and consumers in response to the pandemic, all of which continue to evolve and remain uncertain at this time. We discuss many of these risks and uncertainties in greater detail in this Quarterly Report and in our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2019, particularly in Item 1A. “Risk Factors.” These forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report regardless of the time of delivery of this Quarterly Report, and such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Quarterly Report.

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

PART I.I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	June 30,		December 31,
	2020		2019
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	87,388	$	73,685
Restricted cash		1,865		1,865
Short-term investments		11,101		11,675
Restricted short-term investments		2,200		2,290
Accounts receivable, net		49,862		45,376
Inventories		104,726		110,501
Income tax refunds and deposits		682		311
Prepaid expenses and other assets		8,997		9,538
Total current assets		266,821		255,241

Property, plant, and equipment, net		238,236		233,856
Finance lease right-of-use assets		774		887
Operating lease right-of-use assets		17,086		18,805
Goodwill and intangible assets, net		40,271		41,153
Other assets		12,635		11,156
Deferred tax assets		24,235		25,873
Total assets	$	600,058	$	586,971

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	75,385	$	77,051
Income taxes payable		2,345		2,042
Current portion of long-term debt		12,075		7,741
Current portion of operating lease liabilities		3,481		3,175
Total current liabilities		93,286		90,009

Long-term reserve for income tax liabilities		3,425		3,425
Long-term debt, net of current portion		34,622		39,394
Long-term operating lease liabilities, net of current portion		14,530		16,315
Deferred tax liabilities		760		867
Other long-term liabilities		10,998		9,433
Total liabilities		157,621		159,443
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; 54,372,275 and 47,494,909 shares issued and outstanding as of June 30, 2020 and 52,495,483 and 46,576,968 shares issued and outstanding as of December 31, 2019, respectively		5		5
Additional paid-in capital		396,841		367,305
Retained earnings		120,127		116,370
Accumulated other comprehensive loss		(5,173)		(4,687)
Treasury stock		(114,119)		(97,627)
Total Amphastar Pharmaceuticals, Inc. stockholders’ equity		397,681		381,366
Non-controlling interests		44,756		46,162
Total equity		442,437		427,528
Total liabilities and stockholders’ equity	$	600,058	$	586,971

September 30,

December 31,

2017

2016

(unaudited)

ASSETS

Current assets:

Cash and cash equivalents

$
66,920

$
72,354

Short-term investments

2,522

527

Restricted short-term investments

4,155

1,390

Accounts receivable, net

24,152

26,777

Inventories

69,640

79,754

Income tax refunds and deposits

443

22

Prepaid expenses and other assets

8,660

3,272

Total current assets

176,492

184,096

Property, plant, and equipment, net

173,046

152,944

Goodwill and intangible assets, net

45,731

50,307

Other assets

10,623

9,390

Deferred tax assets

31,874

31,001

Total assets

$
437,766

$
427,738

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable

$
9,590

$
16,196

Accrued liabilities

16,421

15,703

Income taxes payable

4,181

7,705

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

Total current liabilities

57,397

60,617

Long-term product return accrual

1,865

1,343

Long-term reserve for income tax liabilities

845

845

Long-term deferred revenue

1,215

97

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

42,232

32,356

Deferred tax liabilities

1,586

1,455

Other long-term liabilities

1,971

1,770

Total liabilities

107,111

98,483

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

Additional paid-in capital

303,208

283,123

Retained earnings

74,767

70,855

Accumulated other comprehensive loss

(2,595)

(4,696)

Treasury stock

(44,730)

(20,032)

Total stockholders’ equity

330,655

329,255

Total liabilities and stockholders’ equity

$
437,766

$
427,738

See Accompanying Notes to Condensed Consolidated Financial Statements.

-1-

Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF ~~OPERATIONS~~OPERATIONS

(Unaudited; in thousands, except per share data)

Three Months Ended

Nine Months Ended

September 30,

September 30,


2017

2016

2017

2016

Net revenues

$
57,916

$
64,223

$
179,773

$
191,622

Cost of revenues

37,275

36,611

109,557

107,394

Gross profit

20,641

27,612

70,216

84,228

Operating (income) expenses:

Selling, distribution, and marketing

1,756

1,291

4,831

3,975

General and administrative

11,665

10,801

35,237

31,129

Research and development

10,040

9,723

32,022

28,922

Gain on sale of intangible assets

—

—

(2,643)

—

Total operating expenses

23,461

21,815

69,447

64,026

Income (loss) from operations

(2,820)

5,797

769

20,202

Non-operating income (expense):

Interest income

124

63

302

187

Interest expense

(264)

(281)

(692)

(970)

Other income, net

969

422

2,307

150

Total non-operating income (expense), net

829

204

1,917

(633)

Income (loss) before income 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

Net income per share:

Basic

$
0.00

$
0.09

$
0.07

$
0.29

Diluted

$
0.00

$
0.08

$
0.06

$
0.29

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

Basic

46,101

45,398

46,065

45,132

Diluted

48,215

47,953

48,046

46,365


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
Net revenues	$	85,806	$	79,047	$	170,494	$	158,837
Cost of revenues		52,629		46,660		100,494		95,547
Gross profit		33,177		32,387		70,000		63,290

Operating expenses:
Selling, distribution, and marketing		4,026		2,992		7,320		6,133
General and administrative		15,924		12,426		26,670		28,753
Research and development		16,149		15,996		31,452		30,603
Total operating expenses		36,099		31,414		65,442		65,489

(Loss) Income from operations		(2,922)		973		4,558		(2,199)
��
Non-operating income (expenses):
Interest income		198		143		351		291
Interest expense		(35)		(24)		(111)		(54)
Other income (expenses), net		1,255		60,001		(497)		59,422
Total non-operating income (expenses), net		1,418		60,120		(257)		59,659

(Loss) Income before income taxes		(1,504)		61,093		4,301		57,460
Income tax (benefit) provision		(75)		14,173		2,205		12,694

Net (loss) income	$	(1,429)	$	46,920	$	2,096	$	44,766

Net loss attributable to non-controlling interests	$	(1,237)	$	(867)	$	(1,661)	$	(3,889)

Net (loss) income attributable to Amphastar Pharmaceuticals, Inc.	$	(192)	$	47,787	$	3,757	$	48,655

Net (loss) income per share attributable to Amphastar Pharmaceuticals, Inc. shareholders:
Basic	$	(0.00)	$	1.01	$	0.08	$	1.04

Diluted	$	(0.00)	$	0.96	$	0.08	$	0.97

Weighted-average shares used to compute net (loss) income per share attributable to Amphastar Pharmaceuticals, Inc. shareholders:
Basic		46,753		47,107		46,581		46,925

Diluted		46,753		49,894		48,458		50,155

See Accompanying Notes to Condensed Consolidated Financial Statements.

-2-

Table of Contents

AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ~~(LOSS)~~(LOSS)

(Unaudited; in thousands)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
Net (loss) income attributable to Amphastar Pharmaceuticals, Inc.	$	(192)	$	47,787	$	3,757	$	48,655

Other comprehensive income (loss) income attributable to Amphastar Pharmaceuticals, Inc., net of income taxes
Foreign currency translation adjustment		288		(97)		(486)		(210)
Total other comprehensive income (loss) income attributable to Amphastar Pharmaceuticals, Inc.		288		(97)		(486)		(210)

Total comprehensive income attributable to Amphastar Pharmaceuticals, Inc.	$	96	$	47,690	$	3,271	$	48,445

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

See Accompanying Notes to Condensed Consolidated Financial Statements.

-3-

Table of Contents

~~AMPHASTAR~~AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~STOCKHOLDERS’ EQUITY

(Unaudited; in ~~thousands)~~thousands, except share data)


	Common Stock							Accumulated		Treasury Stock			Total
				Additional				Other					Amphastar		Non-
				Paid-in		Retained		Comprehensive					Stockholders'		controlling
	Shares	Amount		Capital		Earnings		loss		Shares	Amount		Equity		Interest		Total
Balance as of December 31, 2019	52,495,483	$	5	$	367,305	$	116,370	$	(4,687)	(5,918,515)	$	(97,627)	$	381,366	$	46,162	$	427,528
Net income attributable to Amphastar Pharmaceuticals, Inc.	—		—		—		3,949		—	—		—		3,949		—		3,949
Other comprehensive loss attributable to Amphastar Pharmaceuticals, Inc.	—		—		—		—		(774)	—		—		(774)		—		(774)
Net loss attributable to non-controlling interest	—		—		—		—		—	—		—		—		(424)		(424)
Purchase of treasury stock	—		—		—		—		—	(647,246)		(10,950)		(10,950)		—		(10,950)
Issuance of treasury stock in connection with the Company's equity plans	—		—		(84)		—		—	6,873		84		—		—		—
Issuance of common stock in connection with the Company's equity plans	369,508		—		(1,238)		—		—	—		—		(1,238)		—		(1,238)
Share-based compensation expense	—		—		5,161		—		—	—		—		5,161		121		5,282
Balance as of March 31, 2020	52,864,991	$	5	$	371,144	$	120,319	$	(5,461)	(6,558,888)	$	(108,493)	$	377,514	$	45,859	$	423,373
Net loss attributable to Amphastar Pharmaceuticals, Inc.	—		—		—		(192)		—	—		—		(192)		—		(192)
Other comprehensive income attributable to Amphastar Pharmaceuticals, Inc.	—		—		—		—		288	—		—		288		—		288
Net loss attributable to non-controlling interest	—		—		—		—		—	—		—		—		(1,237)		(1,237)
Purchase of treasury stock	—		—		—		—		—	(329,391)		(5,756)		(5,756)		—		(5,756)
Issuance of treasury stock in connection with the Company's equity plans	—		—		(130)		—		—	10,913		130		—		—		—
Issuance of common stock in connection with the Company's equity plans	1,507,284		—		19,448		—		—	—		—		19,448		—		19,448
Share-based compensation expense	—		—		6,379		—		—	—		—		6,379		134		6,513
Balance as of June 30, 2020	54,372,275	$	5		396,841	$	120,127	$	(5,173)	(6,877,366)	$	(114,119)	$	397,681	$	44,756	$	442,437

Nine Months Ended

September 30,

2017

2016

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

Depreciation of property, plant, and equipment

9,376

9,009

Amortization of product rights, trademarks, and patents

2,139

1,751

Share-based compensation expense

12,905

11,604

Changes in operating assets and liabilities:

Accounts receivable, net

2,909

6,756

Inventories

12,382

(19,477)

Prepaid expenses and other assets

(3,791)

173

Income tax refund, deposits, and payable

(5,213)

3,215

Accounts payable and accrued liabilities

(2,020)

(2,745)

Net cash provided by operating activities

29,444

24,554

Cash Flows From Investing Activities:

Business Acquisitions

—

(12,461)

Purchases and construction of property, plant, and equipment

(24,981)

(16,045)

Sale of intangible assets

2,000

—

Purchase of short-term investments

(5,645)

(2,270)

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)

Net cash used in investing activities

(28,626)

(32,388)

Cash Flows From Financing Activities:

Net proceeds from equity plans

7,255

17,157

Purchase of treasury stock

(24,773)

(8,986)

Proceeds from issuance of long-term debt

18,983

10,198

Principal payments on long-term debt

(8,381)

(9,968)

Net cash provided by (used in) financing activities

(6,916)

8,401

Effect of exchange rate changes on cash

664

(43)

Net increase (decrease) in cash and cash equivalents

(5,434)

524

Cash and cash equivalents at beginning of period

72,354

66,074

Cash and cash equivalents at end of period

$
66,920

$
66,598

Noncash Investing and Financing Activities:

Equipment acquired under capital leases

$
—

$
1,263

Supplemental Disclosures of Cash Flow Information:

Interest paid, net of capitalized interest

$
1,334

$
1,381

Income taxes paid

$
4,876

$
3,263

-4-

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:


					Six Months Ended
					June 30,
					2020		2019

	Nine Months Ended
	September 30,
	2017		2016
	(in thousands)
					(in thousands)
Beginning balance	$	3,143	$	2,621	$	10,339	$	8,030
Provision for product returns		4,196		958		6,208		3,654
Credits issued to third parties		(1,825)		(873)		(3,989)		(2,243)
Ending balance	$	5,514	$	2,706	$	12,558	$	9,441

Of the provision of product returns as of June 30, 2020 and December 31, 2019, $8.3 million and $7.1 million, respectively, were included in accounts payable and accrued liabilities on the condensed consolidated balance sheets. The remaining provision as of June 30, 2020 and December 31, 2019, of $4.3 million and $3.2 million, respectively, were included in other long-term liabilities. For the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~, 2019, the Company’s aggregate product return rate was ~~1.2%~~1.3% and ~~1.1%~~ 1.5% of qualified sales, respectively.

Note 5. 4. (Loss) Income per Share Attributable to Amphastar Pharmaceuticals, Inc. Shareholders

Basic net (loss) income per share attributable to Amphastar Pharmaceuticals, Inc. shareholders is calculated based upon the weighted-average number of shares outstanding during the period. Diluted net (loss) income 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 and the reallocation of net income attributable to non-controlling interest from the assumed dilutive effect of stock options issued under the 2018 ANP Equity Incentive Plan, or the 2018 Plan.

As the Company reported a net loss for the three months ended June 30, 2020, the diluted net loss per share attributable to Amphastar Pharmaceuticals, Inc. shareholders, as reported, equals the basic net loss per share attributable to Amphastar Pharmaceuticals, Inc. shareholders since the effect of the assumed exercise of stock options, vesting of non-vested RSUs, and issuance of common shares under the Company’s ESPP are anti-dilutive. Total stock options, non-vested RSUs, and shares issuable under the Company’s ESPP excluded from the three months ended June 30, 2020 net loss per share were 8,887,036 stock options, 1,176,479 non-vested RSUs, and 60,386 shares issuable under the ESPP.

For the ~~three and nine~~six months ended ~~September~~June 30, ~~2017,~~2020, options to purchase ~~1,162,850 and 2,424,430~~1,928,773 shares of stock, with a weighted-average exercise price of ~~$27.87~~$20.84 per share, and ~~$21.93 per share, respectively,~~the reallocation of net income attributable to non-controlling interest 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 the three and ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2019, options to purchase ~~1,357,154~~783,001 and ~~4,510,729~~762,937 shares of stock, respectively, with a weighted-average exercise price of ~~$29.31~~$21.98 per share and ~~$19.84~~$22.00 per ~~shares,~~share, respectively, and the reallocation of net income attributable to non-controlling interest 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.

-~~12-~~12-

~~Table of Contents~~

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


									Three Months Ended				Six Months Ended
									June 30,				June 30,
									2020		2019		2020		2019

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016
	(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 (loss) income attributable to Amphastar Pharmaceuticals, Inc.									$	(192)	$	47,787	$	3,757	$	48,655
Denominator:
Weighted-average shares outstanding — basic		46,101		45,398		46,065		45,132		46,753		47,107		46,581		46,925


Net effect of dilutive securities:
Incremental shares from equity awards		2,114		2,555		1,981		1,233		—		2,787		1,877		3,230
Weighted-average shares outstanding — diluted		48,215		47,953		48,046		46,365		46,753		49,894		48,458		50,155
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 (loss) income per share attributable to Amphastar Pharmaceuticals, Inc. shareholders — basic									$	(0.00)	$	1.01	$	0.08	$	1.04
Net (loss) income per share attributable to Amphastar Pharmaceuticals, Inc. shareholders — diluted									$	(0.00)	$	0.96	$	0.08	$	0.97

Note 6. 5. Segment Reporting

The Company’s business is the development, manufacture, and marketing of pharmaceutical products. The Company has ~~established two~~identified 2 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 Primatene^® Mist, enoxaparin, naloxone, phytonadione, lidocaine, epinephrine, as well as various other critical and non-critical care drugs. The API segment manufactures and distributes recombinant human insulin API and porcine insulin API for external customers and internal product development.

-~~13-~~13-

~~Table of Contents~~

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Selected financial information by reporting segment is presented below:


									Three Months Ended				Six Months Ended
									June 30,				June 30,
									2020		2019		2020		2019

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016
	(in thousands)
									(in thousands)
Net revenues:
Finished pharmaceutical products	$	54,455	$	59,058	$	174,154	$	181,368	$	80,935	$	73,735	$	162,233	$	148,274
API		3,461		5,165		5,619		10,254		4,871		5,312		8,261		10,563
Total net revenues		57,916		64,223		179,773		191,622		85,806		79,047		170,494		158,837


Gross profit:
Finished pharmaceutical products		21,310		28,621		74,486		85,042		35,437		34,540		74,247		66,852
API		(669)		(1,009)		(4,270)		(814)		(2,260)		(2,153)		(4,247)		(3,562)
Total gross profit		20,641		27,612		70,216		84,228		33,177		32,387		70,000		63,290


Operating expenses		23,461		21,815		69,447		64,026		36,099		31,414		65,442		65,489

Income (loss) from operations		(2,820)		5,797		769		20,202
Non-operating income (expenses)		829		204		1,917		(633)

Income (loss) before income taxes	$	(1,991)	$	6,001	$	2,686	$	19,569

(Loss) income from operations										(2,922)		973		4,558		(2,199)
Non-operating expense										1,418		60,120		(257)		59,659

(Loss) income before income taxes									$	(1,504)	$	61,093	$	4,301	$	57,460

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

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


									Three Months Ended				Six Months Ended
									June 30,				June 30,
									2020		2019		2020		2019

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016
	(in thousands)
									(in thousands)
Finished pharmaceutical products net revenues:
Primatene^® Mist									$	12,468	$	2,512	$	25,345	$	5,409
Phytonadione										10,689		12,441		21,718		22,561
Enoxaparin	$	6,549	$	15,363	$	25,247	$	51,049		10,218		9,838		19,386		24,322
Lidocaine										7,608		10,082		18,265		22,061
Naloxone		12,709		12,407		33,909		38,222		8,723		7,833		17,598		15,197
Lidocaine		9,596		8,279		27,218		26,378
Phytonadione		9,352		8,667		27,242		23,555
Epinephrine		2,027		5,303		22,249		14,921		6,957		3,139		10,947		5,818
Other finished pharmaceutical products		14,222		9,039		38,289		27,243		24,272		27,890		48,974		52,906
Total finished pharmaceutical products net revenues	$	54,455	$	59,058	$	174,154	$	181,368	$	80,935	$	73,735	$	162,233	$	148,274

~~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-~~14-

~~Table of Contents~~

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019

	(in thousands)
Depreciation and amortization expense
Finished pharmaceutical products	$	1,453	$	1,371	$	2,917	$	2,721
API		575		290		1,157		575
Total depreciation and amortization expense	$	2,028	$	1,661	$	4,074	$	3,296

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


													Net Revenue								Long-Lived Assets
													Three Months Ended				Six Months Ended
													June 30,				June 30,				June 30,		December 31,
													2020		2019		2020		2019		2020		2019

	Net Revenue								Long-Lived Assets
	Three Months Ended				Nine Months Ended
	September 30,				September 30,				September 30,		December 31,
	2017		2016		2017		2016		2017		2016
	(in thousands)
													(in thousands)
United States	$	55,346	$	62,691	$	175,075	$	188,865	$	105,311	$	104,110	$	81,898	$	74,781	$	162,963	$	151,238	$	106,301	$	108,399
China		—		—		—		—		39,639		35,085		295		984		523		984		81,951		79,846
France		2,570		1,532		4,698		2,757		28,004		13,659		3,613		3,282		7,008		6,615		49,984		45,611
United Kingdom		—		—		—		—		92		90
Total	$	57,916	$	64,223	$	179,773	$	191,622	$	173,046	$	152,944	$	85,806	$	79,047	$	170,494	$	158,837	$	238,236	$	233,856

Note 7.6. Customer and Supplier Concentration

Customer Concentrations

~~Three~~NaN 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~~3 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~~2020 and ~~2016,~~2019, and accounts receivable as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, 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,
	2020		2019		2020		2019		2020		2019
AmerisourceBergen	9	%	13	%	23	%	25	%	23	%	23	%
McKesson	22	%	34	%	23	%	25	%	23	%	27	%
Cardinal Health	22	%	17	%	19	%	21	%	19	%	23	%

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

-15-

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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~~2020 and December 31, ~~2016,~~2019, there were no ~~significant~~ adjustments to fair value for nonfinancial assets or liabilities.

Note 8. Investments

-~~16-~~

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

~~AMPHASTAR PHARMACEUTICALS, INC.~~


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

	(in thousands)
Corporate bonds	$	2,005	$	5	$	—	$	2,010
Total investments as of June 30, 2020	$	2,005	$	5	$	—	$	2,010

Corporate bonds	$	2,790	$	—	$	(1)	$	2,789
Total investments as of December 31, 2019	$	2,790	$	—	$	(1)	$	2,789

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~The Company believes that the unrealized gains and losses disclosed above were primarily driven by interest rate change rather than by unfavorable changes in the credit ratings associated with these securities and as a result, the Company continues to expect to collect the principal and interest due on its debt securities that have an amortized cost in excess of fair value. At each reporting period, the Company evaluates securities for impairment when the fair value of the investment is less than its amortized cost. The Company evaluated the underlying credit quality and credit ratings of the issuers, noting neither a significant deterioration since purchase nor any other factors that would indicate a material credit loss.

~~(Unaudited)~~

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

Note 9. Goodwill and Intangible Assets

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

												��
								Weighted-Average			Accumulated
								Life (Years)	Original Cost		Amortization		Net Book Value

	Weighted-Average			Accumulated
	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	10	$	8,625	$	3,378	$	5,247
Patents	12		486		160		326	12		486		276		210
Land-use rights	39		2,540		403		2,137	39		2,540		584		1,956
Other intangible assets	4		69		42		27
Subtotal	12		39,600		27,495		12,105	12		11,651		4,238		7,413
Indefinite-lived intangible assets
Trademark	*		29,225		—		29,225	*		29,225		—		29,225
Goodwill - Finished pharmaceutical products	*		4,401		—		4,401	*		3,633		—		3,633
Subtotal	*		33,626		—		33,626	*		32,858		—		32,858
As of September 30, 2017	*	$	73,226	$	27,495	$	45,731
As of June 30, 2020								*	$	44,509	$	4,238	$	40,271

Weighted-Average

Accumulated


Life (Years)

Original Cost

Amortization

Net Book Value

(in thousands)

Definite-lived intangible assets

Cortrosyn® product rights

12

$
27,134

$
24,461

$
2,673

IMS (UK) international product rights(1)

10

8,632

359

8,273

Acquired ANDAs(2)

15

4,000

222

3,778

Patents

10

293

137

156

Land-use rights

39

2,540

354

2,186

Other intangible assets

1

574

534

40

Subtotal

12

43,173

26,067

17,106

Indefinite-lived intangible assets

Trademark

*

29,225

—

29,225

Goodwill - Finished pharmaceutical products

*

3,976

—

3,976

Subtotal

*

33,201

—

33,201

As of December 31, 2016

*

$
76,374

$
26,067

$
50,307

*~~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 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. 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 Company is also subject to

-~~17-~~17-

~~Table of Contents~~

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	Weighted-Average			Accumulated
	Life (Years)	Original Cost		Amortization		Net Book Value

	(in thousands)
Definite-lived intangible assets
IMS (UK) international product rights	10	$	9,226	$	3,152	$	6,074
Patents	12		486		255		231
Land-use rights	39		2,540		551		1,989
Other intangible assets	4		69		69		—
Subtotal	12		12,321		4,027		8,294
Indefinite-lived intangible assets
Trademark	*		29,225		—		29,225
Goodwill - Finished pharmaceutical products	*		3,634		—		3,634
Subtotal	*		32,859		—		32,859
As of December 31, 2019	*	$	45,180	$	4,027	$	41,153

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

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

~~Goodwill~~

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


					June 30,		December 31,
					2020		2019

	September 30,		December 31,
	2017		2016
	(in thousands)
					(in thousands)
Beginning balance	$	3,976	$	3,726	$	3,634	$	3,951
Goodwill related to acquisition of business		—		391
Currency translation and other adjustments		425		(141)
Currency translation						(1)		(317)
Ending balance	$	4,401	$	3,976	$	3,633	$	3,634

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.~~2020.

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

~~As a result of environmental concerns about Chlorofluorocarbons, or CFCs, the FDA 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.~~

~~In 2013, the Company filed a new drug application, or NDA, for Primatene~~® Mist and received a Prescription Drug User Fee Act date set for May 2014. In May 2014, the Company received a complete response letter, or CRL, from 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 support 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 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 the over-the-counter market. However, there can be no guarantee that any future amendment to the Company’s NDA will result in timely approval of Primatene~~® ~~Mist or approval at all.~~

~~Based on the Company’s filed version of Primatene~~® ~~Mist, the long history of the Primatene~~® ~~trademark (marketed since~~

-~~18-~~

~~Table of Contents~~

~~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:


					June 30,		December 31,
					2020		2019

	September 30,		December 31,
	2017		2016
	(in thousands)
					(in thousands)
Raw materials and supplies	$	22,008	$	36,209	$	50,657	$	59,233
Work in process		24,780		22,266		39,169		35,548
Finished goods		22,852		21,279		14,900		15,720
Total inventories	$	69,640	$	79,754	$	104,726	$	110,501

-18-

~~A charge of $2.2~~AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Charges totaling $8.1 million and ~~$7.3~~$10.2 million were included in the cost of revenues in the Company’s condensed consolidated statements of operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, respectively, to adjust the Company’s inventory and related firm inventory purchase commitments to their net realizable ~~value, including a $2.0 million and $4.9 million charge in~~value. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017, respectively, related to enoxaparin inventory as a result of a decrease~~2019, charges totaling $2.5 million and $5.7 million were included in the ~~forecasted average selling price.~~cost of revenues, respectively, to adjust the Company’s inventory and related firm inventory purchase commitments to their net realizable value.

Note 11. Property, Plant, and Equipment

Property, plant, and equipment consist of the following:


					June 30,		December 31,
					2020		2019

	September 30,		December 31,
	2017		2016
	(in thousands)
					(in thousands)
Buildings	$	87,313	$	85,283	$	119,648	$	117,928
Leasehold improvements		29,807		24,619		29,510		29,531
Land		7,092		6,857		7,604		7,603
Machinery and equipment		116,777		111,041		174,308		164,802
Furniture, fixtures, and automobiles		15,679		15,113		24,787		22,043
Construction in progress		46,759		32,044		55,832		56,354
Total property, plant, and equipment		303,427		274,957		411,689		398,261
Less accumulated depreciation		(130,381)		(122,013)		(173,453)		(164,405)
Total property, plant, and equipment, net	$	173,046	$	152,944	$	238,236	$	233,856

Note 12. 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,
	2020		2019

	(in thousands)
Accrued customer fees and rebates	$	9,049	$	9,633
Accrued payroll and related benefits		23,134		21,872
Accrued product returns, current portion		8,326		7,126
Accrued loss on firm purchase commitments		5,520		3,352
Other accrued liabilities		7,648		10,007
Total accrued liabilities		53,677		51,990
Accounts payable		21,708		25,061
Total accounts payable and accrued liabilities	$	75,385	$	77,051

-~~19-~~19-

~~Table of Contents~~

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 13. Debt

~~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,
	2020		2019

	(in thousands)
Loans with East West Bank

Line of credit facility due December 2020	$	—	$	—
Mortgage payable due February 2021		3,354		3,401
Equipment loan due June 2021		1,224		1,837
Equipment loan due December 2022		5,000		6,000
Equipment loan due February 2024		6,084		3,570
Mortgage payable due October 2026		3,367		3,400
Mortgage payable due June 2027		8,586		8,659

Loans with Cathay Bank

Line of credit facility due May 2022		—		—
Acquisition loan due June 2024		9,833		10,928
Mortgage payable due August 2027		7,361		7,452

Loans with Seine-Normandie Water Agency

French government loan due June 2020		—		28
French government loan due July 2021		118		114
French government loans due December 2026		380		374

Loan with China Everbright Bank

Line of credit facility due June 2021		707		—

Payment Obligation to Merck		—		561

Equipment under Finance Leases		683		811
Total debt		46,697		47,135
Less current portion of long-term debt		12,075		7,741
Long-term debt, net of current portion	$	34,622	$	39,394

~~Loans with East West Bank~~

~~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-~~

~~Table of Contents~~

~~AMPHASTAR PHARMACEUTICALS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

receivable. This facility matured in March 2016. 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, the Company amended the facility to extend the maturity date to December 2018. As of ~~September~~June 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 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, 2017,2020, the fair value of the ~~loan approximates its book value.~~loans listed above approximated their carrying amount. The interest rate used in the fair value estimation was determined to be a Level 2 input. ~~The~~For certain loans with East West Bank, the Company has entered into a fixed interest rate swap ~~contract on this facility~~contracts to exchange the variable interest ~~rate~~rates for a fixed interest ~~rate of 4.48%~~rates over the life of ~~the facility~~certain debt instruments without the exchange of the underlying notional debt amount. The interest rate swap ~~contract does~~contracts do not qualify for hedge accounting and isare 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~~ These swap contracts were all in ~~January 2016, which had~~a liability position with 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~~aggregate fair value of ~~the loan approximates its book value.~~$1.2 million and $0.4 million as of June 30, 2020 and December 31, 2019, respectively. The ~~interest rate used~~change in fair value is recorded in other income (expense) 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 rateCompany’s condensed consolidated statement 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.operations.

~~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-~~20-

~~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~~2022

In ~~April 2012,~~June 2020, the Company ~~entered into a~~amended the $20.0 million revolving line of credit facility. ~~Borrowings under~~The amendment was effective in June 2020. 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~~amended line of ~~4.00%. In June 2016, the Company amended the~~credit facility, ~~to extend~~ the maturity date ~~from May 2016~~was extended 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~~2022, 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%~~3.75%. ~~Beginning on~~As of June ~~1, 2014, and through the maturity date April 22, 2019,~~30, 2020, the Company ~~must make monthly payments~~did not have any amounts outstanding under this facility.

Loan with China Everbright Bank

Line of principal and interest based on the then outstanding amount of the loan amortized over a 120‑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 ofCredit Facility – Due June 2021

In June 2020, the Company ~~including accounts receivable, inventory, certain investment property, goods, deposit accounts, and general~~

-~~22-~~

~~Table~~entered into a line 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~~credit facility for $0.7 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~~4.05%. Interest payments are due quarterly and repayment of the ~~loan, thereafter; the loan bears a variable interest rate at the prime rate as published by~~ ~~The Wall Street Journal~~ ~~and matures~~principle amount is due in June ~~2027.~~2021. As of ~~September~~June 30, ~~2017,~~2020, 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.~~Company had $0.7 million outstanding under this loan.

~~Loans~~Credit Agreement with ~~Seine-Normandie Water Agency~~China Merchant Bank

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,~~March 2020, the Company entered into a ~~commitment obligation~~credit agreement with ~~Merck, in~~China Merchant Bank. The credit agreement allows the ~~principal amount of €11.6~~Company to borrow up to $14.0 million ~~or $16.0 million, subject to currency exchange~~secured by buildings and land use rights held by ANP. The interest rate ~~fluctuations. The~~and other terms will be determined at the time of the ~~purchase price include annual payments over four years~~borrowing, depending on the type of loan requested. The credit period is for 36 months and ~~bear a fixed interest rate~~expires in March 2023. NaN amounts have been borrowed under this credit agreement as of ~~3.00%. As of September~~June 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.~~2020.

-~~23-~~

~~Table of Contents~~Covenants

~~AMPHASTAR PHARMACEUTICALS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~Covenants~~

At ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, 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.covenants.

~~Equipment under Capital Leases~~

The Company entered into leases for certain equipment under capital leasing arrangements, which will expire at various times through 2021. The cost of equipment under capital leases was $1.6 million and $2.0 million at September 30, 2017 and December 31, 2016, respectively.

The accumulated depreciation 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.

Note ~~13.~~14. Income Taxes

The following table sets forth the Company’s income tax (benefit) provision 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,
	2020			2019			2020			2019

	(in thousands)
(Loss) income before taxes	$	(1,504)		$	61,093		$	4,301		$	57,460
Income tax (benefit) provision		(75)			14,173			2,205			12,694
Net (loss) income	$	(1,429)		$	46,920		$	2,096		$	44,766
Income tax (benefit) provision as a percentage of (loss) income before income taxes		5.0	%		23.2	%		51.3	%	��	22.1	%

The ~~Company has a full valuation allowance against its French deferred tax assets; however, a tax benefit is included~~change in the ~~annual~~Company’s effective tax rate ~~computation~~for the three and six months ended June 30, 2020, was primarily due to differences in pre-tax (loss) income positions, nondeductible executive severance compensation, and timing of discrete tax items.

CARES Act

The Coronavirus Aid, Relief, and Economic Security Act, or 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,CARES Act, became law on March 27, 2020. It provides additional economic stimulus to address the impact of ~~foreign operations, and various credits,~~the COVID-19 pandemic. The Company does not expect there to be any significant benefit to its income tax provision as well as discrete tax items recognized during each period. During the three and nine months ended September 30, 2017, the Company recognized 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.

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 assetsCARES Act, 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.

will continue to closely

-~~24-~~21-

~~Table of Contents~~

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

monitor the impact of the COVID-19 pandemic, as well as any effects that may result from the CARES Act or future legislation.

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. M~~anagement~~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 tax assets of AFP and determined that it was not more likely than not that the net deferred tax assets of AFP would be realized. Therefore, the Company established a full valuation allowance of $0.9 million as of December 31, 2015, and continues to ~~maintain~~record a full valuation allowance on ~~all~~AFP’s income tax benefits and will continue to do so until AFP generates sufficient taxable income to realize its deferred income tax ~~assets.~~assets

For purposes of computing its annual effective tax rate, the Company did not benefit from its losses in the states where it files separately. This increased the Company’s income tax benefit by an immaterial amount during the three months ended June 30, 2020 and increased its income tax provision $0.2 million for the six months ended June 30, 2020.

Note 15. Stockholders' Equity

~~Note 14. Stockholders’ Equity~~

Share Buyback Program

~~A summary of~~

Pursuant to the ~~changes in stockholders’ equity for the nine months ended September 30, 2017, 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

~~2014 Employee Stock Purchase Plan~~

~~In June 2014,~~Company’s existing share buyback program, 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,purchased 329,391 and ~~may specify shorter purchase periods within each offering. Each offering will have one or more purchase dates on which~~976,106 shares of its common stock ~~will be~~during the three and six months ended June 30, 2020, for total consideration of $5.8 million and $16.7 million, respectively. The Company 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~~50,980 and ~~1,679,377~~196,459 shares of its common stock ~~remained available for issuance.~~

~~For~~during the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~, ~~the Company recorded ESPP expense~~2019, for total consideration of ~~$0.1~~$1.1 million and ~~$0.4~~$4.1 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~~.respectively.

-~~25-~~

~~Table of Contents~~

~~AMPHASTAR PHARMACEUTICALS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~Share Buyback Program~~

On November 6, 2014, the Company’s Board of Directors authorized a $10.0 million share buyback program, which was completed in December 2015. On November 10, 2015, the Company’s Board of Directors authorized an additional $10.0 million to the Company’s share buyback program, which was completed in December 2016. On November 7, 2016,In August 2020, 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 condensed 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,~~2020, the Company reserved an aggregate of ~~3,469,873~~6,353,582 shares of common stock for future issuance under the 2015 Equity Incentive Plan, or the 2015 Plan, including 1,164,425 shares that were reserved in January 2020 pursuant to the evergreen provision in the 2015 Plan.

2014 Employee Stock Purchase Plan

As of June 30, 2020, the Company has issued 738,780 shares of common stock under the ESPP, and 1,261,220 shares of its common stock remains available for issuance under the ESPP.

During the three months ended June 30, 2020, the Company issued 79,245 shares at a weighted-average purchase price of $15.84 per share under the ESPP. For the three and six months ended June 30, 2020, the Company recorded ESPP, expense of $0.3 million and $0.4 million, respectively. For the three and six months ended June 30, 2019, the Company

-~~26-~~22-

~~Table of Contents~~

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

recorded ESPP expense of $0.2 million and $0.3 million, respectively.

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

The Company accounts for share-based compensation payments in accordance with ASC 718, which requires measurement and recognition of compensation expense at fair value for all share-based payment awards made to employees and directors. Under these standards, the fair value of option awards and the option components of the ~~ESPP~~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 stock options held by non-employees are revalued at each balance sheet date.~~ 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~~2020 and ~~2016,~~2019, are as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016

									Three Months Ended				Six Months Ended
									June 30,				June 30,
									2020		2019		2020		2019
Average volatility	36.9	%	31.9	%	37.0	%	30.4	%	44.0	%	43.4	%	43.1	%	42.5	%
Risk-free interest rate	2.0	%	1.3	%	2.1	%	1.5	%	0.5	%	2.0	%	0.8	%	2.4	%
Weighted-average expected life in years	6.3		6.3		5.5		5.5		4.9		5.0		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,~~2020, is presented below:


				Weighted-Average
		Weighted-Average		Remaining	Aggregate
		Exercise		Contractual	Intrinsic
	Options	Price		Term (Years)	Value⁽¹⁾
					(in thousands)
Outstanding as of December 31, 2019	9,763,485	$	15.26
Options granted	1,789,254		13.52
Options exercised	(1,473,323)		14.22
Options cancelled	(84,203)		16.53
Options expired	(1,108,177)		16.45
Outstanding as of June 30, 2020	8,887,036	$	14.92	5.65	$	66,980
Exercisable as of June 30, 2020	6,029,545	$	14.31	4.41	$	49,123

Weighted-Average

Weighted-Average

Remaining

Aggregate

Exercise

Contractual

Intrinsic

Options

Price

Term (Years)

Value(1)

(in thousands)

Outstanding as of December 31, 2016

12,530,297

$
14.57






Options granted

1,815,813

14.23

Options exercised

(1,134,259)

11.60

Options cancelled

(44,473)

13.57

Options expired

(118,378)

25.48

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

(1)

⁽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.~~

2020.

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~, 2020, the Company recorded ~~expenses~~an expense of $1.9$2.6 million and $5.9$5.2 million, respectively, related to stock options granted. For the three and six months ended June 30, 2019, the Company recorded an expense of $1.8 million and $4.2 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.~~For~~

In April 2020, Jason Shandell resigned from his position as the Company’s President and General Counsel and as a member of the Company’s board of directors. In connection with his resignation, the Company and Mr. Shandell entered into a separation agreement. As part of the separation agreement, the Company agreed to accelerate 80% of his unvested stock options and extended the expiration date of certain vested stock option awards. As a result of this modification, the Company incurred an expense of $0.7 million, which is included as part of share-based compensation expense within general and administration expenses in the condensed consolidated statement of operations during the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~, ~~the Company recorded expenses of~~ $1.8 million and $6.2 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.2020.

-~~27-~~23-

~~Table of Contents~~

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Information relating to option grants and exercises is as follows:


									Three Months Ended				Six Months Ended
									June 30,				June 30,
									2020		2019		2020		2019

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016
	(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	$	7.15	$	8.17	$	5.48	$	8.46
Intrinsic value of options exercised		1,668		4,998		4,730		5,980		6,486		452		6,974		5,822
Cash received from options exercises		782		14,331		9,521		17,584
Cash received from options exercised										19,088		1,108		20,339		5,047
Total fair value of the options vested during the year		779		2,688		6,984		7,948		2,411		388		9,844		7,502

A summary of the status of the Company’s non-vested options as of ~~September~~June 30, ~~2017,~~2020, and changes during the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, is presented below:


		Weighted-Average
		Grant Date
	Options	Fair Value
Non-vested as of December 31, 2016	4,592,187	$	3.61

					Weighted-Average
					Grant Date
				Options	Fair Value
Non-vested as of December 31, 2019				2,747,133	$	6.99
Options granted	1,815,813		4.95	1,789,254		5.48
Options vested	(1,997,927)		3.50	(1,594,693)		6.17
Options forfeited	(44,473)		4.71	(84,203)		7.13
Non-vested as of September 30, 2017	4,365,600		4.21
Non-vested as of June 30, 2020				2,857,491		6.50

As of ~~September~~June 30, ~~2017,~~2020, there was ~~$12.9~~$14.6 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~~1 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,~~2020, the Company recorded ~~expenses~~a total expense of ~~$1.7~~$3.6 million and ~~$5.4~~$6.0 million, respectively, related to RSU awards ~~granted to employees under all plans~~granted. During the three and six months ended June 30, 2019, the Company recorded expenses of ~~$0.2~~$2.0 million and ~~$0.5~~$4.1 million, respectively, related to RSU awards ~~granted~~granted.

As part of the separation agreement with Mr. Shandell, the Company agreed to accelerate the ~~Board~~vesting of ~~Directors. During~~80% of his RSU awards. As a result of this modification, the Company incurred an expense of $1.6 million, which is included as part of share-based compensation within general and administrative expenses in the condensed consolidated statement of operations during the three and ~~nine~~six months ended ~~September~~June 30, 2016, the Company recorded expenses of $1.4 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.2020.

As of ~~September~~June 30, ~~2017,~~2020, there was ~~$14.2~~$15.9 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	as
	Issued	Compensation⁽¹⁾
		(in thousands)
RSUs outstanding at December 31, 2019	1,099,496
RSUs granted	727,746	$	9,811
RSUs forfeited	(35,792)
RSUs vested⁽²⁾	(614,971)
RSUs outstanding at June 30, 2020	1,176,479

Total Fair Market

Value of RSUs

Issued

Total RSUs

as

Issued

Compensation(1)

(in thousands)

RSUs outstanding at December 31, 2016

1,215,786

RSUs granted

676,482

$
9,298

RSUs forfeited

(13,302)

RSUs vested(2)

(484,739)

RSUs outstanding at September 30, 2017

1,394,227

(1)

⁽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)

⁽²⁾

Of the vested RSUs, ~~184,341~~235,053 shares of common stock were surrendered to ~~fulfil~~fulfill tax withholding obligations.

The 2018 ANP Equity ~~Awards~~Incentive Plan

In December 2018, ANP’s board of directors approved the 2018 Plan, which is set to ~~Consultants~~expire in December 2023. The 2018 Plan permits the grant of stock options and ~~Advisory Board Members~~

other equity awards in ANP shares to ANP employees. As of June 30, 2020, ANP has issued 2,433,445 stock options and issued 3,648,932 stock options in 2019, to its employees under the 2018 Plan. As of June 30, 2020, the number of stock options outstanding was 5,918,777. The ~~Company pays certain consultants~~options vest over a period of approximately four years 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. Duringhave up to a 10 year contractual term. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, the Company recorded ~~expenses~~expense of ~~$0.1~~$0.2 million and $0.3 million ~~respectively, in relation~~related to ~~such share-based compensation. During~~stock options issued by ANP under the 2018 Plan, respectively. For the three and six months ended ~~September~~June 30, ~~2016,~~2019, the Company recorded an immaterial amount of expense ~~in relation~~related to ~~such share-based compensation. During~~stock options issued by ANP under the ~~nine months ended September 30, 2016, the Company recorded an expense of approximately $0.1 million in relation to such share-based compensation.~~2018 Plan.

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


									Three Months Ended				Six Months Ended
									June 30,				June 30,
									2020		2019		2020		2019

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016
	(in thousands)
									(in thousands)
Cost of revenues	$	815	$	675	$	2,843	$	2,245	$	970	$	959	$	2,329	$	2,238
Operating expenses:
Selling, distribution, and marketing		88		45		237		176		123		95		230		189
General and administrative		2,947		2,593		8,715		8,339		5,052		2,648		8,271		5,439
Research and development		306		242		1,110		844		368		330		965		840
Total share-based compensation	$	4,156	$	3,555	$	12,905	$	11,604	$	6,513	$	4,032	$	11,795	$	8,706

Note ~~15.~~16. 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,~~2020 were approximately ~~$0.3~~$0.5 million and ~~$0.8~~$1.0 million, respectively, compared to the prior year expense of ~~$0.3~~$0.4 million and $0.7 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2019, 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, the Company assumed~~The Company’s subsidiary, AFP, has an obligation associated with a defined-benefit plan for its eligible ~~employees of AFP.~~employees. This plan provides benefits to the employees from the date of retirement and is based on the employee’s length of time employed by the Company. The calculation is based on a statistical calculation combining a number of factors that include the employee’s age, length of service, and AFP employee turnover rate.

The liability under the plan is based on a discount rate of ~~1.60% and 1.75%~~0.9% as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, respectively. The liability is included in accrued liabilities in the accompanying condensed consolidated balance sheets. The plan is currently unfunded, and the benefit obligation under the plan was ~~$1.9~~$2.5 million and ~~$1.7~~$2.4 million at ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, respectively. The Company recorded an immaterial amount of expense under the plan for the three and six months ended ~~September~~June 30, ~~2017,~~2020 and ~~$0.1 million for~~2019.

Deferred Compensation Plan

In December 2019, the ~~nine months ended September 30, 2017.~~Company established a non-qualified deferred compensation plan. The deferred compensation plan allows certain eligible participants to defer a portion of their cash compensation and provides a matching contribution at the discretion of the Company. The plan’s obligations are payable upon retirement, termination of employment and/or certain other times in a lump-sum distribution or in installments, as elected by the participant in accordance with the plan. Participants can allocate their deferred compensation amongst various investment options with earnings accruing to the participant. The Company ~~recorded an immaterial amount of expense under~~has established a Rabbi Trust to fund the plan ~~for~~obligations and to hold the ~~three months ended September~~plan assets. Eligible participants began contributing to the plan in January 2020. As of June 30, ~~2016,~~2020, the plan assets and ~~$0.1 million for the nine months ended September 30, 2016.~~ liabilities were valued at approximately $0.5 million.

Note ~~16.~~17. Commitments and Contingencies

~~Supply Agreement with MannKind Corporation~~

On July 31, 2014, the Company entered into a supply agreement with MannKind Corporation, or MannKind, or the Supply Agreement, pursuant to which the Company agreed to manufacture for and supply to MannKind certain quantities of RHI API for use in MannKind’s product Afrezza®. Under 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~~

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 for the three and nine months ended September 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.

Purchase Commitments

As of ~~September~~June 30, ~~2017,~~2020, the Company has entered into commitments to purchase equipment and raw materials for an aggregate amount of approximately ~~$48.4~~$50.0 million. The Company anticipates that most of these commitments with a remaining ~~term~~terms in excess of one year will be fulfilled by ~~2018.~~ the end of 2021.

In ~~addition, the Company is obligated to pay a supplier~~accordance with 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,between 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 of December 31, 2016, the Company had completed its investment 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.

~~Per these agreements,~~Chinese government, in January 2010 and November 2012, 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, 2020, the Company has spent $14.9 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.~~2020.

Note ~~17.~~18. Litigation

Momenta/Sandoz Enoxaparin Patent and Antitrust Litigation

In September 2011, Momenta Pharmaceuticals, Inc., or Momenta, a ~~Boston‑~~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~~2 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 an antitrust 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, in January 2012, and reversed by the Federal Circuit in August 2012.~~

In January 2013, the Company moved for summary judgment of non‑infringement of both patents. Momenta and Sandoz withdrew their allegations as to the ‘466 patent, and in July 2013, the Massachusetts District Court granted theDefendants. The Company’s motion for summary judgment of non‑infringement of 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 the Company’s favor on both patents. Momenta and Sandoz also filed a motion to collect attorneys’ fees 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 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 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~~complaint generally asserted 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, and the Federal Circuit issued its mandate on February 24, 2016, whereby the case returned to the ~~Massachusetts~~ ~~District Court for further proceedings.~~

On March 18, 2016, 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.Defendants had

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~In light~~engaged in certain types of ~~Momenta~~illegal, monopolistic, and ~~Sandoz’s Amended Infringement Contentions and recent changes in Supreme Court precedent since~~anticompetitive conduct giving rise to various causes of action against them. This lawsuit was subsequently transferred to the ~~case was stayed in 2012,~~Massachusetts District Court.

On May 20, 2019, the Company ~~sought~~and the Plaintiffs entered into a Settlement Agreement to ~~amend its Non-Infringement~~fully settle the patent litigation and ~~Invalidity Contentions.~~

antitrust litigation. The Settlement Agreement was contingent upon the District Court’s granting a Joint Motion to Vacate the Patent Judgment and thereafter, the Plaintiffs’ payment of $59.9 million to the Company. On ~~July~~June 18, ~~2016,~~2019, the Company submitted its Motion for Leave to Amend Its Non-Infringement and Invalidity Contentions and Momenta and Sandoz responded on July 25, 2016. In light of the new arguments made in their response, the Company furtherparties filed a Joint 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~~Vacate 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 orderPatent Judgment with the District Court, and on ~~February 21, 2017. On April 13, 2017,~~the same day, 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 duegranted such motion. Accordingly, 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~~19, 2019, the parties ~~proceeded~~filed Joint Stipulations 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~~dismiss the patent litigation and the antitrust litigation, each of which is self-executing and effective upon filing pursuant to the Federal Rules of Civil Procedure 41(a)(1)(A)(ii). Furthermore, on June 26, 2019, the Federal Circuit issued an Order and a Mandate dismissing the appeal of the ~~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. Oppositionslitigation. On June 27, 2019, pursuant to the ~~motions for summary judgment were filed on May 5, 2017. Replies in support of~~Settlement Agreement, the ~~motions for summary judgment were filed on May 19, 2017.On June 16, 2017,~~Plaintiffs paid the ~~District Court issued an order denying the summary judgment motions.~~Company $59.9 million. 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 areCompany is not 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~~future rights or royalties related 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.this settlement.

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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.~~

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 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 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 and the court to discuss whether any discovery and/or a hearing is necessary. On June 13, 2016, the Company and its outside counsel each filed responses to the court’s order to show cause as to why sanctions should not be imposed. On July 21, 2016, Aventis filed a response contending that the court should impose sanctions. On February 10, 2017, the Court held a show cause hearing regarding the potential imposition of sanctions and took the matter under submission. On September 18, 2017, the District Court issued its decision that no sanctions will be imposed on either the Company or its counsel.

On March 28, 2016, the Company filed its opening brief with the Ninth Circuit Court of Appeals setting forth detailed arguments as to why the False Claims Act litigation should not have been dismissed by the California District Court. On June 20, 2016, Aventis filed its principal brief in the appeal, responding to the Company’s arguments regarding dismissal of the False Claims Act litigation, and setting forth Aventis’s argument that it should be awarded attorneys’ fees and expenses. On September 19, 2016, the Company filed its reply brief to Aventis’s 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~~Company’s lawsuit against Aventis was dismissed for lack of subject matter jurisdiction; dismissing as moot Aventis’s appeal from 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 motion for attorneys’ fees; and remanding the case to the District Court for resolution of the attorneys’ fees issue.jurisdiction. 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 February 12, 2019, 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, and indicated that a written opinion on this Application for Fees and Expenses would be forthcoming. The Magistrate Judge’s written opinion on this Application for Fees and Expenses has not been issued yet. 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 (0.1 mg/mL) Patent Litigation

On ~~September 17, 2015,~~June 28, 2018, Belcher Pharmaceuticals, LLC, or Belcher initiated a lawsuit in the United States District Court for the District of Delaware by filing a complaint against IMS for infringement of U.S. Patent No. 9,283,197 (the “197 Patent”) with regard to IMS’s New Drug Application No. 211363, filed under 21 U.S.C. § 355(b)(2) of the Hatch-Waxman Act, for FDA approval to manufacture and sell 0.1 mg/mL epinephrine injections. On July 3, 2019, Parties filed a Joint Stipulation to stay the litigation pending the Court’s ruling on the outcome of Belcher’s trial with Hospira. On August 19, 2019, the judge signed the order staying the litigation pending the Court’s ruling on the outcome of Belcher’s trial with Hospira because it involves the same ‘197 Patent as the Company’s litigation. On March 31, 2020, the Court in Belcher’s trial with Hospira issued its ruling in favor of Hospira and invalidated the ‘197 Patent based on obviousness and the ‘197 Patent is unenforceable due to inequitable conduct, and accordingly, the Court entered Final Judgment in favor of Hospira on April 3, 2020. Belcher filed a notice of appeal on only the inequitable conduct rulings from Final Judgment in favor of Hospira on May 4, 2020, and therefore, the ‘197 Patent is still invalid based on obviousness. On May 21, 2020, the Court entered an Order dismissing, with prejudice, the Company’s patent lawsuit with Belcher.

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~~Complaint against the Company in the ~~California~~United States District

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Court ~~against Momenta~~for the District of Delaware for infringement of U.S. Patent Nos. 9,375,478 (“the ‘478 Patent”), 9,687,526 (“the ‘526 Patent”), 9,744,209 (“the ‘209 Patent”), 9,744,239 (“the ‘239 Patent”), 9,750,785 (“the ‘785 Patent”) and ~~Sandoz, or~~ 9,937,223 (“the ~~Defendants.~~‘223 Patent”) (collectively, “Par Patents”) with regard to the Company’s Abbreviated New Drug Application No. 211,857 for FDA approval to manufacture and sell Vasopressin (20 units/ mL). The Company filed its Answer to this Complaint on February 19, 2019. On April 18, 2019, the Court held a scheduling conference and entered a Scheduling Order.

On September 27, 2019, the Court entered a Revised Scheduling Order that consolidates the Company’s ~~complaint generally asserts that Defendants have engaged~~vasopressin patent lawsuit with two other vasopressin patent lawsuits filed by Par in ~~certain types of illegal, monopolistic,~~the same Court, Par v. Amneal Pharmaceuticals GMBH et al., and ~~anticompetitive conduct giving rise to various causes of action against them.~~Par v. American Regent, Inc. (collectively, the “Consolidated Vasopressin Patent Lawsuit”). In the Revised Scheduling Order, trial is still scheduled for January 2021 and the Company’s 30-month FDA stay is maintained at May 21, 2021. On the same day, the Court entered a Protective Order on the Consolidated Vasopressin Patent Lawsuits. On December 9, ~~2015, Defendants filed~~2019, the Court entered a ~~motion~~Second Revised Scheduling Order to ~~dismiss~~include Fresenius Kabi USA, LCC as part of the Consolidated Vasopressin Patent Lawsuit, with trial still scheduled for January 11, 2021 and the Company’s 30-month FDA stay still maintained at May 21, 2021. On May 21, 2020, the Court entered a ~~motion~~Consent Judgment between Par and American Regent, Inc., and thus, American Regent, Inc. is no longer part of the Consolidated Vasopressin Patent Lawsuit. The Company intends to ~~transfer~~vigorously defend this patent lawsuit.

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

On February 25, 2020, Astellas US LLC, Astellas Pharma US, Inc., and Gilead Sciences, Inc. (collectively, “Astellas-Gilead”) initiated a patent lawsuit by filing a Complaint in the ~~case to~~United States District Court for the District of ~~Massachusetts.~~Delaware against IMS for infringement of U.S. Patent Nos. 8,106,183 (the “‘183 patent”), RE47,301 (the “‘301 patent”), and 8,524,883 (the “‘883 patent”) (collectively, “Astellas-Gilead Patents”) with regard to IMS’s Abbreviated New Drug Application No. 214,252 for FDA approval to manufacture and sell 0.4 mg/5 mL (0.08 mg/mL) intravenous solution of Regadenoson. On ~~January~~March 4, ~~2016,~~2020, IMS filed its Answer to the Complaint and its Counterclaims. On March 30, 2020, the Court issued an Order allowing the Company ~~filed oppositions~~ to ~~both motions. On January 26, 2016,~~join 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. On March 6, 2017, the First Circuit Court of Appeals issued its decision,consolidated litigation in which ~~it held 3 to 0 that~~five other generic Regadenoson ANDA filers are currently pending. In the ~~District Court of Massachusetts erred in dismissing 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 the Company filed its opposition on May 4, 2017. No reply briefs are allowed. The Court promised to rule on the motion to dismiss by the end of May but did not do so. If 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; and replies would be due on January 15, 2019. Trialconsolidated litigation, trial is currently scheduled for June 14, 2021. The Company’s 30-month FDA stay expires August 10, 2022. The Company intends to vigorously defend this patent lawsuit.

Employment Litigation

Raquel Brenes

On September 11, 2019, a former employee, Raquel Brenes, (“Brenes”), initiated an employment litigation against IMS et al. by filing a Complaint having individual and class action claims for alleged violations of various California labor laws pertaining to wage and hour, and other state laws. This Complaint was filed in the Superior Court of California, Los Angeles County. On September 18, 2019, Brenes filed a First Amended Complaint maintaining the individual and class action claims. On January 21, 2020, Brenes filed a Second Amended Complaint that alleges only Private Attorney General Act, or PAGA, claims and omitted the individual and class action claims. On February 24, 2020, IMS filed an Answer to the Second Amended Complaint. On February 14, 2020, Brenes filed another Complaint against IMS in the Superior Court of California alleging various individual claims relating to disability discrimination and retaliation. The parties have agreed to reschedule the August 21, 2020 mediation to a later date due to the recent change in our Company’s outside labor counsel. The Company intends to vigorously defend this employment litigation.

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Robert Navarrette

On April ~~1, 2019.~~7, 2020, a former employee, Robert Navarrette (“Navarrette”), filed a PAGA lawsuit against IMS and Amphastar Pharmaceuticals, Inc. in the Superior Court of California, Los Angeles County. In this PAGA lawsuit, Navarrette alleges various wage and hour claims. Navarrette has agreed to mediate this PAGA lawsuit, along with Brenes’ PAGA lawsuit. The parties are currently evaluating mediators and their availability for this mediation. The Company intends to vigorously defend this employment litigation.

Priscilla Ramirez

On April 10, 2020, ex-employee Priscilla Ramirez provided written notice to Amphastar Pharmaceuticals, Inc. that she intends to file a PAGA lawsuit for alleged violations of various California labor laws pertaining to wage and hour. On May 29, 2020, Ramirez filed this PAGA lawsuit against the Company. On August 4, 2020, Ramirez served this PAGA lawsuit on our Company. The Company intends to vigorously defend this 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

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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.

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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,~~2019, 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, the FDA granted approval of our ANDA for Neostigmine Methylsulfate Injection, therapeutically equivalent to Avadel’s Bloxiverz~~®.

We are currently developing a portfolio of 1614 generic abbreviated new drug applications, or ANDAs, three ~~generic~~ biosimilar insulin 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~~Five ANDAs and ~~two NDAs~~one NDA are currently on file with the FDA.

Our largest products by net revenues currently include Primatene^® Mist, phytonadione, enoxaparin sodium injection, lidocaine jelly sterile solution, and naloxone hydrochloride injection. In July 2019, we began a national digital, radio, and television campaign for our over-the-counter product Primatene^® Mist, which will continue throughout 2020. During the second quarter of 2020, we launched our Epinephrine Injection, USP 30mg/30mL Multiple Dose Vial product.

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~~API 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~~products.

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

COVID-19 Pandemic

In March 2020, the World Health Organization declared the outbreak of a novel coronavirus, or COVID-19, as a pandemic, which continues to spread throughout the world, including locations where we operate, such as the United States, China and France. We have been actively monitoring the COVID-19 pandemic and its impact globally. In late January 2020, China implemented extensive curfews and travel restrictions to control the outbreak, and started easing these restrictions in March. Our business operations in China experienced a temporary disruption but resumed full operations in February 2020. In March 2020, France also implemented a stay-at-home order limiting movement and restricting travel, however, we were deemed to be ~~re-launched~~an essential business and was not impacted by ~~us.~~the restrictions. In

-30-

~~One~~March 2020, the Governors of the States of California and Massachusetts declared a health emergency and issued orders to close all nonessential businesses; as a specialty pharmaceutical company we were deemed to be an essential business. In June 2020, some of the restrictions were eased or lifted. Currently, our production facilities in all of our ~~largest~~locations continue to operate as they had prior to the COVID-19 pandemic with very little change, other than for enhanced safety measures intended to prevent the spread of the virus.

The COVID-19 pandemic led to an increase in sales of Primatene^® Mist and some hospital products ~~by net revenues~~due to “pantry loading” towards the end of the first quarter and early into the second quarter of 2020. We also noticed a decline in demand for certain products such as Cortrosyn^® and lidocaine jelly which are frequently used in elective procedures.

It is ~~enoxaparin sodium injection,~~not possible at this time to estimate the ~~generic equivalent~~complete impact that COVID-19 could have on our business, as the impact will depend on future developments, which are highly uncertain and cannot be predicted. Infections may resurge or become more widespread and the limitation on our ability to travel and timely sell and distribute our products, as well as any closures or supply disruptions, may be extended for longer periods of ~~Sanofi S.A.’s Lovenox~~®~~. Enoxaparin is~~time, all of which would have a ~~difficult~~negative impact on our business, financial condition and operating results. We will continue to ~~manufacture injectable form~~monitor the impact of ~~low molecular weight heparin~~COVID-19 on all aspects of our business.

The COVID-19 pandemic has and will continue to adversely affect global economies and financial markets, resulting in an economic downturn that ~~is used~~could affect demand for our products and impact our operating results. Even after the COVID-19 pandemic has subsided, we may continue to experience an adverse impact to our business as ~~an anticoagulant and has multiple indications, including~~a result of the ~~prevention and treatment~~continued global economic impact of ~~deep vein thrombosis.~~the pandemic. We cannot anticipate all of the ways in which health epidemics such as COVID-19 could adversely impact our business. See the Risk Factors section for further discussion of the possible impact of the COVID-19 pandemic on our business.

We have agreements with established group purchasing organizations and wholesaler networks to distribute enoxaparin, which is marketed under our own label for the hospital and clinic market. Since December 2016, we have been distributing enoxaparin directly in the U.S. retail market under our own label.

Business Segments

~~Our~~As of June 30, 2020, 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 Primatene^® Mist, enoxaparin, ~~Cortrosyn~~®~~, Amphadase~~®, naloxone, phytonadione, lidocaine, epinephrine, as well as various other critical and non-critical care drugs. The API segment ~~currently~~ manufactures and 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.”

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~~Table of Contents~~

Results of Operations

Three Months Ended ~~September~~June 30, ~~2017~~2020 Compared to Three Months Ended ~~September~~June 30, ~~2016~~2019

Net revenues


											Three Months Ended
											June 30,						Change
											2020			2019			Dollars		%

	Three Months Ended
	September 30,						Change
	2017			2016			Dollars		%
	(in thousands)
											(in thousands)
Net revenues
Finished pharmaceutical products	$	54,455		$	59,058		$	(4,603)	(8)	%	$	80,935		$	73,735		$	7,200	10	%
API		3,461			5,165			(1,704)	(33)	%		4,871			5,312			(441)	(8)	%
Total net revenues	$	57,916		$	64,223		$	(6,307)	(10)	%	$	85,806		$	79,047		$	6,759	9	%
Cost of revenues																					��
Finished pharmaceutical products	$	33,145		$	30,438		$	2,707	9	%	$	45,498		$	39,195		$	6,303	16	%
API		4,130			6,173			(2,043)	(33)	%		7,131			7,465			(334)	(4)	%
Total cost of revenues	$	37,275		$	36,611		$	664	2	%	$	52,629		$	46,660		$	5,969	13	%
Gross profit	$	20,641		$	27,612		$	(6,971)	(25)	%	$	33,177		$	32,387		$	790	2	%
as % of net revenues		36	%		43	%						39	%		41	%

The increase in net revenues of ~~the~~ finished pharmaceutical products for the three months ended ~~September~~June 30, ~~2017,~~2020 was due to the following changes:


									Three Months Ended
									June 30,				Change
									2020		2019		Dollars		%

	Three Months Ended
	September 30,				Change
	2017		2016		Dollars		%
	(in thousands)
									(in thousands)
Finished pharmaceutical products net revenues
Primatene^® Mist									$	12,468	$	2,512	$	9,956	396	%
Phytonadione										10,689		12,441		(1,752)	(14)	%
Enoxaparin	$	6,549	$	15,363	$	(8,814)	(57)	%		10,218		9,838		380	4	%
Naloxone		12,709		12,407		302	2	%		8,723		7,833		890	11	%
Lidocaine		9,596		8,279		1,317	16	%		7,608		10,082		(2,474)	(25)	%
Phytonadione		9,352		8,667		685	8	%
Epinephrine		2,027		5,303		(3,276)	(62)	%		6,957		3,139		3,818	122	%
Other finished pharmaceutical products		14,222		9,039		5,183	57	%		24,272		27,890		(3,618)	(13)	%
Total finished pharmaceutical products net revenues	$	54,455	$	59,058	$	(4,603)	(8)	%	$	80,935	$	73,735	$	7,200	10	%

The ~~decrease~~increase in sales of ~~enoxaparin was driven by lower unit volumes,~~Primatene^® Mist in the second quarter of 2020 is a result of the continued success of our nationwide digital, television and radio campaign, which ~~resulted in a decrease of approximately $5.8 million,~~will continue throughout 2020, as well as a short-term increase due to “pantry loading” in response to the COVID-19 pandemic in April. Sales of naloxone increased during the quarter primarily due to higher unit volumes. During the second quarter of 2020, we launched our newly approved epinephrine injection, USP 30mg/30mL multiple dose vial, which had sales of $2.6 million, and we saw an increase in demand for our epinephrine pre-filled syringes. We experienced lower ~~average selling prices,~~demand for certain products, which ~~resulted~~are frequently used in elective procedures, including lidocaine and some products such as Cortrosyn^® which are included in other finished pharmaceutical products. We attribute these declines in products used in elective procedures to a ~~decrease~~nationwide decline in these procedures by hospitals and individuals in response to the COVID-19 pandemic. These declines were partially offset by a $2.4 million increase in sales of ~~approximately $3.0 million.~~ sodium bicarbonate, included in other finished pharmaceutical products, as we were able to utilize the new production line approved earlier in the year to meet strong market demand.

We ~~expect~~anticipate that the ~~average selling price~~sales of naloxone and ~~unit volumes of~~ enoxaparin will continue to fluctuate in the ~~near term~~future as a result of competition.

The increase in sales of lidocaine was 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” exception to the FDA’s “Prescription Drug Wrap-Up” program. Sales of other finished pharmaceutical products rose due to an increase in units shipped, resulting from competitor shortages.

Sales of ~~RHI~~ API decreased ~~because there were no shipments~~primarily due to ~~MannKind during~~ the ~~period.~~ timing of customer purchases.

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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.~~MannKind Corporation pursuant to a supply agreement with them. 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~~

A significant portion of our customer shipments in any period relate to orders received and shipped in the same period, generally resulting in low product backlog relative to total shipments at any time. We had no significant backlog as of June 30, 2020. Historically, our backlog has not ~~exercise its minimum annual purchase option~~been a meaningful indicator in any given period of ~~RHI API for 2018. We recognized the cancellation fee for 2018~~our ability to achieve any particular level of ~~$0.9 million~~overall revenue or financial performance.

Gross margins

The decrease in ~~net revenues in our condensed consolidated statements of operations for~~gross margins during the three months ended ~~September~~June 30, ~~2017,~~2020, primarily relates to inventory reserves, including a $3.6 million reserve for crude heparin purchases and ~~subsequently collected on this receivable.~~commitments at ANP. This was partially offset by an increase in sales of Primatene^® Mist and the recent launch of epinephrine injection multiple dose vial, both of which are higher margin products.

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~~Table of Contents~~

~~Cost of revenues~~

The ~~increase in~~ cost 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~~heparin, which is the starting material for enoxaparin, ~~as well as due~~has increased and is expected to ~~the discontinuation of our epinephrine vial product in the second quarter of 2017 in accordance with the FDA’s request.~~

~~Declining average selling prices and unit volume of enoxaparin and the discontinuation 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 isoproterenol, epinephrine multi dose vials, and ~~unit volumes of several other finished pharmaceutical products and new product launches. As a result, gross margin is expected~~Primatene^® Mist. Additionally, we have not seen any supply disruption due to ~~fluctuate depending on revenue mix.~~the COVID-19 pandemic at this time, but we are carefully monitoring our supply chain for any potential problems.

Selling, distribution and marketing, and general and administrative


									Three Months Ended
									June 30,				Change
									2020		2019		Dollars		%

	Three Months Ended
	September 30,				Change
	2017		2016		Dollars		%
	(in thousands)
									(in thousands)
Selling, distribution, and marketing	$	1,756	$	1,291	$	465	36	%	$	4,026	$	2,992	$	1,034	35	%
General and administrative	$	11,665	$	10,801	$	864	8	%	$	15,924	$	12,426	$	3,498	28	%

The increase in selling, distribution, and marketing expenses was primarily due to marketing and distribution expenses related to Primatene^® Mist, including the cost of a national digital, television and radio marketing campaign which began in July 2019. The increase in general and administrative ~~expenses was~~expense primarily ~~due~~relates to the separation agreement entered into with a former executive. In connection with the separation agreement, we incurred an ~~increase in legal expenses~~expense of $4.9 million relating to ~~our July 2017 patent trial (see Note 17 to the condensed consolidated financial statements for more information).~~ cash compensation and share-based compensation expense.

We expect that ~~general~~selling, distribution and ~~administrative~~marketing expenses will increase ~~on an annual basis~~ due to ~~increased costs associated with ongoing compliance with public company reporting obligations.~~the increase in marketing expenditures for Primatene^® Mist. Legal fees may fluctuate due to the timing of patent challenges and other litigation matters.

Research and development


	Three Months Ended
	June 30,				Change
	2020		2019		Dollars		%

	(in thousands)
Salaries and personnel-related expenses	$	6,682	$	6,237	$	445	7	%
Pre-launch inventory		—		143		(143)	(100)	%
Clinical trials		1,429		1,530		(101)	(7)	%
FDA fees		45		104		(59)	(57)	%
Testing, operating and lab supplies		3,343		3,878		(535)	(14)	%
Depreciation		2,459		2,147		312	15	%
Other expenses		2,191		1,957		234	12	%
Total research and development expenses	$	16,149	$	15,996	$	153	1	%

Three Months Ended

September 30,

Change


2017

2016

Dollars

%

(in thousands)

Salaries and personnel-related expenses

$
3,392

$
3,955

$
(563)

(14)
%

Clinical trials

13

248

(235)

(95)
%

FDA fees

15

14

1

7
%

Testing, operating and lab supplies

4,579

3,313

1,266

38
%

Depreciation

1,093

1,174

(81)

(7)
%

Other expenses

948

1,019

(71)

(7)
%

Total research and development expenses

$
10,040

$
9,723

$
317

3
%

-33-

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 and lab supplies increased due to expenditures on materials for our pipeline products.~~

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 as well as APIs 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. Some of our ongoing clinical trials have experienced short-term interruptions in the recruitment of patients due to the COVID-19 pandemic, as hospitals prioritize their resources towards the COVID-19 pandemic and governments impose travel restrictions. These conditions may in turn delay spending and delay the results of these trials.

Other income (expenses), net


	Three Months Ended
	June 30,				Change
	2020		2019		Dollars		%

	(in thousands)
Other income (expenses), net	$	1,255	$	60,001	$	(58,746)	NM

-39-

~~Table~~In June 2019, we recognized a gain of ~~Contents~~

$59.9 million relating to our settlement of the enoxaparin patent and antitrust 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.”

~~Provision for income~~

Income tax ~~expense (benefit)~~provision


										Three Months Ended
										June 30,						Change
										2020			2019			Dollars		%

	Three Months Ended
	September 30,						Change
	2017			2016			Dollars		%
	(in thousands)
Income tax expense (benefit)	$	(2,166)		$	2,111		$	(4,277)	NM
										(in thousands)
Income tax provision (benefit)										$	(75)		$	14,173		$	(14,248)	NM
Effective tax rate		109	%		35	%					5	%		23	%

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

~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2020 Compared to ~~Nine~~Six Months Ended ~~September~~June 30, ~~2016~~2019

Net revenues


	Six Months Ended
	June 30,						Change
	2020			2019			Dollars		%

	(in thousands)
Net revenues
Finished pharmaceutical products	$	162,233		$	148,274		$	13,959	9	%
API		8,261			10,563			(2,302)	(22)	%
Total net revenues	$	170,494		$	158,837		$	11,657	7	%
Cost of revenues
Finished pharmaceutical products	$	87,986		$	81,422		$	6,564	8	%
API		12,508			14,125			(1,617)	(11)	%
Total cost of revenues	$	100,494		$	95,547		$	4,947	5	%
Gross profit	$	70,000		$	63,290		$	6,710	11	%
as % of net revenues		41	%		40	%

Nine Months Ended

September 30,

Change


2017

2016

Dollars

%

(in thousands)

Net revenues

Finished pharmaceutical products

$
174,154

$
181,368

$
(7,214)

(4)
%

API

5,619

10,254

(4,635)

(45)
%

as % of net revenues

$
179,773

$
191,622

$
(11,849)

(6)
%

Cost of revenues

Finished pharmaceutical products

$
99,668

$
96,326

$
3,342

3
%

API

9,889

11,068

(1,179)

(11)
%

Total cost of revenues

$
109,557

$
107,394

$
2,163

2
%

Gross profit

$
70,216

$
84,228

$
(14,012)

(17)
%

as % of net revenues

39
%

44
%

-34-

The ~~decrease~~increase in net revenues of the finished pharmaceutical products for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, was due to the following changes:


									Six Months Ended
									June 30,				Change
									2020		2019		Dollars		%

	Nine Months Ended
	September 30,				Change
	2017		2016		Dollars		%
	(in thousands)
									(in thousands)
Finished pharmaceutical products net revenues
Primatene^® Mist									$	25,345	$	5,409	$	19,936	369	%
Phytonadione										21,718		22,561		(843)	(4)	%
Enoxaparin	$	25,247	$	51,049	$	(25,802)	(51)	%		19,386		24,322		(4,936)	(20)	%
Lidocaine										18,265		22,061		(3,796)	(17)	%
Naloxone		33,909		38,222		(4,313)	(11)	%		17,598		15,197		2,401	16	%
Lidocaine		27,218		26,378		840	3	%
Phytonadione		27,242		23,555		3,687	16	%
Epinephrine		22,249		14,921		7,328	49	%		10,947		5,818		5,129	88	%
Other finished pharmaceutical products		38,289		27,243		11,046	41	%		48,974		52,906		(3,932)	(7)	%
Total finished pharmaceutical products net revenues	$	174,154	$	181,368	$	(7,214)	(4)	%	$	162,233	$	148,274	$	13,959	9	%

The increase in sales of Primatene^® Mist is a result of the continued success of our nationwide digital, television and radio campaign, which will continue throughout 2020, as well as a short-term increase due to “pantry loading” in March and April 2020, in response to the COVID-19 pandemic. The increase in epinephrine was primarily due to an increase in unit volumes relating to the launch of our epinephrine injection, USP 30mg/30mL multiple dose vial product. Sales of naloxone increased primarily due to an increase in unit volume. The decrease in sales of enoxaparin ~~was driven by lower unit volumes, which resulted in~~relates to a decrease in unit volume of ~~approximately $18.6~~$7.0 million, ~~as well as lower~~which was partially offset by an increase in average selling ~~prices,~~price. We experienced lower demand for certain products, which ~~resulted~~are frequently used in elective procedures, including lidocaine and some products such as Cortrosyn^® which are included in other finished pharmaceutical products. We attribute these declines in products used in elective procedures to a ~~decrease~~nationwide decline in these procedures by hospitals and individuals in response to the COVID-19 pandemic. These declines were partially offset by a $3.9 million increase in sales of ~~approximately $7.2 million.~~ sodium bicarbonate, included in other finished pharmaceutical products, as we were able to utilize the new production line approved earlier in the year to meet strong market demand.

We ~~expect~~anticipate that the ~~average selling price~~sales of naloxone and ~~unit volumes of~~ enoxaparin will continue to fluctuate in the ~~near term~~future as a result of competition.

Lower unit volumes 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 fluctuate due to increased competition driven by future competitor launches.

-40-

~~Table of Contents~~

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~~primarily due to ~~MannKind during~~ the ~~period.~~ timing of customer purchases.

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.~~MannKind Corporation pursuant to a supply agreement with them. 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.

~~Cost of revenues~~Gross margins

The increase in sales of Primatene^® Mist and the recent launch of epinephrine injection multiple dose vial, which are both higher margin products, helped increase our gross margins for the six months ended June 30, 2020. Gross margins for Primatene^® Mist were magnified by the use of API and components which were expensed to pre-launch inventory in prior years. These trends were partially offset by inventory reserves, including a $3.6 million reserve for crude heparin purchases and commitments at ANP.

The cost of ~~revenues was primarily due to an increase in unabsorbed manufacturing expense and a charge of $7.3 million to adjust certain inventory to their net realizable value, including $4.9 million~~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 isoproterenol, Primatene^® Mist, and ~~unit volumes of several other finished pharmaceutical products. As a result, gross margin is expected~~epinephrine multi dose vials, which were launched over the past few years. Additionally, we have not seen any supply disruption due to ~~fluctuate depending on revenue mix.~~the COVID-19 pandemic at this time, but we are carefully monitoring for any potential problems.

-35-

Selling, distribution and marketing, and general and administrative


									Six Months Ended
									June 30,				Change
									2020		2019		Dollars		%

	Nine Months Ended
	September 30,				Change
	2017		2016		Dollars		%
	(in thousands)
									(in thousands)
Selling, distribution, and marketing	$	4,831	$	3,975	$	856	22	%	$	7,320	$	6,133	$	1,187	19	%
General and administrative	$	35,237	$	31,129	$	4,108	13	%	$	26,670	$	28,753	$	(2,083)	(7)	%

The increase in ~~general~~selling, distribution, and ~~administrative~~marketing expenses was primarily due to ~~an increase~~marketing and distribution expenses related to Primatene^® Mist, including the cost of a national digital, television and radio marketing campaign which began in July 2019. The decrease in general and administrative expense was primarily due a decrease in legal expenses as a result of the enoxaparin patent and antitrust litigation settlement reached in the second quarter of 2019. This was partially offset by an expense of $4.9 million relating to ~~our July 2017 patent trial (see Note 17~~cash compensation and share-based compensation expense in connection with a separation agreement with a former executive during the second quarter of 2020.

For more information regarding litigation matters, 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 ~~condensed consolidated financial statements~~increase in marketing expenditures for ~~more information).~~ Primatene^® Mist. Legal fees may fluctuate due to the timing of patent challenges and other litigation matters.

Research and development


									Six Months Ended
									June 30,				Change
									2020		2019		Dollars		%

	Nine Months Ended
	September 30,				Change
	2017		2016		Dollars		%
	(in thousands)
									(in thousands)
Salaries and personnel-related expenses	$	10,862	$	10,911	$	(49)	(0)	%	$	12,902	$	12,642	$	260	2	%
Pre-launch inventory		711		—		711	N/A			(10)		158		(168)	(106)	%
Clinical trials		2,064		1,246		818	66	%		3,884		3,233		651	20	%
FDA fees		115		2,416		(2,301)	(95)	%		89		404		(315)	(78)	%
Testing, operating and lab supplies		12,341		7,741		4,600	59	%		6,031		6,450		(419)	(6)	%
Depreciation		3,278		3,571		(293)	(8)	%		4,807		4,275		532	12	%
Other expenses		2,651		3,037		(386)	(13)	%		3,749		3,441		308	9	%
Total research and development expenses	$	32,022	$	28,922	$	3,100	11	%	$	31,452	$	30,603	$	849	3	%

-41-

~~Table of Contents~~

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 expense increased due to purchases related to Primatene~~® ~~Mist. Testing, operating and lab supplies increased due to expenditures on materials for our pipeline products, particularly production 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 partially offset by a decrease in FDA fees pertaining to the NDA filing of~~pipeline, primarily for our ~~intranasal naloxone product candidate that was submitted in the second quarter of 2016.~~inhalation ANDAs and our insulin biosimilar programs.

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 as well as APIs 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. Some of our ongoing clinical trials have experienced short term interruptions in the recruitment of patients due to the COVID-19 pandemic, as hospitals prioritize their resources towards the COVID-19 pandemic and governments impose travel restrictions. These conditions may in turn delay spending and delay the results of these trials.

-36-

~~Gain on sale of intangible assets~~

Nine Months Ended

September 30,

Change


2017

2016

Dollars

%

(in thousands)

Gain on sale of intangible assets

$
(2,643)

$
—

$
(2,643)

N/A

Other income (expenses), net


	Six Months Ended
	June 30,				Change
	2020		2019		Dollars		%

	(in thousands)
Other (expenses) income, net	$	(497)	$	59,422	$	(59,919)	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 and ~~Note 9~~antitrust litigation with Momenta Pharmaceuticals, Inc. and Sandoz Inc. For more information regarding litigation matters, 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 (benefit)~~provision


										Six Months Ended
										June 30,						Change
										2020			2019			Dollars		%

	Nine Months Ended
	September 30,						Change
	2017			2016			Dollars		%
	(in thousands)
Income tax expense (benefit)	$	(354)		$	6,295		$	(6,649)	NM
										(in thousands)
Income tax provision										$	2,205		$	12,694		$	(10,489)	NM
Effective tax rate		(13)	%		32	%					51	%		22	%

The difference in income tax ~~expense (benefit)~~provision was primarily due to ~~the change~~differences in pre-tax income positions, nondeductible executive severance compensation, 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~~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,~~2020, our foreign subsidiaries collectively held ~~$22.5~~$14.2 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,

-42-

~~Table of Contents~~

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~~$8.3 million to ~~$119.1~~$173.5 million at ~~September~~June 30, ~~2017,~~2020, compared to ~~$123.5~~$165.2 million at December 31, ~~2016.~~2019.

-37-

Cash Flows from Operations

The following table summarizes our cash flows used in operating, investing, and financing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~:2020 and 2019:


			Six Months Ended June 30,
			2020		2019

	Nine Months Ended
	September 30, 2017
	(in thousands)
			(in thousands)
Statement of Cash Flow Data:
Net cash provided by (used in)
Operating activities	$	29,444	$	31,566	$	48,113
Investing activities		(28,626)		(18,788)		(24,553)
Financing activities		(6,916)		1,007		10,487
Effect of exchange rate changes on cash		664		(82)		(11)
Net increase in cash and cash equivalents	$	(5,434)
Net increase in cash, cash equivalents, and restricted cash			$	13,703	$	34,036

Sources and Use of Cash

Operating Activities

Net cash provided by operating activities was ~~$29.4~~$31.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, which included net income of ~~$3.0~~$2.1 million. Non-cash items were primarily comprised of ~~$11.5~~$10.0 million of depreciation and amortization, ~~$12.9~~and $11.8 million of share-based compensation ~~expense, a $5.2 million change in tax related items, and a gain of $2.3 million on~~expense.

Additionally, for the ~~sale of long-lived assets.~~

~~Over the nine~~six months ended ~~September~~June 30, ~~2017,~~2020, there was a net cash inflow from changes in operating assets and liabilities of $4.3 million, which resulted from a decrease in inventory and an increase in accounts payable and accrued liabilities, which was partially offset by an increase in accounts receivable. The increase in accounts receivable ~~declined by approximately $2.9 million~~was due to the timing of sales. Accounts payable and accrued liabilities decreased primarily due to the timing of ~~customer~~payments.

Net cash provided by operating activities was $48.1 million for the six months ended June 30, 2019, which included net income of $44.8 million. Non-cash items were primarily comprised of $8.8 million of depreciation and amortization, and $8.7 million of share-based compensation expense. Additionally, there was a net cash outflow from changes in operating assets and liabilities of $15.0 million which resulted from the increase in accounts receivable and inventory partially offset by an increase in accounts payable and accrued liabilities. The increase in accounts receivable was due to the timing of sales in the quarter. The increase in inventory was partially due to increased purchases of raw materials and ~~payments, inventories decreased~~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 ~~approximately $12.4~~a decrease in API at AFP. Tax related items increased as a result of the receipt of the $59.9 million relating to the litigation settlement with Momenta Pharmaceuticals, Inc. and Sandoz Inc. Accounts payable and accrued liabilities increased primarily due to the timing of ~~component and raw material purchases and sales deliveries as well as a non-cash charge of $7.3 million to adjust certain inventory items to their net realizable value.~~payments.

Investing Activities

Net cash used in investing activities was ~~$28.6~~$18.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, primarily as a result of ~~$25.0~~$18.9 million in purchases of property, ~~machinery,~~plant, and equipment, ~~including~~which included $3.3 million incurred in the ~~associated capitalized labor and interest on self-constructed assets, an increase of $2.0~~United States, $2.2 million in ~~short-term investments, an increase of $2.8~~France, and $13.4 million in restricted short-term investment. The cash used was partially offset by the receipt of the $2.0 million initial payment relating to the sale of the various ANDAs in February 2017 (see Note 9 to the condensed consolidated financial statements for more information).China.

-43-

~~Table of Contents~~

~~Financing Activities~~

Net cash used in ~~financing~~investing activities was ~~$6.9~~$24.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, primarily as a result of ~~$24.8~~$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.

-38-

Financing Activities

Net cash provided by financing activities was $1.0 million for the six months ended June 30, 2020, primarily as a result of $18.2 million in net proceeds from the settlement of share-based compensation awards under our equity plans offset by $16.7 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~~$3.8 million from borrowings on ~~a mortgage loan and~~our lines of credit, of which $3.1 million was converted into an equipment ~~line of credit, and~~loan during the year. We also made ~~$8.4~~$4.3 million in principal payments on our long-term ~~debts.~~debt.

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

Indebtedness

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

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,~~2019, except that ourour outstanding debt obligations have changed as follows:


							June 30,		December 31,
							2020		2019		Change

	September 30,		December 31,
	2017		2016		Change
	(in thousands)
							(in thousands)
Short-term debt and current portion of long-term debt	$	6,212	$	5,366	$	846	$	12,075	$	7,741	$	4,334
Long-term debt		42,232		32,356		9,876		34,622		39,394		(4,772)
Total debt	$	48,444	$	37,722	$	10,722	$	46,697	$	47,135	$	(438)

As of ~~September~~June 30, ~~2017,~~2020, we had ~~$43.0~~$49.0 million in unused borrowing capacity under revolving lines of credit with Cathay Bank, ~~and~~ East West Bank, and China Merchant 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. There were no material changes to our critical accounting policies during the nine months ended September 30, 2017.~~2019.

Recent Accounting Pronouncements

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

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~~Table of Contents~~

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.

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Government Regulation

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

From 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 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, 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 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 22, 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 April 24, 2017 through April 28, 2017, our facility in Nanjing, China was subject to an inspection 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, and Facilities and Equipment Maintenance. The inspection also included a review of our corrective actions taken from the previous inspection in April 2017. There were no Form 483 observations issued.

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~~Table of Contents~~

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

~~The following discussion provides forward-looking quantitative~~Except for the broad effects of the COVID-19 pandemic as a result of its negative impact on the global economy and ~~qualitative~~financial markets, there have been no material changes in market risk from the information ~~about~~provided in our ~~potential exposure~~Annual Report on Form 10-K for the year ended December 31, 2019. We are exposed to market ~~risk.~~risk in the ordinary course of business. Market risk represents the potential loss arising from adverse changes in the value of financial instruments. The risk of loss is assessed based on the likelihood of adverse changes in fair values, cash flows or future earnings. We are exposed to market risk for changes in the market values of our investments (Investment Risk), the impact of interest rate changes (Interest Rate Risk), and the impact of foreign currency exchange changes (Foreign Currency Exchange Risk).

~~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 30, 2017, we did not have any such investments.

~~As of September 30, 2017, we had $13.6 million~~ deposited in five banks located in China, $8.7 million deposited in one bank located in France, and $0.2 million deposited in one bank located in the United Kingdom. We also maintained $36.9 million in cash equivalents that include money market accounts and money market funds, as of September 30, 2017. The remaining amounts of our cash equivalent as of September 30, 2017, 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 30, 2017, we had $48.4 million in long-term debts and capital leases outstanding. Of this amount, $15.6 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% at September 30, 2017. An increase in the index underlying these rates of 1% (100 basis points) would increase our annual interest expense on the debts with variable interest rate exposure by approximately $0.2 million per year.

~~Foreign Currency Exchange Risk~~

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

Our French subsidiary, AFP, maintains their books of record in Euros. Our U.K. subsidiary, IMS UK, maintain its books of record in Great Britain Pounds. These books 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 do not undertake hedging transactions to cover our foreign currency exposure.

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

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~~Table of Contents~~

ITEM 4. CONTROLS AND ~~PROCEDURES~~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,~~2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting ~~(as~~(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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~~Table of Contents~~

PART II. OTHER ~~INFORMATION~~INFORMATION

ITEM 1. LEGAL PROCEEDINGS

For information regarding legal proceedings, ~~refer to Litigation in Note 17 in the accompanying “Notes~~see “Part I – Item 1. Financial Statements – Notes to Condensed Consolidated Financial ~~Statements” in this Quarterly Report.~~Statements – Litigation.”

ITEM 1A. RISK ~~FACTORS~~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,~~2019, filed with the ~~SEC~~Securities and Exchange Commission on March ~~15, 2017.~~ 16, 2020.

Our business may be adversely affected by the current COVID-19 pandemic or other epidemics.

In March 2020, the World Health Organization declared the outbreak of a novel coronavirus, or COVID-19, as a pandemic, which continues to spread throughout the world, including locations where we operate, such as the United States, China and France. We have been actively monitoring the COVID-19 pandemic and its impact globally. In late January 2020, China implemented extensive curfews and travel restrictions to control the outbreak, and started easing these restrictions in March. In March 2020, France also implemented a stay-at-home order limiting movement and restricting travel. In March 2020, the Governors of the States of California and Massachusetts declared a health emergency and issued orders to close all nonessential businesses. As a specialty pharmaceutical company we are deemed to be an essential business. Since then, the government in the United States, China and France, have re-opened and re-imposed restrictions on travel and business as the pandemic recedes and grows.

This contagious disease outbreak has continued to spread across the globe and is impacting worldwide economic activity and financial markets. The COVID-19 pandemic may disrupt the operations of our customers, suppliers and partners for an indefinite period of time, including as a result of travel restrictions and/or business shutdowns, all of which could negatively impact our business and results of operations, including cash flows. Disruptions to our manufacturing partners and suppliers could result in disruption to the production of our products and failure to satisfy demand. More generally, the outbreak of COVID-19 could adversely affect economies and financial markets globally and nationally, potentially leading to an economic downturn, which could decrease spending and adversely affect demand for our products and harm our business and results of operations. Even after the COVID-19 pandemic has subsided, we may continue to experience an adverse impact to our business as a result of its global economic impact, including any recession that has occurred or may occur in the future. Specifically, difficult macroeconomic conditions, increased and prolonged unemployment or a decline in business confidence as a result of the COVID-19 pandemic, could have a continuing adverse effect on the demand for some of our products. The degree of impact of the COVID-19 pandemic on our business will depend on several factors, such as the duration and the extent of the pandemic, as well as actions taken by governments, businesses, and consumers in response to the pandemic, all of which continue to evolve and remain uncertain at this time.

In addition, some of our ongoing clinical trials have experienced short-term interruptions in the recruitment of patients due to the COVID-19 pandemic, as hospitals prioritize their resources toward the COVID-19 pandemic and governments impose travel restrictions. These conditions may in turn delay spending and delay the results of these trials.

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

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

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

●

disruptions in the construction of the manufacturing facility;

●

interruptions to our operations in China or the inability of our manufacturing facility to produce adequate quantities of raw materials or APIs to meet our needs as a result of natural catastrophic events or other causes beyond our control such as power disruptions or widespread disease outbreaks, including the recent outbreaks that impact animal-derived products, such as the importation of pig-derived crude heparin from countries impacted by the African swine flu, and outbreak of the COVID-19 pandemic, which has resulted in and may in the future result in, business closures, transportation restrictions, import and export complications, and otherwise cause shortages in the supply of raw materials or cause disruptions in our manufacturing capability;

●

product supply disruptions and increased costs as a result of heightened exposure to changes in the policies of the Chinese government, political unrest or unstable economic conditions in China;

●

the imposition of tariffs or other trade barriers as a result of changes in social, political, and economic conditions or in laws, regulations, and policies governing foreign trade, including the tariffs previously implemented and additional tariffs that have been proposed by the U.S. government on various imports from China and by the Chinese government on certain U.S. goods, the scope and duration of which, if implemented, remain uncertain;

●

the nationalization or other expropriation of private enterprises or intellectual property by the Chinese government, which could result in the total loss of our investment in China; and

●

interruptions to our manufacturing or business operations resulting from geo-political actions, including war and terrorism, natural disasters including earthquakes, typhoons, floods, and fires, or outbreaks of health epidemics such as coronavirus, or outbreaks in livestock or animals that impact or restrict importation, use, or distribution of animal-derived products.

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

We are actively monitoring and assessing the potential impact of the COVID-19 pandemic. This includes evaluating the impact on our employees, suppliers, and logistics providers as well as evaluating governmental actions being taken to curtail the spread of the virus. While the Chinese government has been relaxing work restrictions, at this time, it is unclear if the Chinese government will reinstate restrictions or if further restrictions will be put into place by the government. In addition, many countries have placed significant bans on travel to and from China, with many countries and airlines suspending flights to and from mainland China. Any material adverse effect on our employees, suppliers, and logistics providers could have a material adverse effect on our manufacturing operations in China or the supply of raw materials or APIs originating from China.

Our business and operations would be impacted in the event of system breach or failure.

We, our collaborators, third-party providers, distributors, customers and other contractors utilize information technology systems and networks to transmit, store and otherwise process electronic data in connection with our business activities.

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This includes our clinical data and business proprietary information, Electronic Data Interchange, or EDI, on purchase orders, invoices, chargebacks, etc. We, and others on our behalf, also collect and process certain personal data, including about our personnel, business partners, and others, which may be subject to applicable data protection laws and regulations. We, and others on our behalf, rely on complex information technology systems, including Internet-based systems, to transmit, store and otherwise process such data in support of our supply chain processes, operations, and communications. Despite our implementation of security measures to protect the confidentiality, integrity, and availability of the systems and data within our control from various threats (e.g., cyber-attack, insider threat, accidental disclosure, intellectual property theft and economic espionage, natural disaster, war, terrorism, telecommunications and electrical outage), risks remain.

Potential legal (regulatory or contractual), financial, operational, and reputational harm may arise from the accidental or unlawful destruction, damage, loss, unavailability, alteration, impairment, misuse, unauthorized disclosure of, or unauthorized access to (i) our data, which is transmitted, stored or otherwise processed by us or by collaborators, third-party providers, distributors and other contractors on our behalf (a “data security incident”); and (ii) the systems upon which we rely for our operations (an “other event”). For example:

●

The accidental or unlawful loss, unavailability or alteration of clinical trial data from completed or ongoing clinical trials for any of our product candidates could result in delays in our development and regulatory approval efforts as well as significantly increase our costs to recover or reproduce the data.

●

The size and complexity of our systems may make them potentially vulnerable to breakdown or interruption, whether due to computer viruses or other causes, which may result in the loss of key information or the impairment of production and other supply chain processes, adversely affecting our business.

●

Any data security incident or other event, either on its own or as a pattern, may require costly response and remediation efforts, trigger litigation or adverse regulatory action arising from or related to such an incident or event, and result in significant additional expense to implement further data protection measures. Integrating the systems and data of any acquired entity may in some cases further increase these risks due to unforeseen threats and vulnerabilities.

●

Similarly, any data security incident or other event experienced by our collaborators, third-party providers, distributors and other contractors may hinder our product development, supply chain, other business operations, or our regulatory and contractual obligations to others, and could also give rise to litigation or adverse regulatory action.

Subsequent to the first quarter of 2020, we were subject to a cyber-event that resulted in a temporary disruption to some of our internal computer systems. At this time, we are still evaluating the impact to the business.

There can be no assurance that we will be successful in preventing data security incidents or other events nor that we will be successful in mitigating their effects, despite the implementation of security measures for systems and data within our control. Similarly, there can be no assurance that our collaborators, third-party providers, distributors and other contractors will be successful in protecting our data on their systems or in protecting other systems upon which we may rely. Any such data security incident or other event could have a material adverse effect on our business and prospects.

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

~~A number~~

Some of our prescription products are marketed without FDA approval. These products, like many other prescription drugs on the market that the FDA ~~has~~have not been 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

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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~~help address a national 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 Drug ~~Wrap-Up” program.~~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 ended December 31, 2016, we recognized $17.9 million and $18.6 million, in net revenues for 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 inventory and firm purchase commitments to their net realizable value due to the anticipated discontinuation of the product.In ~~September 2017,~~April 2020, the FDA granted approval of our ~~ANDA for Sodium Bicarbonate injections.~~Epinephrine Injection USP 30mg/30mL Multiple Dose Vial, and we launched the product in May 2020.

For the years ended December 31, 2019, 2018, and 2017, we recorded net revenues of $39.3 million, $26.4 million, and $22.0 million, respectively, from our unapproved products. For the six months ended June 30, 2020 and 2019, we recorded net revenues of $21.7 million and $18.7 million, respectively, from our unapproved products. Our unapproved products currently on the market include: atropine, morphine, dextrose and epinephrine prefilled syringes. We have filed three ANDAs and ~~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.

Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders, and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws, as well as provisions of the Delaware General Corporation Law, or the DGCL, could depress the trading price of our common stock by making it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions include:

●

authorizing the issuance of “blank check” preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval;

●

prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders;

●

eliminating the ability of stockholders to call a special meeting of stockholders;

●

establishing advance notice requirements for nominations for election to the Board of Directors or for proposing matters that can be acted upon at stockholder meetings;

●

establishing a classified Board of Directors, whereby only one-third of the members of our Board of Directors are elected at one time; and

●

providing that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum.

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~~Table~~These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of ~~Contents~~

~~Our reported financial results~~our Board of Directors, which is responsible for appointing the members of our management. Furthermore, our amended and restated certificate of incorporation provides that unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for: (i) any derivative action or proceeding brought on our behalf; (ii) any action asserting a breach of fiduciary duty owed by any of our current or former directors, officers or other employees to us or our stockholders; (iii) any action asserting a claim arising pursuant to any provision of the DGCL, our amended and restated certificate of incorporation, or our amended and restated bylaws; or (iv) any action asserting a claim against us that is governed by the internal affairs doctrine. This provision is not intended to apply to actions arising under the Securities Act or the Exchange Act, or any claim for which the federal courts have exclusive jurisdiction. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and consented to this provision. This exclusive-forum provision may ~~be adversely affected by changes in accounting principles generally accepted in the United States.~~

~~Generally accepted accounting principles,~~discourage lawsuits against us or ~~U.S. GAAP in the United States~~our directors, officers, and employees. In addition, we are subject to ~~interpretation~~Section 203 of the DGCL, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with an interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder, unless such transactions are approved by ~~the Financial Accounting Standards~~our Board of Directors. This provision could delay or ~~FASB, the SEC and various bodies formed~~prevent a change of control, whether or not it is desired by or beneficial to ~~promulgate and interpret appropriate accounting principles. A change in these principles or interpretations~~our stockholders, which could ~~have a significant effect on our reported financial results, and could~~also 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 Improvementsprice that some investors are willing to ~~Topic 606, Revenue from Contracts with Customers), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP and becomes effective~~pay 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.common stock.

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

(c)Issuer Purchases of Equity Securities

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


				Total Number of Shares	Maximum Number of
		Average		Purchased as Part of	Shares that May Yet Be
	Total Number of Shares	Price Paid		Publicly Announced Plans	Purchased Under the Plans
Period	Purchased ⁽¹⁾	per Share		or Programs	or Programs
April 1 – April 30, 2020	150,646	$	15.68	150,646	—
May 1 – May 31, 2020	96,785		18.04	96,785	—
June 1 – June 30, 2020	81,960		19.99	81,960	—

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

—

(1)

⁽¹⁾

During the ~~third~~second quarter of ~~2017,~~2020, we repurchased shares of our common stock as part of the share buyback program authorized by our Board of Directors on November ~~7, 2016 and August 7, 2017.~~4, 2019. As of ~~September~~June 30, ~~2017, $15.1~~2020, $5.1 million remained available under such program.

In August 2020, our Board of Directors authorized an increase of $20.0 million to our share buyback program.

ITEM 3. DEFAULTS UPON SENIOR ~~SECURITIES~~SECURITIES

Not applicable.

ITEM 4. MINE SAFETY ~~DISCLOSURES~~DISCLOSURES

Not applicable.

ITEM 5. OTHER ~~INFORMATION~~INFORMATION

Not applicable.

-4946-

~~Table of Contents~~

ITEM 6. ~~EXHIBITS~~EXHIBITS

Exhibit No.		Description
10.1+		Separation Agreement and General Release of Claims by and between the Company and Jason Shandell dated as of April 13, 2020
Exhibit No.		~~Description~~
~~10.1~~10.2		~~Business Loan~~Eighth Modification to the Revolving Line of Credit Agreement, dated ~~August 14, 2017,~~June 15, 2020, between Amphastar Pharmaceuticals, Inc. and Armstrong Pharmaceuticals, Inc. and Cathay Bank in the ~~original~~ principal sum of ~~$7,865,000~~$20,000,000.

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

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definitions Linkbase Document

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

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

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

+	Indicates a management contract or compensatory plan or arrangement.

#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.

-5047-

~~Table of Contents~~

SIGNATURES

~~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 9, 2017~~August 7, 2020

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

Date: ~~November 9, 2017~~August 7, 2020

-5148-


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


Large accelerated filer	◻	Accelerated filer	☒⌧

Non-accelerated filer	◻ ~~(Do not check if a smaller reporting company)~~	Smaller reporting company	◻
			
		Emerging growth company	☒◻



Part I. FINANCIAL INFORMATION
		PAGE
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016~~2019		1
Condensed Consolidated Statements of Operations for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019		2
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019		3
Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2020 and 2019		4
Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019		4 6
Notes to Condensed Consolidated Financial Statements		5 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		37 30
Item 3. Quantitative and Qualitative Disclosure about Market Risk		46 41
Item 4. Controls and Procedures		47 41
Part II. OTHER INFORMATION
Item 1. Legal Proceedings		48 42
Item 1A. Risk Factors		48 42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		49 46
Item 3. Defaults Upon Senior Securities		49 46
Item 4. Mine Safety Disclosures		49 46
Item 5. Other Information		49 46
Item 6. Exhibits		50 47
Signatures		51 48


			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


	% 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	%


	Total		(Level 1)		(Level 2)		(Level 3)

	(in thousands)
Cash equivalents - money market	$	62,525	$	62,525	$	—	$	—
Restricted cash - money market		1,865		1,865		—		—
Short-term investments - certificates of deposit		9,079		—		9,079		—
Restricted short-term investments - certificates of deposit		2,200		—		2,200		—
Corporate bonds		2,010		—		2,010		—
Fair value measurement as of June 30, 2020	$	77,679	$	64,390	$	13,289	$	—

Cash equivalents - money market	$	29,521	$	29,521	$	—	$	—
Restricted cash - money market		1,865		1,865		—		—
Short-term investments - certificates of deposit		8,867		—		8,867		—
Restricted short-term investments - certificates of deposit		2,290		—		2,290		—
Corporate bonds		2,789		—		2,789		—
Fair value measurement as of December 31, 2019	$	45,332	$	31,386	$	13,946	$	—


				Weighted-Average
		Weighted-Average		Remaining	Aggregate
		Exercise		Contractual	Intrinsic
	Options	Price		Term (Years)	Value(1)
					(in thousands)
Outstanding as of December 31, 2016	12,530,297	$	14.57
Options granted	1,815,813		14.23
Options exercised	(1,134,259)		11.60
Options cancelled	(44,473)		13.57
Options expired	(118,378)		25.48
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


		Total Fair Market
		Value of RSUs
		Issued
	Total RSUs	as
	Issued	Compensation(1)
		(in thousands)
RSUs outstanding at December 31, 2016	1,215,786
RSUs granted	676,482	$	9,298
RSUs forfeited	(13,302)
RSUs vested(2)	(484,739)
RSUs outstanding at September 30, 2017	1,394,227


				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	—

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