Amphastar Pharmaceuticals (AMPH) 10-Q 2020 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020

or

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

For the transition period from             to             

Commission file number 001-36509

AMPHASTAR PHARMACEUTICALS, INC.

(Exact name of Registrant as specified in its charter)

Delaware	33-0702205
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

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

(909) 980-9484

(Registrant’s telephone number, including area code)

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

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

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

Large accelerated filer	◻	Accelerated filer	⌧
Non-accelerated filer	◻	Smaller reporting company	◻
		Emerging growth company	◻

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

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

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

T
Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.0001 per share	AMPH	The NASDAQ Stock Market LLC

The number of shares outstanding of the registrant’s common stock as of November 2, 2020 was 47,504,019.

AMPHASTAR PHARMACEUTICALS, INC.

TABLE OF CONTENTS

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020

Part I. FINANCIAL INFORMATION
	PAGE
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019	1
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019	2
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2020 and 2019	3
Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2020 and 2019	4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019	6
Notes to Condensed Consolidated Financial Statements	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
Item 4. Controls and Procedures	41
Part II. OTHER INFORMATION
Item 1. Legal Proceedings	42
Item 1A. Risk Factors	42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3. Defaults Upon Senior Securities	47
Item 4. Mine Safety Disclosures	47
Item 5. Other Information	47
Item 6. Exhibits	47
Signatures	48

SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

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

● our expectations regarding the sales and marketing of our products;

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

● the 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 at our ANP and Amphastar facilities;

● the timing and extent of share buybacks; and

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

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, 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 – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	September 30,		December 31,
	2020		2019
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	87,910	$	73,685
Restricted cash		1,865		1,865
Short-term investments		10,873		11,675
Restricted short-term investments		2,200		2,290
Accounts receivable, net		52,382		45,376
Inventories		108,870		110,501
Income tax refunds and deposits		1,455		311
Prepaid expenses and other assets		10,986		9,538
Total current assets		276,541		255,241
Property, plant, and equipment, net		245,881		233,856
Finance lease right-of-use assets		693		887
Operating lease right-of-use assets		20,256		18,805
Goodwill and intangible assets, net		40,377		41,153
Other assets		7,735		11,156
Deferred tax assets		22,235		25,873
Total assets	$	613,718	$	586,971
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	79,292	$	77,051
Income taxes payable		1,619		2,042
Current portion of long-term debt		12,167		7,741
Current portion of operating lease liabilities		3,639		3,175
Total current liabilities		96,717		90,009
Long-term reserve for income tax liabilities		3,425		3,425
Long-term debt, net of current portion		32,903		39,394
Long-term operating lease liabilities, net of current portion		17,534		16,315
Deferred tax liabilities		823		867
Other long-term liabilities		11,354		9,433
Total liabilities		162,756		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; 54,623,837 and 47,534,215 shares issued and outstanding as of September 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		404,084		367,305
Retained earnings		124,046		116,370
Accumulated other comprehensive loss		(4,478)		(4,687)
Treasury stock		(118,425)		(97,627)
Total Amphastar Pharmaceuticals, Inc. stockholders’ equity		405,232		381,366
Non-controlling interests		45,730		46,162
Total equity		450,962		427,528
Total liabilities and stockholders’ equity	$	613,718	$	586,971

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,
	2020		2019		2020		2019
Net revenues	$	83,431	$	80,137	$	253,925	$	238,974
Cost of revenues		46,923		44,885		147,417		140,432
Gross profit		36,508		35,252		106,508		98,542
Operating expenses:
Selling, distribution, and marketing		3,673		3,221		10,993		9,354
General and administrative		11,674		11,021		38,344		39,774
Research and development		17,644		18,606		49,096		49,209
Total operating expenses		32,991		32,848		98,433		98,337
Income from operations		3,517		2,404		8,075		205
Non-operating income (expenses):
Interest income		161		450		512		741
Interest expense		(175)		(22)		(286)		(76)
Other income (expenses), net		3,575		(1,250)		3,078		58,172
Total non-operating income (expenses), net		3,561		(822)		3,304		58,837
Income before income taxes		7,078		1,582		11,379		59,042
Income tax provision		2,285		598		4,490		13,292
Net income	$	4,793	$	984	$	6,889	$	45,750
Net income (loss) attributable to non-controlling interests	$	874	$	(326)	$	(787)	$	(4,215)
Net income attributable to Amphastar Pharmaceuticals, Inc.	$	3,919	$	1,310	$	7,676	$	49,965
Net income per share attributable to Amphastar Pharmaceuticals, Inc. stockholders:
Basic	$	0.08	$	0.03	$	0.16	$	1.06
Diluted	$	0.08	$	0.03	$	0.16	$	1.00
Weighted-average shares used to compute net income per share attributable to Amphastar Pharmaceuticals, Inc. stockholders:
Basic		47,496		47,239		46,886		47,030
Diluted		49,848		50,075		48,922		50,128

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				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Net income attributable to Amphastar Pharmaceuticals, Inc.	$	3,919	$	1,310	$	7,676	$	49,965
Other comprehensive income (loss) attributable to Amphastar Pharmaceuticals, Inc., net of income taxes
Foreign currency translation adjustment		695		(1,625)		209		(1,835)
Total other comprehensive income (loss) attributable to Amphastar Pharmaceuticals, Inc.		695		(1,625)		209		(1,835)
Total comprehensive income (loss) attributable to Amphastar Pharmaceuticals, Inc.	$	4,614	$	(315)	$	7,885	$	48,130

See Accompanying Notes to Condensed Consolidated Financial Statements.

-3-

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, 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
Net income attributable to Amphastar Pharmaceuticals, Inc.	—		—		—		3,919		—	—		—		3,919		—		3,919
Other comprehensive income attributable to Amphastar Pharmaceuticals, Inc.	—		—		—		—		695	—		—		695		—		695
Acquisition of additional ownership interest in ANP	—		—		—		—		—	—		—		—		(106)		(106)
Net income attributable to non-controlling interest	—		—		—		—		—	—		—		—		874		874
Purchase of treasury stock	—		—		—		—		—	(214,256)		(4,329)		(4,329)		—		(4,329)
Issuance of treasury stock in connection with the Company's equity plans	—		—		(23)		—		—	2,000		23		—		—		—
Issuance of common stock in connection with the Company's equity plans	251,562		—		3,102		—		—	—		—		3,102		—		3,102
Share-based compensation expense	—		—		4,164		—		—	—		—		4,164		206		4,370
Balance as of September 30, 2020	54,623,837	$	5	$	404,084	$	124,046	$	(4,478)	(7,089,622)	$	(118,425)	$	405,232	$	45,730	$	450,962

-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
Net income attributable to Amphastar Pharmaceuticals, Inc.	—		—		—		1,310		—	—		—		1,310		—		1,310
Other comprehensive loss attributable to Amphastar Pharmaceuticals, Inc.	—		—		—		—		(1,625)	—		—		(1,625)		—		(1,625)
Net loss attributable to non-controlling interest	—		—		—		—		—	—		—		—		(326)		(326)
Purchase of treasury stock	—		—		—		—		—	(206,686)		(4,426)		(4,426)		—		(4,426)
Issuance of treasury stock in connection with the Company's equity plans	—		—		(32)		—		—	2,634		32		—		—		—
Issuance of common stock in connection with the Company's equity plans	186,284		—		2,138		—		—	—		—		2,138		—		2,138
Share-based compensation expense	—		—		4,163		—		—	—		—		4,163		131		4,294
Balance as of September 30, 2019	52,399,044	$	5	$	361,705	$	117,396	$	(5,848)	(5,199,137)	$	(83,853)	$	389,405	$	44,248	$	433,653

See Accompanying Notes to Condensed Consolidated Financial Statements.

-5-

AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)

	Nine Months Ended
	September 30,
	2020		2019
Cash Flows From Operating Activities:
Net income	$	6,889	$	45,750
Reconciliation to net cash provided by operating activities:
Loss on impairment and disposal of assets		161		869
Depreciation of property, plant, and equipment		14,946		12,527
Amortization of product rights, trademarks, and patents		771		777
Operating lease right-of-use asset amortization		2,693		2,188
Share-based compensation expense		16,165		13,000
Changes in deferred taxes, net		3,638		9,872
Changes in operating assets and liabilities:
Accounts receivable, net		(6,706)		6,722
Inventories		2,351		(41,146)
Prepaid expenses and other assets		(3,755)		(3,607)
Income tax refunds, deposits, and payable, net		(1,973)		(631)
Operating lease liabilities		(2,478)		(1,866)
Accounts payable and accrued liabilities		7,671		(8,345)
Net cash provided by operating activities		40,373		36,110
Cash Flows From Investing Activities:
Purchases and construction of property, plant, and equipment		(24,526)		(33,145)
Purchase of short-term investments		—		(9,825)
Maturity of short-term investments		961		—
Payment of deposits and other assets		(674)		(205)
Net cash used in investing activities		(24,239)		(43,175)
Cash Flows From Financing Activities:
Proceeds from the private placement of ANP		—		18,298
Acquisition of additional ownership interest in ANP		(106)		—
Proceeds from equity plans, net of withholding tax payments		21,312		1,981
Purchase of treasury stock		(21,035)		(8,514)
Proceeds from borrowing under lines of credit		1,072		—
Repayments under lines of credit		—		(347)
Proceeds from issuance of long-term debt		3,067		—
Principal payments on long-term debt		(6,329)		(4,819)
Net cash (used in) provided by financing activities		(2,019)		6,599
Effect of exchange rate changes on cash		110		(260)
Net increase (decrease) in cash, cash equivalents, and restricted cash		14,225		(726)
Cash, cash equivalents, and restricted cash at beginning of period		75,550		88,202
Cash, cash equivalents, and restricted cash at end of period	$	89,775	$	87,476
Noncash Investing and Financing Activities:
Capital expenditure included in accounts payable	$	6,477	$	5,279
Operating lease right-of-use assets	$	4,119	$	7,848
Equipment acquired under finance leases	$	61	$	61
Supplemental Disclosures of Cash Flow Information:
Interest paid, net of capitalized interest	$	1,678	$	1,874
Income taxes paid	$	2,807	$	4,189

See Accompanying Notes to Condensed Consolidated Financial Statements.

-6-

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. General

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

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 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, 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 subsidiaries, and are prepared in accordance with United States generally accepted accounting principles, or GAAP. All intercompany activity has been eliminated in the preparation of the condensed consolidated financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments 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 Biological Technology Co., Ltd., or Letop, (5) Nanjing Hanxin Pharmaceutical Technology Co., Ltd., or Hanxin, (6) Nanjing Hanxin Biomedical Testing Service Co., Ltd., or Hanxin Biomedical, (7) Nanjing Haiziquan Biotechnology Co., Ltd., or Haiziquan Biotechnology, (8) Nanjing Baixin Trading Co. Ltd., or Baixin, (9) Amphastar France Pharmaceuticals, S.A.S., or AFP, (10) Amphastar UK Ltd., or AUK, and (11) 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 complete extent of the impact of the COVID-19 pandemic on the Company’s business is highly uncertain and difficult to predict, as the information is constantly 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 September 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, including its customers and suppliers, 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 results could differ from those estimates. The principal accounting estimates include: determination of allowances for credit 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, workers’ compensation liabilities, litigation reserves, stock price volatilities for share-based compensation expense, valuation allowances for deferred tax assets, and liabilities for uncertain income tax positions.

Foreign Currency

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

The Company’s French subsidiary, AFP, maintains its book of record in euros. ANP’s Chinese subsidiaries maintain their books of record in Chinese yuan. AUK’s subsidiary, IMS UK, maintains its book of record in British pounds. These local currencies have been determined to be the subsidiaries’ respective functional currencies. These books of record are translated into USD using average exchange rates during the period. Assets and liabilities are translated at the rate of exchange prevailing on the balance sheet date. Equity is translated at the prevailing rate of exchange at the date of the equity transactions. Translation adjustments are reflected in stockholders’ equity and are included as a component of

-8-

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 on intercompany foreign currency transactions that are of a long-term investment nature were $1.4 million for both the three and nine months ended September 30, 2020. For the three and nine months ended September 30, 2019, the unrealized gains or losses on intercompany foreign currency transactions that are of a long-term investment nature were $1.5 million loss and $1.7 million loss, respectively.

Comprehensive Income (Loss)

For the three and nine months ended September 30, 2020 and 2019, the Company included its foreign currency translation gain or loss as part of its comprehensive income (loss). Income tax expense of $0.4 million was allocated to other comprehensive income for both the three and nine months ended September 30, 2020. There was no material income tax (benefit) expense allocated to other comprehensive income (loss) for the three and nine months ended September 30, 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 they are incurred, except for expenses related to the development of a major commercial or media campaign, which are expensed in the period in which the commercial or campaign is first presented, and are reflected as a component of selling, distribution, and marketing in the Company’s condensed consolidated statement of operations. For the three and nine months ended September 30, 2020, advertising expenses were $1.5 million and $3.9 million, respectively. For the three and nine months ended September 30, 2019, advertising expenses were $1.1 million and $2.9 million, respectively.

Financial Instruments

The carrying amounts of cash and cash equivalents, short-term investments, restricted cash and short-term investments, accounts receivable, accounts payable, accrued expenses, and short-term borrowings approximate fair value due to the short maturity of these items. The majority of the Company’s long-term obligations consist of variable rate debt, and their carrying value approximates fair value as the stated borrowing rates are comparable to rates currently offered to the Company for instruments with similar maturities. The Company at times enters into 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 September 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 September 30, 2020 and December 31, 2019, the restricted cash balance was $1.9 million.

-9-

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 but less than one year. As of September 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 enacted tax rates. A valuation allowance is recorded when it is more likely than not that the deferred tax assets will not be realized.

Recent Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board, or FASB, issued Accounting Standard Update, or ASU, No. 2019-12 Simplifying the Accounting for Income Taxes (Topic 740), which simplifies various aspects related to accounting for income taxes. The amendment also improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The guidance is effective for the Company’s interim and annual reporting periods during the year ended December 31, 2021, with early adoption permitted, including in any interim 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.

In March 2020, the FASB issued ASU No. 2020-04 Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This new guidance is effective prospectively beginning on March 12, 2020 through December 31, 2022. As of September 30, 2020, the Company has not modified any contracts that will be impacted by reference rate reform. The Company will continue to assess the impact the adoption of this standard will have on its consolidated financial position, results of operations, and related disclosures as and when its contracts impacted by the reference rate reform are modified.

Note 3. Revenue Recognition

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

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

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

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.

-10-

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Provision for Chargebacks and Rebates

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

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

	Nine Months Ended
	September 30,
	2020		2019
	(in thousands)
Beginning balance	$	21,644	$	22,423
Provision for chargebacks and rebates		110,763		94,548
Credits and payments issued to third parties		(113,576)		(97,324)
Ending balance	$	18,831	$	19,647

Changes in the chargeback provision from period to period are primarily dependent on the Company’s sales to its wholesalers, the level of inventory held by wholesalers, and the wholesalers’ customer mix. Changes in the rebate provision from period to period are primarily dependent on retailer’s and other indirect customers’ purchases. The approach that the Company uses to estimate chargebacks has been consistently applied for all periods presented. Variations in estimates have been historically small. The Company continually monitors the provision for chargebacks and rebates and makes adjustments when it believes that the actual chargebacks and rebates may differ from the estimates. The settlement of chargebacks and rebates generally occurs within 30 days to 60 days after the sale to wholesalers. Accounts receivable and/or accounts payable and accrued liabilities are reduced and/or increased by the chargebacks and rebate amounts depending on whether the Company has the right to offset with the customer. Of the provision for chargebacks and rebates as of September 30, 2020 and December 31, 2019, $14.9 million and $15.4 million were included in accounts receivable, net, on the condensed consolidated balance sheets, respectively. The remaining provision as of September 30, 2020 and December 31, 2019 of $3.9 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, API product sales are generally non-returnable. The Company’s product returns primarily consist of the returns of expired products from sales made in prior periods. Returned products cannot be resold. At the time product revenue is recognized, the Company records an accrual for product returns estimated using the expected value method. The accrual is based, in part, upon the historical relationship of product returns to sales and customer contract terms. The Company also assesses other factors that could affect product returns including market conditions, product obsolescence, and the

-11-

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.

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

	Nine Months Ended
	September 30,
	2020		2019
	(in thousands)
Beginning balance	$	10,339	$	8,030
Provision for product returns		9,084		4,611
Credits issued to third parties		(6,731)		(3,945)
Ending balance	$	12,692	$	8,696

Of the provision of product returns as of September 30, 2020 and December 31, 2019, $8.6 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 September 30, 2020 and December 31, 2019, of $4.1 million and $3.2 million, respectively, were included in other long-term liabilities. For the nine months ended September 30, 2020 and 2019, the Company’s aggregate product return rate was 1.3% and 0.9% of qualified sales, respectively.

Note 4. Income per Share Attributable to Amphastar Pharmaceuticals, Inc. Stockholders

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

For the three and nine months ended September 30, 2020, options to purchase 1,271,347 and 1,928,629 shares of stock, respectively, with a weighted-average exercise price of $21.35 and $20.84 per 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 stockholders because the effect would be anti-dilutive.

For the three and nine months ended September 30, 2019, options to purchase 803,257 and 783,193 shares of stock, respectively, with a weighted-average exercise price of $21.99 per share and $22.02 per 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 stockholders because the effect would be anti-dilutive.

-12-

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
	(in thousands, except per share data)
Basic and dilutive numerator:
Net income attributable to Amphastar Pharmaceuticals, Inc.	$	3,919	$	1,310	$	7,676	$	49,965
Denominator:
Weighted-average shares outstanding — basic		47,496		47,239		46,886		47,030
Net effect of dilutive securities:
Incremental shares from equity awards		2,352		2,836		2,036		3,098
Weighted-average shares outstanding — diluted		49,848		50,075		48,922		50,128
Net income per share attributable to Amphastar Pharmaceuticals, Inc. stockholders — basic	$	0.08	$	0.03	$	0.16	$	1.06
Net income per share attributable to Amphastar Pharmaceuticals, Inc. stockholders — diluted	$	0.08	$	0.03	$	0.16	$	1.00

Note 5. Segment Reporting

The Company’s business is the development, manufacture, and marketing of pharmaceutical products. The Company has identified 2 reporting segments that each report to the Chief Operating Decision Maker, or CODM, as defined in ASC 280, Segment Reporting. The Company’s performance is assessed and resources are allocated by the CODM based on the following two reportable segments:

● Finished pharmaceutical products

● API

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

-13-

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Selected financial information by reporting segment is presented below:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
	(in thousands)
Net revenues:
Finished pharmaceutical products	$	81,335	$	75,729	$	243,568	$	224,003
API		2,096		4,408		10,357		14,971
Total net revenues		83,431		80,137		253,925		238,974
Gross profit (loss):
Finished pharmaceutical products		39,546		34,992		113,793		101,844
API		(3,038)		260		(7,285)		(3,302)
Total gross profit		36,508		35,252		106,508		98,542
Operating expenses		32,991		32,848		98,433		98,337
Income from operations		3,517		2,404		8,075		205
Non-operating income (expense)		3,561		(822)		3,304		58,837
Income before income taxes	$	7,078	$	1,582	$	11,379	$	59,042

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

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
	(in thousands)
Finished pharmaceutical products net revenues:
Primatene Mist®	$	12,988	$	3,654	$	38,333	$	9,063
Phytonadione		10,470		10,916		32,188		33,477
Enoxaparin		11,647		9,573		31,033		33,895
Lidocaine		10,657		11,670		28,922		33,731
Naloxone		8,739		10,613		26,337		25,810
Epinephrine		5,370		3,756		16,317		9,574
Other finished pharmaceutical products		21,464		25,547		70,438		78,453
Total finished pharmaceutical products net revenues	$	81,335	$	75,729	$	243,568	$	224,003

-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				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
	(in thousands)
Depreciation and amortization expense
Finished pharmaceutical products	$	1,408	$	1,407	$	4,325	$	4,128
API		1,048		288		2,205		863
Total depreciation and amortization expense	$	2,456	$	1,695	$	6,530	$	4,991

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				Nine Months Ended
	September 30,				September 30,				September 30,		December 31,
	2020		2019		2020		2019		2020		2019
	(in thousands)
United States	$	79,407	$	76,070	$	242,370	$	227,308	$	106,725	$	108,399
China		1,959		59		2,482		1,043		88,032		79,846
France		2,065		4,008		9,073		10,623		51,124		45,611
Total	$	83,431	$	80,137	$	253,925	$	238,974	$	245,881	$	233,856

Note 6. Customer and Supplier Concentration

Customer Concentrations

NaN large wholesale drug distributors, AmerisourceBergen Corporation, or AmerisourceBergen, Cardinal Health, Inc., or Cardinal, and McKesson Corporation, or McKesson, are all distributors of the Company’s products as well as suppliers of a broad range of health care products. The Company considers these 3 customers to be its major customers, as each individually, and these customers collectively, represented a significant percentage of the Company’s net revenue for the three and nine months ended September 30, 2020 and 2019, and accounts receivable as of September 30, 2020 and December 31, 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,
	2020		2019		2020		2019		2020		2019
AmerisourceBergen	11	%	13	%	23	%	26	%	23	%	24	%
McKesson	24	%	34	%	21	%	24	%	22	%	26	%
Cardinal Health	13	%	17	%	17	%	21	%	18	%	22	%

Supplier Concentrations

The Company depends on suppliers for raw materials, APIs, and other components that are subject to stringent FDA requirements. Some of these materials may only be available from one or a limited number of sources. Establishing additional or replacement suppliers for these materials may take a substantial period of time, as suppliers must be approved by the FDA. Furthermore, a significant portion of raw materials may only be available from foreign sources. If the Company is unable to secure, on a timely basis, sufficient quantities of the materials it depends on to manufacture

-15-

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Note 7. Fair Value Measurements

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

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

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

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

As of September 30, 2020, cash equivalents include money market accounts. Short-term investments consist of certificates of deposit as well as investment-grade corporate bonds with original expiration dates within 12 months. The certificates 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 corporate bonds are classified as held-to-maturity and are carried at amortized cost net 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 have a negligible effect on the fair value of these financial assets.

The fair value of the Company’s financial assets and liabilities measured on a recurring basis as of September 30, 2020 and December 31, 2019, are as follows:

	Total		(Level 1)		(Level 2)		(Level 3)
	(in thousands)
Cash equivalents - money market	$	70,291	$	70,291	$	—	$	—
Restricted cash - money market		1,865		1,865		—		—
Short-term investments - certificates of deposit		9,080		—		9,080		—
Restricted short-term investments - certificates of deposit		2,200		—		2,200		—
Corporate bonds		1,764		—		1,764		—
Fair value measurement as of September 30, 2020	$	85,200	$	72,156	$	13,044	$	—
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 at 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 September 30, 2020 and December 31, 2019, there were no adjustments to the fair value for nonfinancial assets or liabilities.

Note 8. Investments

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

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
	(in thousands)
Corporate bonds	$	1,763	$	1	$	—	$	1,764
Total investments as of September 30, 2020	$	1,763	$	1	$	—	$	1,764
Corporate bonds	$	2,790	$	—	$	(1)	$	2,789
Total investments as of December 31, 2019	$	2,790	$	—	$	(1)	$	2,789

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

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
	(in thousands)
Definite-lived intangible assets
IMS (UK) international product rights	10	$	8,983	$	3,743	$	5,240
Patents	12		486		287		199
Land-use rights	39		2,540		600		1,940
Subtotal	12		12,009		4,630		7,379
Indefinite-lived intangible assets
Trademark	*		29,225		—		29,225
Goodwill - Finished pharmaceutical products	*		3,773		—		3,773
Subtotal	*		32,998		—		32,998
As of September 30, 2020	*	$	45,007	$	4,630	$	40,377

-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.

Goodwill

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

	September 30,		December 31,
	2020		2019
	(in thousands)
Beginning balance	$	3,634	$	3,951
Currency translation		139		(317)
Ending balance	$	3,773	$	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, recorded at the allocated fair value of $29.2 million, which is its carrying value as of September 30, 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.

Note 10. Inventories

Inventories consist of the following:

	September 30,		December 31,
	2020		2019
	(in thousands)
Raw materials and supplies	$	52,403	$	59,233
Work in process		38,424		35,548
Finished goods		18,043		15,720
Total inventories	$	108,870	$	110,501

-18-

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Charges totaling $2.5 million and $12.7 million were included in the cost of revenues in the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2020, respectively, to adjust the Company’s inventory and related firm inventory purchase commitments to their net realizable value. For the three and nine months ended September 30, 2019, charges totaling $0.4 million and $6.1 million were included in the cost of revenues, respectively, to adjust the Company’s inventory and related firm inventory purchase commitments to their net realizable value.

Note 11. Property, Plant, and Equipment

Property, plant, and equipment consist of the following:

	September 30,		December 31,
	2020		2019
	(in thousands)
Buildings	$	123,552	$	117,928
Leasehold improvements		29,674		29,531
Land		7,656		7,603
Machinery and equipment		199,399		164,802
Furniture, fixtures, and automobiles		24,761		22,043
Construction in progress		39,671		56,354
Total property, plant, and equipment		424,713		398,261
Less accumulated depreciation		(178,832)		(164,405)
Total property, plant, and equipment, net	$	245,881	$	233,856

Note 12. Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consisted of the following:

	September 30,		December 31,
	2020		2019
	(in thousands)
Accrued customer fees and rebates	$	8,126	$	9,633
Accrued payroll and related benefits		26,430		21,872
Accrued product returns, current portion		8,626		7,126
Accrued loss on firm purchase commitments		4,156		3,352
Other accrued liabilities		8,784		10,007
Total accrued liabilities		56,122		51,990
Accounts payable		23,170		25,061
Total accounts payable and accrued liabilities	$	79,292	$	77,051

-19-

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 13. Debt

Debt consists of the following:

	September 30,		December 31,
	2020		2019
	(in thousands)
Loans with East West Bank
Line of credit facility due December 2020	$	—	$	—
Mortgage payable due February 2021		3,330		3,401
Equipment loan due June 2021		918		1,837
Equipment loan due December 2022		4,500		6,000
Equipment loan due February 2024		5,669		3,570
Equipment line of credit facility due September 2025		—		—
Mortgage payable due October 2026		3,351		3,400
Mortgage payable due June 2027		8,548		8,659
Loans with Cathay Bank
Line of credit facility due May 2022		—		—
Acquisition loan due June 2024		9,276		10,928
Mortgage payable due August 2027		7,315		7,452
Loans with Seine-Normandie Water Agency
French government loan paid off June 2020		—		28
French government loan due July 2021		59		114
French government loans due December 2026		398		374
Loan with China Everbright Bank
Line of credit facility due June 2021		734		—
Loan with China Merchant Bank
Line of credit facility due August 2021		367		—
Payment Obligation to Merck		—		561
Equipment under Finance Leases		605		811
Total debt		45,070		47,135
Less current portion of long-term debt		12,167		7,741
Long-term debt, net of current portion	$	32,903	$	39,394

-20-

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As of September 30, 2020, the fair value of the loans listed above approximated their carrying amount. The interest rate used in the fair value estimation was determined to be a Level 2 input. For certain loans with East West Bank, the Company has entered into fixed interest rate swap contracts to exchange the variable interest rates for fixed interest rates over the life of certain debt instruments without the exchange of the underlying notional debt amount. The interest rate swap contracts do not qualify for hedge accounting and are recorded at fair value based on Level 2 inputs. These swap contracts were all in a liability position with an aggregate fair value of $1.0 million and $0.4 million as of September 30, 2020 and December 31, 2019, respectively. The change in fair value is recorded in other income (expense) in the Company’s condensed consolidated statement of operations.

Loan with East West Bank

Equipment Line of Credit—Due September 2025

In September 2020, the Company entered into a $10.0 million equipment credit line with a 12-month draw down period. Interest payments are due monthly through September 2021 at the prime rate as published by The Wall Street Journal minus 0.5%. After the draw down period, the outstanding principal balance converts into a 48-month term loan that bears a variable interest rate at the prime rate as published by The Wall Street Journal minus 0.5%. The loan matures in September 2025, and the principal and interest payments are due monthly. Borrowings under the facility are secured by equipment. As of September 30, 2020, there was 0 outstanding balance on the equipment line of credit.

Covenants

At September 30, 2020 and December 31, 2019, the Company was in compliance with its debt covenants.

Note 14. Income Taxes

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019
	(in thousands)
Income before taxes	$	7,078		$	1,582		$	11,379		$	59,042
Income tax provision		2,285			598			4,490			13,292
Net income	$	4,793		$	984		$	6,889		$	45,750
Income tax provision as a percentage of income before income taxes		32.3	%		37.8	%		39.5	%		22.5	%

The change in the Company’s effective tax rate for the three and nine months ended September 30, 2020, was primarily due to differences in pre-tax income positions, nondeductible executive severance compensation, and timing of discrete tax items.

CARES Act

The Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, became law on March 27, 2020. It provides additional economic stimulus to address the impact of the COVID-19 pandemic. The Company does not expect there to be any significant benefit to its income tax provision as a result of the CARES Act, and will continue to closely monitor the impact of the COVID-19 pandemic, as well as any effects that may result from the CARES Act or future legislation.

-21-

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Valuation Allowance

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

The Company continues to record a full valuation allowance on AFP’s income tax benefits and will continue to do so until AFP generates sufficient taxable income to realize its deferred income tax assets. However, a tax benefit is included in the annual effective tax rate computation due to AFP reporting a year-to-date foreign exchange gain in other comprehensive income.

For purposes of computing its annual effective tax rate, the Company did not benefit from its losses in the states where it files separately. This increased the Company’s income tax provision for the three and nine months ended September 30, 2020, by $0.2 million and $0.4 million, respectively.

Note 15. Stockholders' Equity

Share Buyback Program

Pursuant to the Company’s existing share buyback program, the Company purchased 214,256 and 1,190,362 shares of its common stock during the three and nine months ended September 30, 2020, for total consideration of $4.3 million and $21.0 million, respectively. The Company purchased 206,686 and 403,145 shares of its common stock during the three and nine months ended September 30, 2019, for total consideration of $4.4 million and $8.5 million, respectively.

In August 2020, the Company’s Board of Directors authorized an increase of $20.0 million to the Company’s share buyback program, which is expected to continue for an indefinite period of time. The primary goal of the program is to offset dilution created by the Company’s equity compensation programs.

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

2015 Equity Incentive Plan

As of September 30, 2020, the Company reserved an aggregate of 6,358,084 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 September 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.

In May 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 nine months ended September 30, 2020, the Company recorded ESPP, expense of $0.1 million and $0.5 million, respectively. For the three and nine months ended September 30, 2019, the Company recorded ESPP expense of $0.2 million and $0.5 million, respectively.

-22-

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

The Company accounts for share-based compensation payments in accordance with ASC 718, which requires measurement and recognition of compensation expense at fair value for all share-based payment awards made to employees and directors. Under these standards, the fair value of option awards and the option components of the Employee Stock Purchase Plan awards are estimated at the grant date using the Black-Scholes option-pricing model. The fair value of RSUs is estimated at the grant date using the Company’s common share price. The portion that is ultimately expected to vest is amortized and recognized in compensation expense on a straight-line basis over the requisite service period, generally from the grant date to the vesting date.

The weighted-averages for key assumptions used in determining the fair value of options granted during the three and nine months ended September 30, 2020 and 2019, are as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Average volatility	43.7	%	41.9	%	43.1	%	42.5	%
Risk-free interest rate	0.5	%	1.5	%	0.8	%	2.4	%
Weighted-average expected life in years	6.3		6.3		5.7		5.7
Dividend yield rate	0	%	0	%	0	%	0	%

A summary of option activity for the nine months ended September 30, 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	1,799,106		13.56
Options exercised	(1,693,393)		14.03
Options cancelled	(91,568)		16.53
Options expired	(1,108,951)		16.45
Outstanding as of September 30, 2020	8,668,679	$	14.98	5.43	$	36,693
Exercisable as of September 30, 2020	5,824,852	$	14.38	4.16	$	27,154

(1) The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the estimated fair value of the Company’s common stock for those awards that have an exercise price below the estimated fair value at September 30, 2020.

For the three and nine months ended September 30, 2020, the Company recorded an expense of $1.9 million and $7.1 million, respectively, related to stock options granted. For the three and nine months ended September 30, 2019, the Company recorded an expense of $2.0 million and $6.2 million, respectively, related to stock options granted under all plans.

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 share-based compensation expense of $0.7 million, which is included within general and administration expenses in the condensed consolidated statement of operations for the nine months ended September 30, 2020.

-23-

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Information relating to option grants and exercises is as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
	(in thousands, except per share data)
Weighted-average grant date fair value per option share	$	8.64	$	9.50	$	5.50	$	8.48
Intrinsic value of options exercised		1,687		1,700		8,661		7,522
Cash received from options exercised		3,195		2,234		23,534		7,281
Total fair value of the options vested during the year		121		85		9,965		7,587

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

		Weighted-Average
		Grant Date
	Options	Fair Value
Non-vested as of December 31, 2019	2,747,133	$	6.99
Options granted	1,799,106		5.50
Options vested	(1,610,844)		6.19
Options forfeited	(91,568)		7.13
Non-vested as of September 30, 2020	2,843,827		6.50

As of September 30, 2020, there was $13.0 million of total unrecognized compensation cost, net of forfeitures, related to non-vested stock option based compensation arrangements granted. The cost is expected to be recognized over a weighted-average period of 2.3 years and will be adjusted for future changes in estimated forfeitures.

Restricted Stock Units

The Company grants restricted stock units, or RSUs, to certain employees and members of the Board of Directors with a vesting period of up to five years. The grantee receives 1 share of common stock at a specified future date for each RSU awarded. The RSUs may not be sold or otherwise transferred until certificates of common stock have been issued, recorded, and delivered to the participant. The RSUs do not have any voting or dividend rights prior to the issuance of certificates of the underlying common stock. The share-based expense associated with these grants was based on the Company’s common stock fair value at the time of grant and is amortized over the requisite service period, which generally is the vesting period using the straight-line method. During the three and nine months ended September 30, 2020, the Company recorded a total expense of $2.0 million and $8.0 million, respectively, related to RSU awards granted. During the three and nine months ended September 30, 2019, the Company recorded expenses of $2.1 million and $6.2 million, respectively, related to RSU awards granted.

As part of the separation agreement with Mr. Shandell, the Company agreed to accelerate the vesting of 80% of his RSU awards. As a result of this modification, the Company incurred share-based compensation expense of $1.6 million, which is included within general and administrative expenses in the condensed consolidated statement of operations for the nine months ended September 30, 2020.

As of September 30, 2020, there was $14.0 million of total unrecognized compensation cost, net of forfeitures, related to non-vested RSU-based compensation arrangements granted. The cost is expected to be recognized over a weighted-average period of 2.3 years and will be adjusted for future changes in estimated forfeitures.

-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	731,921	$	9,896
RSUs forfeited	(39,434)
RSUs vested(2)	(626,772)
RSUs outstanding at September 30, 2020	1,165,211

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

(2) Of the vested RSUs, 239,801 shares of common stock were surrendered to fulfill tax withholding obligations.

The 2018 ANP Equity Incentive Plan

In December 2018, ANP’s board of directors approved the 2018 Plan, which is set to expire in December 2023. The 2018 Plan permits the grant of stock options and other equity awards in ANP shares to ANP employees. During the nine months ended September 30, 2020, ANP has granted 2,433,445 stock options to its employees under the 2018 Plan. In 2019, 3,648,932 stock options were granted to its employees under the 2018 Plan. As of September 30, 2020, the number of stock options outstanding was 5,727,677. The options vest over a period of approximately four years and have up to a 10 year contractual term. For the three and nine months ended September 30, 2020, the Company recorded expense of $0.2 million and $0.5 million related to stock options issued by ANP under the 2018 Plan, respectively. For the three and nine months ended September 30, 2019, the Company recorded expense of $0.1 million and $0.2 million related to stock options issued by ANP under the 2018 Plan, respectively.

The Company recorded the aggregated share-based compensation expense in the consolidated statement of operations as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
	(in thousands)
Cost of revenues	$	947	$	701	$	3,276	$	2,939
Operating expenses:
Selling, distribution, and marketing		120		96		350		285
General and administrative		2,899		3,138		11,170		8,577
Research and development		404		359		1,369		1,199
Total share-based compensation	$	4,370	$	4,294	$	16,165	$	13,000

Note 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. Total employer contributions for the three and nine months ended September 30, 2020 were approximately $0.4 million and $1.4 million, respectively, compared to the prior year expense of $0.3 million and $1.0 million for the three and nine months ended September 30, 2019, respectively.

-25-

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Defined Benefit Pension Plan

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

The liability under the plan is based on a discount rate of 0.9% as of September 30, 2020 and December 31, 2019. 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 $2.6 million and $2.4 million at September 30, 2020 and December 31, 2019, respectively. The Company recorded an immaterial amount of expense under the plan for the three and nine months ended September 30, 2020 and 2019.

Deferred Compensation Plan

In December 2019, the 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 has established a Rabbi Trust to fund the plan obligations and to hold the plan assets. Eligible participants began contributing to the plan in January 2020. As of September 30, 2020, the plan assets and liabilities were valued at approximately $0.7 million and $0.8 million, respectively.

Note 17. Commitments and Contingencies

Purchase Commitments

As of September 30, 2020, the Company has entered into commitments to purchase equipment and raw materials for an aggregate amount of approximately $46.6 million. The Company anticipates that most of these commitments with remaining terms in excess of one year will be fulfilled by the end of 2021.

In accordance with certain agreements between ANP and the Chinese government, in January 2010 and November 2012, the Company acquired certain land-use rights for $1.2 million and $1.3 million, respectively. As required by these agreements, the Company was committed to spend approximately $15.0 million in the related land development, which primarily included the construction of fixed assets according to a specific timetable. As of September 30, 2020, the Company has spent $15.8 million on such construction, fulfilling its commitment.

Note 18. Litigation

Momenta/Sandoz Enoxaparin Patent and Antitrust Litigation

In September 2011, Momenta Pharmaceuticals, Inc., or Momenta, a Boston based pharmaceutical company, and Sandoz Inc., or Sandoz, the generic division of Novartis, initiated litigation against the Company for alleged patent infringement of 2 patents related to testing methods for batch release of enoxaparin, which the Company refers to as the “’886 patent” and the “’466 patent.” The lawsuit was filed in the United States District Court for the District of Massachusetts, or the Massachusetts District Court.

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

-26-

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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.

On May 11, 2017, the Company’s lawsuit against Aventis was dismissed for lack of 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 imposition of attorneys’ fees and expenses in this case.

Epinephrine (0.1 mg/mL) Patent Litigation

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

Vasopressin (20 units/mL) Patent Litigation

On December 20, 2018, Par Pharmaceutical, Inc., Par Sterile Products, LLC and Endo Par Innovation Company (collectively, “Par”) initiated a patent lawsuit by filing a Complaint against the Company in the United States District Court for the District of Delaware for infringement of U.S. Patent Nos. 9,375,478 (“the ‘478 Patent”), 9,687,526 (“the ‘526 Patent”), 9,744,209 (“the ‘209 Patent”), 9,744,239 (“the ‘239 Patent”), 9,750,785 (“the ‘785 Patent”) and 9,937,223

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(“the ‘223 Patent”) (collectively, “Par Patents”) with regard to the Company’s Abbreviated New Drug Application No. 211,857 for FDA approval to manufacture and sell Vasopressin (20 units/ mL). The parties resolved the litigation via settlement. On August 20, 2020, the parties filed a Stipulation of Dismissal pursuant to the settlement. On August 24, 2020, the Court entered the parties’ Stipulation of Dismissal.

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 United States District Court for the District of Delaware against IMS for infringement of U.S. Patent Nos. 8,106,183 (the “‘183 patent”), RE47,301 (the “‘301 patent”), and 8,524,883 (the “‘883 patent”) (collectively, “Astellas-Gilead Patents”) with regard to IMS’s 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 March 4, 2020, IMS filed its Answer to the Complaint and its Counterclaims. On March 30, 2020, the Court issued an Order allowing the Company to join the consolidated litigation in which five other generic Regadenoson ANDA filers are currently pending. In the consolidated 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. For these PAGA claims, the parties have a mediation scheduled in February 2021.

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. For these individual claims, Brenes filed a demand for arbitration on August 31, 2020. The Company intends to vigorously defend this employment litigation.

b. Robert Navarrette

On April 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. Navarrette has agreed to the mediation scheduled in February 2021 with Brenes. In this PAGA lawsuit, Navarrette alleges various wage and hour claims. 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 parties have agreed to a mediation scheduled in April 2021. The Company intends to vigorously defend this lawsuit.

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AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Other Litigation

The Company is also subject to various other claims, arbitrations, and lawsuits from time to time arising in the ordinary course of business, including contractual employment matters.

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

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

The following is a discussion and analysis of the consolidated operating results, financial condition, liquidity and cash flows of our company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the “Condensed Consolidated Financial Statements” and the related notes thereto included in this Quarterly Report on Form 10-Q, or Quarterly Report. This discussion contains forward-looking statements that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements. These risks, uncertainties, and other factors include, among others, those identified under the “Special Note About Forward-Looking Statements,” above and described in greater detail elsewhere in this Quarterly Report and in our Annual Report on Form 10-K for the year ended December 31, 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 over 20 products.

We are currently developing a portfolio of 14 generic abbreviated new drug applications, or ANDAs, three biosimilar insulin product candidates and four proprietary product candidates, which are in various stages of development and target a variety of indications. Five ANDAs and one NDA are currently on file with the FDA.

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

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

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

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

COVID-19 Pandemic

In March 2020, the World Health Organization declared the outbreak of a novel coronavirus, or COVID-19, as a pandemic, which continues to spread throughout the world, including locations where we operate, such as the United States, China and France. We have been actively monitoring the COVID-19 pandemic and its impact globally. In late January 2020, China implemented extensive curfews and travel restrictions to control the outbreak, and started easing these restrictions in March 2020. 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 an essential business and was not impacted by the restrictions. In

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

As a result of the COVID-19 pandemic, during the first quarter and second quarter, sales of Primatene Mist^® and certain hospital products increased, while sales of certain products frequently used in elective produces, such as Cortrosyn^® and lidocaine jelly, decreased. During the third quarter of 2020, sales of these products returned to levels closer to those experienced prior to the COVID-19 pandemic. Also, 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.

It is not possible at this time to estimate the complete impact that COVID-19 could have on our business, including our customers and suppliers, as the 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.

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

Business Segments

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

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

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Results of Operations

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

Net revenues

	Three Months Ended
	September 30,						Change
	2020			2019			Dollars		%
	(in thousands)
Net revenues
Finished pharmaceutical products	$	81,335		$	75,729		$	5,606	7	%
API		2,096			4,408			(2,312)	(52)	%
Total net revenues	$	83,431		$	80,137		$	3,294	4	%
Cost of revenues
Finished pharmaceutical products	$	41,789		$	40,737		$	1,052	3	%
API		5,134			4,148			986	24	%
Total cost of revenues	$	46,923		$	44,885		$	2,038	5	%
Gross profit	$	36,508		$	35,252		$	1,256	4	%
as % of net revenues		44	%		44	%

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

	Three Months Ended
	September 30,				Change
	2020		2019		Dollars		%
	(in thousands)
Finished pharmaceutical products net revenues
Primatene Mist®	$	12,988	$	3,654	$	9,334	255	%
Enoxaparin		11,647		9,573		2,074	22	%
Lidocaine		10,657		11,670		(1,013)	(9)	%
Phytonadione		10,470		10,916		(446)	(4)	%
Naloxone		8,739		10,613		(1,874)	(18)	%
Epinephrine		5,370		3,756		1,614	43	%
Other finished pharmaceutical products		21,464		25,547		(4,083)	(16)	%
Total finished pharmaceutical products net revenues	$	81,335	$	75,729	$	5,606	7	%

The increase in sales of Primatene Mist^® in the third quarter of 2020 was a result of the continued success of our nationwide digital, television and radio campaign, which will continue throughout 2020. Additionally, sales of Primatene Mist^® increased as we began selling online on Amazon earlier this year and began shipments in September to Kroger, the largest grocery store chain in the United States. Sales of enoxaparin increased during the quarter primarily due to higher unit volumes. Epinephrine sales increased primarily due to the launch of our approved epinephrine injection, USP 30mg/30mL multiple dose vial in the second quarter of 2020, which had sales of $2.8 million during the third quarter. Naloxone sales decreased primarily due to lower average selling price because of increased competition. Lidocaine and other finished pharmaceutical product sales decreased due to lower unit volumes, largely due to competitors returning to their normal distribution levels.

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

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

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

A significant portion of our customer shipments in any period relate to orders received and shipped in the same period, generally resulting in low product backlog relative to total shipments at any time. We had no significant backlog as of September 30, 2020. Historically, our backlog has not been a meaningful indicator in any given period of our ability to achieve any particular level of overall revenue or financial performance.

Gross margins

Gross margins were relatively unchanged during the three months ended September 30, 2020. Higher margins associated with increased sales of Primatene Mist^® and the recently launched epinephrine injection multiple dose vial, were offset by a decrease in sales of naloxone and other finished pharmaceutical products which also have higher margins.

The cost of heparin, which is the starting material for enoxaparin, has increased and is expected to increase further, putting downward pressure on our gross margins. However, we believe that this trend will be offset by sales of our higher-margin products, such as epinephrine multi dose vial, and Primatene Mist^®. Additionally, we have not seen significant supply disruptions due to 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
	September 30,				Change
	2020		2019		Dollars		%
	(in thousands)
Selling, distribution, and marketing	$	3,673	$	3,221	$	452	14	%
General and administrative	$	11,674	$	11,021	$	653	6	%

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 expense primarily relates to an increase in legal expenses.

We expect that selling, distribution and marketing expenses will increase due to 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
	September 30,				Change
	2020		2019		Dollars		%
	(in thousands)
Salaries and personnel-related expenses	$	6,774	$	6,979	$	(205)	(3)	%
Clinical trials		2,544		2,238		306	14	%
FDA fees		44		194		(150)	(77)	%
Testing, operating and lab supplies		3,344		4,770		(1,426)	(30)	%
Depreciation		2,590		2,171		419	19	%
Other expenses		2,348		2,254		94	4	%
Total research and development expenses	$	17,644	$	18,606	$	(962)	(5)	%

Clinical trial expense increased due to external studies related to our generic inhalation product pipeline, our insulin biosimilar programs and our intranasal epinephrine program.

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

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

Income tax provision

	Three Months Ended
	September 30,						Change
	2020			2019			Dollars		%
	(in thousands)
Income tax provision	$	2,285		$	598		$	1,687	NM
Effective tax rate		32	%		38	%

The difference in income tax provision was primarily due to differences in pre-tax income positions.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

Net revenues

	Nine Months Ended
	September 30,						Change
	2020			2019			Dollars		%
	(in thousands)
Net revenues
Finished pharmaceutical products	$	243,568		$	224,003		$	19,565	9	%
API		10,357			14,971			(4,614)	(31)	%
Total net revenues	$	253,925		$	238,974		$	14,951	6	%
Cost of revenues
Finished pharmaceutical products	$	129,775		$	122,159		$	7,616	6	%
API		17,642			18,273			(631)	(3)	%
Total cost of revenues	$	147,417		$	140,432		$	6,985	5	%
Gross profit	$	106,508		$	98,542		$	7,966	8	%
as % of net revenues		42	%		41	%

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

	Nine Months Ended
	September 30,				Change
	2020		2019		Dollars		%
	(in thousands)
Finished pharmaceutical products net revenues
Primatene Mist®	$	38,333	$	9,063	$	29,270	323	%
Phytonadione		32,188		33,477		(1,289)	(4)	%
Enoxaparin		31,033		33,895		(2,862)	(8)	%
Lidocaine		28,922		33,731		(4,809)	(14)	%
Naloxone		26,337		25,810		527	2	%
Epinephrine		16,317		9,574		6,743	70	%
Other finished pharmaceutical products		70,438		78,453		(8,015)	(10)	%
Total finished pharmaceutical products net revenues	$	243,568	$	224,003	$	19,565	9	%

The increase in sales of Primatene Mist^® for the nine months ended September 30, 2020 was a result of the continued success of our nationwide digital, television and radio campaign, which will continue throughout 2020. Additionally, sales of Primatene Mist^® increased as we began selling online on Amazon earlier this year and began shipments in September to Kroger, the largest grocery store chain in the United States. 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 in the second quarter of 2020. The decrease in sales of enoxaparin relates to a decrease in unit volume of $5.5 million, which was partially offset by an increase in average selling price. During the first half of 2020, we experienced lower demand for certain products which are frequently used in elective procedures, including lidocaine jelly 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 nationwide decline in these procedures by hospitals and individuals in response to the COVID-19 pandemic. These declines were partially offset by a $5.5 million increase in sales of sodium bicarbonate, included in other finished pharmaceutical products, as we were able to utilize the new production line approved by the FDA earlier in the year to meet strong market demand.

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

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

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

Gross margins

The increase in sales of Primatene Mist^® and the launch of epinephrine injection multiple dose vial, which are both higher-margin products, helped increase our gross margins for the nine months ended September 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 $3.8 million reserve for crude heparin purchases and commitments at ANP.

The cost of heparin, which is the starting material for enoxaparin, has increased and is expected to increase further, putting downward pressure on our gross margins. However, we believe that this trend will be offset by sales of our higher-margin products, such as Primatene Mist^®, and epinephrine multi dose vials, which were launched over the past few years. Additionally, we have not seen significant supply disruption due to the COVID-19 pandemic at this time, but we are carefully monitoring for any potential problems.

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Selling, distribution and marketing, and general and administrative

	Nine Months Ended
	September 30,				Change
	2020		2019		Dollars		%
	(in thousands)
Selling, distribution, and marketing	$	10,993	$	9,354	$	1,639	18	%
General and administrative	$	38,344	$	39,774	$	(1,430)	(4)	%

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 decrease in general and administrative expense was primarily due to 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 cash compensation and share-based compensation expense in connection with a separation agreement with a former executive during the second quarter of 2020.

For more information regarding litigation matters, see “Part I – Item 1. Financial Statements –Notes to Condensed Consolidated Financial Statements – Litigation.”

We expect that selling, distribution and marketing expenses will increase due to the 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

	Nine Months Ended
	September 30,				Change
	2020		2019		Dollars		%
	(in thousands)
Salaries and personnel-related expenses	$	19,676	$	19,621	$	55	0	%
Pre-launch inventory		—		158		(158)	(100)	%
Clinical trials		6,428		5,471		957	17	%
FDA fees		133		598		(465)	(78)	%
Testing, operating and lab supplies		9,375		11,220		(1,845)	(16)	%
Depreciation		7,397		6,447		950	15	%
Other expenses		6,087		5,694		393	7	%
Total research and development expenses	$	49,096	$	49,209	$	(113)	(0)	%

Clinical trial expense increased due to external studies related to our generic inhalation product pipeline, our insulin biosimilar programs and our intranasal epinephrine program.

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

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

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Other income, net

	Nine Months Ended
	September 30,				Change
	2020		2019		Dollars		%
	(in thousands)
Other income, net	$	3,078	$	58,172	$	(55,094)	NM

In June 2019, we recognized a gain of $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.”

Income tax provision

	Nine Months Ended
	September 30,						Change
	2020			2019			Dollars		%
	(in thousands)
Income tax provision	$	4,490		$	13,292		$	(8,802)	NM
Effective tax rate		39	%		23	%

The difference in income tax provision was primarily due to differences in pre-tax income positions, nondeductible executive severance compensation, and timing of discrete tax items.

Liquidity and Capital Resources

Cash Requirements and Sources

We need capital resources to maintain and expand our business. We expect our cash requirements to increase significantly in the foreseeable future as we sponsor clinical trials for, seek regulatory approvals of, and develop, manufacture and market our current development-stage product candidates and pursue strategic acquisitions of businesses or assets. Our future capital expenditures include projects to upgrade, expand, and improve our manufacturing facilities in the United States, China, and France. Our cash obligations include the principal and interest payments due on our existing loans and lease payments, as described below and throughout this Quarterly Report. 

As of September 30, 2020, our foreign subsidiaries collectively held $12.6 million in cash and cash equivalents. Cash or cash equivalents held at foreign subsidiaries are not available to fund the parent company’s operations in the United States. We believe that our cash reserves, operating cash flows, and borrowing availability under our credit facilities will be sufficient to fund our operations for at least the next 12 months from the filing date of this Quarterly Report. We expect additional cash flows to be generated in the longer term from future product introductions, although there can be no assurance as to the receipt of regulatory approval for any product candidates that we are developing or the timing of any product introductions, which could be lengthy or ultimately unsuccessful.

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

Working capital increased by $14.6 million to $179.8 million at September 30, 2020, compared to $165.2 million at December 31, 2019.

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Cash Flows from Operations

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

	Nine Months Ended September 30,
	2020		2019
	(in thousands)
Statement of Cash Flow Data:
Net cash provided by (used in)
Operating activities	$	40,373	$	36,110
Investing activities		(24,239)		(43,175)
Financing activities		(2,019)		6,599
Effect of exchange rate changes on cash		110		(260)
Net increase (decrease) in cash, cash equivalents, and restricted cash	$	14,225	$	(726)

Sources and Use of Cash

Operating Activities

Net cash provided by operating activities was $40.4 million for the nine months ended September 30, 2020, which included net income of $6.9 million. Non-cash items were primarily comprised of $15.7 million of depreciation and amortization, and $16.2 million of share-based compensation expense.

Additionally, for the nine months ended September 30, 2020, there was a net cash outflow from changes in operating assets and liabilities of $4.9 million, which resulted from an increase in accounts receivable, which was partially offset by a decrease in inventory, as well as an increase in accounts payable and accrued liabilities. The increase in accounts receivable was due to the timing of sales. Accounts payable and accrued liabilities increased primarily due to the timing of payments.

Net cash provided by operating activities was $36.1 million for the nine months ended September 30, 2019, which included net income of $45.8 million. Non-cash items were primarily comprised of $13.3 million of depreciation and amortization, and $13.0 million of share-based compensation expense. Additionally, there was a net cash outflow from changes in operating assets and liabilities of $48.9 million which resulted from the decrease in accounts receivable, offset by an increase in inventory, as well as a decrease in accounts payable and accrued liabilities. The decrease in accounts receivable was due to the timing of sales in the quarter. The increase in inventory was partially due to increased purchases of raw materials and production of finished goods resulting in a net increase of $31.0 million of enoxaparin and a net increase of $8.9 million of Primatene Mist^® inventory. We plan to utilize our deferred tax credits to offset a significant portion of the tax liability related to 2019 U.S. federal and California state taxable income. Accounts payable and accrued liabilities decreased primarily due to the timing of payments.

Investing Activities

Net cash used in investing activities was $24.2 million for the nine months ended September 30, 2020, primarily as a result of $24.5 million in purchases of property, plant, and equipment, which included $5.9 million incurred in the United States, $2.7 million in France, and $15.9 million in China.

Net cash used in investing activities was $43.2 million for the nine months ended September 30, 2019, primarily as a result of $33.1 million in purchases of property, plant, and equipment, which included $7.3 million incurred in the United States, $6.6 million in France, and $19.2 million in China. Additionally, we purchased $9.8 million in short-term investments.

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Financing Activities

Net cash used in financing activities was $2.0 million for the nine months ended September 30, 2020, primarily as a result of $21.0 million used to purchase treasury stock offset by $21.3 million in net proceeds from the settlement of share-based compensation awards under our equity plans. Additionally, we also made $6.3 million in principal payments on our long-term debt and received $4.1 million from borrowings on our lines of credit, of which $3.1 million was converted into an equipment loan during the year.

Net cash provided by financing activities was $6.6 million for the nine months ended September 30, 2019, primarily as a result of the receipt of $18.3 million for ANP private placement, and $2.0 million in net proceeds received from our equity plans. This was partially offset by $8.5 million used to purchase treasury stock. Additionally, we made $5.2 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, 2019, except that our outstanding debt obligations have changed as follows:

	September 30,		December 31,
	2020		2019		Change
	(in thousands)
Short-term debt and current portion of long-term debt	$	12,167	$	7,741	$	4,426
Long-term debt		32,903		39,394		(6,491)
Total debt	$	45,070	$	47,135	$	(2,065)

As of September 30, 2020, we had $59.2 million in unused borrowing capacity under revolving lines of credit with Cathay Bank, East West Bank, and China Merchant Bank.

Critical Accounting Policies

The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the notes to the financial statements. Some of those judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions or conditions. A summary of our critical accounting policies is presented in Part II, Item 7, of our Annual Report on Form 10-K for the year ended December 31, 2019.

Recent Accounting Pronouncements

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

Off-Balance Sheet Arrangements

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

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Government Regulation

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

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).

Inherent Limitations of Internal Controls

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

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

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

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

We, our collaborators, third-party providers, distributors, customers and other contractors utilize information technology systems and networks, including internet-based system, to transmit, store and otherwise process electronic data in connection with our business activities, including our supply chain processes, operations and communications. This includes our clinical data and business proprietary information, Electronic Data Interchange, or EDI, on purchase orders, invoices, chargebacks, etc. We, and 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 that require adoption of minimum information security standards. The cost of compliance with applicable data protection laws and regulations have increased and may increase in the future. Despite our implementation of security measures to protect the confidentiality, integrity, and availability of the systems 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, and our systems and networks and the systems and networks of third parties that support us and our services may be breached due to these threats. System breaches, malware, ransomware, computer hacking, and insider threats have become more prevalent, and experts have warned that the COVID-19 pandemic has resulted in increased threats and malicious activity.

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 affect our ability to operate, result in delays in our development and regulatory approval efforts, and significantly increase our costs to recover or reproduce the data.

● 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 notification obligations under breach notification laws, result in 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.

We have experienced and may continue to experience cyberattacks of varying degrees from time to time. In the second quarter of 2020, we were subject to a cyber-event that resulted in a temporary disruption to some of our internal computer systems. In response to this incident, we engaged a third-party forensic expert to investigate, and determined that cyber criminals illegally obtained certain personal information of certain current and former employees. We notified affected individuals and regulators, as we deemed was required or appropriate. We have incurred costs to respond to this incident and may continue to incur costs to support our efforts to enhance our security measures.

There can be no assurance that we will be successful in preventing other data security incidents or 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

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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.

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

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

In February 2017, the FDA requested that we discontinue the manufacturing and distribution of our epinephrine injection, USP vial product, which had been marketed under the “grandfather” exception to the FDA’s “Prescription Drug Wrap-Up program”. We discontinued selling this product in the second quarter of 2017. In April 2020, the FDA granted approval of our Epinephrine Injection USP 30mg/30mL Multiple Dose Vial, and we launched the product in May 2020.

The FDA granted approval of our Atropine Sulfate Injection 0.1mg/mL in the 10mL Luer-Jet^® Prefilled Syringe in October 2020.

For the years ended December 31, 2019, 2018, and 2017, we recorded net revenues of $27.1 million, $19.1 million, and $14.9 million, respectively, from our unapproved products. For the nine months ended September 30, 2020 and 2019, we recorded net revenues of $19.0 million and $19.6 million, respectively, from our unapproved products. Our unapproved products currently on the market include: morphine, dextrose and epinephrine prefilled syringes. We have filed two ANDAs and one NDA with respect to our remaining unapproved products in order to mitigate all risk associated with the marketing of unapproved drug products. Prior to the approval of our ANDA and NDA submissions, we continue to operate in compliance with the FDA Compliance Policy Guide, CPG Sec. 440.100 Marketed New Drugs Without Approved NDAs and ANDAs.

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

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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.

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our Board of Directors, which is responsible for appointing the members of our management. Furthermore, our amended and restated certificate of incorporation provides that unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for: (i) any derivative action or proceeding brought on our behalf; (ii) any action asserting a breach of fiduciary duty owed by any of our current or former directors, officers or other employees to us or our stockholders; (iii) any action asserting a claim arising pursuant to any provision of the DGCL, our amended and restated certificate of incorporation, or our amended and restated bylaws; or (iv) any action asserting a claim against us that is governed by the internal affairs doctrine. This provision is not intended to apply to actions arising under the Securities Act or the Exchange Act, or any claim for which the federal courts have exclusive jurisdiction. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and consented to this provision. This exclusive-forum provision may discourage lawsuits against us or our directors, officers, and employees. In addition, we are subject to Section 203 of the DGCL, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with an interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder, unless such transactions are approved by our Board of Directors. This provision could delay or prevent a change of control, whether or not it is desired by or beneficial to our stockholders, which could also affect the price that some investors are willing to pay for our 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
July 1 – July 31, 2020	67,420	$	20.77	67,420	—
August 1 – August 31, 2020	76,931		20.33	76,931	—
September 1 – September 30, 2020	69,905		19.46	69,905	—

(1) During the third quarter of 2020, we repurchased shares of our common stock as part of the share buyback program authorized by our Board of Directors on November 4, 2019. In August 2020, our Board of Directors authorized an increase of $20.0 million to our share buyback program. As of September 30, 2020, $20.8 million remained available under such program.

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

Exhibit No.	Description
10.1	Equipment Line of Credit, dated September 1, 2020, between International Medication Systems, Limited and East West Bank in the original sum of $10,000,000.
31.1	Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1#	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2#	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.
101.SCH	Inline XBRL Taxonomy Extension Schema Document
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF	Inline XBRL Taxonomy Extension Definitions Linkbase Document
104	Cover Page Interactive File (formatted as Inline XBRL and contained in Exhibit 101)

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

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SIGNATURES

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

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

Date: November 6, 2020

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

Date: November 6, 2020

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