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, 2016

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 001-36329

 

Recro Pharma, Inc.

(Exact name of registrant as specified in its charter)

 

Pennsylvania

26-1523233

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

490 Lapp Road, Malvern, Pennsylvania

19355

(Address of principal executive offices)

(Zip Code)

 

(484) 395-2470

(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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

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

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

 

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

As of November 10, 2016, there were 12,163,660 shares of common stock, par value $0.01 per share, outstanding.

 

 

 

 


TABLE OF CONTENTS

Index

 

PART I. FINANCIAL INFORMATION

3

 

Item 1.

Consolidated Financial Statements

3

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30

 

Item 4.

Controls and Procedures

30

PART II. OTHER INFORMATION

32

 

Item 1.

Legal Proceedings

32

 

Item 1A.

Risk Factors

32

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

 

Item 3.

Defaults Upon Senior Securities

32

 

Item 4.

Mine Safety Disclosures

32

 

Item 5.

Other Information

32

 

Item 6.

Exhibits

32

SIGNATURES

34

EXHIBIT INDEX

35

 

 

 


PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

RECRO PHARMA, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(unaudited)

 

(amounts in thousands, except share and per share data)

 

September 30, 2016

 

 

December 31, 2015

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

24,752

 

 

$

19,779

 

Accounts receivable

 

 

12,400

 

 

 

8,580

 

Other receivables

 

 

60

 

 

 

36

 

Inventory

 

 

9,812

 

 

 

8,982

 

Prepaid expenses

 

 

1,668

 

 

 

757

 

Deferred equity costs

 

 

316

 

 

 

542

 

Total current assets

 

 

49,008

 

 

 

38,676

 

Property, plant and equipment, net

 

 

36,487

 

 

 

37,922

 

Deferred income taxes

 

 

15,989

 

 

 

15,637

 

Intangible assets, net

 

 

38,079

 

 

 

40,016

 

Goodwill

 

 

6,446

 

 

 

6,446

 

Total assets

 

$

146,009

 

 

$

138,697

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,917

 

 

$

1,553

 

Accrued expenses

 

 

7,857

 

 

 

3,418

 

Current portion of long-term debt

 

 

1,498

 

 

 

4,516

 

Total current liabilities

 

 

11,272

 

 

 

9,487

 

Long-term debt

 

 

22,738

 

 

 

25,244

 

Warrants

 

 

3,817

 

 

 

3,770

 

Contingent consideration-long term

 

 

67,551

 

 

 

59,846

 

Total liabilities

 

 

105,378

 

 

 

98,347

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value. Authorized, 10,000,000 shares; none issued and

   outstanding

 

 

 

 

 

 

Common stock, $0.01 par value. Authorized, 50,000,000 shares; issued and

   outstanding, 11,863,660 shares at September 30, 2016 and 9,224,315 shares at

   December 31, 2015

 

 

119

 

 

 

92

 

Additional paid-in capital

 

 

91,378

 

 

 

71,321

 

Accumulated deficit

 

 

(50,866

)

 

 

(31,063

)

Total shareholders’ equity

 

 

40,631

 

 

 

40,350

 

Total liabilities and shareholders’ equity

 

$

146,009

 

 

$

138,697

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

3


RECRO PHARMA, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(unaudited)

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

(amounts in thousands, except share and per share data)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Manufacturing, royalty and profit sharing revenue

 

$

16,188

 

 

$

16,120

 

 

$

50,260

 

 

$

32,824

 

Research and development revenue

 

 

763

 

 

 

419

 

 

 

1,713

 

 

 

2,375

 

Total revenue

 

 

16,951

 

 

 

16,539

 

 

 

51,973

 

 

 

35,199

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales (excluding amortization of intangible assets)

 

 

5,745

 

 

 

10,039

 

 

 

25,563

 

 

 

19,228

 

Research and development

 

 

7,046

 

 

 

2,716

 

 

 

23,175

 

 

 

7,260

 

General and administrative

 

 

3,841

 

 

 

3,478

 

 

 

9,263

 

 

 

8,492

 

Amortization of intangible assets

 

 

646

 

 

 

646

 

 

 

1,937

 

 

 

1,238

 

Change in warrant valuation

 

 

402

 

 

 

(762

)

 

 

47

 

 

 

119

 

Change in contingent consideration valuation

 

 

3,192

 

 

 

586

 

 

 

7,705

 

 

 

2,586

 

Total operating expenses

 

 

20,872

 

 

 

16,703

 

 

 

67,690

 

 

 

38,923

 

Operating loss

 

 

(3,921

)

 

 

(164

)

 

 

(15,717

)

 

 

(3,724

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

10

 

 

 

2

 

 

 

27

 

 

 

10

 

Interest expense

 

 

(1,450

)

 

 

(1,990

)

 

 

(4,279

)

 

 

(3,888

)

Net loss before income taxes

 

 

(5,361

)

 

 

(2,152

)

 

 

(19,969

)

 

 

(7,602

)

Income tax benefit (expense)

 

 

(18

)

 

 

 

 

 

166

 

 

 

 

Net loss

 

$

(5,379

)

 

$

(2,152

)

 

$

(19,803

)

 

$

(7,602

)

Basic and diluted net loss per common share

 

$

(0.50

)

 

$

(0.24

)

 

$

(2.01

)

 

$

(0.92

)

Weighted average basic and diluted common shares outstanding

 

 

10,780,911

 

 

 

9,118,664

 

 

 

9,862,526

 

 

 

8,243,909

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

4


RECRO PHARMA, INC. AND SUBSIDIARIES

Consolidated Statement of Shareholders’ Equity

Nine Months Ended September 30, 2016

(unaudited)

 

 

 

Common stock

 

 

Additional

 

 

 

 

 

 

 

 

 

(amounts in thousands, except share and per share data)

 

Shares

 

 

Amount

 

 

paid-in

capital

 

 

Accumulated

deficit

 

 

Total

 

Balance, December 31, 2015

 

 

9,224,315

 

 

$

92

 

 

$

71,321

 

 

$

(31,063

)

 

$

40,350

 

Sale of common stock under Aspire equity facility, net of

   transaction costs

 

 

643,940

 

 

 

7

 

 

 

3,944

 

 

 

 

 

 

3,951

 

Sale of common stock in public offering, net of offering costs

 

 

1,986,666

 

 

 

20

 

 

 

13,347

 

 

 

 

 

 

 

13,367

 

Issuance of restricted stock units, net of shares withheld for

   income taxes

 

 

8,739

 

 

 

 

 

 

(33

)

 

 

 

 

 

 

(33

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

2,799

 

 

 

 

 

 

2,799

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(19,803

)

 

 

(19,803

)

Balance, September 30, 2016

 

 

11,863,660

 

 

$

119

 

 

$

91,378

 

 

$

(50,866

)

 

$

40,631

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

5


RECRO PHARMA, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited)

 

 

 

For the Nine Months Ended September 30,

 

(amounts in thousands, except share and per share data)

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(19,803

)

 

$

(7,602

)

Adjustments to reconcile net loss to net cash provided by (used in) operating

   activities:

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

2,799

 

 

 

1,725

 

Depreciation expense

 

 

3,756

 

 

 

2,730

 

Noncash interest expense

 

 

800

 

 

 

439

 

Amortization

 

 

1,937

 

 

 

1,238

 

Change in warrant valuation

 

 

47

 

 

 

119

 

Change in contingent consideration valuation

 

 

7,705

 

 

 

2,586

 

Deferred income taxes

 

 

(352

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Inventory

 

 

(830

)

 

 

1,384

 

Prepaid expenses

 

 

(911

)

 

 

(475

)

Accounts receivable and other receivables

 

 

(3,844

)

 

 

3,007

 

Accounts payable and accrued expenses

 

 

4,498

 

 

 

2,688

 

Net cash (used in) provided by operating activities

 

 

(4,198

)

 

 

7,839

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisition of Gainesville, net of cash acquired

 

 

 

 

 

(52,690

)

Purchase of property and equipment

 

 

(2,014

)

 

 

(1,787

)

Net cash used in investing activities

 

 

(2,014

)

 

 

(54,477

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from Aspire facility

 

 

4,175

 

 

 

 

Proceeds from sale of common stock, net of transaction costs

 

 

13,367

 

 

 

14,812

 

Proceeds from long-term debt

 

 

 

 

 

50,000

 

Payment on long-term debt

 

 

(6,324

)

 

 

(7,838

)

Payment of deferred financing costs

 

 

 

 

 

(1,718

)

Payment of deferred equity costs

 

 

 

 

 

(253

)

Payment of withholdings on shares withheld for income taxes

 

 

(33

)

 

 

 

Proceeds from option exercise

 

 

 

 

 

228

 

Net cash provided by financing activities

 

 

11,185

 

 

 

55,231

 

Net increase in cash and cash equivalents

 

 

4,973

 

 

 

8,593

 

Cash and cash equivalents, beginning of period

 

 

19,779

 

 

 

19,682

 

Cash and cash equivalents, end of period

 

$

24,752

 

 

$

28,275

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Common stock issued in connection with equity facility

 

 

 

 

$

285

 

Cash paid for interest

 

$

3,479

 

 

$

3,449

 

Purchase of property, plant and equipment included in accrued expenses

 

$

307

 

 

$

179

 

Amortization of deferred equity costs

 

$

224

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

6


RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to unaudited Consolidated Financial Statements

(amounts in thousands, except share and per share data)

 

(1)

Background

Recro Pharma, Inc., or the Company, was incorporated in Pennsylvania on November 15, 2007. The Company is a revenue-generating, specialty pharmaceutical company focused on products for hospital and ambulatory care settings, currently developing non-opioid products for treatment of serious acute pain. On April 10, 2015, the Company acquired from Alkermes plc, or Alkermes, worldwide rights to intravenous and intramuscular, or injectable meloxicam, a proprietary, long-acting preferential COX-2 inhibitor for the treatment of moderate to severe acute pain, as well as a contract manufacturing, royalty and formulation business in Gainesville, Georgia, now operating through the Company’s subsidiary, Recro Gainesville, LLC, or Gainesville. The acquisition is referred to herein as the Gainesville Transaction. Gainesville develops and manufactures innovative pharmaceutical products that deliver clinically meaningful benefits to patients, using its proprietary delivery technologies for pharmaceutical companies who commercialize or plan to commercialize these products.

 

 

(2)

Development-Stage Risks and Liquidity

The Company has incurred losses from operations since its incorporation and has an accumulated deficit of $50,866 as of September 30, 2016. Though its Gainesville business has been profitable, the Company anticipates incurring additional losses on a consolidated basis until such time, if ever, that it can generate significant sales of its products currently in development. Substantial additional financing will be needed by the Company to fund its operations and to commercially develop its product candidates.

The Company’s future operations are highly dependent on a combination of factors, including (i) the continued profitability of the Gainesville business, (ii) the timely and successful completion of additional financing and/or alternative sources of capital, debt and partnering transactions; (iii) the success of its research and development, including the results and timing of its clinical trials; (iv) the development of competitive therapies by other biotechnology and pharmaceutical companies; and, ultimately (v) regulatory approval and market acceptance of the Company’s proposed future products.

 

 

(3)

Summary of Significant Accounting Principles

 

(a)

Basis of Presentation and Principles of Consolidation

The accompanying unaudited consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, for interim financial information. The Company’s consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. In the opinion of management, the accompanying consolidated financial statements include all normal and recurring adjustments (which consist primarily of accruals, estimates and assumptions that impact the financial statements) considered necessary to present fairly the Company’s financial position as of September 30, 2016 and its results of operations for the three and nine months ended September 30, 2016 and 2015 and cash flows for the three and nine months ended September 30, 2016 and 2015. Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2016. The consolidated interim financial statements, presented herein, do not contain the required disclosures under U.S. GAAP for annual financial statements.

The accompanying unaudited interim consolidated financial statements should be read in conjunction with the annual audited financial statements and related notes as of and for the year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

 

(b)

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from such estimates.

 

(c)

Cash and Cash Equivalents

The Company considers all highly liquid investments that have maturities of three months or less when acquired to be cash equivalents. Cash equivalents as of September 30, 2016 and December 31, 2015 consisted of money market mutual funds and government and agency bonds.

 

7


RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to unaudited Consolidated Financial Statements

(amounts in thousands, except share and per share data)

 

 

(d)

Fair Value of Financial Instruments

Management believes that the carrying amounts of the Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued expenses, approximate fair value due to the short-term nature of those instruments. Management believes the carrying value of debt approximates fair value as the interest rates are reflective of the rate the Company could obtain on debt with similar terms and conditions.

 

(e)

Inventory

Inventory is stated at the lower of cost or market value. Cost is determined using the first-in, first-out method. Included in inventory are raw materials used in production of commercial products.

 

(f)

Property and Equipment

Property and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, which are as follows: four to ten years for furniture, office and computer equipment; six to ten years for manufacturing equipment; two to five years for vehicles; 35 to 40 years for buildings; and the shorter of the lease term or useful life for leasehold improvements. Repairs and maintenance costs are expensed as incurred.

 

(g)

Goodwill and Intangible Assets

Goodwill represents the excess of purchase price over the fair value of net assets acquired by the Company. Goodwill is not amortized, but assessed for impairment on an annual basis or more frequently if impairment indicators exist. The impairment model prescribes a two-step method for determining impairment.

The first step compares a reporting unit’s fair value to its carrying amount to identify potential goodwill impairment. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, the second step of the impairment test must be completed to measure the amount of the reporting unit’s goodwill impairment loss, if any. Step two requires an assignment of the reporting unit’s fair value to the reporting unit’s assets and liabilities to determine the implied fair value of the reporting unit’s goodwill. The implied fair value of the reporting unit’s goodwill is then compared with the carrying amount of the reporting unit’s goodwill to determine the goodwill impairment loss to be recognized, if any.

Intangible assets include the Company’s royalties and contract manufacturing relationships intangible asset as well as an in-process research and development, or IPR&D, asset. The royalties and contract manufacturing relationships intangible asset is considered a definite-lived intangible asset and is amortized on a straight-line basis over a useful life of six years.

Intangible assets related to IPR&D are considered indefinite-lived intangible assets and are assessed for impairment annually or more frequently if impairment indicators exist. If the associated research and development effort is abandoned, the related assets will be written-off and the Company will record a noncash impairment loss on its consolidated statements of operations. For those compounds that reach commercialization, the IPR&D assets will be amortized over their estimated useful lives.

The impairment test for indefinite-lived intangible assets is a one-step test, which compares the fair value of the intangible asset to its carrying value. If the carrying value exceeds its fair value, an impairment loss is recognized in an amount equal to the excess. Based on accounting standards, it is required that these assets be assessed at least annually for impairment unless a triggering event occurs between annual assessments which would then require an assessment in the period which a triggering event occurred.

 

(h)

Revenue Recognition

The Company generates revenues from manufacturing, packaging and related services for multiple pharmaceutical companies. The agreements that the Company has with its commercial partners provide for manufacturing revenues, royalties and/or profit sharing components.

Manufacturing and other related services revenue is recognized when persuasive evidence of an arrangement exists, shipment has occurred and the title to the product and associated risk of loss has passed to the customer, the sales price is fixed or determinable and collectability is reasonably assured.

8


RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to unaudited Consolidated Financial Statements

(amounts in thousands, except share and per share data)

 

In addition to manufacturing and other related services revenue, the customer agreements have royalties and/or profit sharing payments, computed on the net product sales of the partner. Royalty and profit sharing revenues are generally recognized under the terms of the license and supply agreement in the period the products are sold and expenses are incurred by our commercial partner and collectability is reasonably assured.

Revenues related to research and development are generally recognized as the related services or activities are performed, in accordance with the contract terms. To the extent that the agreements specify services are to be performed on a fixed basis, revenues are recognized consistent with the pattern of the work performed.

 

(i)

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash, cash equivalents and accounts receivable. The Company’s policy is to limit the amount of credit exposure to any one financial institution and place its cash and cash equivalents with financial institutions evaluated as being creditworthy. To date, the Company has not experienced any losses on its cash equivalents.

 

(j)

Research and Development

Research and development costs for the Company’s proprietary products/product candidates are charged to expense as incurred. Research and development expenses consist primarily of funds paid to third parties for the provision of services for manufacturing of clinical supplies, drug development, clinical trials, statistical analysis and report writing, and regulatory compliance costs. At the end of the reporting period, the Company compares payments made to third-party service providers to the estimated progress toward completion of the research or development objectives. Such estimates are subject to change as additional information becomes available. Depending on the timing of payments to the service providers and the progress that the Company estimates has been made as a result of the service provided, the Company may record net prepaid or accrued expense relating to these costs.

Upfront and milestone payments made to third parties who perform research and development services on the Company’s behalf are expensed as services are rendered. Costs incurred in obtaining technology licenses are charged to research and development expense as acquired in-process research and development if the technology licensed has not reached technological feasibility and has no alternative future use.

 

(k)

Stock-Based Awards

The Company measures employee stock-based awards at grant-date fair value and recognizes employee compensation expense on a straight-line basis over the vesting period of the award.

Determining the appropriate fair value of stock options requires the input of subjective assumptions, including the expected life of the option and expected stock price volatility. The Company uses the Black-Scholes option pricing model to value its stock option awards. The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, stock-based compensation expense could be materially different for future awards.

The expected life of stock options was estimated using the “simplified method,” as the Company has limited historical information to develop reasonable expectations about future exercise patterns and post vesting employment termination behavior for its stock options grants. The simplified method is based on the average of the vesting tranches and the contractual life of each grant. For stock price volatility, the Company uses comparable public companies as a basis for its expected volatility to calculate the fair value of options grants. The risk-free interest rate is based on U.S. Treasury notes with a term approximating the expected life of the option.

Nonemployee stock-based awards are revalued until an award vests and the Company recognizes compensation expense on a straight-line basis over the vesting period of each separated vesting tranche of the award, or the accelerated attribution method. The estimation of the number of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from the Company’s current estimates, such amounts are recognized as an adjustment in the period in which estimates are revised.

9


RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to unaudited Consolidated Financial Statements

(amounts in thousands, except share and per share data)

 

 

(l)

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. A valuation allowance is recorded to the extent it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Unrecognized income tax benefits represent income tax positions taken on income tax returns that have not been recognized in the consolidated financial statements. The Company recognizes the benefit of an income tax position only if it is more likely than not (greater than 50%) that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position. Otherwise, no benefit is recognized. The tax benefits recognized are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company accrues interest and related penalties are classified as income tax expense in the Consolidated Statements of Operations. The Company does not anticipate significant changes in the amount of unrecognized income tax benefits over the next year.

 

(m)

Net Loss Per Common Share

Basic and diluted net loss per common share is determined by dividing net loss applicable to common shareholders by the weighted average common shares outstanding during the period. For all periods presented, the outstanding common stock options and warrants have been excluded from the calculation because their effect would be anti-dilutive. Therefore, the weighted average shares used to calculate both basic and diluted net loss per share are the same.

The following potentially dilutive securities have been excluded from the computations of diluted weighted average shares outstanding as of September 30, 2016 and 2015, as they would be anti-dilutive:

 

 

 

September 30, 2016

 

 

September 30, 2015

 

Options and restricted stock units outstanding

 

 

2,363,794

 

 

 

1,570,982

 

Warrants

 

 

784,928

 

 

 

784,928

 

 

Amounts in the table above reflect the common stock equivalents of the noted instruments.

 

(n)

Recent Accounting Pronouncements

In August 2016, the Financial Accounting Standards Board, or FASB, issued updated guidance in the classification of certain cash receipts and payments in the statement of cash flows where diversity in practice exists.  This new guidance is effective for annual periods beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

In March 2016, the FASB issued updated guidance on the accounting for share-based payment transactions including the income tax consequences, classification of awards as either equity or liabilities, employee tax withholding, calculation of shares for use in diluted earnings per share and the classification on the statement of cash flows. The new guidance is effective for annual periods beginning after December 15, 2016, with early adoption permitted. The Company early adopted the guidance effective July 1, 2016. The guidance did not have a material impact to the consolidated financial statements upon adoption.

In November 2015, the FASB issued updated guidance on the presentation requirements for deferred income tax liabilities and assets to be classified as noncurrent in a classified statement of financial position. The update is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, and early adoption is permitted for all entities as of the beginning of an interim or annual reporting period. The Company adopted this guidance during the year ended December 31, 2015.

10


RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to unaudited Consolidated Financial Statements

(amounts in thousands, except share and per share data)

 

In September 2015, the FASB issued updated guidance regarding the accounting for and disclosure of measurement-period adjustments that occur in periods after a business combination is consummated. This update requires that the acquirer recognize measurement-period adjustments in the reporting period in which they are determined. Prior period information should not be revised. This update also requires an entity to present separately on the face of the income statement or disclose in the notes the amount recorded in the current-period income statement that would have been recorded in previous reporting periods if the adjustments had been recognized as of the acquisition date. The effective date for annual and interim periods begins after December 15, 2015. The adoption of this updated standard did not have a material impact on the Company’s consolidated financial statements and related disclosures.

In July 2015, the FASB issued updated guidance which changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. The amendments in this guidance do not apply to inventory that is measured using last-in, first-out, or LIFO, or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out or average cost. Within the scope of this new guidance, an entity should measure inventory at the lower of cost and net realizable value; where, net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new guidance is effective for annual periods beginning after December 15, 2016, with early adoption permitted. The new guidance must be applied on a prospective basis. The Company is evaluating the effect that the new guidance will have on its consolidated financial statements and related disclosures.

In April 2015, the FASB issued updated guidance on the presentation requirements for debt issuance costs and debt discount and premium. The update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the updated guidance. The updated guidance is effective for annual and interim periods beginning after December 15, 2015 and early adoption is permitted for financial statements that have not been previously issued. The Company adopted this guidance during the year ended December 31, 2015.

In August 2014, the FASB issued updated guidance regarding the going concern assumption.  The amendments in this update will explicitly require a company’s management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. This new guidance is effective for annual periods beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the potential impact of the adoption of this standard, but the Company believes the adoption of this guidance will not have a material impact on its consolidated financial statements and related disclosures.

In May 2014, the FASB issued updated guidance regarding the accounting for and disclosures of revenue recognition, with an effective date for annual and interim periods beginning after December 15, 2016. The update provides a single comprehensive model for accounting for revenue from contracts with customers. The model requires that revenue recognized reflect the actual consideration to which the entity expects to be entitled in exchange for the goods or services defined in the contract, including in situations with multiple performance obligations. In July 2015, the FASB deferred the effective date by one year. The guidance will be effective for annual and interim periods beginning after December 15, 2017. The Company is currently evaluating the effect that this guidance may have on its consolidated financial statements.

 

 

(4)

Acquisition of Gainesville and Meloxicam

On April 10, 2015, the Company completed the Gainesville Transaction. The consideration paid in connection with the Gainesville Transaction consisted of $50,000 at closing, a $4,010 working capital adjustment and a seven-year warrant to purchase 350,000 shares of the Company’s common stock at an exercise price of $19.46 per share. In addition, the Company may be required to pay up to an additional $120,000 in milestone payments (including $10,000 payable upon the new drug application “NDA” filing and $30,000 upon regulatory approval, and other revenue target milestones), and royalties on future product net sales related to injectable meloxicam. Under the acquisition method of accounting, the consideration paid and the fair value of the contingent consideration and royalties are allocated to the fair value of the assets acquired and liabilities assumed. The contingent consideration obligation is remeasured each reporting date with changes in fair value recognized as a period charge within the statement of operations (see note 6 for further information regarding fair value).

11


RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to unaudited Consolidated Financial Statements

(amounts in thousands, except share and per share data)

 

The following is the purchase price for the Gainesville Transaction:

 

 

 

Estimated

Fair Value

 

Purchase price agreement

 

$

50,000

 

Fair value of warrants

 

 

2,470

 

Fair value of contingent consideration

 

 

54,600

 

Working capital adjustment

 

 

4,010

 

 

 

$

111,080

 

 

The contingent consideration consists of three separate components. The first component consists of two potential payments, which will be payable upon the submission of the new drug application, or NDA, for meloxicam, and the related regulatory approval, respectively. The second component consists of three potential payments, based on the achievement of specified annual revenue targets. The third component consists of net sales milestones related to injectable meloxicam and royalties on future product sales of injectable meloxicam between 10% and 12% (subject to a 30% reduction when no longer covered by patent).

The fair value of the first contingent consideration component recognized on the acquisition date was estimated by applying a risk adjusted discount rate to the probability adjusted contingent payments and the expected approval dates. The fair value of the second contingent consideration component recognized on the acquisition date was estimated by applying a risk adjusted discount rate to the potential payments resulting from probability weighted revenue projections and expected revenue target attainment dates. The fair value of the third contingent consideration component recognized on the acquisition date was estimated by applying a risk adjusted discount rate to the potential payments resulting from probability weighted revenue projections and the defined royalty percentage.

These fair values are based on significant inputs not observable in the market, which are referred to in the guidance as Level 3 inputs. The contingent consideration components are classified as liabilities and are subject to the recognition of subsequent changes in fair value through the results of operations.

The Gainesville results of operations have been included in the consolidated statement of operations beginning April 10, 2015.

The following is the allocation of fair value to the assets acquired and the liabilities assumed in connection with the Gainesville Transaction, reconciled to the purchase price:

 

 

 

Amount

 

Accounts receivable

 

$

12,519

 

Inventory

 

 

10,253

 

Prepaid expenses

 

 

380

 

Property, plant and equipment

 

 

39,424

 

Intangible assets

 

 

41,900

 

Goodwill

 

 

6,446

 

Total assets acquired

 

 

110,922

 

Accounts payable and accrued expenses

 

 

1,162

 

Warrants

 

 

2,470

 

Contingent consideration

 

 

54,600

 

Total liabilities assumed

 

 

58,232

 

Cash paid, net of $1,320 of cash acquired

 

$

52,690

 

 

12


RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to unaudited Consolidated Financial Statements

(amounts in thousands, except share and per share data)

 

The fair value of the property, plant and equipment and their weighted-average useful lives are as follows:

 

 

 

Estimated

Fair Value

 

 

Estimated

Useful Life

Buildings and improvements

 

$

16,371

 

 

35 years

Land

 

 

3,263

 

 

N/A

Furniture, office & computer equipment

 

 

2,510

 

 

4-5 years

Vehicles

 

 

30

 

 

2 years

Manufacturing equipment

 

 

17,250

 

 

6-7 years

 

 

$

39,424

 

 

 

 

The estimated fair value of property, plant and equipment was determined using the cost and sales approaches.

The fair value of the identifiable intangible assets and their weighted-average useful lives are as follows:

 

 

 

Estimated

Fair Value

 

 

Weighted

Average

Estimated Useful

Life

Royalties and contract manufacturing relationships

 

$

15,500

 

 

6

In-process research and development

 

 

26,400

 

 

N/A

Total intangible assets

 

$

41,900

 

 

 

 

The in-process research and development asset and customer relationships were valued using the multi-period excess earnings method, which is an income approach in which excess earnings are the earnings remaining after deducting the market rates of return on the estimated values of contributory assets, including debt-free net working capital, tangible and intangible assets. The excess earnings are thereby calculated for each quarter of a multi-quarter projection period discounted to a present value utilizing an appropriate discount rate for the subject asset.

 

 

(5)

Unaudited Pro Forma Results of Operations

The unaudited pro forma combined results of operations for the nine months ended September 30, 2016 (assuming the closing of the Gainesville Transaction had occurred on January 1, 2015) are as follows:

 

 

 

Nine Months Ended

 

 

 

 

 

 

Net revenue

 

$

54,931

 

Net loss

 

 

(6,978

)

 

The pro forma results have been prepared for reporting purposes only and are not necessarily indicative of the actual results of operations had the closing of the Transaction taken place on January 1, 2015. Furthermore, the pro forma results do not purport to project the future results of operations of the Company.

 

 

(6)

Fair Value of Financial Instruments

The Company follows the FASB accounting guidance on fair value measurements for financial assets and liabilities measured on a recurring basis. The guidance requires fair value measurements to maximize the use of “observable inputs.” The three-level hierarchy of inputs to measure fair value are as follows:

 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities

 

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability

 

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity)

13


RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to unaudited Consolidated Financial Statements

(amounts in thousands, except share and per share data)

 

The Company has classified assets and liabilities measured at fair value on a recurring basis as follows:

 

 

 

Fair value measurements at reporting

date using

 

 

 

Quoted prices

in active

markets for

identical

assets

(Level 1)

 

 

Significant

other

observable

inputs

(Level 2)

 

 

Significant

unobservable

inputs

(Level 3)

 

At December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds

 

$

5,081

 

 

 

 

 

 

 

Government and agency bonds

 

 

10,250

 

 

 

 

 

 

 

Cash equivalents

 

$

15,331

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

 

 

 

 

 

 

 

$

3,770

 

Contingent consideration

 

 

 

 

 

 

 

 

59,846

 

 

 

 

 

 

 

 

 

$

63,616

 

At September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Money market accounts

 

$

8,585

 

 

 

 

 

 

 

Government and agency bonds

 

 

9,270

 

 

 

 

 

 

 

Cash equivalents

 

$

17,855

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

 

 

 

 

 

 

 

$

3,817

 

Contingent consideration

 

 

 

 

 

 

 

 

67,551

 

 

 

 

 

 

 

 

 

$

71,368

 

 

The reconciliation of the contingent consideration and warrants measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows:

 

 

 

Warrants

 

 

Contingent Consideration

 

Balance at December 31, 2015

 

$

3,770

 

 

$

59,846

 

Additions

 

 

 

 

 

 

Remeasurement

 

 

47

 

 

 

7,705

 

Balance at September 30, 2016

 

$

3,817

 

 

$

67,551

 

 

 

(7)

Inventory

Inventory consists of the following:

 

 

 

September 30, 2016

 

 

December 31, 2015

 

Raw materials

 

$

2,098

 

 

$

2,933

 

Work in process

 

 

3,149

 

 

 

4,340

 

Finished goods

 

 

4,565

 

 

 

1,709

 

 

 

$

9,812

 

 

$

8,982

 

 

 

14


RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to unaudited Consolidated Financial Statements

(amounts in thousands, except share and per share data)

 

(8)

Property, Plant and Equipment

Property, plant and equipment consists of the following:

 

 

 

September 30, 2016

 

 

December 31, 2015

 

Land

 

$

3,263

 

 

$

3,263

 

Building and improvements

 

 

16,689

 

 

 

16,367

 

Furniture, office and computer equipment

 

 

3,341

 

 

 

2,888

 

Vehicles

 

 

30

 

 

 

30

 

Manufacturing equipment

 

 

21,050

 

 

 

19,504

 

 

 

 

44,373

 

 

 

42,052

 

Less: accumulated depreciation and amortization

 

 

7,886

 

 

 

4,130

 

Property, plant and equipment, net

 

$

36,487

 

 

$

37,922

 

 

Depreciation expense for the three and nine months ended September 30, 2016 was $1,245 and $3,756, respectively, and $1,445 and $2,730 for the three and nine months ended September 30, 2015, respectively.

 

 

(9)

Intangible Assets

The following represents the balance of the intangible assets at September 30, 2016:

 

 

 

Cost

 

 

Accumulated

Amortization

 

 

Net

Intangible

Assets

 

Royalties and contract manufacturing relationships

 

$

15,500

 

 

$

3,821

 

 

$

11,679

 

In-process research and development

 

 

26,400

 

 

 

 

 

 

26,400

 

Total

 

$

41,900

 

 

$

3,821

 

 

$

38,079

 

 

The following represents the balance of the intangible assets at December 31, 2015:

 

 

 

Cost

 

 

Accumulated

Amortization

 

 

Net

Intangible

Assets

 

Royalties and contract manufacturing relationships

 

$

15,500

 

 

$

1,884

 

 

$

13,616

 

In-process research and development

 

 

26,400

 

 

 

 

 

 

26,400

 

Total

 

$

41,900

 

 

$

1,884

 

 

$

40,016

 

 

Amortization expense for the three and nine months ended September 30, 2016 was $646 and $1,937, respectively, and $646 and $1,238 for the three and nine months ended September 30, 2015, respectively. The amortization expense for each of the next five years will be $2,583 per year.

 

 

(10)

Accrued Expenses

Accrued expenses consist of the following:

 

 

 

September 30, 2016

 

 

December 31, 2015

 

Clinical trial and related costs

 

$

2,265

 

 

$

1,364

 

Professional and consulting fees

 

 

429

 

 

 

863

 

Payroll and related costs

 

 

3,555

 

 

 

697

 

Income tax payable

 

 

106

 

 

 

86

 

Deferred revenue

 

 

747

 

 

 

 

 

Other

 

 

755

 

 

 

408

 

 

 

$

7,857

 

 

$

3,418

 

 

15


RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to unaudited Consolidated Financial Statements

(amounts in thousands, except share and per share data)

 

 

(11)

Long-Term Debt

The Company financed the Gainesville Transaction with cash on hand and a $50,000 five-year senior secured term loan, pursuant to a credit agreement, entered into on April 10, 2015, with OrbiMed Royalty Opportunities II, LP, or OrbiMed. The unpaid principal amount under the credit agreement is due and payable on the five year anniversary of the loan provided thereunder by OrbiMed. The credit agreement also provides for certain mandatory prepayment events, including a quarterly excess cash flow prepayment requirement at OrbiMed’s request. The Company may make voluntary prepayments in whole or in part, subject to: (i) on or prior to the 36 month anniversary of the closing of the credit agreement, payment of a buy-out premium amount equal to (A) for full prepayments of the unpaid principal amount, $75,000 less all previously prepaid principal amounts and all previously paid interest or (B) for partial prepayments of the unpaid principal amount, 0.5 times the partial prepayment amount less interest payments previously paid in respect to the partial prepayment amount and (ii) after the 36 month anniversary of the closing of the credit agreement, payment of an exit fee amount equal to 10% of the amount of any prepayments. As defined by the agreement, based upon the Gainesville business financial results, OrbiMed has the option to require the Company to prepay a portion of the loan balance based upon an Excess Cash Flow. No payments under this option shall be subject to the buy-out premium. As of September 30, 2016, the Company has paid $22,653 of principal payments on the senior secured loan from the Excess Cash Flow calculation.

The credit agreement carries interest at three-month LIBOR plus 14.0% with a 1.0% floor. The Company’s obligations under the senior term loan are secured by substantially all of the Company’s assets.

The credit agreement contains certain usual and customary affirmative and negative covenants, as well as financial covenants that the Company will need to satisfy on a monthly and quarterly basis. As of September 30, 2016, the Company was in compliance with the covenants.

The Company issued to OrbiMed a warrant to purchase 294,928 shares of common stock, with an exercise price of $3.28 per share. The warrant is exercisable through April 10, 2022. The initial fair value of the warrant of $2,861 was recorded as debt issuance costs.

Debt issuance costs related to the term loan of $4,579, including the initial warrant fair value of $2,861, are being amortized to interest expense over the five year term of the loan and netted with the loan principal amount. The unamortized balance of debt issuance costs is $3,111 as of September 30, 2016. As of September 30, 2016, the long-term debt balance is comprised of the following:

 

Principal balance outstanding

 

$

27,347

 

Unamortized deferred issuance costs

 

 

(3,111

)

 

 

 

24,236

 

Current portion

 

 

(1,498

)

 

 

$

22,738

 

 

The Company has estimated the amount of the Excess Cash Flow payments that could be payable within one year of September 30, 2016 upon request of OrbiMed and has classified that amount as a current debt in the accompanying consolidated balance sheet.

 

 

(12)

Commitments and Contingencies

 

(a)

License and Supply Agreements

In August 2008, the Company entered into a License Agreement with Orion Corporation, or Orion, for Non-Injectable Dexmedetomidine. Under the Dexmedetomidine License Agreement, the Company was granted an exclusive license under the Orion Know-How and Cygnus/Farmos Patent to commercialize products worldwide, except for Europe, Turkey, and the CIS (currently includes Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine and Uzbekistan), referred to herein as the Territory, and to use, research, develop, and manufacture products worldwide solely for purposes of commercialization. The Company also entered into a supply agreement with Orion in which Orion will supply the Company with Dexmedetomidine at no cost during the product development period and upon U.S. Food and Drug Administration, or FDA, approval, Orion will supply commercial quantities of bulk active pharmaceutical ingredient Dexmedetomidine, for commercialization.

16


RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to unaudited Consolidated Financial Statements

(amounts in thousands, except share and per share data)

 

The Company will pay up to €20,500 ($23,038 as of September 30, 2016) in contingent milestones upon the achievement of certain regulatory and commercialization events. There are also royalty payments to be paid at varying percentages of net sales, which generally range from 10% to 20% depending on annual sales levels. No amounts were due or payable during 2016 or 2015.

In July 2010, the Company entered into a License Agreement with Orion for Fadolmidine. Under the Fadolmidine License Agreement, the Company was granted an exclusive license under the Orion Know-How and Orion Patent Rights (each as defined in the License Agreement) to commercialize products in the Territory, and to use, research, develop, and manufacture products worldwide solely for purposes of commercialization.

The Company will pay up to an additional €12,200 ($13,710 as of September 30, 2016) in contingent milestones upon the achievement of certain regulatory and commercialization events. There are also royalty payments to be paid at varying percentages, which range from 10% to 15% of net sales. No amounts were due or payable during 2016 or 2015.

As of September 30, 2016, the Company had $3,663 of non-cancellable commitments at the Gainesville facility for capital expenditures and material and services.

 

(b)

Agreements with Alkermes

Pursuant to the purchase and sale agreement governing the Gainesville Transaction, the Company agreed to pay to Alkermes up to $120.0 million in milestone payments upon the achievement of certain regulatory and net sales milestones related to injectable meloxicam and royalties on future product sales of injectable meloxicam between 10% and 12% (subject to a 30% reduction when no longer covered by patent).

In July 2015, the Company also entered into a Development, Manufacturing and Supply Agreement, or Supply Agreement, with Alkermes (through a subsidiary of Alkermes), pursuant to which Alkermes will (i) provide clinical and, if elected by the Company, commercial bulk supplies of injectable meloxicam formulation and (ii) provide development services with respect to the Chemistry, Manufacturing and Controls section of a NDA for injectable meloxicam. Pursuant to the Supply Agreement, Alkermes will supply the Company with such quantities of bulk injectable meloxicam formulation as shall be reasonably required for the completion of clinical trials of injectable meloxicam, subject to a maximum of eight clinical batches in any twelve-month period unless otherwise agreed by the parties. The Company has elected to have Alkermes supply its initial commercial requirements of bulk injectable meloxicam formulation. During the term of the Supply Agreement, the Company will purchase its clinical and commercial supplies of bulk injectable meloxicam formulation exclusively from Alkermes, subject to certain exceptions, for a period of time.

 

(c)

Litigation

The Company is involved, from time to time, in various claims and legal proceedings arising in the ordinary course of its business. Except as disclosed below, the Company is not currently a party to any such claims or proceedings that, if decided adversely to it, would either individually or in the aggregate have a material adverse effect on its business, financial condition or results of operations.

As part of the Gainesville Transaction, the Company acquired the rights to Zohydro ER®, which the Company licenses to its commercial partner, Pernix Therapeutics Holdings, Inc., or Pernix, in the United States, and which is subject to ongoing intellectual property litigation and proceedings.

Zohydro ER® is subject to six paragraph IV certifications, two of which were filed in 2014 by Actavis plc, or Actavis, and Alvogen Pine Brook, Inc., or Alvogen, regarding the filing of Abbreviated NDAs, or ANDAs, with the FDA for a generic version of Zohydro ER®, one of which was filed in April 2015, by Actavis regarding the filing of a supplemental ANDA, or sANDA, and another three of which were filed in November 2015 and October 2016, by Actavis, and in December 2015, by Alvogen regarding one of our recently issued patents relating to a formulation of Zohydro ER®. These certification notices allege that three U.S. patents listed in the FDA’s Orange Book for Zohydro ER®, with an expiration date of November 2019 and September 2034, will not be infringed by Actavis’ or Alvogen’s proposed products, are invalid and/or are unenforceable. In 2014, Davrata Limited (a subsidiary of Alkermes and the Company’s predecessor in interest) filed suit against each of Actavis and Alvogen in the U.S. District Court for the District of Delaware based on the ANDAs, and in 2015, the Company filed suit against Actavis in the U.S. District Court of the District of Delaware based on the sANDA.  On September 29, 2016, the Company entered into a settlement agreement with Alvogen pursuant to which the case against Alvogen was dismissed.

17


RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to unaudited Consolidated Financial Statements

(amounts in thousands, except share and per share data)

 

Under the Company’s license agreement with Pernix, we have the right to control the enforcement of the Company’s patents and related proceedings involving Zohydro ER® and any prospective generic entrant, and Pernix has the obligation to reimburse the Company for all reasonable costs of paragraph IV certification actions. The Company intends to vigorously enforce the intellectual property rights relating to Zohydro ER®, but cannot predict the outcome of these matters or guarantee the outcome of any litigation or interference.

 

 

(13)

Capital Structure

 

(a)

Common Stock

The Company is authorized to issue 50,000,000 shares of common stock, with a par value of $0.01 per share.

On March 12, 2014, the Company completed an initial public offering, or IPO, in which the Company sold 4,312,500 shares of common stock at $8.00 per share resulting in gross proceeds of $34,500. In connection with the IPO, the Company paid $4,244 in underwriting discounts, commissions and offering costs resulting in net proceeds of $30,256. Also in connection with the IPO, all of the outstanding shares of the Company’s Series A Redeemable Convertible Preferred Stock, or Series A Stock, including accreted dividends, and Bridge Notes, including accrued interest, were converted into common stock.

On July 7, 2015, the Company closed a Private Placement with certain accredited investors in which the Company sold 1,379,311 shares of common stock at a price per share of $11.60, for net proceeds of $14,812 after deducting the placement agents fee.   

On August 19, 2016, the Company closed an underwritten public offering in which the company sold 1,986,666 shares of common stock at a price per share of $7.50 for net proceeds of $13,367 after deducting underwriting commissions and offering expenses.    

 

(b)

Common Stock Purchase Agreement

On February 2, 2015, the Company entered into a Common Stock Purchase Agreement, or the Purchase Agreement, with Aspire Capital Fund, LLC, or Aspire Capital, pursuant to which Aspire Capital is committed to purchase, at the Company’s election, up to an aggregate of $10,000 of shares of the Company’s common stock over the 24 month term of the Purchase Agreement. On the execution of the Purchase Agreement, the Company issued 96,463 shares of common stock to Aspire Capital with a fair value of $285, as consideration for entering in the Purchase Agreement. In addition, the Company incurred $229 of costs in connection with the Aspire Capital Purchase Agreement, which, along with the fair value of the common stock has been recorded as deferred equity costs. As of September 30, 2016, the Company has sold 643,940 shares of common stock under the Purchase Agreement for proceeds of $4,175.

 

(c)

Preferred Stock

The Company is authorized to issue 10,000,000 shares of preferred stock, with a par value of $0.01 per share. As of September 30, 2016, no preferred stock was issued or outstanding.

 

(d)

Warrants

As of September 30, 2016, the Company had the following warrants outstanding to purchase shares of the Company’s common stock:

 

Number of Shares

 

Exercise Price per Share

 

 

Expiration Date

140,000

 

$

12.00

 

 

March 2018

350,000

 

$

19.46

 

 

April 2022

294,928

 

$

3.28

 

 

April 2022

 

The warrant to purchase 350,000 shares is liability classified since it contains a contingent net cash settlement feature. The warrant to purchase 294,928 shares is liability classified since it contains an anti-dilution provision. The fair value of both warrants will be remeasured through settlement or expiration with changes in fair value recognized as a period charge within the statement of operations.      

 

 

18


RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to unaudited Consolidated Financial Statements

(amounts in thousands, except share and per share data)

 

(14)

Stock-Based Compensation

The Company established the 2008 Stock Option Plan, or the 2008 Plan, which allows for the granting of common stock awards, stock appreciation rights, and incentive and nonqualified stock options to purchase shares of the Company’s common stock to designated employees, nonemployee directors, and consultants and advisors. As of September 30, 2016, no stock appreciation rights have been issued. Subsequent to adoption, the 2008 Plan was amended to increase the authorized number of shares available for grant to 444,000 shares of common stock. In October 2013, the Company established the 2013 Equity Incentive Plan, or the 2013 Plan, which allows for the grant of stock options, stock appreciation rights and stock awards for a total of 600,000 shares of common stock. In June 2015, the Company’s shareholders approved the Amended and Restated Equity Incentive Plan, or the A&R Plan, which amended and restated the 2013 Plan and increased the aggregate amount of shares available for issuance to 2,000,000. In December 2015, per the “evergreen” provision of the A&R Plan, the number of shares authorized for issuance under the plan was increased by 461,215 shares which represented 5% of outstanding shares of common stock of the Company on December 1, 2015. The total number of shares authorized for issuance under the A&R Plan as of September 30, 2016 is 2,461,215.

Stock options are exercisable generally for a period of 10 years from the date of grant and generally vest over four years. As of September 30, 2016, 855,022 shares and 174 shares are available for future grants under the A&R Plan and 2008 Plan, respectively.

The weighted average grant-date fair value of the options awarded to employees during the nine months ended September 30, 2016 and 2015 was $5.02 and $8.07, respectively. The fair value of the options was estimated on the date of grant using a Black-Scholes option pricing model with the following assumptions:

 

 

 

September 30, 2016

 

 

September 30, 2015

 

Range of expected option life

 

6 years

 

 

6-7 years

 

Expected volatility

 

 

79.95%

 

 

 

78.98%

 

Risk-free interest rate

 

1.07-1.91%

 

 

2.06-2.51%

 

Expected dividend yield

 

 

 

 

 

 

 

The following table summarizes stock option activity during the nine months ended September 30, 2016:

 

 

 

Number of

shares

 

 

Weighted

average

exercise

price

 

 

Weighted

average

remaining

contractual life

Balance, December 31, 2015

 

 

2,042,194

 

 

$

7.00

 

 

 

Granted

 

 

323,700

 

 

 

7.28

 

 

 

Exercised

 

 

 

 

 

 

 

 

Expired/forfeited/cancelled

 

 

(22,075

)

 

 

11.03

 

 

 

Balance, September 30, 2016

 

 

2,343,819

 

 

$

7.00

 

 

7.4 years

Vested

 

 

1,196,833

 

 

$

6.15

 

 

6.0 years

Vested and expected to vest

 

 

2,303,250

 

 

$

6.79

 

 

7.4 years

 

Included in the table above are 364,000 options granted outside the plan. The grants were made pursuant to the NASDAQ inducement grant exception in accordance with NASDAQ Listing Rule 5635(c)(4).  Also included in the table above are 105,300 performance based options granted to the Chief Executive Officer in December 2015.  As of September 30, 2016, 52,650 of these options vested upon meeting the first of two performance targets resulting in compensation expense of $275.