 and approximately €23.3 million each year from 2016 through 2019.

In January 2015, the Company entered into a supply option agreement with MannKind, or the Option Agreement, pursuant to which MannKind will have the option to purchase RHI API, in excess of the minimum amounts specified in the Supply Agreement in calendar years 2016 through 2019. In the event MannKind elects not to exercise its minimum annual purchase option for any year under the Option Agreement, MannKind is obligated to pay the Company a specified capacity cancellation fee.

In October 2015, MannKind informed the Company that it was not exercising the option to purchase additional quantities of RHI API for 2016 under the Option Agreement and paid the Company the specified capacity cancellation fee of $0.8 million. Such capacity cancellation fee was recorded as net revenue in the Company’s consolidated statement of operations for the year ended December 31, 2015.

~~For the year ended December 31, 2016, sales of RHI API to MannKind totaled $6.8 million, which fulfilled the remaining unfulfilled 2015 commitment of RHI under the Supply Agreement.~~

In November 2016, the Company amended the Supply Agreement with MannKind, whereby MannKind’s aggregate total commitment of RHI API under the Supply Agreement has not been reduced; however, the annual minimum purchase commitments of RHI API under the Supply Agreement have been modified and extended through 2023, which timeframe had previously lapsed after calendar year 2019. Specifically, the minimum annual purchase commitment in calendar year 2016 has been cancelled, and the minimum annual purchase commitments in calendar years 2017 through 2023 have been modified to be €2.7 million of insulin in the fourth quarter of 2017, €8.9 million in 2018, €11.6 million in 2019, €15.5 million in 2020 and in 2021, and €19.4 million in 2022 and in 2023. MannKind may request to purchase additional quantities of RHI API in excess of its annual minimum purchase commitments. The Supply Agreement Amendment also (i) shortened the required expiry dates for RHI API delivered to MannKind pursuant to the Supply Agreement, (ii) modified the timing of MannKind’s payment for the minimum annual purchase commitment in calendar year 2017, and

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~~AMPHASTAR PHARMACEUTICALS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

(iii) added a pre-payment requirement for purchases of RHI API by MannKind in calendar years 2017 and 2018. The amendment can be renewed for additional, successive two-year terms upon 12 months’ written notice, given prior to the end of the initial term or any additional two-year term.

Concurrent with the amendment of the Supply Agreement, the Company amended the Option Agreement with MannKind, whereby the amendment to the Option Agreement extends the timing for payment of the capacity cancellation fee for 2017 and decreases the amounts payable as capacity cancellation fees for 2018 and 2019 in the event MannKind fails to exercise its minimum annual purchase option for any given year. The Company recognized the cancellation fee for 2017 of $1.5 million in net revenues in its consolidated statement of operations for the year ended December 31, 2016, and subsequently collected on this receivable. In August 2017, MannKind notified the Company that it would not exercise its minimum annual purchase option of RHI API for 2018. The Company recognized the cancellation fee for 2018 of $0.9 million in net revenues in its condensed consolidated statements of operations for the three and nine months ended September 30, 2017, and subsequently collected on this receivable.

In addition to, and in consideration of the amended timeframe and other amendments contained in the amendment to the Supply Agreement in the amendment to the Option Agreement, the Supply Agreement Amendment provided the Company right of first refusal to participate in the development and commercialization of Afrezza® ~~in China through a collaborative arrangement.~~

~~Collaboration Agreement with a Medical Device Manufacturer~~

In 2014, the Company entered into a collaboration agreement with a medical device manufacturer to develop a drug delivery system to be used by the Company for one of its pipeline products. As of September 30, 2017, the Company has paid an upfront payment of $0.5 million and has paid $1.5 million in milestone payments under this agreement, which were classified as research and development expense as the milestones were met. The Company is obligated to pay up to an additional $0.5 million if certain milestones are met. As of September 30, 2017, no such obligation existed. Pursuant to the collaboration agreement, if the medical device manufacturer is successful in the development of this drug delivery system and the Company’s pipeline products receive appropriate regulatory approval, the Company intends to enter into a commercial supply agreement with such medical device manufacturer for a minimum purchase of 1.0 million units during the first 12 months.

~~Operating Lease Agreements~~

lease payments. The Company leases real and personal property, in the normal course of business, under various non-cancelable operating leases. The Company, at its option, can renew a substantial portion of its leases, at the market rate, for various renewal periods ranging from one to six years. ~~Rental expense under these leases~~

The components of lease costs for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017, was approximately $0.9 million and $2.6 million, respectively, compared to $0.8 million and $2.5 million for the three and nine months ended September 30, 2016, respectively.~~ 2019 were as follows:

~~Purchase Commitments~~


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

Short-term lease costs		177		307

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

Total lease costs	$	1,179	$	2,292

As of September 30, 2017, the Company has entered into commitments to purchase equipment and raw materials for an aggregate amount of approximately $48.4 million. The Company anticipates that most of these commitments with a remaining term in excess of one year will be fulfilled by 2018. In addition, the Company is obligated to pay a supplier certain payments up to $1.5 million based on its launch and sale of one of the Company’s pipeline products.

The Company entered into agreements with a Chinese governmental entity to acquire land-use rights to real property in Nanjing, China. Under the terms of these agreements, the Company committed to invest capital in its wholly-owned subsidiary, ANP, and to develop these properties as an API manufacturing facility for the Company’s pipeline products. In conjunction with these agreements, ANP modified its business license on July 3, 2012, to increase its authorized

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~capital. As~~

Other information to leases are as follows:


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


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

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

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

Future minimum rental payments under operating leases that have initial or remaining non-cancelable lease terms in excess of ~~December 31, 2016, the Company had completed its investment~~12 months as of ~~total registered capital commitment of $61.0 million to ANP. This investment in ANP resulted in cash being transferred from the U.S. parent company to ANP.~~June 30, 2019, are as follows:


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

Purchase Commitments

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

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

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

the Company acquired certain land-use rights ~~with a carrying value of~~for $1.2 ~~million. In addition,~~million and $1.3 million, respectively. As required by these agreements, the ~~Company purchased additional land-use rights in November 2012 for $1.3 million. The~~ Company committed to spend approximately $15.0 million in the related land ~~development. The agreements require~~development, which primarily includes the construction of fixed assets according to a specific timetable. As of June 30, 2019, the Company has spent $8.3 million on the property and specified a timetable for the construction of these fixed assets. The current pace of development of the property is behind the schedules described in the purchase agreements and, per the purchase agreement, potential monetary penalties could result if the development is delayed or not completed in accordance with the guidelines stated in the purchase agreements.such construction. The Company ~~is in discussions with~~anticipates that this spending commitment will be met by the ~~Chinese government regarding the development and believes that the likelihood~~end of ~~incurring any penalty is remote.~~2019.

Note 17. Related-Party Transactions

ANP Private Placement

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

Note 18. Litigation

Momenta/Sandoz Enoxaparin Patent and Antitrust Litigation

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

On September 17, 2015, the ~~Massachusetts~~Company initiated a lawsuit by filing a complaint in the California District Court ~~issued a preliminary injunction barring the Company from selling its generic enoxaparin product and also requiring~~against Momenta and Sandoz, ~~to post a $100.1 million bond. The preliminary injunction was stayed by the United States Court of Appeals for the Federal Circuit,~~ or the ~~Federal Circuit,~~Defendants. The Company’s complaint generally asserts that Defendants have engaged in ~~January 2012,~~certain types of illegal, monopolistic, and ~~reversed by the Federal Circuit in August 2012.~~anticompetitive conduct giving rise to various causes of action against them.

~~In January 2013,~~On May 20, 2019, the Company ~~moved for summary judgment~~and the Plaintiffs entered into a Settlement Agreement to fully settle the patent litigation and antitrust litigation. The Settlement Agreement was contingent upon the District Court’s granting a Joint Motion to Vacate the Patent Judgment and thereafter, the Plaintiffs’ payment of ~~non‑infringement of both patents. Momenta and Sandoz withdrew their allegations as~~$59.9 Million to the ~~‘466 patent,~~Company. On June 18, 2019, the parties filed a Joint Motion to Vacate the Patent Judgment with the District Court, and ~~in July 2013,~~on the ~~Massachusetts~~same day, the District Court granted such motion. Accordingly, on June 19, 2019, the ~~Company’s motion for summary judgment of non‑infringement of~~parties filed Joint Stipulations with the ~~‘886 patent and denied Momenta and Sandoz’s motion for leave to amend their infringement contentions. On January 24, 2014, the Massachusetts~~ District Court ~~judge entered final judgment in~~to dismiss the ~~Company’s favor on both patents. Momenta~~patent litigation and ~~Sandoz also filed a motion to collect attorneys’ fees~~the antitrust litigation, each of which is self-executing and costs relating to a discovery motion, which the Massachusetts District Court granted. On May 9, 2016, the Massachusetts District Court issued an order imposing fees and costs of approximately $0.4 million in relation to this discovery motion. This amount has been accrued in the general and administrative expense for the quarter ended March 31, 2016. ~~On January 30, 2014, Momenta and Sandoz filed a notice of appeal~~effective upon filing pursuant to the Federal ~~Circuit appealing the court’s final judgment including summary judgment denying Momenta and Sandoz’s motion for leave to amend their infringement contentions.~~

~~Following appeal briefing filed by the parties, the Federal Circuit held oral argument~~Rules of Civil Procedure 41(a)(1)(A)(ii). Furthermore, on ~~May 4, 2015. On November 10, 2015, the Federal Circuit panel affirmed-in-part and vacated-in-part the decision of the~~ ~~Massachusetts~~ ~~District Court granting summary judgment of non-infringement as to the Company, and it remanded the case to the~~ ~~Massachusetts~~ ~~District Court for further proceedings consistent with its opinion. The Federal Circuit panel affirmed the~~ ~~Massachusetts~~ District Court’s holding in the Company’s favor that the Company does not infringe under 35 U.S.C. 271(g), and the panel vacated the grant of summary judgment to the extent it was based on the determination that the Company’s activities fall within the 35 U.S.C. 271(e)(1) safe harbor. The Federal Circuit panel also left to the ~~Massachusetts~~ District Court’s discretion whether to reconsider on remand its denial of leave for Momenta and Sandoz to amend their infringement contentions. On January 11, 2016, the Company filed a Petition for Rehearing En Banc with the Federal Circuit. On February 17, 2016, the Federal Circuit denied the Company’s Petition, andJune 26, 2019, the Federal Circuit issued ~~its mandate on February 24, 2016, whereby~~an Order and a Mandate dismissing the ~~case returned~~appeal of the patent litigation. On June 27, 2019, pursuant to the ~~Massachusetts~~ ~~District Court for further proceedings.~~

~~On March 18, 2016,~~Settlement Agreement, the parties filed a joint status report with the Massachusetts District Court. On June 21, 2016, the Massachusetts District Court granted Momenta and Sandoz’s Motion for Leave to Amend its Infringement Contentions.

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~~AMPHASTAR PHARMACEUTICALS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~In light of Momenta and Sandoz’s Amended Infringement Contentions and recent changes in Supreme Court precedent since the case was stayed in 2012,~~Plaintiffs paid the Company ~~sought~~$59.9 Million. The Company is not entitled to ~~amend its Non-Infringement and Invalidity Contentions.~~

~~On July 18, 2016,~~future rights or royalties related to this settlement. Accordingly, the Company ~~submitted~~recorded the settlement amount as other income (expenses), in its ~~Motion for Leave to Amend Its Non-Infringement and Invalidity Contentions and Momenta and Sandoz responded on July 25, 2016. In light~~condensed consolidated statements of the new arguments made in their response, the Company further filed a Motion For Leave to Reply in Further Support of Defendants’ Motion for Leave to Amend Non-Infringement and Invalidity Contentions, which was granted. A hearing was held on August 23, 2016, where the Magistrate Judge ordered the Company to file its proposed amended contentions, which it filed on August 31, 2016. On February 4, 2017, the Magistrate Judge issued an order denying the Company leave to amend its contentions. The Company filed objections to this order with the District Court on February 21, 2017. On April 13, 2017, the District Court rejected the determination of the Magistrate Judge with respect to the Company’s amended non-infringement contentions, and allowed the Company to amend its non-infringement contentions. With respect to the Company’s amended invalidity contentions, the District Court accepted the Magistrate Judge’s determination; however, the District Court specifically stated that the Company can argue changes in law at the summary judgment stage or at trial.

In parallel with the Massachusetts District Court proceedings, the Company appealed the Federal Circuit’s decision to vacate the grant of the Company’s summary judgment to the extent it was based on the determination that the Company’s activities are protected under the Safe Harbor. The Company filed a Petition for a Writ of Certiorari with the Supreme Court on May 17, 2016. Momenta and Sandoz initially waived their right to respond to the petition; however, on May 31, 2016, the Supreme Court requested a response from Momenta and Sandoz. The response from Momenta and Sandoz was initially due on June 30, 2016, but they requested an extension. Momenta and Sandoz filed their response on August 1, 2016. On October 3, 2016, the Supreme Court declined the Petition for a Writ of Certiorari.

Fact discovery in the Massachusetts District Court proceedings closed on November 22, 2016, and the parties proceeded with expert discovery and exchanged opening and rebuttal expert reports. Expert discovery closed on March 24, 2017. On April 14, 2017, Plaintiffs filed a Motion for Summary Judgment seeking to dismiss the Company’s equitable defenses. On April 14, 2017, the Company filed Defendants’ Motion for Summary Judgment of Invalidity and Noninfringement. In the Motion, the Company moved for the District Court to grant summary judgment in favor of the Company on the following issues: (1) the ’886 patent is invalid under 35 U.S.C. § 101 as claiming non-patentable subject matter; (2) the ’886 patent is invalid under 35 U.S.C. § 112 because the claims are indefinite; and (3) the Company’s tests do not infringe the claims of the ’886 patent. Oppositions to the motions for summary judgment were filed on May 5, 2017. Replies in support of the motions for summary judgment were filed on May 19, 2017.On June 16, 2017, the District Court issued an order denying the summary judgment motions. The District Court also denied Plaintiffs’ motion for summary judgment dismissing the Company’s defenses of implied waiver and equitable estoppel, and denied Plaintiffs’ alternative request for a separate hearing on the implied waiver and equitable estoppel defenses holding that the defenses would be submitted to the jury for an advisory verdict.

Trial in the Massachusetts District Court on all claims and defenses began on July 10, 2017. On July 21, 2017, the jury returned a unanimous verdict finding that although the Company’s tests infringed the asserted patent, the patent was invalid for lack of enablement and lack of written description and the jury further found that Plaintiffs are entitled to zero ($0) damages. As for the Company’s defenses of implied waiver and equitable estoppel, the jury found that Plaintiffs waived their right to recover for infringement of the asserted patent and that Plaintiffs are estopped from enforcing the asserted patent against the Company. The verdict on these equitable defenses will be briefed by the parties and submitted to the court, which will render a final judgment on the matter.In the post-trial briefing, the Company has requested the Massachusetts District Court to adopt the findings of the jury on the equitable defenses, and has requested the Massachusetts District Court to set aside the jury’s finding of infringement. In Plaintiffs’ post-trial briefing, Plaintiffs have requested a new trial, and have requested the Massachusetts District Court to set aside the jury’s finding that the asserted patent was invalid for lack of enablement and lack of written description. Post-trial briefing on the issues of infringement, invalidity, the equitable defenses, and Plaintiffs’ request for a new trial concluded on October 25, 2017.

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~~AMPHASTAR PHARMACEUTICALS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~The Company will continue to vigorously defend the jury’s verdict, including against any potential appeal by the Plaintiffs. The Company intends to attempt to collect the $100.1 million bond posted by Momenta and Sandoz following a final judgement by the~~ ~~Massachusetts~~ ~~District Court.~~operations.

False Claims Act Litigation

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

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

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

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

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

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~~AMPHASTAR PHARMACEUTICALS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Aventis filed its reply brief in support of its cross-appeal of the District Court’s denial of attorneys’ fees. On November 10, 2016, the Ninth Circuit heard oral argument on the appeals.

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

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

~~Momenta/Sandoz Antitrust~~Epinephrine Injection, 0.1 mg/mL Litigation

On ~~September 17, 2015, the Company~~June 28, 2018, Belcher Pharmaceuticals, LLC, or Belcher, initiated a lawsuit by filing a complaint inagainst IMS for infringement of U.S. Patent No. 9,283,197 (the “‘197 Patent”), with regard to IMS’s New Drug Application No. 211363, filed under 21 U.S.C. § 355(b)(2) of the ~~California District Court against Momenta~~Hatch-Waxman Act, for FDA approval to manufacture and ~~Sandoz, or~~sell 0.1 mg/mL epinephrine injections. On July 20, 2018, the Defendants. The Company’s complaint generally asserts that Defendants have engaged in certain types of illegal, monopolistic, and anticompetitive conduct giving rise to various causes of action against them. On December 9, 2015, DefendantsCompany filed a motion to dismiss ~~and a motion to transfer the case to the District~~Belcher’s complaint for patent infringement under Federal Rule of Massachusetts. On January 4, 2016, the Company filed oppositions to both motions. On January 26, 2016, the California District Court granted Defendants’ motion to transfer and did not rule on Defendants’ motion to dismiss. Accordingly, the case was transferred to the District of Massachusetts. On February 9, 2016, the Company filed a writ of mandamus with the Ninth Circuit to attempt to appeal the California District Court’s granting of Defendants’ motion to transfer to the District of Massachusetts. The Ninth Circuit denied this petition on May 20, 2016, and as such the case will remain before the District of Massachusetts. On July 27, 2016, the Massachusetts District Court granted Defendants’ motion to dismiss based on antitrust immunity doctrine, without addressing the substantive merits of the claims.

On August 25, 2016, the Company filed with the First Circuit Court of Appeals a notice of appeal of the Massachusetts District Court’s dismissal of the antitrust case. On October 31, 2016, the Company filed ~~its appeal brief with the~~ First Circuit. On December 5, 2016, Defendants filed their response brief with the First Circuit Court of Appeals. On December 19, 2016, the Company filed its rely brief with the First Circuit Court of Appeals, which concluded the briefing on this appeal. On February 9, 2017, the First Circuit Court of Appeals heard oral arguments.Civil Procedure 12(b)(6). On March ~~6, 2017,~~31, 2019, the ~~First Circuit~~ Court ~~of Appeals issued its decision, in which it held 3 to 0 that the District Court of Massachusetts erred in dismissing~~denied the Company’s ~~antitrust case and sent the case back to the District Court to consider additional arguments.~~

On April 6, 2017, the District Court held a status conference to address scheduling matters for the rest of the case. The Court set a briefing schedule for Defendants’ supplemental motion to dismiss and a full case schedule in the event that it denies Defendants’ supplemental motion to dismiss. On April ~~20, 2017, Defendants filed their supplemental motion to dismiss and~~15, 2019, the Company filed its ~~opposition on May 4, 2017. No reply briefs are allowed. The~~Answer and Counterclaims. On April 24, 2019, the Court ~~promised~~entered the Parties’ Joint Stipulation to ~~rule~~stay the litigation until after Belcher’s June 2019 trial with Hospira, Inc. regarding the ‘197 patent. Belcher’s trial with Hospira regarding the ‘197 patent concluded in June 2019 but the Court has not yet ruled on the ~~motion~~outcome of this trial. Thus, on July 3, 2019, the Parties filed a Joint Stipulation to ~~dismiss~~stay the litigation pending the Court’s ruling on the outcome of Belcher’s trial with Hospira. The Company intends to vigorously defend this lawsuit.

Vasopressin (20 units/mL) Patent Litigation

On December 20, 2018, Par Pharmaceutical, Inc., Par Sterile Products, LLC and Endo Par Innovation Company (collectively, “Par”) initiated a patent lawsuit by filing a Complaint against the ~~end~~Company for infringement of ~~May but did not do so. If~~U.S. Patent Nos. 9,375,478 (“the ‘478 Patent”), 9,687,526 (“the ‘526 Patent”), 9,744,209 (“the ‘209 Patent”), 9,744,239 (“the ‘239 Patent”), 9,750,785 (“the ‘785 Patent”) and 9,937,223 (“the ‘223 Patent”) (collectively, “Par Patents”) with regard to the Company’s Abbreviated New Drug Application No. 211,857 for FDA approval to manufacture and sell Vasopressin (20 units/ mL). The Company filed its Answer to this Complaint on February 19, 2019. On April 18, 2019, the Court ~~denies Defendants’ supplemental motion to dismiss, discovery will commence. Summary judgment arguments would be due on November 15, 2018; oppositions would be due on December 15, 2018;~~held a scheduling conference and ~~replies would be due on January 15, 2019.~~entered a Scheduling Order. Trial is ~~currently~~ scheduled for ~~April 1, 2019.~~January 2021. The Company intends to vigorously defend this patent lawsuit.

Other Litigation

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

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

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~defense and settlement costs, diversion of management resources, and other factors.~~

Note 19. Subsequent Events

Supply Agreement with MannKind Corporation

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

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

The following is a discussion and analysis of the consolidated operating results, financial condition, liquidity and cash flows of our company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the “Condensed Consolidated Financial Statements” and the related notes thereto included in this Quarterly Report on Form 10-Q, or Quarterly Report. This discussion contains forward-looking statements that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements. These risks, uncertainties, and other factors include, among others, those identified under the “Special Note About Forward-Looking Statements,” above and described in greater detail elsewhere in this Quarterly Report and in our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2018, particularly in Item 1A. “Risk Factors”.

Overview

We are a specialty pharmaceutical company that focuses primarily on developing, manufacturing, marketing and selling technically challenging generic and proprietary injectable, inhalation and intranasal products as well as insulin API products. We currently manufacture and sell 19over 20 products. In ~~addition, in September 2017,~~November 2018, the FDA granted over-the-counter approval offor our ~~ANDA~~NDA for ~~Neostigmine Methylsulfate Injection, therapeutically equivalent to Avadel’s Bloxiverz~~Primatene®. Mist in a new CFC-free formulation.

We are currently developing a portfolio of 1615 generic abbreviated new drug applications, or ANDAs, three ~~generic~~ biosimilar product candidates and ~~six~~four proprietary product candidates, which are in various stages of development and target a variety of indications. ~~With respect to these product candidates, we have six~~Four of the ANDAs and ~~two~~one of the NDAs are currently on file with the FDA.

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

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

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

~~One~~In July 2018, our Chinese subsidiary, ANP, completed a private placement of its common equity interest and received approximately $56.3 million of cash proceeds. We have retained approximately 58% of the equity interest in ANP following the private placement. ANP’s net income or loss after July 2, 2018, is attributed to us in accordance with our ~~largest products by net revenues is enoxaparin sodium injection, the generic equivalent~~equity interest of ~~Sanofi S.A.’s Lovenox~~®. Enoxaparin is a difficult to manufacture injectable form of low molecular weight heparin that is used as an anticoagulant and has multiple indications, including the prevention and treatment of deep vein thrombosis.approximately 58% in ANP.

~~We have agreements~~On May 20, 2019, we entered into a settlement relating to the enoxaparin patent litigation with ~~established group purchasing organizations~~Momenta Pharmaceuticals, Inc. and ~~wholesaler networks~~Sandoz Inc. For more information regarding the enoxaparin patent litigation, see “Part I – Item 1. Financial Statements – Notes to ~~distribute enoxaparin, which is marketed under our own label for~~Condensed Consolidated Financial Statements – Litigation.” Pursuant to the ~~hospital and clinic market. Since December 2016, we have been distributing enoxaparin directly in~~settlement agreement, the ~~U.S. retail market under our own label.~~plaintiffs paid us $59.9 Million on June 27, 2019.

Business Segments

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

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distributes RHI API and porcine insulin ~~API.~~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”.~~Reporting.”

Results of Operations

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

Net revenues


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

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


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

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

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~~Results of Operations~~

~~Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016~~

~~Net revenues~~

Three Months Ended

September 30,

Change


2017

2016

Dollars

%

(in thousands)

Net revenues

Finished pharmaceutical products

$
54,455

$
59,058

$
(4,603)

(8)
%

API

3,461

5,165

(1,704)

(33)
%

Total net revenues

$
57,916

$
64,223

$
(6,307)

(10)
%

Cost of revenues

Finished pharmaceutical products

$
33,145

$
30,438

$
2,707

9
%

API

4,130

6,173

(2,043)

(33)
%

Total cost of revenues

$
37,275

$
36,611

$
664

2
%

Gross profit

$
20,641

$
27,612

$
(6,971)

(25)
%

as % of net revenues

36
%

43
%

~~The increase in net revenues of the finished pharmaceutical products for the three months ended September 30, 2017, was due to the following changes:~~

Three Months Ended

September 30,

Change


2017

2016

Dollars

%

(in thousands)

Finished pharmaceutical products net revenues

Enoxaparin

$
6,549

$
15,363

$
(8,814)

(57)
%

Naloxone

12,709

12,407

302

2
%

Lidocaine

9,596

8,279

1,317

16
%

Phytonadione

9,352

8,667

685

8
%

Epinephrine

2,027

5,303

(3,276)

(62)
%

Other finished pharmaceutical products

14,222

9,039

5,183

57
%

Total finished pharmaceutical products net revenues

$
54,455

$
59,058

$
(4,603)

(8)
%

~~The decrease in~~We anticipate that sales of naloxone, enoxaparin, was driven by lower unit volumes, which resulted in a decrease of approximately $5.8 million, as well as lower average selling prices, which resulted in a decrease of approximately $3.0 million. We expect that the average selling price and ~~unit volumes of enoxaparin~~medroxyprogesterone will continue to fluctuate in the ~~near term~~future as a result of competition.

~~The increase in sales~~Sales of ~~lidocaine was~~API decreased primarily driven by higher unit volumes. The decrease in sales of epinephrine was a result of the discontinuation of our epinephrine injection, USP vial product in the second quarter of 2017 in accordance with the FDA’s request. Our epinephrine injection, USP vial product, was marketed under the “grandfather” exceptiondue to the ~~FDA’s “Prescription Drug Wrap-Up” program. Sales~~timing of ~~other finished pharmaceutical products rose due to an increase in units shipped, resulting from competitor shortages.~~customer purchases.

~~Sales of RHI API decreased because there were no shipments to MannKind during the period.~~ We anticipate that sales of ~~our~~ API ~~business~~ will continue to fluctuate and ~~will likely~~may decrease due to the inherent uncertainties related to sales ~~of RHI API~~ to MannKind Corporation, or MannKind. In addition, most of our API sales are denominated in ~~Euros,~~euros, and the fluctuation in the value of the ~~Euro~~euro versus the U.S. dollar has had, and will continue to have, an impact on API sales revenues in the near term. In August 2017, MannKind notified us that it would not exercise its minimum annual purchase option of RHI API for 2018. We recognized the cancellation fee for 2018 of $0.9 million in net revenues in our condensed consolidated statements of operations for the three months ended September 30, 2017, and subsequently collected on this receivable.

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

Gross margins

The launch of Primatene® Mist and an increase in ~~cost~~sales of ~~revenue was primarily due to a charge of $2.0 million to adjust enoxaparin inventory to their net realizable value. Gross margins decreased due to lower selling prices for enoxaparin~~medroxyprogesterone and Cortrosyn®, which are higher margin products, as well as ~~due to~~ the ~~discontinuation~~higher average selling price of enoxaparin, helped increase our ~~epinephrine vial product in~~gross margins for the second quarter of ~~2017~~2019. Gross margins for Primatene® Mist were magnified by the use of API and components which were expensed to pre-launch inventory in ~~accordance with the FDA’s request.~~prior years.

~~Declining average selling prices and unit volume~~In 2018, we received FDA approval of ~~enoxaparin~~our ANDA supplement for the manufacture of semi-purified heparin at ANP, and the ~~discontinuation~~manufacture of ~~our epinephrine injection, USP vial product will continue~~heparin sodium at IMS. The cost of heparin, which is the starting material for enoxaparin, has increased and is expected to ~~put~~increase further, putting downward pressure on our gross margins. However, we believe that this trend will be ~~partially~~ offset by ~~increases in prices~~sales of our higher-margin products, such as medroxyprogesterone isoproterenol, and ~~unit volumes of several other finished pharmaceutical products and new product launches. As a result, gross margin is expected to fluctuate depending on revenue mix.~~Primatene® Mist, which were launched over the past two years.

Selling, distribution and marketing, and general and administrative


	Three Months Ended								Three Months Ended
	September 30,				Change				June 30,				Change
	2017		2016		Dollars		%		2019		2018		Dollars		%
	(in thousands)								(in thousands)
Selling, distribution, and marketing	$	1,756	$	1,291	$	465	36	%	$	2,992	$	1,876	$	1,116	59	%
General and administrative	$	11,665	$	10,801	$	864	8	%	$	12,426	$	11,669	$	757	6	%

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

We expect that selling, distribution and marketing expenses will increase due to the increase in ~~legal expenses relating to our July 2017 patent trial (see Note 17 to the condensed consolidated financial statements~~marketing expenditures for ~~more information).~~

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

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Research and development


	Three Months Ended								Three Months Ended
	September 30,				Change				June 30,				Change
	2017		2016		Dollars		%		2019		2018		Dollars		%
	(in thousands)								(in thousands)
Salaries and personnel-related expenses	$	3,392	$	3,955	$	(563)	(14)	%	$	6,237	$	4,920	$	1,317	27	%
Pre-launch inventory										143		835		(692)	(83)	%
Clinical trials		13		248		(235)	(95)	%		1,530		1,218		312	26	%
FDA fees		15		14		1	7	%		104		235		(131)	(56)	%
Testing, operating and lab supplies		4,579		3,313		1,266	38	%		3,878		5,558		(1,680)	(30)	%
Depreciation		1,093		1,174		(81)	(7)	%		2,147		1,630		517	32	%
Other expenses		948		1,019		(71)	(7)	%		1,957		1,064		893	84	%
Total research and development expenses	$	10,040	$	9,723	$	317	3	%	$	15,996	$	15,460	$	536	3	%

Research and development costs consist primarily of costs associated with the research and development of our product candidates such as salaries and other personnel related expenses for employees involved with research and development activities, manufacturing pre-launch inventory, clinical trials, FDA fees, testing, operating and lab supplies, depreciation and other related expenses.including the cost of developing APIs. We expense research and development costs as incurred.

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

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

Other income (expenses), net


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

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

Income tax provision (benefit)


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

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

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~~Provision for income tax expense (benefit)~~

Three Months Ended

September 30,

Change


2017

2016

Dollars

%

(in thousands)

Income tax expense (benefit)

$
(2,166)

$
2,111

$
(4,277)

NM

Effective tax rate

109
%

35
%

The difference in income tax expense (benefit) was primarily due to the change in pre-tax income positions and discrete tax benefits recognized (see Note 13 to the condensed consolidated financial statements for more information).

~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2019 Compared to ~~Nine~~Six Months Ended ~~September~~June 30, ~~2016~~2018

Net revenues


	Nine Months Ended										Six Months Ended
	September 30,						Change				June 30,						Change
	2017			2016			Dollars		%		2019			2018			Dollars		%
	(in thousands)										(in thousands)
Net revenues
Finished pharmaceutical products	$	174,154		$	181,368		$	(7,214)	(4)	%	$	148,274		$	116,358		$	31,916	27	%
API		5,619			10,254			(4,635)	(45)	%		10,563			13,075			(2,512)	(19)	%
as % of net revenues	$	179,773		$	191,622		$	(11,849)	(6)	%
Total net revenues											$	158,837		$	129,433		$	29,404	23	%
Cost of revenues
Finished pharmaceutical products	$	99,668		$	96,326		$	3,342	3	%	$	81,422		$	69,073		$	12,349	18	%
API		9,889			11,068			(1,179)	(11)	%		14,125			17,324			(3,199)	(18)	%
Total cost of revenues	$	109,557		$	107,394		$	2,163	2	%	$	95,547		$	86,397		$	9,150	11	%
Gross profit	$	70,216		$	84,228		$	(14,012)	(17)	%	$	63,290		$	43,036		$	20,254	47	%
as % of net revenues		39	%		44	%						40	%		33	%

The ~~decrease~~increase in net revenues of the finished pharmaceutical products for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, was primarily due to the following changes:


	Nine Months Ended								Six Months Ended
	September 30,				Change				June 30,				Change
	2017		2016		Dollars		%		2019		2018		Dollars		%
	(in thousands)								(in thousands)
Finished pharmaceutical products net revenues
Enoxaparin	$	25,247	$	51,049	$	(25,802)	(51)	%	$	24,322	$	15,722	$	8,600	55	%
Phytonadione										22,561		19,987		2,574	13	%
Lidocaine										22,061		19,792		2,269	11	%
Naloxone		33,909		38,222		(4,313)	(11)	%		15,197		20,060		(4,863)	(24)	%
Lidocaine		27,218		26,378		840	3	%
Phytonadione		27,242		23,555		3,687	16	%
Medroxyprogesterone										13,909		9,071		4,838	53	%
Epinephrine		22,249		14,921		7,328	49	%		5,818		6,910		(1,092)	(16)	%
Primatene® Mist										5,409		—		5,409	N/A
Other finished pharmaceutical products		38,289		27,243		11,046	41	%		38,997		24,816		14,181	57	%
Total finished pharmaceutical products net revenues	$	174,154	$	181,368	$	(7,214)	(4)	%	$	148,274	$	116,358	$	31,916	27	%

The increase in sales of enoxaparin during the first half of 2019 was primarily driven by higher average selling prices due to a price increase and a change in customer mix, which resulted in an increase of $9.8 million, and was partially offset by a decrease in unit volume of $1.2 million. The increase in sales of phytonadione was primarily driven by a higher average selling price. $1.4 million of the increase in sales of lidocaine was due to higher unit volumes, while the remainder was due to higher average selling prices. The decrease in sales of ~~enoxaparin~~naloxone was primarily driven by lower unit ~~volumes, which resulted~~volumes. The increase in sales of medroxyprogesterone was due to increased unit sales as it was launched in the first quarter of 2018. Therefore, the prior year did not have a ~~decrease~~full quarter of ~~approximately $18.6 million, as well as lower average selling prices, which resulted in a decrease~~sales during the first quarter of ~~approximately $7.2 million. We expect that the average selling price and~~2018. Other finished pharmaceutical products sales increased primarily due to higher unit sales volumes of Cortrosyn®, atropine, sodium bicarbonate and dextrose which were in high demand due to market shortages. Sales of isoproterenol which we launched in the third quarter of 2018, also contributed to the increase in other finished pharmaceutical sales.

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

~~Lower unit volumes~~Sales of naloxone led to a decrease in sales of approximately $3.9 million, while lower average selling price caused a decrease in sales of approximately $0.4 million. We anticipate that sales of this product may fluctuateAPI decreased primarily due to ~~increased competition driven by future competitor launches.~~the timing of customer purchases.

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The increase in phytonadione sales was primarily the result of higher unit volumes. An increase in average selling prices of epinephrine caused an increase of approximately $9.6 million in net revenues, which was partially offset by the decrease in unit volumes which was primarily a result of the discontinuation of our epinephrine injection, USP vial product in the second quarter of 2017 in accordance with the FDA’s request. Our epinephrine injection, USP vial product, was marketed under the “grandfather” exception to the FDA’s “Prescription Drug Wrap-Up” program. For the nine months ended September 30, 2017, we recognized $17.9 million in net revenues for the sale of this product.

~~Sales of RHI API decreased because there were no shipments to MannKind during the period.~~ We anticipate that sales of API will continue to fluctuate and ~~will likely~~may decrease due to the inherent uncertainties related to sales ~~of RHI API~~ to MannKind. In addition, most of our API sales are denominated in ~~Euros,~~euros, and the fluctuation in the value of the ~~Euro~~euros versus the U.S. dollar has had, and will continue to have, an impact on API sales revenues in the near term. In August 2017, MannKind notified us that it would not exercise its minimum annual purchase option of RHI API for 2018. We recognized the cancellation fee for 2018 of $0.9 million in net revenues in our condensed consolidated statements of operations for the nine months ended September 30, 2017, and subsequently collected on this receivable.

Gross margins

The ~~increase in cost~~launch of ~~revenues was primarily due to~~Primatene® Mist and an increase in ~~unabsorbed manufacturing expense~~sales of medroxyprogesterone and ~~a charge~~Cortrosyn®, which are higher margin products, as well as the higher average selling price of ~~$7.3 million~~enoxaparin, helped increase our gross margins for the first half of 2019. Gross margins for Primatene® Mist were magnified by the use of API and components which were expensed to ~~adjust certain~~pre-launch inventory ~~to their net realizable value, including $4.9 million~~in prior years.

In 2018, we received FDA approval of our ANDA supplement for the manufacture of semi-purified heparin at ANP, and the manufacture of heparin sodium at IMS. The cost of heparin, which is the starting material for enoxaparin, ~~inventory due~~has increased and is expected to ~~a decrease in the forecasted average selling price. Gross margins decreased primarily due to lower pricing of enoxaparin.~~

~~Declining average selling prices and unit volume of enoxaparin and the discontinuance of our epinephrine injection, USP vial product will continue to put~~increase further, putting downward pressure on our gross margins. However, we believe that this trend will be ~~partially~~ offset by ~~increases in prices~~sales of our higher-margin products, such as medroxyprogesterone, isoproterenol, and ~~unit volumes of several other finished pharmaceutical products. As a result, gross margin is expected to fluctuate depending on revenue mix.~~Primatene® Mist, which were launched over the past two years.

Selling, distribution and marketing, and general and administrative


	Nine Months Ended								Six Months Ended
	September 30,				Change				June 30,				Change
	2017		2016		Dollars		%		2019		2018		Dollars		%
	(in thousands)								(in thousands)
Selling, distribution, and marketing	$	4,831	$	3,975	$	856	22	%	$	6,133	$	3,597	$	2,536	71	%
General and administrative	$	35,237	$	31,129	$	4,108	13	%	$	28,753	$	22,667	$	6,086	27	%

The increase in selling, distribution, and marketing expenses was primarily due to marketing expenses related to Primatene® Mist and increased freight costs. The increase in general and administrative ~~expenses~~expense was primarily due to ~~an increase in~~increased legal expenses ~~relating to our July 2017 patent trial~~ (see Note 1718 to the condensed consolidated financial statements for more ~~information)~~information regarding litigation matters).

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

Research and development


	Nine Months Ended								Six Months Ended
	September 30,				Change				June 30,				Change
	2017		2016		Dollars		%		2019		2018		Dollars		%
	(in thousands)								(in thousands)
Salaries and personnel-related expenses	$	10,862	$	10,911	$	(49)	(0)	%	$	12,642	$	9,685	$	2,957	31	%
Pre-launch inventory		711		—		711	N/A			158		1,573		(1,415)	(90)	%
Clinical trials		2,064		1,246		818	66	%		3,233		2,026		1,207	60	%
FDA fees		115		2,416		(2,301)	(95)	%		404		1,461		(1,057)	(72)	%
Testing, operating and lab supplies		12,341		7,741		4,600	59	%		6,450		8,967		(2,517)	(28)	%
Depreciation		3,278		3,571		(293)	(8)	%		4,275		2,941		1,334	45	%
Other expenses		2,651		3,037		(386)	(13)	%		3,441		2,837		604	21	%
Total research and development expenses	$	32,022	$	28,922	$	3,100	11	%	$	30,603	$	29,490	$	1,113	4	%

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Research and development costs consist primarily of costs associated with the research and development of our product candidates, such as salaries and other personnel related expenses for employees involved with research and development activities, manufacturing pre-launch inventory, clinical trials, FDA fees, testing, operating and lab supplies, depreciation and other related expenses.candidates. We expense research and development costs as incurred.

~~Pre-launch inventory~~Salaries and personnel-related expenses as well as depreciation expense increased during the first half of 2019 primarily due to ~~purchases related to Primatene~~® ~~Mist. Testing, operating and lab supplies increased due to expenditures on materials for our pipeline products, particularly production~~the expansion of ~~APIs for our pipeline at~~ our ANP facility. Clinical ~~trials~~trial expense increased due to external studies related to our generic product pipeline. ~~This increase was~~These increases were partially offset by a decrease in pre-launch inventory compared to the same period last year relating to the production of Primatene® Mist in anticipation for the launch at the end of 2018. FDA fees ~~pertaining to~~decreased for the period, as we filed an NDA ~~filing of our intranasal naloxone product candidate that was submitted~~and ANDA for products we currently market or previously marketed under the grandfather exception in ~~the second quarter of 2016.~~2018.

~~Gain on sale of intangible assets~~Other income (expenses), net

Nine Months Ended

September 30,

Change


2017

2016

Dollars

%

(in thousands)

Gain on sale of intangible assets

$
(2,643)

$
—

$
(2,643)

N/A


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

In ~~February 2017,~~June 2019, we ~~sold the ANDAs that we acquired in March 2016 and~~ recognized a gain of ~~$2.6~~$59.9 million ~~(see Note 3~~relating to our settlement of the enoxaparin patent litigation with Momenta Pharmaceuticals, Inc. and ~~Note 9~~Sandoz Inc. For more information regarding the enoxaparin patent litigation, see “Part I – Item 1. Financial Statements –Notes to ~~the condensed consolidated financial statements for more information).~~Condensed Consolidated Financial Statements – Litigation.”

~~Provision for income~~Income tax ~~expense~~provision (benefit)


	Nine Months Ended									Six Months Ended
	September 30,						Change			June 30,						Change
	2017			2016			Dollars		%	2019			2018			Dollars		%
	(in thousands)									(in thousands)
Income tax expense (benefit)	$	(354)		$	6,295		$	(6,649)	NM
Income tax provision (benefit)										$	12,694		$	(3,095)		$	15,789	NM
Effective tax rate		(13)	%		32	%					22	%		24	%

The difference in income tax ~~expense~~provision (benefit) was primarily due to ~~the change~~differences in pre-tax income (loss) positions and timing of discrete tax ~~benefits recognized (see Note 13 to the condensed consolidated financial statements for more information).~~items.

Liquidity and Capital Resources

Cash Requirements and Sources

We need capital resources to maintain and expand our business. We expect our cash requirements to increase significantly in the foreseeable future as we sponsor clinical trials for, seek regulatory approvals of, and develop, manufacture and market our current development‑stage product candidates and pursue strategic acquisitions of businesses or assets. Our future capital expenditures include projects to upgrade, expand, and improve our manufacturing facilities in the United States, China, and France. Our cash obligations include the principal and interest payments due on our existing loans and lease payments, as described below and throughout this Quarterly ~~Report on Form 10-Q.~~Report. As of ~~September~~June 30, ~~2017,~~2019, our foreign subsidiaries collectively held ~~$22.5~~$38.7 million in cash and cash equivalents. ~~We do not plan to repatriate foreign earnings to the United States.~~ Cash or cash equivalents held at foreign subsidiaries are not available to fund the parent company’s operations in the United States. We believe that our cash reserves, operating cash flows, and borrowing availability under our credit facilities will be sufficient to fund our operations for at least the next 12 months. We expect additional cash flows to be generated in the longer term from future ~~product introductions,~~

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

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

Working capital ~~decreased~~increased by ~~$4.4~~$69.6 million to ~~$119.1~~$183.1 million at ~~September~~June 30, ~~2017,~~2019, compared to ~~$123.5~~$113.5 million at December 31, ~~2016.~~2018 as a result of the $59.9 million settlement received relating to the enoxaparin patent litigation with Momenta Pharmaceuticals, Inc. and Sandoz Inc. For more information regarding the enoxaparin patent litigation, see “Part I – Item 1. Financial Statements –Notes to Condensed Consolidated Financial Statements – Litigation.”

Cash Flows from Operations

The following table summarizes our cash flows used in operating, investing, and financing activities for the six~~nine~~ months ended ~~September~~June 30, ~~2017~~2019 and 2018:


	Nine Months Ended		Six Months Ended June 30,
	September 30, 2017		2019		2018
	(in thousands)		(in thousands)
Statement of Cash Flow Data:
Net cash provided by (used in)
Operating activities	$	29,444	$	48,113	$	12,893
Investing activities		(28,626)		(24,553)		(20,509)
Financing activities		(6,916)		10,487		(9,718)
Effect of exchange rate changes on cash		664		(11)		(190)
Net increase in cash and cash equivalents	$	(5,434)
Net increase (decrease) in cash, cash equivalents, and restricted cash			$	34,036	$	(17,524)

Sources and Use of Cash

Operating Activities

Net cash provided by operating activities was ~~$29.4~~$48.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, which included net income of ~~$3.0~~$44.8 million. Non-cash items were primarily comprised of ~~$11.5~~$8.8 million of depreciation and amortization, ~~$12.9~~and $8.7 million of share-based compensation ~~expense,~~expense.

Additionally, there was a ~~$5.2~~net cash outflow from changes in operating assets and liabilities of $15.0 million ~~change~~which resulted from the increase in ~~tax~~accounts receivable and inventory partially offset by an increase in accounts payable and accrued liabilities. The increase in accounts receivable was due to the timing of sales in the quarter. The increase in inventory was partially due to increased purchases of raw materials and production of finished goods resulting in a net increase of $24.9 million of enoxaparin and a net increase of $6.3 million of Primatene® Mist inventory. These trends were partially offset by a decrease in API at AFP. Tax related items increased as a result of the receipt of the $59.9 million relating to the litigation settlement with Momenta Pharmaceuticals, Inc. and ~~a gain of $2.3 million on the sale of long-lived assets.~~

~~Over the nine months ended September 30, 2017, accounts receivable declined by approximately $2.9 million~~Sandoz Inc. Accounts payable and accrued liabilities increased primarily due to the timing of ~~customer purchases~~payments.

Net cash provided by operating activities was $12.9 million for the six months ended June 30, 2018, which included net loss of $10.0 million. Non-cash items were primarily comprised of $8.0 million of depreciation and ~~payments, inventories decreased by approximately $12.4~~amortization, and $8.9 million of share-based compensation expense. Operating assets and liabilities changed primarily due to the timing

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Table of ~~component~~Contents

of sales and ~~raw material~~ purchases activities in the normal course of business and ~~sales deliveries as well as a non-cash charge~~the timing of ~~$7.3 million to adjust certain inventory items to their net realizable value.~~the related cash receipts and disbursements.

Investing Activities

Net cash used in investing activities was ~~$28.6~~$24.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, primarily as a result of ~~$25.0~~$24.5 million in purchases of property, plant, and equipment, which included $6.0 million incurred in the United States, $4.3 million in France, and $14.2 million in China.

Net cash used in investing activities was $20.5 million for the six months ended June 30, 2018, primarily as a result of $24.6 million in purchases of property, machinery, and equipment, ~~including~~which included $8.4 million incurred in the ~~associated capitalized labor and interest on self-constructed assets, an increase of $2.0~~United States, $7.0 million in ~~short-term investments, an increase of $2.8~~France, and $9.2 million in ~~restricted short-term investment.~~China. The cash used was partially offset by the $4.4 million receipt of the ~~$2.0 million initial payment relating to~~remaining consideration of the sale of the various ANDAs in February ~~2017 (see Note 9 to the condensed consolidated financial statements for more information).~~2017.

Financing Activities

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~~Table~~Net cash provided by financing activities was $10.5 million for the six months ended June 30, 2019, primarily as a result of ~~Contents~~

~~Financing Activities~~the receipt of $18.3 million for ANP private placement, which was partially offset by $4.1 million used to purchase treasury stock, and $0.2 million of net proceeds used to settle share-based compensation awards under our equity plans. Additionally, we made $3.6 million in principal payments on our long-term debt and lines of credit.

Net cash used in financing activities was ~~$6.9~~$9.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, primarily as a result of ~~$24.8~~$14.9 million used to purchase treasury ~~stock, which was offset by $7.3 million of proceeds received from our equity plans.~~stock. Additionally, we ~~received proceeds of $19.0 million from borrowings on a mortgage loan and an equipment line of credit, and~~ made ~~$8.4~~$2.8 million in principal payments on our long-term ~~debts.~~debt, and drew down $8.0 million on the equipment line of credit from East West Bank, which is due December 2022.

Indebtedness

For more information regarding our outstanding indebtedness, see ~~“Part I – Item 1. Financial Statements –~~Note 12 of Notes to Condensed Consolidated Financial Statements ~~– Debt”.~~of this Quarterly Report on Form 10-Q.

Contractual Obligations

There have been no material changes outside the ordinary course of our business in the contractual obligations disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2018, except that our outstanding debt obligations have changed as follows:


	September 30,		December 31,				June 30,		December 31,
	2017		2016		Change		2019		2018		Change
	(in thousands)						(in thousands)
Short-term debt and current portion of long-term debt	$	6,212	$	5,366	$	846	$	6,941	$	18,229	$	(11,288)
Long-term debt		42,232		32,356		9,876		39,793		31,984		7,809
Total debt	$	48,444	$	37,722	$	10,722	$	46,734	$	50,213	$	(3,479)

As of ~~September~~June 30, ~~2017,~~2019, we had ~~$43.0~~$45.0 million in unused borrowing capacity under revolving lines of credit with Cathay Bank and East West Bank.

~~Collaboration Agreement with a Medical Device Manufacturer~~

In 2014, we entered into a collaboration agreement with a medical device manufacturer to develop a drug delivery system to be used by us for one of our pipeline products. As of September 30, 2017, we have paid an upfront payment of $0.5 million and have paid $1.5 million in milestone payments under this agreement, which were classified as research and development expense as the milestones were met. We are obligated to pay up to an additional $0.5 million if certain milestones are met. As of September 30, 2017, no such obligation existed. Pursuant to the collaboration agreement, if the medical device manufacturer is successful in the development of this drug delivery system and our pipeline products receive appropriate regulatory approval, we intend to enter into a commercial supply agreement with such medical device manufacturer for a minimum purchase of 1.0 million units during the first 12 months.

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, ~~2016.~~ 2018.

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There were no material changes to our critical accounting policies during the ~~nine~~three and six months ended ~~September~~June 30, ~~2017.~~2019, other than the adoption of ASC 2016-02, Leases, or ASC 2016-02, using the alternative transition method. The adoption of ASC 2016-02 did not have a material impact on the Company’s condensed consolidated financial statements. The results for the reporting period beginning after January 1, 2019, are presented in accordance with the new standard, although comparative information has not been restated and continues to be reported under the accounting standards and policies in effect for those periods.

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements, ~~refer~~see “Part I – Item 1. Financial Statements – Notes to ~~Note 2 in the accompanying “Notes to Condensed~~ Consolidated Financial ~~Statements” in this Quarterly Report.~~

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~~Table~~Statements – Summary of ~~Contents~~

Significant Accounting Policies.”

Off-Balance Sheet Arrangements

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

Government Regulation

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

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

From November 29, 2016 through December 7, 2016, our IMS facility in South El Monte, California was subject to an inspection by the FDA. The inspection included a review of our compliance with cGMP regulations and verification of corrective actions implemented from a previous inspection in July 2015. The inspection resulted in multiple observations on Form 483, an FDA form on which deficiencies are noted after an FDA inspection. We responded to those observations on December 29, 2016. A follow up letter to the FDA District Office was additionally sent on January 31, 2017, outlining additional progress on our corrective action plan submitted in December. We believe that our responses to the observations satisfied the requirements of the FDA and the inspection is considered closed.

~~From January 30, 2017~~February 5, 2019 through February 09, 2017, our IMS facility in South El Monte, California was subject to a preapproval inspection by the FDA. The inspection included a review of our corrective actions taken from the recent cGMP inspection as well as review of data to support our pending application. The inspections resulted in multiple observations on Form 483. We responded to those observations on February 14, 2017.~~We believe that our responses to the observations will satisfy the requirements of the FDA and that no significant further actions will be necessary.~~

~~From March 13, 2017 through March 31, 2017,~~12, 2019, our Amphastar facility in Rancho Cucamonga, California was subject to a preapproval inspection by the FDA. The inspection included a review of our corrective actions taken from the previous cGMP inspection in ~~July 2014~~March 2017, as well as review of data to support our pending applications. The inspections resulted in multiple observations on Form 483. We fully responded to those observations on ~~April~~March 6, 2019. We believe that our responses to the observations will satisfy the requirements of the FDA and that no significant further actions will be necessary.

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

From ~~April 24, 2017~~July 23 through ~~April 28, 2017,~~July 25, 2019, our Amphastar facility in ~~Nanjing, China~~Rancho Cucamonga, California was subject to ana routine, post-marketing adverse drug experience reporting inspection, or PADE, by the FDA. The purpose was a pre-approval inspection for the manufacture of API. The inspection resulted in several observations on Form 483. We responded to those observations on May 19, 2017, and believe that our responses to the observations satisfied the requirements of the FDA and the inspection is considered closed.

On October 20, 2017, a representative from the U.S. Department of Agriculture, or USDA inspected our facility in Chino, California. The inspection covered compliance with USDA regulations regarding laboratory animal handling and well-being. No citations were made.

From October 23, 2017 through October 26, 2017, our facility in Nanjing, China was subject to an inspection by the FDA. The purpose was a general cGMP inspection to cover the facility for FDA fiscal year 2018. The inspection included a review of ~~Quality Systems, Production Controls, Laboratory Controls, Material Management,~~our processes for collecting, reviewing, investigating and ~~Facilities and Equipment Maintenance.~~reporting post-marketing adverse drug experiences reported through various sources. The inspection ~~also included a review of our corrective actions taken from the previous inspection~~resulted in ~~April 2017. There were~~ no Form 483 ~~observations issued.~~findings. No further actions will be necessary.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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

Investment Risk

We regularly review the carrying value of our investments and identify and recognize losses, for income statement purposes, when events and circumstances indicate that any declines in the fair values of such investments below our accounting basis are other than temporary. As of ~~September~~June 30, ~~2017,~~2019, we did not have any such investments. We do not enter into investments for trading or speculative purposes.

As of ~~September~~June 30, ~~2017,~~2019, we had $$35~~13.6~~.1 million deposited in ~~five~~seven banks located in China, ~~$8.7~~$2.8 million deposited in one bank located in France, and ~~$0.2~~$0.9 million deposited in one bank located in the United Kingdom. We also maintained ~~$36.9~~$75.3 million in cash equivalents that include money market accounts, ~~and money market funds,~~ as of ~~September~~June 30, ~~2017.~~2019. The remaining amounts of our cash equivalent as of ~~September~~June 30, ~~2017,~~2019, are in non-interest bearing accounts.

Interest Rate Risk

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

As of ~~September~~June 30, ~~2017,~~2019, we had ~~$48.4~~$46.7 million in long-term ~~debts~~debt and ~~capital~~finance leases outstanding. Of this amount, ~~$15.6~~$12.0 million had variable interest rates which were not locked-in through fixed interest rate swap contracts. The debt with variable interest rate exposure had a weighted-average interest rate of ~~4.3%~~5.5% at ~~September~~June 30, ~~2017.~~2019. An increase in the index underlying these rates of 1% (100 basis points) would increase our annual interest expense on the ~~debts~~debt with variable interest rate exposure by approximately ~~$0.2~~$0.1 million per year.

Foreign Currency Exchange Risk

Our finished pharmaceutical products are primarily sold in the U.S. domestic market, and ~~for the three and nine months ended September 30, 2017 and 2016, foreign sales were minimal. Therefore, we~~ have little exposure to foreign currency price fluctuations. However, as a result of our acquisition of the API manufacturing business in Éragny-sur-Epte, France, we are exposed to market risk related to changes in foreign currency exchange rates. Specifically, our insulin sales contracts are ~~primarily~~frequently denominated in ~~Euros,~~euros, which are subject to fluctuations relative to the USD. We do not currently hedge our foreign currency exchange rate risk. At this time, an immediate 10% change in currency exchange rates would not have a material effect on our financial position, results of operations or cash flows.

Our Chinese subsidiary, ANP, maintains ~~their~~its books of record in Chinese ~~Yuan.~~yuan. These books are remeasured into the functional currency of USD, using the current or historical exchange rates. The resulting currency remeasurement adjustments and other transactional foreign exchange gains and losses are reflected in our statement of operations.

Our French subsidiary, AFP, maintains ~~their~~its books of record in ~~Euros.~~euros. Our U.K. subsidiary, IMS UK, ~~maintain~~maintains its books of record in ~~Great Britain Pounds. These books~~British pounds. The results of operations are translated to USD at the average exchange rates during the period. Assets and liabilities are translated at the rate of exchange prevailing on the balance sheet date. Equity is translated at the prevailing exchange rate at the date of the equity transactions. Translation adjustments are reflected in stockholders’ equity and are included as a component of other comprehensive income (loss).

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

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

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

As of ~~September~~June 30, ~~2017, we~~2019, our foreign subsidiaries had cash balances denominated in foreign currencies ~~in the amount~~ of ~~$9.0~~$7.2 million.

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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 ~~three months~~quarter ended ~~September~~June 30, ~~2017,~~2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).

Inherent Limitations of Internal Controls

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

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

For information regarding legal proceedings, ~~refer~~see “Part I – Item 1. Financial Statements – Notes to ~~Litigation in Note 17 in the accompanying “Notes to Condensed~~ Consolidated Financial ~~Statements” in this Quarterly Report.~~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, ~~2016,~~2018, filed with the ~~SEC~~Securities and Exchange Commission on March 15, ~~2017.~~2019.

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

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

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

In February 2017, the years ended December 31, 2016, 2015, and 2014, we recorded net revenues of $46.2 million, $35.6 million, and $22.5 million, respectively, from unapproved products. For the nine months ended September 30, 2017 and 2016, we recorded net revenues of $43.3 million, $29.5 million, respectively. ~~The~~ FDA requested ~~us to~~that we discontinue the manufacturing and distribution of our epinephrine injection, USP vial product, which had been marketed under the “grandfather” exception to the FDA’s ~~“Prescription~~Prescription Drug ~~Wrap-Up”~~Wrap-Up program. We discontinued selling this product in the second quarter of 2017.

For the ~~nine months ended September 30, 2017 and for the year~~years ended December 31, 2018, 2017, and 2016, we ~~recognized $17.9~~recorded net revenues of $26.4 million, $22.0 million, and ~~$18.6~~$17.4 million, inrespectively, from our unapproved products. For the six months ended June 30, 2019 and 2018, we recorded net revenues ~~for~~of $8.9 million and $7.2 million, respectively, from our unapproved products. Our unapproved products currently on the sale of this product, respectively. The charge of $3.3 million was included in the cost of revenues in our consolidated statements of operations for the year ended December 31, 2016, to adjust the related inventorymarket include: atropine, morphine, dextrose and ~~firm purchase commitments to their net realizable value due to the anticipated discontinuation of the product.~~ ~~In September 2017, the FDA granted approval of our ANDA for Sodium Bicarbonate injections.~~epinephrine prefilled syringes. We have filed three ANDAs and ~~are preparing additional applications~~one NDA with respect to ~~other~~our remaining unapproved products in order to mitigate all risk associated with the marketing of unapproved drug products. InPrior to the ~~interim,~~approval of our ANDA and NDA submissions, we continue to operate ~~within~~in compliance with the FDA Compliance Policy Guide, CPG Sec. 440.100 Marketed New Drugs Without Approved NDAs and ANDAs.

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~~Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.~~

Generally accepted accounting principles, or U.S. GAAP in the United States are subject to interpretation by the Financial Accounting Standards Board, or FASB, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change. For example, in May 2014, the FASB issued ASU No. 2014-09, Revenue From Contracts With Customers (Topic 606), (as amended in June 2016, by ASU No. 2016-12-Revenue-Narrow-Scope Improvements and Practical Expedients, and in December 2016, by ASU No. 2016-20-Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP and becomes effective for us beginning the first quarter of fiscal 2018. In addition, were we to change our critical accounting estimates, our results of operations could be significantly impacted. These or other changes in accounting principles could adversely affect our financial results. See Note 2 of the Notes to Condensed Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for information regarding the effect of new accounting pronouncements on our financial statements. Any difficulties in implementing these pronouncements could cause us to fail to meet our financial reporting obligations, which could result in regulatory discipline and harm investors’ confidence in us. Furthermore, the adoption of Topic 606 is expected to impact the amount and timing of revenue recognized and the related disclosures on our financial statements and will also require that we defer all incremental commission costs to obtain a customer contract; as such the adoption could have a material adverse effect on our financial position or results of operations.

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, 2017

66,100

$
17.86

66,100

—

August 1 – August 31, 2017

209,079

15.61

209,079

—

September 1 – September 30, 2017

197,200

15.90

197,200

—


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

⁽¹⁾

During the ~~third~~second quarter of ~~2017,~~2019, we repurchased shares of our common stock as part of the share buyback program authorized by our Board of Directors on ~~November~~May 7, ~~2016~~2018 and ~~August 7, 2017.~~May 6, 2019. As of ~~September~~June 30, ~~2017, $15.1~~2019, $20.0 million remained available under such program.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

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ITEM 6. EXHIBITS



Exhibit No.		Description
10.1		~~Business~~Ninth Amendment to the Acquisition Loan, ~~Agreement,~~ dated ~~August 14, 2017,~~July 19, 2019 between ~~Armstrong~~Amphastar Pharmaceuticals, Inc. and Cathay Bank in

10.2*		Fifth Amendment to the ~~original principal sum of $7,865,000~~Supply Agreement by and between MannKind Corporation and Amphastar Pharmaceuticals, Inc., dated August 2, 2019

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

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

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

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

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definitions Linkbase Document

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

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

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SIGNATURES

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

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

Date: ~~November~~August 9, ~~2017~~2019

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

Date: ~~November~~August 9, ~~2017~~

2019

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			U.S.
	Euros		Dollars
	(in thousands)
At Closing, April 2014	€	13,252	$	18,352
December 2014		4,899		5,989
December 2015		3,186		3,483
December 2016		3,186		3,427
December 2017		500		591
	€	25,023	$	31,842

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

The NASDAQ Stock Market LLC