UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED SEPTEMBERJUNE 30, 20172020
or
◻ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-36509
AMPHASTAR PHARMACEUTICALS, INC.
(Exact name of Registrant as specified in its charter)
| | |
Delaware | 33-0702205 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer |
11570 6th Street
| | |
11570 6th Street | | |
Rancho Cucamonga, CA | 91730 | |
(Address of principal executive offices) | | (zip code) |
Rancho Cucamonga, CA 91730(909) 980-9484
(Address of principal executive offices, including zip code)
(909) 980-9484
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrantregistrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrantregistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒⌧ No ◻ ◻
Indicate by check mark whether the Registrant (1)registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrantregistrant was required to submit and post such files). Yes ☒⌧ No ◻◻
Indicate by check mark whether the Registrantregistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | |
Large accelerated filer | | ◻ | | Accelerated filer | |
|
| | | | |||
Non-accelerated filer | | ◻ | | Smaller reporting company | | ◻ |
| |
| | | |
|
| |
| | Emerging growth company | |
|
If an emerging growth company, indicate by check mark if the Registrantregistrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒◻
Indicate by check mark whether the Registrantregistrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ◻No ☒⌧
Securities registered pursuant to Section 12(b) of the Act:
T | | | | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered | ||
| | | | |||
Common Stock, par value $0.0001 per share | | AMPH | | The NASDAQ Stock Market LLC | ||
| | | | | | |
The number of shares outstanding of the Registrant’s only class ofregistrant’s common stock as of November 2, 2017August 3, 2020 was 45,975,746.47,485,546.
AMPHASTAR PHARMACEUTICALS, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBERJUNE 30, 20172020
Special Note About Forward-Looking Statements
| | |
| | |
| | PAGE |
| | |
Condensed Consolidated Balance Sheets as of | | 1 |
| 2 | |
| 3 | |
| 4 | |
| 6 | |
| 7 | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | | 30 |
Item 3. Quantitative and Qualitative Disclosure about Market Risk | | 41 |
| 41 | |
| 42 | |
| 42 | |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | | 46 |
| 46 | |
| 46 | |
| 46 | |
| 47 | |
| 48 |
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
STATEMENTS
This Quarterly Report on Form 10-Q, or Quarterly Report, contains “forward-looking statements” that involve substantial risks and uncertainties. In some cases, you can identify forward-looking statements by the following words: “may,” “might,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these identifying words. Forward-looking statements relate to future events or future financial performance or condition and involve known and unknown risks, uncertainties and other factors that could cause actual results, levels of activity, performance or achievement to differ materially from those expressed or implied by the forward-looking statements. These forward-looking statements include, but are not limited to, statements about:
| our expectations regarding the sales and marketing of our |
| our expectations regarding our manufacturing and production and the integrity of our supply chain for our products, including the risks associated with our single source suppliers; |
| the impact of the COVID-19 pandemic and related responses of business and governments to the pandemic on our operations and personnel, and on commercial activity and demand across our business operations and results of operations; |
● | interruptions to our manufacturing and production as a result of natural catastrophic events or other causes beyond our control such as power disruptions or widespread disease outbreaks, such as the COVID-19 pandemic; |
● | global, national and local economic and market conditions, specifically with respect to geopolitical uncertainty, and the COVID-19 pandemic; |
● | the timing and likelihood of U.S. Food and Drug Administration, or FDA, approvals and regulatory actions on our product candidates, manufacturing activities and product marketing activities; |
| our ability to advance product candidates in our platforms into successful and completed clinical trials and our subsequent ability to successfully commercialize our product candidates; |
| our ability to compete in the development and marketing of our products and product candidates; |
| our expectations regarding the business expansion plans for our Chinese subsidiary, ANP; |
● | the potential for adverse application of environmental, health and safety and other laws and regulations on our operations; |
| our expectations for market acceptance of our new products and proprietary drug delivery technologies, as well as those of our active pharmaceutical ingredient, or API, customers; |
| the potential for our marketed products to be withdrawn due to patient adverse events or deaths, or if we fail to secure FDA approval for products subject to the Prescription Drug Wrap-Up program; |
| our expectations in obtaining insurance coverage and adequate reimbursement for our products from third-party payers; |
| the amount of price concessions or exclusion of suppliers adversely affecting our business; |
| our ability to establish and maintain intellectual property protection for our products and our ability to successfully defend our intellectual property in cases of alleged infringement; |
| the implementation of our business strategies, product development strategies and technology utilization; |
| the potential for exposure to product liability claims; |
| future acquisitions, divestitures or investments, including the anticipated benefits of such acquisitions, divestitures or investments; |
| our ability to expand internationally; |
| economic and industry trends and trend analysis; |
| our ability to remain in compliance with laws and regulations that currently apply or become applicable to our business both in the United States and internationally; |
| the impact of trade tariffs, export or import restrictions, or other trade barriers; |
● | the impact of Patient Protection and Affordable Care Act (as amended) and other legislative and regulatory healthcare reforms in the countries in which we operate including the potential for drug price controls; |
● | the impact of global and domestic tax reforms, including the Tax Cuts and Jobs Act of 2017, or the Tax Act, as amended by the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act; |
● | the timing for completion and the validation of the new construction |
| the timing and extent of share buybacks; and |
● | our financial performance expectations, including our expectations regarding our backlog, revenue, cost of revenue, gross profit or gross margin, operating expenses, including changes in research and development, sales and marketing and general and administrative expenses, and our ability to achieve and maintain future profitability. |
You should read this Quarterly Report and the documents that we reference elsewhere in this Quarterly Report completely and with the understanding that our actual results may differ materially from what we expect as expressed or implied by our forward-looking statements. In light of the significant risks and uncertainties to which our forward-looking statements are subject, you should not place undue reliance on or regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified timeframe, or at all. In particular, the extent of COVID-19’s impact on our business will depend on several factors, including the severity, duration and extent of the pandemic, 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. 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-
AMPHASTAR PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Three Months Ended |
| Nine Months Ended |
|
| |||||||||
|
| September 30, |
| September 30, |
|
| |||||||||
|
| 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-
AMPHASTAR PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (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-
AMPHASTARAMPHASTAR PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSSTOCKHOLDERS’ 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.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited; in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | | | | | | | Accumulated | | Treasury Stock | | Total | | | | | | | ||||||||
| | | | | | | Additional | | | | | Other | | | | | | | Amphastar | | Non- | | | | ||||
| | | | | | | Paid-in | | Retained | | Comprehensive | | | | | | | Stockholders' | | controlling | | | | |||||
| | Shares | | Amount | | Capital | | Earnings | | loss | | Shares | | Amount | | Equity | | Interest | | Total | ||||||||
Balance as of December 31, 2018 |
| 51,438,675 | | $ | 5 | | $ | 344,434 | | $ | 67,485 | | $ | (4,013) |
| (4,807,557) | | $ | (75,476) | | $ | 332,435 | | $ | 31,924 | | $ | 364,359 |
Beginning balance adjustment as a result of the adoption of new accounting standards | | — | | | — | | | — | | | (54) | | | — | | — | | | — | | | (54) | | | — | | | (54) |
Net income attributable to Amphastar Pharmaceuticals, Inc. |
| — | |
| — | |
| — | |
| 868 | |
| — |
| — | |
| — | |
| 868 | |
| — | |
| 868 |
Other comprehensive loss attributable to Amphastar Pharmaceuticals, Inc. |
| — | |
| — | |
| — | |
| — | |
| (113) |
| — | |
| — | |
| (113) | |
| — | |
| (113) |
Proceeds from the private placement of ANP | | — | | | — | | | 2,588 | | | — | | | — | | — | | | — | | | 2,588 | | | 16,378 | | | 18,966 |
Net loss attributable to non-controlling interest | | — | | | — | | | — | | | — | | | — | | — | | | — | | | — | | | (3,022) | | | (3,022) |
Purchase of treasury stock |
| — | |
| — | |
| — | |
| — | |
| — |
| (145,479) | | | (3,015) | | | (3,015) | | | — | |
| (3,015) |
Issuance of treasury stock in connection with the Company's equity plans | | — | | | — | | | (98) | | | — | | | — | | 8,334 | | | 98 | | | — | | | — | | | — |
Issuance of common stock in connection with the Company's equity plans |
| 604,651 | |
| — | |
| (2,397) | |
| — | |
| — |
| — | |
| — | |
| (2,397) | |
| — | |
| (2,397) |
Share-based compensation expense |
| — | |
| — | |
| 4,674 | |
| — | |
| — |
| — | |
| — | |
| 4,674 | |
| — | |
| 4,674 |
Balance as of March 31, 2019 |
| 52,043,326 | | $ | 5 | | $ | 349,201 | | $ | 68,299 | | $ | (4,126) |
| (4,944,702) | | $ | (78,393) | | $ | 334,986 | | $ | 45,280 | | $ | 380,266 |
Net income attributable to Amphastar Pharmaceuticals, Inc. |
| — | |
| — | |
| — | |
| 47,787 | |
| — |
| — | |
| — | |
| 47,787 | |
| — | |
| 47,787 |
Other comprehensive loss attributable to Amphastar Pharmaceuticals, Inc. |
| — | |
| — | |
| — | |
| — | |
| (97) |
| — | |
| — | |
| (97) | |
| — | |
| (97) |
Net loss attributable to non-controlling interest | | — | | | — | | | — | | | — | | | — | | — | | | — | | | — | | | (867) | | | (867) |
Purchase of treasury stock |
| — | |
| — | |
| — | |
| — | |
| — |
| (50,980) | | | (1,073) | | | (1,073) | | | — | |
| (1,073) |
Issuance of treasury stock in connection with the Company's equity plans | | — | |
| — | |
| (7) | |
| — | |
| — |
| 597 | | | 7 | | | — | | | — | |
| — |
Issuance of common stock in connection with the Company's equity plans |
| 169,434 | |
| — | |
| 2,240 | |
| — | |
| — |
| — | |
| — | |
| 2,240 | |
| — | |
| 2,240 |
Share-based compensation expense |
| — | |
| — | |
| 4,002 | |
| — | |
| — |
| — | |
| — | |
| 4,002 | |
| 30 | |
| 4,032 |
Balance as of June 30, 2019 |
| 52,212,760 | | $ | 5 | | $ | 355,436 | | $ | 116,086 | | $ | (4,223) |
| (4,995,085) | | $ | (79,459) | | $ | 387,845 | | $ | 44,443 | | $ | 432,288 |
See Accompanying Notes to Condensed Consolidated Financial Statements.
-4--5-
AMPHASTAR PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)
| | | | | | | |
| | Six Months Ended | | ||||
| | June 30, | | ||||
|
| 2020 |
| 2019 |
| ||
Cash Flows From Operating Activities: | | | | | | | |
Net income | | $ | 2,096 | | $ | 44,766 | |
Reconciliation to net cash provided by operating activities: | | | | | | | |
Loss on impairment and disposal of assets | |
| 30 | |
| 850 | |
Depreciation of property, plant, and equipment | |
| 9,531 | |
| 8,311 | |
Amortization of product rights, trademarks, and patents | |
| 509 | |
| 526 | |
Operating lease right-of-use asset amortization | | | 1,700 | | | 1,390 | |
Share-based compensation expense | |
| 11,795 | |
| 8,706 | |
Changes in deferred taxes, net | |
| 1,638 | |
| 9,872 | |
Changes in operating assets and liabilities: | | | | | | | |
Accounts receivable, net | |
| (4,454) | |
| 1,700 | |
Inventories | |
| 5,760 | |
| (30,012) | |
Prepaid expenses and other assets | |
| 541 | |
| (1,221) | |
Income tax refunds, deposits, and payables, net | |
| (78) | |
| 1,784 | |
Operating lease liabilities | | | (1,565) | | | (1,297) | |
Accounts payable and accrued liabilities | |
| 4,063 | |
| 2,738 | |
Net cash provided by operating activities | |
| 31,566 | |
| 48,113 | |
| | | | | | | |
Cash Flows From Investing Activities: | | | | | | | |
Purchases and construction of property, plant, and equipment | |
| (18,895) | |
| (24,467) | |
Purchase of short-term investments | | | 669 | | | — | |
Payment of deposits and other assets | |
| (562) | |
| (86) | |
Net cash used in investing activities | |
| (18,788) | |
| (24,553) | |
| | | | | | | |
Cash Flows From Financing Activities: | | | | | | | |
Proceeds from the private placement of ANP | | | — | | | 18,298 | |
Proceeds from equity plans, net of withholding tax payments | |
| 18,210 | |
| (157) | |
Purchase of treasury stock | |
| (16,706) | |
| (4,088) | |
Proceeds from borrowing under lines of credit | |
| 705 | |
| — | |
Repayments under lines of credit | |
| — | |
| (347) | |
Proceeds from issuance of long-term debt | |
| 3,067 | |
| — | |
Principal payments on long-term debt | |
| (4,269) | |
| (3,219) | |
Net cash provided by financing activities | |
| 1,007 | |
| 10,487 | |
| | | | | | | |
Effect of exchange rate changes on cash | |
| (82) | |
| (11) | |
| | | | | | | |
Net increase in cash, cash equivalents, and restricted cash | |
| 13,703 | |
| 34,036 | |
| | | | | | | |
Cash, cash equivalents, and restricted cash at beginning of period | |
| 75,550 | |
| 88,202 | |
| | | | | | | |
Cash, cash equivalents, and restricted cash at end of period | | $ | 89,253 | | $ | 122,238 | |
| | | | | | | |
Noncash Investing and Financing Activities: | | | | | | | |
Capital expenditure included in accounts payable | | $ | 9,662 | | $ | 6,631 | |
Operating lease right-of-use assets | | $ | — | | $ | 7,671 | |
Equipment acquired under finance leases | | $ | 61 | | $ | 61 | |
| | | | | | | |
Supplemental Disclosures of Cash Flow Information: | | | | | | | |
Interest paid, net of capitalized interest | | $ | 1,119 | | $ | 1,277 | |
Income taxes paid | | $ | 662 | | $ | 1,147 | |
See Accompanying Notes to Condensed Consolidated Financial Statements.
-6-
AMPHASTAR PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Amphastar Pharmaceuticals, Inc., a California corporation, was incorporated on February 29, 1996 and merged with and into Amphastar Pharmaceuticals, Inc., a Delaware corporation in July 2004 (together with its subsidiaries, hereinafter referred to as “the Company”the “Company”). The Company is a specialty pharmaceutical company that primarily develops, manufactures, markets, and sells generic and proprietary injectable, inhalation, and intranasal products, including products with high technical barriers to market entry. Additionally, the Company sells insulin active pharmaceutical ingredient, or API, products. Most of the Company’s products are used in hospital or urgent care clinical settings and are primarily contracted and distributed through group purchasing organizations and drug wholesalers. The Company’s insulin API products are sold to other pharmaceutical companies for use in their own products and are being used by the Company in the development of injectable finished pharmaceutical products. The Company’s inhalation products will beproduct, Primatene® Mist, is primarily distributed through drug retailers if they are approved and brought to market.retailers.
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2016,2019 and the notes thereto as filed with the Securities and Exchange Commission, or SEC, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2019. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles, or GAAP, have been condensed or omitted from the accompanying condensed consolidated financial statements. The accompanying year-end condensed consolidated balance sheet was derived from the audited financial statements. The accompanying interim financial statements are unaudited, but reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the Company’s consolidated financial position, results of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the periods presented. Unless otherwise noted, all such adjustments are of a normal, recurring nature. The Company’s results of operations, comprehensive income (loss) and cash flows for the interim periods are not necessarily indicative of the results of operations and cash flows that it may achieve in future periods.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, and are prepared in accordance with the requirements of the SEC for interim reporting. Certain amounts in the prior period condensed consolidated statements of operations and statement of cash flows have been reclassified to conform to the current quarter presentation.United States generally accepted accounting principles, or GAAP. All significant intercompany activity has been eliminated in the preparation of the condensed consolidated financial statements. Effective January 1, 2017, the Company prospectively adopted certain requirements of Auditing Standards Update, or ASU, No. 2016-09 to classify cash flows related to excess tax benefits in operating activities without adjusting prior periods. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the consolidated financial position, results of operations, and cash flows of the Company.
The Company’s subsidiaries include: (1) International Medication Systems, Limited, or IMS, (2) Armstrong Pharmaceuticals, Inc., or Armstrong, (3) Amphastar Nanjing Pharmaceuticals Inc., or ANP, (4) Nanjing Letop Fine ChemistryBiological Technology Co., Ltd., or Letop, (5) Nanjing Hanxin MedicalPharmaceutical Technology Co., Ltd,Ltd., or Hanxin, (6) Nanjing Hanxin Biomedical Testing Service Co., Ltd., or Hanxin Biomedical, (7) Nanjing Baixin Trading Co. Ltd., or Baixin, (8) Amphastar France Pharmaceuticals, S.A.S., or AFP, (7)(9) Amphastar UK Ltd., or AUK, and (8)(10) International Medication Systems (UK) Limited, or IMS UK.
In July 2018, the Company’s Chinese subsidiary, ANP, completed a private placement of its common equity interest to accredited investors for aggregate gross proceeds of approximately $57 million, a portion of which was received in 2019. The Company has retained approximately 58% of the equity interest in ANP following the private placement and continues to consolidate the financial results of ANP with the Company’s results of operations. ANP’s net income after July 2, 2018, was attributed to the Company in accordance with the Company’s equity interest of approximately 58% in ANP.
-7-
AMPHASTAR PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
COVID-19 Pandemic
The Company is subject to risks and uncertainties as a result of the novel coronavirus pandemic, or COVID-19. The extent of the impact of the COVID-19 pandemic on the Company’s business is highly uncertain and difficult to predict, as the response to the pandemic is in its initial stages and information is rapidly evolving. The Company considered the impact of COVID-19 on the assumptions and estimates used to determine the results reported and asset valuations as of June 30, 2020.
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 the Company operates, such as the United States, China and France. The Company has 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 operation in February 2020. In March 2020, France also implemented a stay-at-home order limiting movement and restricting travel, however, the Company was deemed to be an essential business and was not impacted by the restrictions. In March 2020, the Governors of the States of California and Massachusetts declared a health emergency and issued orders to close all nonessential business; as a specialty pharmaceutical company, the Company was deemed to be an essential businesses. In June 2020, some but not all of the restrictions were lifted in China, France, and states where the Company operates, and most businesses were allowed to reopen. All of the Company’s production facilities continued to operate during the quarter as they had prior to the COVID-19 pandemic with very little change, other than for enhanced safety measures intended to prevent the spread of the virus.
It is not possible at this time to estimate the complete impact that COVID-19 could have on the Company’s business, 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 the Company’s ability to travel and timely sell and distribute its 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 the Company’s business, financial condition and operating results. The Company will continue to monitor the impact of COVID-19 on all aspects of its business.
Use of Estimates
The preparation of condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual
-5-
AMPHASTAR PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
results could differ from those estimates. The principal accounting estimates include: determination of allowances for doubtful accounts andcredit losses, allowance for discounts, provision for chargebacks and rebates, provision for product returns, adjustment of inventory to their net realizable values, impairment of long-lived and intangible assets and goodwill, self-insured claims, workers’ compensation liabilities, litigation reserves, stock price volatilities for share-based compensation expense, valuation allowances for deferred tax assets, and liabilities for uncertain income tax positions.
Foreign Currency
The functional currency of the Company, its domestic subsidiaries, its Chinese subsidiary, ANP, and its U.K. subsidiary, AUK, is the U.S. dollar, or USD. ANP maintains its books of record in Chinese Yuan.yuan. These books are remeasured into the functional currency of USD using the current or historical exchange rates. The resulting currency remeasurement adjustments and other transactional foreign currency exchange gains and losses are reflected in the Company’s condensed consolidated statements of operations.
The Company’s French subsidiary, AFP, maintains its booksbook of record in Euros. Itseuros. ANP’s Chinese subsidiary, Letop,subsidiaries maintain itstheir books of record in Chinese Yuan. Its U.K.yuan. AUK’s subsidiary, IMS UK, maintains its booksbook of record in Great Britain Pounds.British pounds. These local currencies have been determined to be the subsidiaries’ respective functional currencies. These books of record are translated into USD using average exchange rates during the period. Assets and liabilities are translated at the rate of exchange prevailing on the balance sheet date. Equity is translated at the prevailing rate of exchange at the date of the
-8-
AMPHASTAR PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
equity transactions. Translation adjustments are reflected in stockholders’ equity and are included as a component of other accumulated comprehensive income (loss). The unrealized gains or losses of intercompany foreign currency transactions that are of a long-term investment nature are reported in other accumulated comprehensive income (loss). The unrealized gains andor losses of intercompany foreign currency transactions that are of a long-term investment nature for the three and nine months ended SeptemberJune 30, 2017 were a $1.12020, was $0.7 million gain and a $3.8 million gain, respectively, andan immaterial loss for the six months ended June 30, 2020. For the three and ninesix months ended SeptemberJune 30, 2016 were2019, the unrealized gains or losses of intercompany foreign currency transactions that are of a $0.3long-term investment nature was $0.4 million gain and a $0.6$0.2 million gain,loss, respectively.
Additionally, the Company does not undertake hedging transactions to cover its foreign currency exposure.
Comprehensive Income (loss)(Loss)
For the three and ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, the Company included its foreign currency translation gain or loss as part of its comprehensive income (loss). There was no material income tax (benefit) expense allocated to other comprehensive income (loss) for the three and six months ended June 30, 2020 and 2019.
Advertising Expense
In connection with the launch of Primatene® Mist, in July 2019, the Company began to incur advertising expenses. Advertising expenses are recorded as incurred, except for expenses related to the development of a major commercial or media campaign, which are expensed in the period in which the commercial or campaign is first presented, and are reflected as a component of selling, distribution, and marketing in the Company’s condensed consolidated statement of operations. For the three and six months ended June 30, 2020, advertising expenses were $1.4 million and $2.4 million, respectively.
Financial Instruments
The carrying amounts of cash and cash equivalents, short-term investments, restricted cash and short-term investments, accounts receivable, accounts payable, accrued expenses, and short-term borrowings approximate fair value due to the short maturity of these items. AThe majority of the Company’s long-term obligations consist of variable rate debt, and their carrying value approximates fair value as the stated borrowing rates are comparable to rates currently offered to the Company for instruments with similar maturities. However, the Company has one fixed-rate, long-term mortgage for which the carrying value differs from the fair value and is not remeasured on a recurring basis (see Note 12). The Company at times enters into fixed interest rate swap contracts to exchange the variable interest rates for fixed interest rates without the exchange of the underlying notional debt amounts. Such interest rate swap contracts are recorded at their fair values.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash, money market accounts, certificates of deposit and highly liquid investments purchased with original maturities of three months or less.
Short-Term Investments
Short-term investments as of June 30, 2020 and December 31, 2019 consisted of certificates of deposit and investment grade corporate bonds with original expiration dates within 12 months.
Restricted Cash
Restricted cash is collateral required for the Company to guarantee certain vendor payments in France. As of June 30, 2020 and December 31, 2019, the restricted cash balance was $1.9 million.
Restricted Short-Term Investments
Restricted short-term investments consist of certificates of deposit that are collateral for standby letter of credit to qualify for workers’ compensation self-insurance. The certificates of deposit have original maturities greater than three months.
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AMPHASTAR PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of June 30, 2020 and December 31, 2019, the balance of restricted short-term investments was $2.2 million and $2.3 million, respectively.
Deferred Income Taxes
The Company utilizes the liability method of accounting for income taxes, under which deferred taxes are determined based on the temporary differences between the financial statements and the tax basis of assets and liabilities using
-6-
AMPHASTAR PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
enacted tax rates. A valuation allowance is recorded when it is more likely than not that the deferred tax assets will not be realized.
Business Combinations
If an acquired set of activities and assets is capable of being operated as a business consisting of inputs and processes from the viewpoint of a market participant, the asset acquired and liabilities assumed are a business. Business combinations are accounted for using the acquisition method of accounting, which requires an acquirer to recognize the assets acquired and the liabilities assumed at the acquisition date measured at their fair values as of that date. Fair value determinations are based on discounted cash flow analyses or other valuation techniques. In determining the fair value of the assets acquired and liabilities assumed in a material acquisition, the Company may utilize appraisals from third party valuation firms to determine fair values of some or all of the assets acquired and liabilities assumed, or may complete some or all of the valuations internally. In either case, the Company takes full responsibility for the determination of the fair value of the assets acquired and liabilities assumed. The value of goodwill reflects the excess of the fair value of the consideration conveyed to the seller over the fair value of the net assets received.
Acquisition-related costs that the Company incurs to effect a business combination are expensed in the periods in which the costs are incurred. When the operations of the acquired businesses were not material to the Company’s condensed consolidated financial statements, no pro forma presentations were disclosed.
Recent Accounting Pronouncements
In May 2014,December 2019, the Financial Accounting Standards Board, or FASB, issued Accounting Standard Update, or ASU, No. 2014-09 Revenue from Contracts with Customers2019-12 Simplifying the Accounting for Income Taxes (Topic 740), which creates a single sourcesimplifies various aspects related to accounting for income taxes. The amendment also improves consistent application of revenue guidanceand simplify GAAP for companies in all industries. Subsequently, the FASB issued multiple updates. The new standard provides guidance for all revenue arising from contracts with customersother areas of Topic 740 by clarifying and affects all entities that enter into contracts to provide goods or services to their customers, unless the contracts are within the scope of other accounting standards. It also provides a model for the measurement and recognition of gains and losses on the sale of certain nonfinancial assets.amending existing guidance. The guidance also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required regarding customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). Based on ASU No. 2015-14 Deferral of the Effective Date, issued in August 2015, this guidance will be effective for the Company beginning in the first quarter of 2018, including interim periods within the year. The Company expects to adopt the standard in 2018 using the modified retrospective transition method. The majority of the Company’s revenue relates to sale of pharmaceutical products to various customers, and the adoption of the new standard is not expected to have a material impact on these transactions. The Company is continuing to evaluate the impact of all transactions.
In February 2016, the FASB issued ASU No. 2016-02 Leases, that is aimed at making leasing activities more transparent and comparable, and which requires substantially all leases be recognized by lessees on their balance sheets as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. This guidance will become effective for the Company’s interim and annual reporting periods during the year endingended December 31, 2019, and all annual and2021, with early adoption permitted, including in any interim reporting periods thereafter. Early adoption is permitted. The Company is required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements for the reporting periods in which the guidance is adopted.period. The Company is currently evaluating the impact that the adoption of this guidance will have on its condensed consolidated financial statements and related disclosures.
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AMPHASTAR PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In June 2016,April 2020, the FASB issued ASU No. 2016-13 2020-04 Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Instruments – Credit Losses,Reporting, which is aimed at providing financial statement users with more useful information about the expected credit losses on financial instrumentsprovides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other commitmentstransactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to extend credit. The standard update changes the impairment model for financial assets measured at amortized cost, requiring presentation at the net amountcontracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be collected. The measurementdiscontinued because of expected credit losses requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Available-for-sale debt securities with unrealized losses will be recorded through an allowance for credit losses. The guidance is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2020. Early adoption is permitted for interim or annual periods during the year ended December 31, 2019. The Company will be required to apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company does not believe that the adoption of this accounting guidance will have a material impact on its consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU No. 2016-15 Classification of Certain Cash Receipts and Cash Payments, which is aimed at addressing certain issues regarding classifications of certain cash receipts and cash payments on the statement of cash flows where diversity in practice was identified. The guidance is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2018. Early adoption is permitted. The Company will be required to apply the guidance retrospectively in the first interim and each annual period in which the guidance is adopted. The Company does not believe that the adoption of this accounting guidance will have a material impact on the Company’s consolidated financial statements and related disclosures.
In October 2016, the FASB issued ASU No. 2016-16 Intra-Entity Transfers of Assets Other Than Inventory, which requires an entity to recognize the income tax consequences of intra-entity transfer of an asset other than inventory when the transfer occurs. The guidance is effective for the Company's interim and annual reporting periods during the year ending December 31, 2018. Early adoption is permitted as of the beginning of an annual reporting period for which financial statements, interim or annual, have not been issued. The amendments will be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption.reference rate reform. The Company is currently evaluating the impact that the adoption of this guidance will have on its condensed consolidated financial statements and related disclosures.
Note 3. Revenue Recognition
In November 2016, the FASB issued ASU No. 2016-18 Statement of Cash Flows: Restricted Cash, which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, the Company will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The guidance is effective for the Company's interim and annual reporting periods during the year ending December 31, 2018. Early adoption is permitted, including adoption in an interim period. The amendments will be applied using a retrospective transition method to each period presented. The Company will be required to apply the guidance retrospectively when adopted. The Company does not believe that the adoption of this accounting guidance will have a material impact on its consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-01 Clarifying the Definition of a Business, which provides guidance to assist entities with evaluating when a set of transferred assets and activities is a business. Under the updated guidance, a set is not a business if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar assets. If the threshold is not met, the update requires that, to be a business, the set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. The definition of outputs was also alignedaccordance with Accounting Standard Codification, or ASC, 606 by focusing on revenue-generating activities. The guidanceRevenue from Contacts with Customers, revenue is effective forrecognized at the time that the Company’s interim and annual reporting periods during the year ending December 31, 2018, and prospectively applicable to any transactions occurring within the period of adoption. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements and related disclosures.
-8-
AMPHASTAR PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In January 2017, the FASB issued ASU No. 2017-04 Simplifying the Test for Goodwill Impairment, which eliminates the requirement to calculate the implied fair value of goodwill. An entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The update also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2customers obtain control of the goodwill impairment test. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. The guidance is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2020, and applied on a prospective basis. Early adoption is permitted for interim and annual goodwill impairment testing dates after January 1, 2017. The Company currently does not believe that the adoption of this accounting guidance will have a material impact on its consolidated financial statements and related disclosures.promised goods.
In May 2017, the FASB issued ASU No. 2017-09 Scope of Modification Accounting, that clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The new guidance is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2018, and applied prospectively to awards modified on or after the adoption date. Early adoption is permitted. The Company does not believe that the adoption of this accounting guidance will have a material impact on its consolidated financial statements and related disclosures.
In August 2017, the FASB issued ASU No. 2017-12 Targeted Improvements to Accounting for Hedging Activities, which amends the hedge accounting model in ASC 815 to enable entities to better portray the economics of their risk management activities in the financial statements and enhance the transparency and understandability of hedge results. The amendments also simplify the application of hedge accounting in certain situations. The new guidance is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2019. Early adoption is permitted. The Company does not believe that the adoption of this accounting guidance will have a material impact on its consolidated financial statements and related disclosures.
Note 3. Business Acquisitions
Acquisition of International Medication Systems (UK) Limited from UCB PHARMA GmbH
In August 2016, the Company’s UK subsidiary, AUK, acquired IMS UK, a UK-based subsidiary of UCB PHARMA GmbH, including its trademarks, assets related to the products, as well as marketing authorizations for 33 products in the UK, Ireland, Australia, and New Zealand, representing 11 different injectable chemical entities. The Company paid $7.7 million in cash as consideration for the transaction. The Company is in the process of transferring the manufacturing of the purchased products to its facilities in California. The transfer will require approval of the UK Medicines and Healthcare products Regulatory Agency and other related regulatory agencies before the products can be sold by the Company. The transaction is accounted for as a business combination in accordance with ASC 805.
The fair values of the assets acquired and liabilities assumed include marketing authorizations of $9.2 million, manufacturing equipment of $0.1 million, and deferred tax liability of $1.6 million. The acquired marketing authorizations intangible assets are subject to a straight-line amortization over a useful life of approximately 10 years.
-9-
AMPHASTAR PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Acquisition of fourteen injectable products from Hikma Pharmaceuticals PLC
In March 2016, the Company acquired 14 abbreviated new drug application, or ANDAs, representing 11 different injectable chemical entities from Hikma Pharmaceuticals PLC, or Hikma, for $4.0 million. This transaction was accounted for as a business combination in accordance with ASC 805. The ANDAs had an estimated fair value of $4.0 million, and were subject to a straight-line amortization over a useful life of approximately 15 years.
In February 2017, the Company sold these products to an unrelated party (see Note 9).
Acquisition of Nanjing Letop Medical Technology Co. Ltd.
In January 2016, the Company’s Chinese subsidiary, ANP, acquired Nanjing Letop Medical Technology Co. Ltd. for $1.7 million consisting of $0.8 million in cash and a deposit of $0.9 million that ANP had previously paid to Letop and which was effectively eliminated upon the consummation of the transaction. The Company accounted for this transaction as a business combination in accordance with ASC 805. The Company recognized $1.4 million of acquired assets, $0.1 million of assumed liabilities, and $0.4 million of goodwill. Letop had previously supplied ANP with intermediates used in making various active pharmaceutical ingredients. In March 2016, the acquired subsidiary was renamed Nanjing Letop Fine Chemistry Co., Ltd.
Acquisition of Merck’s API Manufacturing Business
On April 30, 2014, the Company completed the acquisition of the Merck Sharpe & Dohme’s API manufacturing business in Éragny-sur-Epte, France, or the Merck API Transaction, which manufactures porcine insulin API and recombinant human insulin API, or RHI API. The purchase price of the transaction totaled €24.8 million, or $34.4 million on April 30, 2014, subject to certain customary post‑closing adjustments and currency exchange rate fluctuations. The terms of the purchase include multiple payments over four years as follows (see Note 12):
|
|
|
|
|
|
|
| |
|
|
|
|
| U.S. |
| ||
|
| Euros |
| Dollars |
| |||
|
| (in thousands) |
| |||||
At Closing, April 2014 |
| € | 13,252 |
| $ | 18,352 |
| |
December 2014 |
|
| 4,899 |
|
| 5,989 |
| |
December 2015 |
|
| 3,186 |
|
| 3,483 |
| |
December 2016 |
|
| 3,186 |
|
| 3,427 |
| |
December 2017 |
|
| 500 |
|
| 591 |
| |
|
| € | 25,023 |
| $ | 31,842 |
|
In order to facilitate the acquisition, the Company established AFP in France. The Company is continuing the current site manufacturing activities, which consist of the manufacturing of porcine insulin API and RHI API. As part of the transaction, the Company has entered into various additional agreements, including various supply agreements, as well as the assignment and/or licensing of patents under which Merck was operating at this facility. In addition, certain existing customer agreements have been assigned to AFP. Currently, the Company is in the process of transferring the manufacturing of starting material for RHI API from Merck to AFP. This process will require capital expenditures at AFP and is expected to take up to two years to complete.
Note 4. Revenue Recognition
Generally, revenue is recognized at the time of product delivery to the Company’s customers. In some cases, revenue is recognized at the time of shipment when stipulated by the terms of the sale agreements.
The consideration the Company receives in exchange for its goods or services is only recognized when it is probable that a significant reversal will not occur. The consideration to which the Company expects to be entitled includes a stated list price, less various forms of variable consideration. The Company makes significant estimates for related variable consideration at the point of sale, including chargebacks, rebates, product returns, other discounts and allowances.
Provisions for estimated chargebacks, rebates, discounts, product returns and credit losses are made at the time of sale and are analyzed and adjusted, if necessary, at each balance sheet date.
Revenues derived from contract manufacturing services are recognized when third-party products are shipped to customers, and after the customer has accepted test samples of the products to be shipped. On June 30, 2016, the Company and Actavis, Inc., or Actavis,
-10-
AMPHASTAR PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
amended the distribution agreement, which terminated the agreement in December 2016. Profit-sharing revenue under this agreement was recognized at the time Actavis sold the products to its customers.
The Company does not recognize product revenue unless the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) transfer of title has occurred, (iii) the price to the customer is fixed or determinable, and (iv) collection is reasonably assured. Furthermore, the Company does not recognize revenue until all customer acceptance requirements have been met. The Company estimates and records reductions to revenue for discounts, product returns, and pricing adjustments, such as wholesaler chargebacks, in the same period that the related revenue is recorded.
The Company’s accounting policy is to review each agreement involving contract development and manufacturing services to determine if there are multiple revenue-generating activities that constitute more than one unit of accounting. Revenues are recognized for each unit of accounting based on revenue recognition criteria relevant to that unit. The Company does not have any revenue arrangements with multiple deliverables.performance obligations.
-10-
AMPHASTAR PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Provision for Wholesaler Chargebacks and Rebates
The provision for chargebacks and rebates is a significant estimate used in the recognition of revenue. As part of itsWholesaler chargebacks relate to sales terms with wholesale customers,under which the Company agrees to reimburse wholesalers for differences between the gross sales prices at which the Company sells its products to wholesalers or list prices, and the actual prices of such products at the timethat wholesalers resell them under the Company’s various contractual arrangements with third parties such as retailers, hospitals and group purchasing organizations.organizations in the United States. Rebates include primarily amounts paid to retailers, payers, and providers in the United States, including those paid to state Medicaid programs, and are based on contractual arrangements or statutory requirements. The Company estimates chargebacks and rebates using the expected value method at the time of sale to wholesalers based on wholesaler inventory stocking levels, historic chargeback and rebate rates, and current contract pricing. The settlement of chargebacks generally occurs within 30 days after the sale to wholesalers.
The provision for chargebacks and rebates is reflected inas a component of net revenues. Accounts receivable and/or accrued liabilities are also reduced and/or increased by the chargebacks amount depending on whether the Company has the right of offset with the customer. The following table is an analysis of the chargeback and rebate provision:
| | | | | | | | |||||||
| | Six Months Ended |
| |||||||||||
| | June 30, | | |||||||||||
| | 2020 | | 2019 |
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| |||||||
|
| Nine Months Ended |
| |||||||||||
|
| September 30, |
| |||||||||||
|
| 2017 |
| 2016 |
| |||||||||
|
| (in thousands) |
| |||||||||||
| | (in thousands) |
| |||||||||||
Beginning balance |
| $ | 37,820 |
| $ | 15,217 |
|
| $ | 21,644 |
| $ | 22,423 | |
Provision for chargebacks |
|
| 115,824 |
|
| 105,772 |
| |||||||
Credits issued to third parties |
|
| (144,142) |
|
| (110,073) |
| |||||||
Provision for chargebacks and rebates | |
| 69,424 | |
| 58,001 | | |||||||
Credits and payments issued to third parties | |
| (72,625) | |
| (61,704) | | |||||||
Ending balance |
| $ | 9,502 |
| $ | 10,916 |
| | $ | 18,443 | | $ | 18,720 | |
Changes in the chargeback provision from period to period are primarily dependent on the Company’s sales to its wholesalers, the level of inventory held by the wholesalers, and on the wholesaler’swholesalers’ customer mix. Changes in the rebate provision from period to period are primarily dependent on retailer’s and other indirect customers’ purchases. The approach that the Company uses to estimate chargebacks has been consistently applied for all periods presented. Variations in estimates have been historically small. The chargeback provision has decreased in the nine months ended September 30, 2017, primarily due to a decrease in the list price of enoxaparin in the first half of 2017. The Company continually monitors the provision for chargebacks and rebates and makes adjustments when it believes that the actual chargebacks and rebates may differ from the estimates. Chargeback provisionsThe settlement of chargebacks and rebates generally occurs within 30 days to 60 days after the sale to wholesalers. Accounts receivable and/or accounts payable and accrued liabilities are reduced and/or increased by the chargebacks and rebate amounts depending on whether the Company has the right to offset with the customer. Of the provision for chargebacks and rebates as of SeptemberJune 30, 20172020 and 2016 areDecember 31, 2019, $14.1 million and $15.4 million were included in accounts receivable, net, on the condensed consolidated balance sheets, respectively. The remaining provision as a reduction to account receivables.of June 30, 2020 and December 31, 2019 of $4.3 million and $6.2 million, respectively, were included in accounts payable and accrued liabilities.
Accrual for Product Returns
The Company offers most customers the right to return qualified excess or expired inventory for partial credit; however, products sold to Actavis and API product sales are generally non-returnable. The Company’s product returns primarily consist of the returns of expired products from sales made in prior periods. Returned products cannot be resold. At the time product revenue is recognized, the Company records an accrual for product returns estimated returns.using the expected value method. The accrual is based, in part, upon the
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AMPHASTAR PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
historical relationship of product returns to sales and customer contract terms. The Company also assesses other factors that could affect product returns including market conditions, product obsolescence, and the introduction of new competition. Although these factors do not normally give the Company’s customers the right to return products outside of the regular return policy, the Company realizes that such factors could ultimately lead to increased returns. The Company analyzes these situations on a case-by-case basis and makes adjustments to the product return reserve as appropriate.If the available information is not sufficient to estimate a reasonable product return accrual, revenues from the sales of the new product would not be recognized until the product is consumed by the end customer or rights of return granted under the return policy have expired. As of September 30, 2017 and December 31, 2016, cumulative sales of approximately $1.1 million and $0.5 million, respectively, for one of the Company’s products were not recognized in revenues, due to insufficient information available to estimate a reasonable product return accrual.
-11-
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 ninesix months ended SeptemberJune 30, 20172020 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 andnon-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 ninesix months ended SeptemberJune 30, 2017,2020, options to purchase 1,162,850 and 2,424,4301,928,773 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 ninesix months ended SeptemberJune 30, 2016,2019, options to purchase 1,357,154783,001 and 4,510,729762,937 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-
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 twoidentified 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 |
|
|
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-
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-
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
ThreeNaN 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 four3 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 ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, and accounts receivable as of SeptemberJune 30, 20172020 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 | % |
|
|
|
| | | | | | | | | | | | | |
| | % 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)
market its products, it could have a materially adverse effect on the Company’s business, financial condition, and results of operations.
-15-
AMPHASTAR PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8.7. Fair Value Measurements
The accounting standards of the FASB, defineGAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability at the measurement date (an exit price). These standards also establish a hierarchy that prioritizes observable and unobservable inputs used in measuring fair value of an asset or liability, as described below:
| Level 1 – Inputs to measure fair value are based on quoted prices (unadjusted) in active markets on identical assets or liabilities; |
| Level 2 – Inputs to measure fair value are based on the following: a) quoted prices in active markets on similar assets or liabilities, b) quoted prices for identical or similar instruments in inactive markets, or c) observable (other than quoted prices) or collaborated observable market data used in a pricing model from which the fair value is derived; and |
| Level 3 – Inputs to measure fair value are unobservable and the assets or liabilities have little, if any, market activity; these inputs reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities based on best information available in the circumstances. |
The fair values of the Company’s cash equivalents, short-term investments, and restricted short-term investments approximate their respective carrying amounts.
As of SeptemberJune 30, 2017 and December 31, 2016,2020, cash equivalents include money market accounts and money market funds.accounts. Short-term investments consist of certificatecertificates of deposits and held-to-maturity municipaldeposit as well as investment-grade corporate bonds with original maturities greater than threeexpiration dates within 12 months. The municipal bondscertificates of deposit are carried at amortized cost in the Company’s condensed consolidated balance sheet, which approximates their fair value determined based on Level 2 inputs. The Company does not intend tocorporate bonds are classified as held-to-maturity and will not be required to sell the investments before recovery of theirare carried at amortized cost basis. Restrictednet of an allowance for credit losses, which approximates their fair value determined based on Level 2 inputs. The restrictions on restricted cash and short-term investments consist of certificates of deposits with original maturities great than three months. The restrictions placed on the certificate of deposit accounts have a negligible effect on the fair value of these financial assets; these funds are restricted to meetassets.
The fair value of the Company’s obligation for workers’ compensation claimsfinancial assets and performance bonds.liabilities measured on a recurring basis as of June 30, 2020 and December 31, 2019, are as follows:
| | | | | | | | | | | | | |
|
| 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 | | $ | — | |
The Company does not hold any Level 3 instruments that are measured forat fair value on a recurring basis.
-16-
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 SeptemberJune 30, 20172020 and December 31, 2016,2019, there were no significant adjustments to fair value for nonfinancial assets or liabilities.
Note 8. Investments
-16-
TableA summary of Contentsthe 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 STATEMENTSThe 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 |
| 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-
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 SeptemberJune 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-
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 $2.2AMPHASTAR 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 ninesix months ended SeptemberJune 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 invalue. For the three and ninesix months ended SeptemberJune 30, 2017, respectively, related to enoxaparin inventory as a result of a decrease2019, 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 | |
As
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-
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-
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 SeptemberJune 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. TheFor certain loans with East West Bank, the Company has entered into a fixed interest rate swap contract on this facilitycontracts to exchange the variable interest raterates for a fixed interest rate of 4.48%rates over the life of the facilitycertain debt instruments without the exchange of the underlying notional debt amount. The interest rate swap contract doescontracts 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 hada 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, theaggregate 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 usedchange 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-
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 20182022
In April 2012,June 2020, the Company entered into aamended the $20.0 million revolving line of credit facility. Borrowings underThe 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 rateamended line of 4.00%. In June 2016, the Company amended thecredit facility, to extend the maturity date from May 2016was 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 million2022, 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 onAs of June 1, 2014, and through the maturity date April 22, 2019,30, 2020, the Company must make monthly paymentsdid 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-
Tableentered 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 $4.6credit 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 years4.05%. 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 maturesprinciple amount is due in June 2027.2021. As of SeptemberJune 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.
LoansCredit Agreement with Seine-Normandie Water AgencyChina 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 obligationcredit agreement with Merck, inChina Merchant Bank. The credit agreement allows the principal amount of €11.6Company to borrow up to $14.0 million or $16.0 million, subject to currency exchangesecured by buildings and land use rights held by ANP. The interest rate fluctuations. Theand other terms will be determined at the time of the purchase price include annual payments over four yearsborrowing, depending on the type of loan requested. The credit period is for 36 months and bear a fixed interest rateexpires in March 2023. NaN amounts have been borrowed under this credit agreement as of 3.00%. As of SeptemberJune 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 ContentsCovenants
AMPHASTAR PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Covenants
At SeptemberJune 30, 20172020 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:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
| 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 includedchange in the annualCompany’s effective tax rate computationfor 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-
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. ManagementManagement 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, theThe 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 maintainrecord a full valuation allowance on allAFP’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:
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|
|
|
|
| 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 which976,106 shares of its common stock will beduring 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 ESPP50,980 and 1,679,377196,459 shares of its common stock remained available for issuance.
Forduring the three and ninesix months ended SeptemberJune 30, 2017, the Company recorded ESPP expense2019, 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-
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 SeptemberJune 30, 2017,2020, the Company reserved an aggregate of 3,469,8736,353,582 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-
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 ESPPEmployee 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 expensesexpense 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 ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, are as follows:
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| 2020 |
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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 ninesix months ended SeptemberJune 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) |
| 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 |
For the three and ninesix months ended SeptemberJune 30, 2017, 2020, the Company recorded expensesan 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 ninesix months ended SeptemberJune 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-
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 SeptemberJune 30, 2017,2020, and changes during the ninesix months ended SeptemberJune 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 SeptemberJune 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 2.32.5 years and will be adjusted for future changes in estimated forfeitures.
Deferred Stock Units/Restricted Stock Units
Beginning in 2007, theThe Company granted deferredgrants 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 one1 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 ninesix months ended SeptemberJune 30, 2017,2020, the Company recorded expensesa total expense of $1.7$3.6 million and $5.4$6.0 million, respectively, related to RSU awards granted to employees under all plansgranted. 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 grantedgranted.
As part of the separation agreement with Mr. Shandell, the Company agreed to accelerate the Boardvesting of Directors. During80% 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 ninesix months ended SeptemberJune 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 SeptemberJune 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 2.42.5 years and will be adjusted for future changes in estimated forfeitures.
-28-24-
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) |
| The total fair market value is derived from the number of RSUs granted times the |
(2) |
| Of the vested RSUs, |
The 2018 ANP Equity AwardsIncentive Plan
In December 2018, ANP’s board of directors approved the 2018 Plan, which is set to Consultantsexpire 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 consultantsoptions 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 ninesix months ended SeptemberJune 30, 2017,2020, the Company recorded expensesexpense of $0.1$0.2 million and $0.3 million respectively, in relationrelated to such share-based compensation. Duringstock options issued by ANP under the 2018 Plan, respectively. For the three and six months ended SeptemberJune 30, 2016,2019, the Company recorded an immaterial amount of expense in relationrelated to such share-based compensation. Duringstock 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 ninesix months ended SeptemberJune 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 ninesix months ended SeptemberJune 30, 2016,2019, respectively.
-29-25-
AMPHASTAR PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Defined Benefit Pension Plan
In connection with the Merck API Transaction, the Company assumedThe 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 SeptemberJune 30, 20172020 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 SeptemberJune 30, 20172020 and December 31, 2016,2019, respectively. The Company recorded an immaterial amount of expense under the plan for the three and six months ended SeptemberJune 30, 2017,2020 and $0.1 million for2019.
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 underhas established a Rabbi Trust to fund the plan forobligations and to hold the three months ended Septemberplan 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
-30-
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 SeptemberJune 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 termterms in excess of one year will be fulfilled by 2018. the end of 2021.
In addition, the Company is obligated to pay a supplieraccordance 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
-31-
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 offor $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 requiredevelopment, 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 withanticipates that this spending commitment will be met by the Chinese government regarding the development and believes that the likelihoodend 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 two2 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 MassachusettsCompany 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 requiringagainst 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 favorcomplaint 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 lightengaged in certain types of Momentaillegal, monopolistic, and Sandoz’s Amended Infringement Contentions and recent changes in Supreme Court precedent sinceanticompetitive 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 soughtand the Plaintiffs entered into a Settlement Agreement to amend its Non-Infringementfully 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 JulyJune 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, whereVacate 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, and19, 2019, the parties proceededfiled 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 favordismiss 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 ofSettlement 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 rightfuture 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 actionCompany’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 AntitrustEpinephrine (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 complaintComplaint against the Company in the CaliforniaUnited States District
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AMPHASTAR PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Court against Momentafor 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 engagedvasopressin 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 filed2019, the Court entered a motionSecond Revised Scheduling Order to dismissinclude 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 motionConsent 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 transfervigorously 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 toUnited 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 JanuaryMarch 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 thatfive 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
a. | 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)
b. | 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.
c. | 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-timetime 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)
-36-29-
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 sixfour proprietary product candidates, which are in various stages of development and target a variety of indications.With respect to these product candidates, we have sixFive ANDAs and two NDAsone 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, APIsAPI 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 canproducts.
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-launchedan essential business and was not impacted by us.the restrictions. In
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OneMarch 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 largestlocations 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 revenuesdue 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 equivalentcomplete 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 istime, all of which would have a difficultnegative impact on our business, financial condition and operating results. We will continue to manufacture injectable formmonitor the impact of low molecular weight heparinCOVID-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 usedcould 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, includinga result of the prevention and treatmentcontinued 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
OurAs 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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Results of Operations
Three Months Ended SeptemberJune 30, 20172020 Compared to Three Months Ended SeptemberJune 30, 20162019
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| $ | 54,455 |
| $ | 59,058 |
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| | $ | 80,935 | | $ | 73,735 | | $ | 7,200 | | 10 | % | |
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| $ | 64,223 |
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| | $ | 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 SeptemberJune 30, 2017,2020 was due to the following changes:
| | | | | | | | | | | | | | |||||||||||||
| | Three Months Ended | | |
| | ||||||||||||||||||||
| | June 30, | | Change | | | ||||||||||||||||||||
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| 2019 |
| Dollars |
| % |
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| Three Months Ended |
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| ||||||||||||||||||||
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| 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 decreaseincrease 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 resultedare 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 decreasenationwide 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 expectanticipate that the average selling pricesales of naloxone and unit volumes of enoxaparin will continue to fluctuate in the near termfuture 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 shipmentsprimarily due to MannKind during the period. timing of customer purchases.
-32-
We anticipate that sales of our API business will continue to fluctuate and will likelymay 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 Euroeuros 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 optionbeen a meaningful indicator in any given period of RHI API for 2018. We recognized the cancellation fee for 2018our ability to achieve any particular level of $0.9 millionoverall revenue or financial performance.
Gross margins
The decrease in net revenues in our condensed consolidated statements of operations forgross margins during the three months ended SeptemberJune 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.
-38-
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 pricesheparin, which is the starting material for enoxaparin, as well as duehas 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 putincrease further, putting downward pressure on our gross margins. However, we believe that this trend will be partially offset by increases in pricessales 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 expectedPrimatene® 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 wasexpense primarily duerelates to the separation agreement entered into with a former executive. In connection with the separation agreement, we incurred an increase in legal expensesexpense 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 generalselling, distribution and administrativemarketing 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 onof APIs developed internally as well as APIs purchased externally, the timingcost of variouspurchasing 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-
$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 expenseprovision (benefit) was primarily due to the changedifferences 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.
NineSix Months Ended SeptemberJune 30, 20172020 Compared to NineSix Months Ended SeptemberJune 30, 20162019
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 decreaseincrease in net revenues of the finished pharmaceutical products for the ninesix months ended SeptemberJune 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 inrelates to a decrease in unit volume of approximately $18.6$7.0 million, as well as lowerwhich was partially offset by an increase in average selling prices,price. We experienced lower demand for certain products, which resultedare 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 decreasenationwide 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 expectanticipate that the average selling pricesales of naloxone and unit volumes of enoxaparin will continue to fluctuate in the near termfuture 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-
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 shipmentsprimarily due to MannKind during the period. timing of customer purchases.
We anticipate that sales of API will continue to fluctuate and will likelymay 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 Euroeuros 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 revenuesGross 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 millionheparin, which is the starting material for enoxaparin, inventory duehas 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 putincrease further, putting downward pressure on our gross margins. However, we believe that this trend will be partially offset by increases in pricessales 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 expectedepinephrine 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
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| |
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| | June 30, | | Change | | | ||||||||||||||||||||
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| 2020 |
| 2019 |
| Dollars |
| % |
| | ||||||||||||||||
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| Nine Months Ended |
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| September 30, |
| Change |
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|
| 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 generalselling, distribution, and administrativemarketing expenses was primarily due to an increasemarketing 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 17cash 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 statementsincrease 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 | | |
| | ||||||||||||||||||||
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| 2020 |
| 2019 |
| Dollars |
| % |
| | ||||||||||||||||
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| Nine Months Ended |
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| 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-
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 trialstrial 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 ofpipeline, 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 onof APIs developed internally as well as APIs purchased externally, the timingcost of variouspurchasing 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
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| Change |
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| (in thousands) |
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Gain on sale of intangible assets |
| $ | (2,643) |
| $ | — |
| $ | (2,643) |
| N/A |
|
|
Other income (expenses), net
| | | | | | | | | | | | | |
| | Six Months Ended | | |
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| | June 30, | | Change | | | |||||||
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| 2020 |
| 2019 |
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| % |
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| | (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 3relating to our settlement of the enoxaparin patent and Note 9antitrust 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 incomeIncome tax expense (benefit)provision
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| | Six Months Ended | | |
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| 2020 |
| 2019 |
| Dollars |
| % |
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| Nine Months Ended |
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| September 30, |
| Change |
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| 2016 |
| Dollars |
| % |
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| (in thousands) |
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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 changedifferences 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‑stagedevelopment-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 SeptemberJune 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-
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 decreasedincreased by $4.4$8.3 million to $119.1$173.5 million at SeptemberJune 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 ninesix months ended SeptemberJune 30, 2017:2020 and 2019:
| | | | | | | | ||||
| | Six Months Ended June 30, | | ||||||||
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| 2020 | | 2019 | | ||||||
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|
|
|
| |||||||
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| Nine Months Ended |
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| September 30, 2017 |
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| (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 ninesix months ended SeptemberJune 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, $12.9and $11.8 million of share-based compensation expense, a $5.2 million change in tax related items, and a gain of $2.3 million onexpense.
Additionally, for the sale of long-lived assets.
Over the ninesix months ended SeptemberJune 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 millionwas due to the timing of sales. Accounts payable and accrued liabilities decreased primarily due to the timing of customerpayments.
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 decreasedproduction 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 $12.4a 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 ninesix months ended SeptemberJune 30, 2017,2020, primarily as a result of $25.0$18.9 million in purchases of property, machinery,plant, and equipment, includingwhich included $3.3 million incurred in the associated capitalized labor and interest on self-constructed assets, an increase of $2.0United States, $2.2 million in short-term investments, an increase of $2.8France, 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-
Financing Activities
Net cash used in financinginvesting activities was $6.9$24.6 million for the ninesix months ended SeptemberJune 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 andour lines of credit, of which $3.1 million was converted into an equipment line of credit, andloan during the year. We also made $8.4$4.3 million in principal payments on our long-term debts.debt.
IndebtednessNet 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 SeptemberJune 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 “Notessee “Part I – Item 1. Financial Statements – Notes to Condensed Consolidated Financial Statements” in this Quarterly Report.Statements – Summary of Significant Accounting Policies”.
-44-
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.
-39-
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.
-4540-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following discussion provides forward-looking quantitativeExcept for the broad effects of the COVID-19 pandemic as a result of its negative impact on the global economy and qualitativefinancial markets, there have been no material changes in market risk from the information aboutprovided in our potential exposureAnnual 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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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 monthsquarter ended SeptemberJune 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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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For information regarding legal proceedings, refer to Litigation in Note 17 in the accompanying “Notessee “Part I – Item 1. Financial Statements – Notes to Condensed Consolidated Financial Statements” in this Quarterly Report.Statements – Litigation.”
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 SECSecurities 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 hashave 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 weus 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 andand/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 withhelp 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. Forsyringes.
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 tothat 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 applicationsone NDA with respect to otherour 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 withinin 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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Our reported financial resultsour 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 Statesour directors, officers, and employees. In addition, we are subject to interpretationSection 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 Standardsour Board of Directors. This provision could delay or FASB, the SEC and various bodies formedprevent 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 interpretationsour stockholders, which could have a significant effect on our reported financial results, and couldalso 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 effectivepay 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) |
| During the |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
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Exhibit |
| Description |
10.1+ | | |
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31.1 | | |
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31.2 | | |
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32.1# | | |
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32.2# | | |
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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. |
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101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
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101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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101.DEF | | Inline XBRL Taxonomy Extension Definitions Linkbase Document |
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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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| AMPHASTAR PHARMACEUTICALS, INC. |
By: | /s/ JACK Y. ZHANG |
| Jack Y. Zhang |
| Chief Executive Officer |
Date: November 9, 2017August 7, 2020
| AMPHASTAR PHARMACEUTICALS, INC. |
By: | /s/ WILLIAM J. PETERS |
| William J. Peters |
| Chief Financial Officer |
Date: November 9, 2017August 7, 2020
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