Amneal Pharmaceuticals, Inc. (AMRX) FY 2021 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Amneal Pharmaceuticals, Inc. (the “Company”, “we,” “us,” or “our”) is a pharmaceutical company specializing in developing, manufacturing, marketing and distributing high-value generic and branded specialty pharmaceutical products across a broad array of dosage forms and therapeutic areas. The Company operates principally in the United States, India, and Ireland, and sells to wholesalers, distributors, hospitals, chain pharmacies and individual pharmacies, either directly or indirectly. The Company is a holding company, whose principal assets are common units (“Amneal Common Units”) of Amneal Pharmaceuticals, LLC (“Amneal”). In 2018, Amneal completed the acquisition of Impax Laboratories, Inc. (“Impax”), a generic and specialty pharmaceutical company.

The group, together with their affiliates and certain assignees, who owned Amneal when it was a private company (the “Amneal Group”) held 50.4% of Amneal Common Units and the Company held the remaining 49.6% as of December 31, 2021. Although the Company has a minority economic interest in Amneal, it is Amneal’s sole managing member, having the sole voting power to make all of Amneal’s business decisions and control its management. Therefore, the Company consolidates the financial statements of Amneal and its subsidiaries. The Company records non-controlling interests for the portion of Amneal’s economic interests that it does not hold.

The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under Item 1A. Risk Factors and under the heading Forward-Looking Statements in this Annual Report on Form 10-K. The following discussion and analysis, as well as other sections in this report, should be read in conjunction with the consolidated financial statements and related notes to consolidated financial statements included elsewhere herein.

For a discussion of our financial condition and results of operations for the year ended December 31, 2020 compared to the year ended December 31, 2019, see “Results of Operations” and “Liquidity and Capital Resources” under Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2020 Annual Report on Form 10-K, which discussion is incorporated herein by reference.

Overview

Segments

We have three reportable segments: Generics, Specialty, and AvKARE.

Generics

Our Generics segment includes approximately 250 product families covering an extensive range of dosage forms and delivery systems, including both immediate and extended release oral solids, powders, liquids, sterile injectables, nasal sprays, inhalation and respiratory products, ophthalmics (which are sterile pharmaceutical preparations administered for ocular conditions), films, transdermal patches and topicals (which are creams or gels designed to administer pharmaceuticals locally through the skin). We focus on developing products with substantial barriers-to-entry resulting from complex drug formulations or manufacturing, or legal or regulatory challenges. Generic products, particularly in the U.S., generally contribute most significantly to revenues and gross margins at the time of their launch, and even more so in periods of market exclusivity, or in periods of limited generic competition. As such, the timing of new product introductions can have a significant impact on the Company’s financial results. The entrance into the market of additional competition generally has a negative impact on the volume and / or pricing of the affected products. Additionally, pricing is determined by market place dynamics and is often affected by factors outside of the Company’s control.

Specialty

Our Specialty segment is engaged in the development, promotion, sale and distribution of proprietary branded pharmaceutical products, with a focus on products addressing CNS disorders, including migraine and Parkinson’s disease. Our portfolio of products includes Rytary®, an extended release oral capsule formulation of carbidopa-levodopa for the treatment of Parkinson’s disease, post-encephalitic parkinsonism, and parkinsonism that may follow carbon monoxide intoxication or manganese intoxication. In addition to Rytary®, our promoted Specialty portfolio also includes Unithroid® (levothyroxine sodium), for the treatment of hypothyroidism, which is sold under a license and distribution agreement with Jerome Stevens Pharmaceuticals, Inc., and Emverm® (mebendazole) 100 mg chewable tablets, for the treatment of pinworm, whipworm, common roundworm, common hookworm and American hookworm in single or mixed infections. Effective during the three

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months ended September 2019, the operating results for oxymorphone were reclassified from Generics to Specialty, where it is sold as a non-promoted product.

For Specialty products, the majority of the product’s commercial value is usually realized during the period in which the product has market exclusivity. In the U.S. when market exclusivity expires and generic versions of a product are approved and marketed, there can often be very substantial and rapid declines in the branded product’s sales. For example, the pediatric exclusivity of the AstraZeneca patent licensed to Impax for Zomig® Nasal Spray expired in May 2021 and we lost market exclusivity in the fourth quarter of 2021.

AvKARE

Our AvKARE segment provides pharmaceuticals, medical and surgical products and services primarily to governmental agencies.  AvKARE is a re-packager of bottle and unit dose pharmaceuticals under the registered names of AvKARE and AvPAK, which service the Department of Defense and Department of Veteran Affairs as well as institutional customers. AvKARE is also a wholesale distributor of pharmaceuticals, over the counter products and medical supplies to institutional customers which are located throughout the United States of America focused primarily on offering 340b-qualified entities products to provide consistency in care and pricing.

The Pharmaceutical Industry

The pharmaceutical industry is highly competitive and highly regulated. As a result, we face a number of industry-specific factors and challenges, which can significantly impact our results. For a more detailed explanation of our business and its risks, refer to Item 1. Business and Item 1A. Risk Factors in this Form 10-K.

COVID-19 Pandemic

In March 2020, the World Health Organization designated the outbreak of a novel strain of coronavirus (“COVID-19”) as a global pandemic. Governments and businesses around the world have taken unprecedented actions to mitigate the spread of COVID-19, including imposing restrictions on movement and travel such as quarantines and shelter-in-place requirements, and restricting or prohibiting outright some or all commercial and business activity, including the manufacture and distribution of certain goods and the provision of non-essential services. These measures, though currently temporary in nature, may become more severe and continue indefinitely depending on the evolution of the outbreak.

As a result of the pandemic, we observed lost sales and some supply interruptions during the year ended December 31, 2020 in our New York, New Jersey and India manufacturing plants. Additionally, decreased influenza activity during the year ended December 31, 2021, drove significantly lower sales volumes and increased returns related to Oseltamivir as compared to the prior year.

While manufacturing has resumed to around pre-pandemic levels, we may again experience supply chain constraints during subsequent waves of COVID-19 infections. Although not currently expected, any supply chain disruptions may significantly impact our 2022 results of operations and cash flows. Increasing infection rates and the introduction of new and more easily transmitted variants of COVID-19, such as the Delta and Omicron variants, could further disrupt our global supply chains and cause labor shortages, as well as reduce the number of physician visits in general.

To the extent that the pandemic continues or worsens, national, state, local and international governments may impose additional restrictions or extend the restrictions already in place. The worsening of the pandemic and the related safety and business operating restrictions could result in a number of adverse impacts to our business, including, but not limited to, additional disruption to the economy and our customers, additional work restrictions, supply chains being interrupted or slowed, and rising supply prices. Also, governments may impose other laws, regulations, or taxes that could adversely impact our business, financial condition, or results of operations. Further, depending on the extent to which our customers are affected, they could delay or reduce purchases of products we provide. The potential effects of the pandemic also could impact us in a number of other ways including, but not limited to, reductions to our profitability, fluctuations in foreign currency markets, the availability of future borrowings, the cost of borrowings, credit risks of our customers and counterparties, and potential impairment of the carrying amount of goodwill or other definite-lived assets.

We continue to actively monitor the situation and may take further precautionary and preemptive actions as may be required by national, state, or local authorities or that we determine are in the best interests of our employees, customers, partners, suppliers, and shareholders. Until the ultimate extent and duration of the pandemic is known, we cannot predict the ultimate effects the

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pandemic may have on our business, in particular with respect to demand for our products, our strategy, and our prospects, the effects on our customers, or the impact on our financial results.

Inflation

While it is difficult to accurately measure the impact of inflation, we estimate our business experienced an increase in costs due to inflation of approximately $10 million for the year ended December 31, 2021. We expect an inflationary impact of approximately $20 million for the year ending December 31, 2022. However, rising inflationary pressures due to higher input costs, including higher material, transportation, labor and other costs, could exceed our expectations and may adversely impact our operating results in future periods.

Results of Operations

Consolidated Results

The following table sets forth our summarized, consolidated results of operations (in thousands):

Net Revenue

Net revenue for the year ended December 31, 2021 increased by 5%, or $101 million, to $2.1 billion as compared to $2.0 billion for the year ended December 31, 2020.  The increase from the prior year period was attributable to growth in all three segments as follows:

•AvKARE segment revenues for the year ended December 31, 2021 increased $55 million, as compared to the prior year, due to the timing of the acquisition in 2020 and organic growth. We completed the acquisitions of the businesses that comprise our AvKARE segment on January 31, 2020 (the “Rondo Acquisitions”). Refer to Note 3. Acquisitions and Divestitures for additional information.

•Generics segment revenues for the year ended December 31, 2021 increased $23 million, as compared to the prior year, primarily due to new products launched in 2020 and 2021 that contributed net revenue growth of $176 million, as well as volume growth in products launched prior to 2020. This increase was partially offset by a $48 million decline in Oseltamivir (generic Tamiflu®) sales from lower demand and increased returns activity above historical levels that were due to decreased influenza activity during the COVID-19 pandemic, and price erosion.

•Specialty segment revenues for the year ended December 31, 2021 increased $23 million, as compared to the prior year, reflecting growth in our promoted products including Rytary® and Unithroid® of 7% and 24%, respectively, partially offset by declines in Zomig® nasal spray.

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Cost of Goods Sold and Gross Profit

Cost of goods sold, including impairment charges, decreased 3%, or $39 million, to $1.32 billion for the year ended December 31, 2021 as compared to $1.36 billion for the year ended December 31, 2020. The decrease in cost of goods sold, including impairment charges, compared to the prior year was primarily attributable to lower impairment charges and gross margin improvement, partially offset by an additional month of expenses from the timing of the Rondo Acquisitions and an increase in revenues. Gross margin improvement compared to the prior year was driven by procurement savings on material costs, better plant utilization, including manufacturing a higher percentage of the Company’s products, and favorable product mix.

Gross profit for the year ended December 31, 2021 was $769 million (37% of net revenue) as compared to gross profit of $628 million (32% of net revenue) for the year ended December 31, 2020. Our gross profit as a percentage of net revenue increased as compared to the prior year primarily as a result of the factors noted above.

Selling, General and Administrative

Selling, general and administrative (“SG&A”) expenses for the year ended December 31, 2021 were $366 million, as compared to $327 million for the year ended December 31, 2020. The $39 million increase from the prior year was primarily due to an increase in employee compensation, an additional month of expenses from the timing of the Rondo Acquisitions, an increase in indirect taxes, and higher freight costs due to increased volume and rising costs.

Research and Development

Research and development expenses for the year ended December 31, 2021 were $202 million, as compared to $180 million for the year ended December 31, 2020. The $22 million increase compared to the prior year was primarily attributable to $11 million related to the acquisition of Kashiv Specialty Pharmaceuticals, LLC (the “KSP Acquisition”) on April 2, 2021, an increase in in-licensing and upfront milestone payments of $3 million to grow our Specialty pipelines, and increased project spend for ongoing project costs associated with complex generic product candidates. Refer to Note 3. Acquisitions and Divestitures for additional information.

In-Process Research and Development Impairment Charges

We recognized in-process research and development (“IPR&D”) impairment charges of $1 million for the year ended December 31, 2021, as compared to $3 million for the year ended December 31, 2020. The charge for the year ended December 31, 2021 was associated with one product in our Generics segment which experienced a delay in its estimated launch date.

For the year ended December 31, 2020, the impairment charges were associated with four products in our Generics segment, three of which experienced significant price erosion, resulting in significantly lower than expected future cash flows, and the other of which was canceled due to the withdrawal of our development partner.

Intellectual Property Legal Development Expense

Intellectual property legal development expenses include, but are not limited to, costs associated with formulation assessments, patent challenge opinions and strategy, and litigation expenses to defend our intellectual property. For the year ended December 31, 2021, these expenses were $8 million as compared to $11 million for the year ended December 31, 2020.  The $3 million decrease from the prior year was due to the timing of specific cases. Expenses may vary based upon the number of individual cases and corresponding litigation outstanding in a particular period.

Acquisition, Transaction-Related and Integration Expenses

Acquisition, transaction-related and integration expenses were $8 million for the year ended December 31, 2021, as compared to $9 million for the year ended December 31, 2020. For the year ended December 31, 2021, acquisition, transaction-related and integration expenses of $8 million primarily consisted of professional services fees (e.g. legal, investment banking and consulting) associated with the acquisition and integration of Puniska Healthcare Pvt. Ltd. (acquired on November 2, 2021) and the KSP Acquisition, and integration of the Rondo Acquisitions. Refer to Note 3. Acquisitions and Divestitures for additional information.

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For the year ended December 31, 2020, acquisition, transaction-related and integration expenses of $9 million primarily consisted of professional services fees associated with the then pending KSP Acquisition, the Rondo Acquisitions, and systems integrations associated with the acquisition of Impax.

Charges Related to Legal Matters, Net

For the year ended December 31, 2021, we recorded charges of $25 million for Corporate commercial legal proceedings and claims.  For the year ended December 31, 2020, we recorded a net charge of $6 million for legal proceedings and claims, primarily related to our Generics segment. For further details, refer to Note 21. Commitments and Contingencies.

Restructuring and Other Charges

We recorded $2 million of restructuring and other charges for each of the years ended December 31, 2021 and 2020. Refer to Note 6. Restructuring and Other Charges for additional information.

Property Losses and Associated Expenses, Net

We recorded net charges for property losses and associated expenses in our Generics segment of $5 million for the year ended December 31, 2021. On September 1, 2021, Tropical Storm Ida brought extreme rainfall and flash flooding to New Jersey that caused damage to two of our facilities. Operations at these facilities were closed for the majority of September in order to assess the damage, make repairs and restore operations. Although, as a result of the significant recovery effort and sufficient safety stock, we did not incur a material business disruption for the year ended December 31, 2021, we concluded that all inventory on-hand at the time of the flooding was damaged and unsellable and that a majority of the equipment was damaged beyond repair. In addition, we incurred significant costs to repair both facilities. Accordingly, we recorded $10 million of charges for property losses and associated expenses in our Generics segment for the year ended December 31, 2021.

The Company has insurance policies for property damage, inventory losses and business interruption. Insurance recoveries are recorded in the periods when it is probable they will be realized. For the year ended December 31, 2021, insurance recoveries of $5 million associated with property and equipment were received and recorded as a reduction of property losses and associated expenses in our Generics segment. Refer to Note 28. Property Losses and Associated Expenses for additional information.

Other Expense, Net

Other expense, net was $121 million for the year ended December 31, 2021, as compared to $127 million for the year ended December 31, 2020. Overall, the decrease of $6 million from the prior year period was primarily due to a $10 million decline in interest expense due to a reduction in interest rates and a $13 million benefit related to a previously outstanding contingent liability, net of $17 million in year-over-year unfavorable net foreign exchange gains and losses.

Provision For (Benefit From) Income Taxes

The provision for (benefit from) income taxes was $11 million and ($104) million for the years ended December 31, 2021 and 2020, respectively. The effective tax rates for the years ended December 31, 2021 and 2020 were 35.7% and 291.7%, respectively.

The benefit from income taxes and effective tax rate for the year ended December 31, 2020 was primarily impacted by a $110 million carryback of U.S. Federal net operating losses under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). The CARES Act was an emergency economic stimulus package in response to the COVID-19 pandemic which, among other things, includes provisions relating to income and non-income-based tax laws. For further details, refer to Note 8. Income Taxes.

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Generics

The following table sets forth the results of operations for our Generics segment (in thousands):

Net Revenue

Generics net revenue for the year ended December 31, 2021 increased by 2%, or $23 million, to $1.37 billion as compared to $1.34 billion for the year ended December 31, 2020. The increase from the prior year was primarily due to new products launched in 2020 and 2021 that contributed net revenue growth of $176 million, as well as volume growth in products launched prior to 2020. This increase was partially offset by a $48 million decline in Oseltamivir (generic Tamiflu®) sales from lower demand and increased returns activity above historical levels that were due to decreased influenza activity during the COVID-19 pandemic, and price erosion.

Cost of Goods Sold and Gross Profit

Generics cost of goods sold, including impairment charges decreased 9%, or $81 million, to $848 million for the year ended December 31, 2021 as compared to $929 million for the year ended December 31, 2020. The decrease in cost of goods sold, including impairment charges, was primarily attributable to lower impairment charges of $12 million and operational gross margin improvement due to procurement savings on material costs, better plant utilization, including manufacturing a higher percentage of the Company’s products, and favorable product mix.

Generics gross profit for the year ended December 31, 2021 was $518 million (38% of net revenue) as compared to gross profit of $414 million (31% of net revenue) for the year ended December 31, 2020 as a result of the factors described above.

Selling, General, and Administrative

Generics selling, general and administrative expense for the year ended December 31, 2021 was $65 million, an increase of 15%, or $8 million, as compared to the year ended December 31, 2020. The increase was primarily attributable to increased employee compensation, increased shipping costs and an increase in indirect taxes, partially offset by a reduction in costs to exit redundancies in connection with Company’s integration efforts of recent business acquisitions.

Research and Development

Generics research and development expense for the year ended December 31, 2021 was $158 million, an increase of 6%, or $8 million, as compared to the year ended December 31, 2020.  The increase was primarily related to higher ongoing project costs associated with complex generic product candidates of $7 million.

In-Process Research and Development Impairment Charges

We recognized Generics IPR&D impairment charges of $1 million for the year ended December 31, 2021, as compared to $3 million for the year ended December 31, 2020. The charge for the year ended December 31, 2021 was associated with one product in our Generics segment which experienced a delay in its estimated launch date.

For the year ended December 31, 2020, we recognized IPR&D impairment charges of $3 million associated with four products in our Generics segment, three of which experienced significant price erosion, resulting in significantly lower than expected future cash flows, and the other of which was canceled due to the withdrawal of our development partner

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Intellectual Property Legal Development Expenses

Generics intellectual property legal development expenses for the year ended December 31, 2021 were $8 million as compared to $11 million for the year ended December 31, 2020.  These costs include, but are not limited to, formulation assessments, patent challenge opinions and strategy, and litigation expenses to defend our intellectual property. The $3 million decrease from the prior year was due to the timing of specific cases. Expenses may vary based upon the number of individual cases and corresponding litigation outstanding in a particular period.

Charges Related to Legal Matters, Net

There were no charges related to legal matters in our Generics segment for the year ended December 31, 2021. For the year ended December 31, 2020, we recorded a net charge of $6 million for Generics legal proceedings and claims.  For further details, see Note 21. Commitments and Contingencies.

Property Losses and Associated Expenses, Net

We recorded net charges for property losses and associated expenses of $5 million in our Generics segment for the year ended December 31, 2021. On September 1, 2021, Tropical Storm Ida brought extreme rainfall and flash flooding to New Jersey that caused damage to two of our facilities. Operations at these facilities were closed for the majority of September in order to assess the damage, make repairs and restore operations. Although, as a result of the significant recovery effort and sufficient safety stock, we did not incur a material business disruption for the year ended December 31, 2021, we concluded that all inventory on-hand at the time of the flooding was damaged and unsellable and that a majority of the equipment was damaged beyond repair. In addition, we incurred significant costs to repair both facilities. Accordingly, we recorded $10 million of charges for property losses and associated expenses in our Generics segment for the year ended December 31, 2021.

The Company has insurance policies for property damage, inventory losses and business interruption. Insurance recoveries are recorded in the periods when it is probable they will be realized. For the year ended December 31, 2021, insurance recoveries of $5 million associated with property and equipment were received and recorded as a reduction of property losses and associated expenses in our Generics segment. Refer to Note 28. Property Losses and Associated Expenses for additional information.

Specialty

The following table sets forth the results of operations for our Specialty segment (in thousands):

Net Revenue

Specialty net revenue for the year ended December 31, 2021 increased 6%, or $23 million to $378 million as compared to $356 million for the year ended December 31, 2020. The increase reflected growth in our promoted products including Rytary® and Unithroid® of 7% and 24%, respectively, partially offset by declines in Zomig® nasal spray.

Cost of Goods Sold and Gross Profit

Specialty cost of goods sold for the year ended December 31, 2021 increased 0.3%, or $1 million, to $194 million as compared to $193 million for the year ended December 31, 2020.  Specialty gross profit for the year ended December 31, 2021 was $185 million (49% of net revenue) as compared to gross profit of $163 million (46% of net revenue) for the year ended December 31, 2020. The increase in gross profit primarily related to the mix of revenues, including the impact of non-promoted products.

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Additionally, the increase in gross margin was due to growth in higher margin products which offset declines in Zomig® nasal spray, which has a higher cost structure than the overall Specialty portfolio.

Selling, General, and Administrative

Specialty selling, general and administrative expense was $84 million for the year ended December 31, 2021, an increase of $9 million or 11% compared to $76 million for the year ended December 31, 2020. The increase was driven by an increase in indirect taxes and payroll-related expenses, primarily attributable to the expansion of our sales force, and an increase in third party spend and promotional efforts as the Company began to resume activities and in-person meetings in the current year.

Research and Development

Specialty research and development expenses for the year ended December 31, 2021 were $43 million, as compared to $30 million for the year ended December 31, 2020. The $13 million increase from the prior year was primarily attributable to $10 million related to the KSP Acquisition on April 2, 2021 (refer to Note 3. Acquisitions and Divestitures for additional information) and an increase in in-licensing and upfront milestone payments of $3 million to grow our Specialty pipeline.

AvKARE

The following table sets forth the results of operations for our AvKARE segment (in thousands):

We completed the Rondo Acquisitions on January 31, 2020. Therefore, the results of operations of our AvKARE segment reflect a full year of activity in 2021 as compared to eleven months of activity in 2020. Refer to Note 3. Acquisitions and Divestitures for additional information.

Net Revenue

AvKARE net revenue for the year ended December 31, 2021 increased 19%, or $55 million, to $349 million for the year ended December 31, 2021 from $294 million for the year ended December 31, 2020. The increase in net revenue as compared to the prior year was due to the timing of the Rondo Acquisitions in 2020 and organic growth.

Cost of Goods Sold and Gross Profit

AvKARE cost of goods sold increased 17%, or $41 million, to $283 million for the year ended December 31, 2021 as compared to $242 million for the year ended December 31, 2020. The increase in cost of goods sold as compared to the prior year was due to the timing of the Rondo Acquisitions in 2020 and organic growth.

AvKARE gross profit for the year ended December 31, 2021 was $66 million (19% of net revenue) as compared to gross profit of $52 million (18% of net revenue) for the year ended December 31, 2020. The increase in gross profit and gross profit percentage over the prior year primarily related to organic growth which more than offset a decrease in less profitable revenues. The increase in gross profit over the prior year was also due to the timing of the Rondo Acquisitions in 2020.

Selling, General, and Administrative

AvKare selling, general and administrative expense for the year ended December 31, 2021 was $58 million as compared to $59 million for the year ended December 31, 2020, as an additional month of expense due to the timing of the Rondo Acquisition and an increase in indirect taxes was offset by a decrease in amortization.

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Liquidity and Capital Resources

Our primary source of liquidity is cash generated from operations, available cash and borrowings under debt financing arrangements, including $489 million of available capacity on our revolving credit facility as of December 31, 2021, as defined in Note 17. Debt. We believe these sources are sufficient to fund our planned operations, meet our interest and contractual obligations and provide sufficient liquidity over the next 12 months. However, our ability to satisfy our working capital requirements and debt obligations will depend upon economic conditions, the impact of the COVID-19 pandemic, and demand for our products, which are factors that may be out of our control.

Our primary uses of capital resources are to fund operating activities, including research and development expenses associated with new product filings, and pharmaceutical product manufacturing expenses, license payments, spending on production facility expansions, capital equipment, and acquisitions. As the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess our liquidity needs. A continued worldwide disruption could materially affect our future access to sources of liquidity, particularly our cash flows from operations, and financial condition. In the event of a sustained market deterioration, we may need additional liquidity, which would require us to evaluate available alternatives and take appropriate actions.

We estimate that we will invest approximately $75 to $85 million during 2022 for capital expenditures to support and grow our existing operations, primarily related to investments in manufacturing equipment, information technology and facilities.

As discussed in Note 3, Acquisitions and Divestitures, we paid $73 million for approximately 74% of the equity interests of Puniska Healthcare Pvt. Ltd. (“Puniska”) on November 2, 2021 and $4 million for land held by one of the sellers during December 2021. We will pay an additional $16 million, which we plan to fund with cash on hand, for the remaining 26% of the equity interests of Puniska and to satisfy a preexisting payable to the sellers, upon approval by the government of India which we expect during the first half of 2022. Also, as discussed in Note 3. Acquisitions and Divestitures, the KSP Acquisition closed on April 2, 2021. In addition to $74 million of cash we paid at closing, we made a payment of $30 million to satisfy deferred consideration, funded with cash on hand, on January 11, 2022. Additionally, as discussed in Note 29. Subsequent Event, we made a payment of $85 million, funded with cash on hand, on February 9, 2022 to acquire the baclofen franchise of certain entities affiliated with Saol International Limited.

Over the next 12 months, we expect to make substantial payments for monthly interest and quarterly principal amounts due for our debt instruments, including our Term Loan and Rondo Term Loan, as well as contractual payments for leased premises. Annually, we are also required to calculate the amount of excess cash flows, as defined in the Term Loan agreement. Based on the results of the excess cash flows calculation for the year ended December 31, 2020, the Company made a $14 million additional principal payment in March 2021. Based on the results of the excess cash flows calculation for the year ended December 31, 2021, no excess cash flows principal payments are due in 2022. Related to our Rondo Term Loan, we made a prepayment of $25 million towards the outstanding principal during the year ended December 31, 2021, in addition to planned principal payments. Refer to Note 17. Debt for additional information.

We are party to a tax receivable agreement (“TRA”) that requires us to make cash payments to the Members other than the Company, in respect of certain tax benefits that we may realize or may be deemed to realize as a result of sales or exchanges of Amneal common units by the Members. The timing and amount of any payments under the TRA will also vary, depending upon a number of factors including the timing and number of Amneal common units sold or exchanged for our class A Common Stock, the price of our class A Common Stock on the date of sale or exchange, the timing and amount of our taxable income, and the tax rate in effect at the time of realization of our taxable income. The tax receivable agreement also requires that we make an accelerated payment to the Members equal to the present value of all future payments due under the agreement upon certain change of control and similar transactions. Further sales or exchanges occurring subsequent to December 31, 2021 could result in future Amneal tax deductions and obligations to pay 85% of such benefits to the holders of Amneal common units. These obligations could be incremental to and substantially larger than the approximate $206 million contingent liability as of December 31, 2021. As a result of the foregoing, our obligations under the tax receivable agreement could have a substantial negative impact on our liquidity. For further information, refer to Item 1A. Risk Factors and Note 8. Income Taxes.

In addition, pursuant to the limited liability operating agreement of Amneal, as amended, in connection with any tax period, we are required to make distributions to Amneal's members, on a pro rata basis in proportion to the number of Amneal Common Units held by each member, of cash until each member (other than Amneal) has received an amount at least equal to its assumed tax liability and Amneal has received an amount sufficient to enable it to timely satisfy all of its U.S. federal, state and local and non-U.S. tax liabilities, and meet its obligations pursuant to the tax receivable agreement. During the year ended December 31, 2021, we made tax distributions of $53 million to Amneal's members.

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At December 31, 2021, our cash and cash equivalents consist of cash on deposit and highly liquid investments. A portion of our cash flows are derived outside the United States. As a result, we are subject to market risk associated with changes in foreign exchange rates. We maintain cash balances at both U.S. based and foreign country based commercial banks. At various times during the year, our cash balances held in the United States may exceed amounts that are insured by the Federal Deposit Insurance Corporation. We make our investments in accordance with our investment policy. The primary objectives of our investment policy are liquidity and safety of principal.

Cash Flows

For a discussion comparing of our cash flows for the fiscal years 2020 to 2019, see Cash Flows under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2020 Annual Report on Form 10-K.

The following table sets forth our summarized, consolidated cash flows for the years ended December 31, 2021 and 2020 (in thousands):

Cash Flows from Operating Activities

Net cash provided by operating activities was $242 million for the year ended December 31, 2021 as compared to $379 million for the year ended December 31, 2020.  Excluding the Federal tax refund and related interest of $110 million received in August 2020 (refer to Note 8. Income taxes for additional information), cash provided by operating activities for the year ended December 31, 2021 decreased $27 million as compared to the prior year. The year-over-year decrease was primarily a result of increased rebate payments and other pricing adjustments as well as other working capital movements, which more than offset an increase in net income, excluding the Federal tax refund mentioned above.

Cash Flows from Investing Activities

Net cash used in investing activities was $194 million for the year ended December 31, 2021 compared to $318 million for the year ended December 31, 2020.  The $123 million decrease in net cash used in investing activities for the year ended December 31, 2021 as compared to the prior year was primarily due to $254 million of net cash paid for the Rondo Acquisitions in 2020 as compared to $147 million paid for the Puniska Acquisition and the KSP Acquisition in 2021, and a decrease in purchases of property, plant and equipment in 2021.

Cash Flows from Financing Activities

Net cash provided used in financing activities was $138 million for the year ended December 31, 2021 as compared to net cash provided by financing activities of $132 million for the year ended December 31, 2020.  The $269 million year-over-year change was primarily attributable to net proceeds from the $180 million term loan associated with the Rondo Acquisitions (“Rondo Term Loan”) in 2020, an increase in year-over-year tax distributions made to non-controlling interests of $54 million, and an increase in year-over-year payments on debt, primarily the $25 million prepayment on the Rondo Term Loan and $14 million paid to satisfy the excess cash flow requirements of Amneal’s term loan. Refer to Note 17. Debt for additional information about our indebtedness.

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Commitments and Contractual Obligations

Our contractual obligations as of December 31, 2021 were as follows (in thousands):

(1)A description of our Term Loan, and related debt service and interest requirements is contained in Note 17. Debt. Interest on our Term Loan was calculated based on applicable rates at December 31, 2021, including any impact from our interest rate swap.

(2)Amounts represent future minimum rental payments under non-cancelable leases for certain facilities. A discussion of our operating lease obligations is contained in Note 12. Leases.

(3)Amounts primarily represent future minimum rental payments under non-cancelable financing lease obligation for a production facility in New York. A discussion of our financing lease obligations is contained in Note 12. Leases.

(4)Rondo Term Loan relates to the Rondo Acquisitions. Interest on the Rondo Term Loan was calculated based on the applicable rate at December 31, 2021. A discussion of the Rondo Term Loan, and related debt service and interest requirements is contained in Note 17. Debt.

(5)Amount represents deferred consideration for the acquisition of Kashiv Specialty Pharmaceuticals, LLC, which closed on April 2, 2021. The deferred consideration consists of $30 million, which was paid on January 11, 2022 and $0.5 million which is due on March 10, 2022. Refer to Note 3. Acquisitions and Divestitures for additional information.

The foregoing table does not include milestone payments potentially payable by the Company under its collaboration agreements and licenses. Such milestone payments are dependent upon the occurrence of specific and contingent events, and not the passage of time. A discussion of our significant contingent milestones is contained in Note 5. Alliance and Collaboration and Note 24. Related Party Transactions. Additionally, the foregoing table does not include $44 million of aggregate principal and the related interest due on the long-term promissory notes. Refer to the section Acquisition Financing – Notes Payable-Related Party in Note 17. Debt for a discussion of this indebtedness.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of December 31, 2021.

Critical Accounting Policies

Our significant accounting policies are described in Note 2. Summary of Significant Accounting Policies.

Included within these policies are certain policies which contain critical accounting estimates and, therefore, have been deemed to be “critical accounting policies.” Critical accounting estimates are those which require management to make assumptions about matters that were uncertain at the time the estimate was made and for which the use of different estimates, which reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur from period to period could have a material impact on our financial condition or results of operations. We have identified the following to be our critical accounting policies: sales-related deductions, impairment of goodwill and intangible assets, income taxes and contingencies.

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Sales-Related Deductions

Our gross product revenue is subject to a variety of deductions, which are estimated and recorded in the same period that the revenue is recognized, and primarily represent chargebacks, rebates, group purchasing organization fees, prompt payment (cash) discounts, consideration payable to the customer, billbacks, Medicaid and other government pricing programs, price protection and shelf stock adjustments, and sales returns. Those deductions represent estimates of rebates and discounts related to gross sales for the reporting period and, as such, knowledge and judgment of market conditions and practice are required when estimating the impact of these revenue deductions on gross sales for a reporting period.

Historically, our changes of estimates reflecting actual results or updated expectations have not been material to our overall business. If any of our ratios, factors, assessments, experiences or judgments are not indicative or accurate predictors of our future experience, our results could be materially affected. The sensitivity of our estimates can vary by program, type of customer and geographic location. However, estimates associated with governmental allowances, Medicaid and other performance-based contract rebates are most at risk for material adjustment because of the extensive time delay between the recording of the accrual and its ultimate settlement, an interval that can generally range up to one year. Because of this time lag, in any given quarter, our adjustments to actual can incorporate revisions of several prior quarters.

Business Combinations

We account for acquired businesses using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. The consolidated financial statements and results of operations reflect an acquired business after the completion of the acquisition. The fair value of the consideration paid is assigned to the underlying net assets of the acquired business based on their respective fair values as determined using a market participant concept. Any excess of the purchase price over the fair value of net assets and other identifiable intangible assets acquired is recorded as goodwill.

Intangible assets are amortized over the estimated useful life of the asset. Significant judgments are used in determining the estimated fair values assigned to the assets acquired and liabilities assumed and in determining estimates of useful lives of long-lived assets. Fair value determinations and useful life estimates are based on, among other factors, estimates of expected future net cash flows, estimates of appropriate discount rates used to present value expected future net cash flow streams, the assessment of each asset’s life cycle, competitive trends impacting the asset and each cash flow stream, as well as other factors. These judgments can materially impact the estimates used to allocate acquisition date fair values to assets acquired and liabilities assumed and the future useful lives. For these and other reasons, actual results may vary significantly from estimated results.

Impairment of Goodwill and Intangible Assets

Goodwill

Goodwill, which represents the excess of purchase price over the fair value of net assets acquired, is carried at cost. Goodwill is not amortized; rather, it is subject to a periodic assessment for impairment by applying a fair value based test. We test goodwill for possible impairment annually during the fourth quarter, or whenever events or circumstances indicate that the carrying amount may not be recoverable.

In order to test goodwill for impairment, an entity is permitted to first assess qualitative factors to determine whether a quantitative assessment of goodwill is necessary. The qualitative factors considered by the Company may include, but are not limited to, general economic conditions, the Company’s outlook, market performance of the Company’s industry and recent and forecasted financial performance. Further testing is only required if the entity determines, based on the qualitative assessment, that it is more likely than not that a reporting unit’s fair value is less than its carrying amount. Otherwise, no further impairment testing is required. If a quantitative assessment is required, the Company determines the fair value of its reporting unit using a combination of the income and market approaches.  If the net book value of the reporting unit exceeds its fair value, the Company recognizes a goodwill impairment charge for the reporting unit equal to the lesser of (i) the total goodwill allocated to that reporting unit and (ii) the amount by which that reporting unit’s carrying amount exceeds its fair value.

Goodwill is allocated and evaluated for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment. As a result of the Rondo Acquisitions, we added a third reportable segment, AvKARE, to our existing reportable segments, Generics and Specialty.  Our reportable segments are the same as the respective operating segments and reporting units. As of December 31, 2021, $363 million, $160 million, and $70 million of goodwill was allocated to the Specialty, Generics, and AvKARE segments, respectively. During the fourth quarter of 2021, we tested each of the

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reporting units for impairment using a quantitative assessment. The determination of fair value in the quantitative assessment required us to make significant estimates and assumptions. These estimates and assumptions primarily included, but were not limited to: the selection of appropriate peer group companies, the discount rate, terminal growth rates, and forecasts of revenue, operating income, depreciation and amortization, restructuring charges and capital expenditures. For more information see Note 15. Goodwill and Other Intangible Assets. There was no impairment of goodwill in any reporting unit for the year ended December 31, 2021.

Significant judgment is employed in determining the assumptions utilized in our quantitative assessment. Accordingly, any changes in assumptions described above could have a material impact on our consolidated results of operations. Additionally, for each of our reporting units, there are a number of future events and factors that may impact future results and the outcome of subsequent goodwill impairment testing. For a list of these factors, see Item 1A. Risk Factors.

Intangible Assets

We review our long-lived assets, including intangible assets with finite lives, for recoverability whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. We evaluate assets for potential impairment by comparing estimated future undiscounted net cash flows to the carrying amount of the asset. If the carrying amount of the assets exceeds the estimated future undiscounted cash flows, impairment is measured based on the difference between the carrying amount of the assets and fair value which is generally an expected present value cash flow technique. Our policy in determining whether an impairment indicator exists comprises measurable operating performance criteria as well as other qualitative measures. Events giving rise to impairment are an inherent risk in the pharmaceutical industry and cannot be predicted. Factors that we consider in deciding when to perform an impairment review include significant under-performance of a product in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in our use of the assets. If our assumptions are not correct, there could be an impairment loss in subsequent periods or, in the case of a change in the estimated useful life of the asset, a change in amortization expense.

Intangible assets with indefinite lives, including in-process research and development (“IPR&D”), are tested for impairment if impairment indicators arise and, at a minimum, annually. However, an entity is permitted to first assess qualitative factors to determine if a quantitative impairment test is necessary. Further testing is only required if the entity determines, based on the qualitative assessment, that it is more likely than not that an indefinite-lived intangible asset’s fair value is less than its carrying amount. Otherwise, no further impairment testing is required. The indefinite-lived intangible asset impairment test consists of a one-step analysis that compares the fair value of the intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. We consider many factors in evaluating whether the value of its intangible assets with indefinite lives may not be recoverable, including, but not limited to the discount rate, terminal growth rates, general economic conditions, our outlook and market performance of our industry and recent and forecasted financial performance.

The impairment charges for the year ended December 31, 2021 were primarily related to seven currently marketed products and one IPR&D product. For the currently marketed products, five products experienced significant price erosion during 2021, without an offsetting increase in customer demand, resulting in significantly lower than expected future cash flows and negative margins. Of the five currently marketed products that experienced significant price erosion during 2021, Levothyroxine contributed $17.7 million of the $23.4 million in cost of goods sold impairment charges (refer to Note 5. Alliance and Collaboration for additional information about the Company’s Levothyroxine license with JSP). Additionally, the supply agreements for two currently marketed products will be terminated early due to market conditions. The IPR&D charge was associated with one product which experienced a delay in its estimated launch date. Refer to Note 15. Goodwill and Other Intangible Assets for additional information.

Contingent Consideration

Business acquisitions may include future payments that are contingent upon the occurrence of certain pharmaceutical regulatory milestones or net sales of pharmaceutical products. For acquisitions that are accounted for as a business combination, the obligations for such contingent consideration payments are recorded at fair value on the acquisition date. For contingent milestone payments, the Company uses a probability-weighted income approach utilizing an appropriate discount rate. For contingent tiered royalties on net sales, the Company uses a Monte Carlo simulation model. Contingent consideration liabilities are revalued to fair value at the end of each reporting period. Changes in the fair value of contingent consideration, other than changes due to payments, are recognized as a gain or loss and recorded within change in fair value of contingent consideration in the consolidated statements of operations.

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The fair value measurement of the contingent consideration liabilities was determined based on significant unobservable inputs, including the discount rate, estimated probabilities of success, timing of achieving specified regulatory milestones and the estimated amount of future sales of the acquired products. The contingent consideration liability is estimated by applying a probability-weighted expected payment model for contingent milestone payments and a Monte Carlo simulation model for contingent royalty payments, which are then discounted to present value. Changes to fair value of the contingent consideration liabilities can result from changes to one or a number of the aforementioned inputs. If different assumptions were used for various inputs, the estimated fair value could be higher or lower than what the Company determined.

For the year ended December 31, 2021, the change in the fair value of contingent consideration was $0.2 million. As of December 31, 2021, contingent consideration of $6 million was accrued in related party payable-long term.

Income Taxes

We record valuation allowances against our DTAs when it is more likely than not that all or a portion of a DTA will not be realized. We routinely evaluate the realizability of our DTAs by assessing the likelihood that our DTAs will be recovered based on all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, estimates of future taxable income, tax planning strategies and results of operations. Estimating future taxable income is inherently uncertain and requires judgment. In projecting future taxable income, we consider our historical results and incorporate certain assumptions, including projected new product launches, revenue growth, and operating margins, among others.

A valuation allowance, if needed, reduces DTAs to the amount expected to be realized. When determining the amount of net DTAs that are more likely than not to be realized, we assess all available positive and negative evidence. This evidence includes, but is not limited to, prior earnings history, projected future earnings, carryback and carry-forward periods and the feasibility of ongoing tax strategies that could potentially enhance the likelihood of the realization of a DTA. The weight given to the positive and negative evidence is commensurate with the extent the evidence may be objectively verified. As such, it is generally difficult for positive evidence regarding projected future taxable income to outweigh objective negative evidence of recent financial reporting losses.

As of December 31, 2021, based upon all available objective and verifiable evidence both positive and negative, including historical levels of pre-tax income (loss) both on a consolidated basis and tax reporting entity basis, legislative developments, expectations and risks associated with estimates of future pre-tax income, and prudent and feasible tax planning strategies, we determined that it is more likely than not that we will not realize the benefits of our gross DTAs. Accordingly, as of December 31, 2021, this valuation allowance was $417 million and reduced the carrying value of these gross DTAs, net of the impact of the reversal of taxable temporary differences, to zero.

As described in Note 8. Income Taxes, we are a party to a TRA under which we are generally required to pay to the other holders of Amneal Common Units 85% of the applicable tax savings, if any, in U.S. federal and state income tax that we are deemed to realize as a result of certain tax attributes of their Amneal Common Units sold to us (or exchanged in a taxable sale) and that are created as a result of (i) the sales of their Amneal Common Units for shares of Class A common stock and (ii) tax benefits attributable to payments made under the TRA.

The timing and amount of any payments under the TRA may vary, depending upon a number of factors including the timing and number of Amneal common units sold or exchanged for our Class A Common Stock, the price of our Class A Common Stock on the date of sale or exchange, the timing and amount of our taxable income, and the tax rate in effect at the time of realization of the our taxable income (the TRA liability is determined based on a percentage of the corporate tax savings from the use of the TRA's attributes). Further sales or exchanges occurring subsequent to December 31, 2021 could result in future Amneal tax deductions and obligations to pay 85% of such benefits to the holders of Amneal common units.

The projection of future taxable income involves significant judgment. Actual taxable income may differ materially from our estimates, which could significantly impact our liabilities under the TRA. As noted above, we have determined it is more-likely-than-not we will be unable to utilize all of our DTAs subject to the TRA; therefore, as of December 31, 2021, we had not recognized the contingent liability under the TRA related to the tax savings we may realize from common units sold or exchanged. If utilization of these DTAs becomes more-likely-than-not in the future, at such time, these TRA liabilities (which amount to approximately $206 million as of December 31, 2021, as a result of basis adjustments under Internal Revenue Code Section 754) will be recorded through charges to our statements of operations. However, if the tax attributes are not utilized in future years, it is reasonably possible no amounts would be paid under the TRA. Should we determine that a DTA with a valuation allowance is realizable in a subsequent period, the related valuation allowance will be released and if a resulting TRA payment is determined to be probable, a corresponding TRA liability will be recorded.

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Contingencies

We are involved in various litigation, government investigations and other legal proceedings that arise from time to time in the ordinary course of business. Our legal proceedings are complex, constantly evolving and subject to uncertainty. As such, we cannot predict the outcome or impact of our legal proceedings.

While we believe we have valid claims and/or defenses for the matters described in Note 21. Commitments and Contingencies, the nature of litigation is unpredictable and the outcome of the following proceedings could include damages, fines, penalties and injunctive or administrative remedies. For any proceedings where losses are probable and reasonably capable of estimation, we accrue for a potential loss. When we have a probable loss for which a reasonable estimate of the liability is a range of losses and no amount within that range is a better estimate than any other amount, we record the loss at the low end of the range. While these accruals have been deemed reasonable by our management, the assessment process relies heavily on estimates and assumptions that may ultimately prove inaccurate or incomplete. Additionally, unforeseen circumstances or events may lead us to subsequently change our estimates and assumptions. The process of analyzing, assessing and establishing reserve estimates relative to legal proceedings involves a high degree of judgment.

Although the outcome and costs of the asserted and unasserted claims is difficult to predict, based on the information presently known to management, we do not currently expect the ultimate liability, if any, for such matters to have a material adverse effect on our business, financial condition, results of operations, or cash flows.

For further details, see Note 21. Commitments and Contingencies.

Recently Issued Accounting Standards

Recently issued accounting standards are discussed in Note 2. Summary of Significant Accounting Policies.