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: March 31, 2017

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act.

 

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

As of May 10, 2017, there were 19,050,966 shares of common stock, par value $0.01 per share, outstanding.

 

 

 


 

TABLE OF CONTENTS

Index

 

 

 

 

 

 

Page

 

 

 

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

 

22

 

 

 

 

 

 

 

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)

 

March 31, 2017

 

 

December 31, 2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

19,485

 

 

$

64,483

 

Short-term investments

 

 

36,060

 

 

 

 

Accounts receivable

 

 

12,278

 

 

 

10,411

 

Inventory

 

 

7,810

 

 

 

8,746

 

Prepaid expenses and other current assets

 

 

1,636

 

 

 

1,118

 

Total current assets

 

 

77,269

 

 

 

84,758

 

Property, plant and equipment, net

 

 

37,277

 

 

 

37,300

 

Deferred income taxes

 

 

18,295

 

 

 

17,060

 

Intangible assets, net

 

 

36,787

 

 

 

37,433

 

Goodwill

 

 

6,446

 

 

 

6,446

 

Total assets

 

$

176,074

 

 

$

182,997

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,954

 

 

$

4,132

 

Accrued expenses

 

 

8,137

 

 

 

9,893

 

Current portion of long-term debt, net

 

 

1,851

 

 

 

2,236

 

Total current liabilities

 

 

12,942

 

 

 

16,261

 

Long-term debt, net

 

 

22,695

 

 

 

22,152

 

Warrants

 

 

3,688

 

 

 

3,397

 

Contingent consideration

 

 

72,388

 

 

 

69,574

 

Total liabilities

 

 

111,713

 

 

 

111,384

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

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, 19,050,966 shares at March 31, 2017 and 19,043,216 shares at

   December 31, 2016

 

 

190

 

 

 

190

 

Additional paid-in capital

 

 

133,583

 

 

 

132,691

 

Accumulated deficit

 

 

(69,355

)

 

 

(61,268

)

Accumulated other comprehensive loss

 

 

(57

)

 

 

 

Total shareholders’ equity

 

 

64,361

 

 

 

71,613

 

Total liabilities and shareholders’ equity

 

$

176,074

 

 

$

182,997

 

 

See accompanying notes to consolidated financial statements.

3


 

RECRO PHARMA, INC. AND SUBSIDIARIES

Consolidated Statements of Operations and Comprehensive Loss

(unaudited)

 

 

 

For the Three Months Ended March 31,

 

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

 

2017

 

 

2016

 

Revenue:

 

 

 

 

 

 

 

 

Manufacturing, royalty and profit sharing revenue

 

$

18,128

 

 

$

17,138

 

Research and development revenue

 

 

614

 

 

 

604

 

Total revenues

 

 

18,742

 

 

 

17,742

 

Operating expenses:

 

 

 

 

 

 

 

 

Cost of sales (excluding amortization of intangible assets)

 

 

10,498

 

 

 

10,271

 

Research and development

 

 

7,763

 

 

 

7,808

 

General and administrative

 

 

4,032

 

 

 

2,658

 

Amortization of intangible assets

 

 

646

 

 

 

646

 

Change in warrant valuation

 

 

291

 

 

 

(1,594

)

Change in contingent consideration valuation

 

 

2,814

 

 

 

2,978

 

Total operating expenses

 

 

26,044

 

 

 

22,767

 

Operating loss

 

 

(7,302

)

 

 

(5,025

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

 

105

 

 

 

9

 

Interest expense

 

 

(1,183

)

 

 

(1,512

)

Net loss before income taxes

 

 

(8,380

)

 

 

(6,528

)

Income tax benefit (expense)

 

 

293

 

 

 

(11

)

Net loss

 

$

(8,087

)

 

$

(6,539

)

Basic and diluted net loss per common share

 

$

(0.42

)

 

$

(0.71

)

Weighted average basic and diluted common shares outstanding

 

 

19,049,416

 

 

 

9,251,948

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

Unrealized loss on available-for-sale securities

 

 

(57

)

 

 

 

Comprehensive loss

 

$

(8,144

)

 

$

(6,539

)

 

See accompanying notes to consolidated financial statements.

4


 

RECRO PHARMA, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

For the Three Months Ended March 31, 2017

(unaudited)

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

Accumulated other

 

 

 

 

 

(amounts in thousands, except share data)

 

Shares

 

 

Amount

 

 

paid-in

capital

 

 

Accumulated

Deficit

 

 

comprehensive

loss

 

 

Total

 

Balance, December 31, 2016

 

 

19,043,216

 

 

 

190

 

 

 

132,691

 

 

 

(61,268

)

 

 

 

 

 

71,613

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

892

 

 

 

 

 

 

 

 

 

892

 

Issuance of restricted stock units

 

 

7,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(57

)

 

 

(57

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

(8,087

)

 

 

 

 

 

(8,087

)

Balance, March 31, 2017

 

 

19,050,966

 

 

$

190

 

 

$

133,583

 

 

$

(69,355

)

 

$

(57

)

 

$

64,361

 

 

See accompanying notes to consolidated financial statements.

5


 

RECRO PHARMA, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited)

 

 

 

For the Three Months Ended March 31,

 

(amounts in thousands)

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(8,087

)

 

$

(6,539

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

892

 

 

 

701

 

Non-cash interest expense

 

 

158

 

 

 

296

 

Depreciation expense

 

 

1,196

 

 

 

1,271

 

Amortization

 

 

646

 

 

 

646

 

Change in warrant valuation

 

 

291

 

 

 

(1,594

)

Change in contingent consideration valuation

 

 

2,814

 

 

 

2,978

 

Deferred income taxes

 

 

(1,235

)

 

 

(406

)

Changes in operating assets and liabilities, net of effect of acquisition:

 

 

 

 

 

 

 

 

Inventory

 

 

936

 

 

 

1,344

 

Prepaid expenses and other current assets

 

 

(518

)

 

 

(177

)

Accounts receivable

 

 

(1,867

)

 

 

(3,589

)

Accounts payable and accrued expenses

 

 

(2,363

)

 

 

2,624

 

Net cash used in operating activities

 

 

(7,137

)

 

 

(2,445

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(1,744

)

 

 

(344

)

Purchase of short-term investments

 

 

(36,117

)

 

 

 

Net cash used in investing activities

 

 

(37,861

)

 

 

(344

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from Aspire facility

 

 

 

 

 

560

 

Payments on long-term debt

 

 

 

 

 

(2,633

)

Net cash used in financing activities

 

 

 

 

 

(2,073

)

Net decrease in cash and cash equivalents

 

 

(44,998

)

 

 

(4,862

)

Cash and cash equivalents, beginning of year

 

 

64,483

 

 

 

19,779

 

Cash and cash equivalents, end of year

 

$

19,485

 

 

$

14,917

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

1,026

 

 

$

1,215

 

Unrealized loss on available-for-sale securities

 

$

57

 

 

$

 

Purchase of property, plant and equipment included in accrued expenses and accounts

   payable

 

$

237

 

 

$

 

 

See accompanying notes to consolidated financial statements.

 

 

 

6


 

RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to the 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 specialty pharmaceutical company that operates through two business divisions: an Acute Care division and a revenue-generating contract development and manufacturing, or CDMO division. Each of these divisions are deemed to be reportable segments (see Note 3(n) and Note 14). The Acute Care division is primarily focused on developing innovative products for hospital and related settings, and the CDMO division leverages the Company’s formulation expertise to develop and manufacture pharmaceutical products using the Company’s proprietary delivery technologies for commercial partners who commercialize or plan to commercialize these products. On April 10, 2015, the Company acquired from Alkermes plc, or Alkermes, worldwide rights to intravenous and intramuscular, or injectable meloxicam, a proprietary, Phase III-ready, long-acting preferential COX-2 inhibitor for the management of moderate to severe pain, as well as a contract manufacturing facility, royalty and formulation business in Gainesville, Georgia. The acquisition is referred to herein as the Gainesville Transaction.

(2)

Development-Stage Risks and Liquidity

 

The Company has incurred losses from operations since inception and has an accumulated deficit of $69,355 as of March 31, 2017. Though its CDMO segment has been profitable, the Company anticipates incurring additional losses 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, including the payment of the Gainesville Transaction contingent payments, which may become due upon achievement of certain development and commercialization milestones for meloxicam. The Company’s future operations are highly dependent on a combination of factors, including (i) the continued profitability of the CDMO segment; (ii) the timely and successful completion of additional financing and/or alternative sources of capital, debt or 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. Management believes that the Company’s existing cash as of March 31, 2017 will be sufficient to fund its operations through mid-year 2018.

(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 March 31, 2017 and its results of operations and cash flows for the three months ended March 31, 2017 and 2016. Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. 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, 2016 included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

 

(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.

7


RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

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

 

 

(c)

Cash, Cash Equivalents and Short-term Investments

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 March 31, 2017 and 2016 consisted of money market mutual funds and U.S. Government and agency bonds. Short-term investments consisted of U.S. Government and agency bonds with maturities of less than one year.

The Company classifies all of its short-term investments as “available-for-sale.” In general, these investments are free of trading restrictions. The Company carries these investments at fair value, based on quoted market prices or other readily available market information. Unrealized gains and losses are included in accumulated other comprehensive loss, which is reflected as a separate component of shareholders’ equity in the Company’s consolidated balance sheets. Gains and losses are recognized when realized in the Company’s consolidated statements of income. When the Company has determined that an other-than-temporary decline in fair value has occurred, the amount of the decline that is related to a credit loss is recognized in income. Gains and losses are determined using the specific identification method.

 

 

(d)

Fair Value of Financial Instruments

Management believes that the carrying amounts of the Company’s financial instruments, including cash equivalents, short-term investments, 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 and net realizable 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: three to ten years for furniture and office equipment; six to ten or more 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 cost 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.

8


RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

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

 

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.

In addition to manufacturing and packaging 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 the Company’s CDMO commercial partner and when 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. In agreements which specify milestones, the related revenues are recognized upon the achievement of a substantive milestone.

 

(i)

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash, cash equivalents, short-term investments 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 expenses 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 IPR&D 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

9


RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

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

 

result, if factors change and/or 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.

Non-employee 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, which is known as 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.

 

(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 net loss per common share is determined by dividing net loss by the weighted average common shares outstanding during the period. For all periods presented, the outstanding common stock options, unvested restricted stock units and warrants have been excluded from the calculation of diluted net loss per share 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 March 31, 2017 and 2016, as they would be anti-dilutive:

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Options and restricted stock units outstanding

 

 

3,337,461

 

 

 

2,224,123

 

Warrants

 

 

784,928

 

 

 

784,928

 

 

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

 

(n)

Segment Information

The Company determined its reportable segments based on its strategic business units, the commonalities among the products and services within each segment and the manner in which the Company reviews and evaluates operating performance. The Company has identified CDMO and Acute Care as reportable segments. Segment disclosures are included in Note 14. Segment operating profit (loss) is defined as segment revenue less segment operating expenses

10


RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

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

 

(segment operating expenses consist of general and administrative expenses, research and development expenses, and the change in valuation of contingent consideration and warrants). The following items are excluded from segment operating profit (loss): interest income and expense, and income tax benefit (expense). Segment assets are those assets and liabilities that are recorded and reported by segment operations. Segment operating capital employed represents segment assets less segment liabilities.

 

(o)

Recent Accounting Pronouncements

In January 2017, the Financial Accounting Standards Board, or FASB, issued updated guidance on the annual goodwill impairment test. The amended guidance allows companies to apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The amendments of the Accounting Standards Update, or ASU, are effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the effect that this guidance may have on its consolidated financial statements.

In August 2016, the 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 February 2016, the FASB issued updated guidance regarding the accounting for and disclosures of leases. This new ASU represents a wholesale change to lease accounting and introduces a lease model that brings most leases on the balance sheet. It also eliminates the required use of bright-line tests in current U.S. GAAP for determining lease classification. The new guidance is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect that this guidance may have on its consolidated financial statements.

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 updated guidance is effective for annual and interim periods beginning after December 15, 2016. The Company adopted the guidance effective January 1, 2017. The guidance did not have a material impact to the consolidated financial satements upon adoption.

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 adopted the guidance effective January 1, 2017. The guidance did not have a material impact to the consolidated financial satements upon adoption.

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

11


RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

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

 

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 new standard permits two methods of adoption: the full retrospective method, which requires the standard to be applied to each prior period presented, or the modified retrospective method, which requires the cumulative effect of adoption to be recognized as an adjustment to opening retained earnings in the period of adoption. The Company currently anticipates adopting the standard using the modified retrospective method. The Company plans to complete an analysis of existing contracts with its customers and to assess the differences in accounting for such contracts under ASU 2014-09 compared with current revenue accounting standards by the end of the third quarter. The new standard will result in additional revenue-related disclosures in the footnotes to the consolidated financial statements. The Company will continue to assess new customer contracts during 2017. Adoption of this standard will require changes to business processes, systems and controls to support the additional required disclosures. The Company is in the process of identifying such changes.

(4)

Acquisition of Gainesville Facility and Meloxicam

On April 10, 2015, the Company completed the Gainesville Transaction. The consideration paid in connection with the Acquisition consisted of $50.0 million cash at closing, a $4.0 million 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 $125.0 million in milestone payments (including, at the Company’s election, either (i) $10 million upon a new drug application, or NDA, filing and $30 million upon regulatory approval or (ii) an aggregate of $45 million upon regulatory approval, as well as net sales milestones related to injectable meloxicam) and a percentage of future product net sales related to injectable meloxicam between 10% and 12% (subject to a 30% reduction when no longer covered by patent). 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 5 for further information regarding fair value).

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 NDA for meloxicam and the related regulatory approval or one payment upon regulatory approval. The second component consists of three potential payments, based on the achievement of specified annual revenue targets. The third component consists of a royalty payment for a defined term on future meloxicam net sales.

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.

(5)

Fair Value of Financial Instruments

The Company follows 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)

12


RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to the 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, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds

 

$

37,079

 

 

$

 

 

$

 

U.S. Government and agency bonds

 

 

20,517

 

 

 

 

 

 

 

Cash equivalents

 

$

57,596

 

 

$

 

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

 

 

 

 

 

 

 

$

3,397

 

Contingent consideration

 

 

 

 

 

 

 

 

69,574

 

 

 

$

 

 

$

 

 

$

72,971

 

At March 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds

 

$

18,028

 

 

$

 

 

$

 

Total cash equivalents

 

$

18,028

 

 

$

 

 

$

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agency bonds

 

$

36,060

 

 

$

 

 

$

 

Total financial assets

 

$

54,088

 

 

$

 

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

 

 

 

 

 

 

 

$

3,688

 

Contingent consideration

 

 

 

 

 

 

 

 

72,388

 

 

 

$

 

 

$

 

 

$

76,076

 

 

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

 

 

 

Warrants

 

 

Contingent Consideration

 

Balance at December 31, 2016

 

$

3,397

 

 

$

69,574

 

Additions

 

 

 

 

 

 

Remeasurement

 

 

291

 

 

 

2,814

 

Balance at March 31, 2017

 

$

3,688

 

 

$

72,388

 

 

(6)

Inventory

Inventory consists of the following:

 

 

 

March 31, 2017

 

 

December 31, 2016

 

Raw materials

 

$

2,361

 

 

$

2,557

 

Work in process

 

 

2,833

 

 

 

4,396

 

Finished goods

 

 

2,616

 

 

 

1,793

 

 

 

$

7,810

 

 

$

8,746

 

 

 

13


RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

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

 

(7)

Property, Plant and Equipment

Property, plant and equipment consists of the following:

 

 

 

March 31, 2017

 

 

December 31, 2016

 

Land

 

$

3,263

 

 

$

3,263

 

Building and improvements

 

 

15,756

 

 

 

15,613

 

Furniture, office and computer equipment

 

 

3,973

 

 

 

3,811

 

Vehicles

 

 

30

 

 

 

30

 

Manufacturing equipment

 

 

22,832

 

 

 

21,508

 

Construction in Progress

 

 

1,742

 

 

 

2,198

 

 

 

 

47,596

 

 

 

46,423

 

Less: accumulated depreciation and amortization

 

 

10,319

 

 

 

9,123

 

Property, plant and equipment, net

 

$

37,277

 

 

$

37,300

 

 

Depreciation expense for the three months ended March 31, 2017 and 2016 was $1,196 and $1,271.

(8)

Intangible Assets

The following represents the balance of the intangible assets at March 31, 2017:

 

 

 

Cost

 

 

Accumulated Amortization

 

 

Net Intangible Assets

 

Royalties and contract manufacturing relationships:

 

$

15,500

 

 

$

5,113

 

 

$

10,387

 

In-process research and development

 

 

26,400

 

 

 

 

 

 

26,400

 

Total

 

$

41,900

 

 

$

5,113

 

 

$

36,787

 

 

The following represents the balance of intangible assets at December 31, 2016:

 

 

 

Cost

 

 

Accumulated Amortization

 

 

Net Intangible Assets

 

Royalties and contract manufacturing relationships:

 

$

15,500

 

 

$

4,467

 

 

$

11,033

 

In-process research and development

 

 

26,400

 

 

 

 

 

 

26,400

 

Total

 

$

41,900

 

 

$

4,467

 

 

$

37,433

 

Amortization expense for each of the three months ended March 31, 2017 and 2016 was $646. As of March 31, 2017, future amortization expense is as follows:

 

 

Amortization

 

April - December 2017

$

1,937

 

2018

 

2,583

 

2019

 

2,583

 

2020

 

2,583

 

2021

 

701

 

Total

$

10,387

 

 

14


RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

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

 

(9)

Accrued Expenses

Accrued expenses consist of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Clinical trial and related costs

 

$

2,415

 

 

$

2,564

 

Professional and consulting fees

 

 

604

 

 

 

360

 

Payroll and related costs

 

 

2,153

 

 

 

4,547

 

Property plant and equipment

 

 

201

 

 

 

720

 

Deferred revenue

 

 

796

 

 

 

418

 

Income tax payable

 

 

1,252

 

 

 

311

 

Other

 

 

716

 

 

 

973

 

 

 

$

8,137

 

 

$

9,893

 

 

(10)

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 April 10, 2020, 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 CDMO segment 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 March 31, 2017, 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 March 31, 2017, 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 $2,801 as of March 31, 2017. As of March 31, 2017, the long-term debt balance is comprised of the following:

 

Principal balance outstanding

 

$

27,347

 

Unamortized deferred issuance costs

 

 

(2,801

)

 

 

$

24,546

 

Current portion

 

 

(1,851

)

 

 

$

22,695

 

 

The Company has estimated the amount of the Excess Cash Flow payments that could be payable within one year of March 31, 2017 upon request of OrbiMed and has classified that amount as a current debt in the accompanying consolidated balance sheet.

15


RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

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

 

(11)

Commitments and Contingencies

 

(a)

License and Supply Agreements

In August 2008, the Company entered into a License Agreement with Orion Corporation (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 in the territory, as defined in such agreement, and to use, research, develop and manufacture 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 United States Food and Drug Administration, or FDA, approval, Orion will supply commercial quantities of bulk active pharmaceutical ingredient Dexmedetomidine for commercialization.

The Company will pay up to €20,500 ($21.9 million as of March 31, 2017) 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 2017 or 2016.

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, as defined in such agreement, and to use, research, develop and manufacture products worldwide solely for purposes of commercialization.

The Company will pay up to an additional €12,200 ($13.1 million as of March 31, 2017) 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 2017 or 2016.

As of March 31, 2017, the Company had $4,866 of non-cancellable commitments at our CDMO segment 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 an additional $125.0 million in milestone payments (including, at the Company’s election, either (i) $10 million upon NDA filing and $30 million upon regulatory approval or (ii) an aggregate of $45 million upon regulatory approval, as well as 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 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 commercial bulk supplies of injectable meloxicam formulation and (ii) provide development services with respect to the Chemistry, Manufacturing and Controls section of an 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. 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.

16


RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

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

 

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 for the District of Delaware based on the sANDA. In addition, in April 2015, the U.S. Patent and Trademark Office, or the USPTO, declared an interference between one of the Company’s patent applications relating to a dosage form of Zohydro ER® and two Purdue Pharma, LP, or Purdue, applications. On April 29, 2016, the USPTO found the Company’s claims and the Purdue claims involved in the interference to be invalid. Purdue appealed this decision to the U.S. Court of Appeals for the Federal Circuit on June 28, 2016.

Under the Company’s license agreement with Pernix, the Company has 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. On September 29, 2016, the Company entered into a settlement agreement with Alvogen pursuant to which the case against Alvogen was dismissed. In February 2017, the District Court in the Actavis case ruled in the Company’s favor and enjoined Actavis from selling the proposed generic version of Zohydro ER®. Actavis has appealed this decision to the U.S. Court of Appeals for the Federal Circuit.

 

(d)

Leases

On January 1, 2017, the Company entered into a six-year lease for the Malvern facility that expires on December 31, 2022. In April 2017, the Company also entered into a three-year lease for office space in Dublin, Ireland that expires April 2020. Rent expense includes rent as well as additional operating and tenant improvement expenses.

As of March 31, 2017, future minimum lease payments (including our Dublin lease) excluding operating expenses and tenant improvements for the leases, are as follows:

 

 

Lease payments

 

2017

$

312

 

2018

 

496

 

2019

 

507

 

2020

 

395

 

2021

 

362

 

2022

 

373

 

Total

$

2,445

 

 

(12)

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, 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 of $11.60 per share, for net proceeds of $14,812. The Company paid the

17


RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

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

 

placement agents a fee equal to 6.0% of the aggregate gross proceeds from the private placement, plus reimbursement of certain expenses.

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. 

On December 16, 2016, the Company closed an underwritten public offering in which the company sold 6,670,000 shares of common stock at a price per share of $6.00, for net proceeds of $36,888 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 was 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 $253 of costs in connection with the Aspire Capital facility, which, along with the fair value of the common stock, has been recorded as deferred equity costs. During 2016, the Company sold 1,143,940 shares of common stock under the Purchase Agreement for $7,796. The agreement expired in February 2017.

 

(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 March 31, 2017, no preferred stock was issued or outstanding.

 

(d)

Warrants

As of March 31, 2017, 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. 

(13)

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, non-employee directors, and consultants and advisors. As of March 31, 2017, 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. On December 1st of each year, pursuant to the “Evergreen” provision of the A&R Plan, the number of shares available under the plan may be increased by the board of directors by an amount equal to 5% of the outstanding common stock on December 1st of that year. In December 2016 and 2015, the number of shares available for issuance under the A&R Plan was increased by 619,181 and 461,215, respectively. The total number of shares authorized for issuance under the A&R plan as of March 31, 2017 is 3,080,396.

18


RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

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

 

Stock options are exercisable generally for a period of 10 years from the date of grant and generally vest over four years. As of March 31, 2017, 479,874 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 three months ended March 31, 2017 and 2016 was $5.29 and $4.09, 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:

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Range of expected option life

 

6 years

 

 

6 years

 

Expected volatility

 

 

84.71%

 

 

 

74.82%

 

Risk-free interest rate

 

2.05-2.17%

 

 

1.78-1.91%

 

Expected dividend yield

 

 

 

 

 

 

 

The following table summarizes stock option activity during the three months ended March 31, 2017:

 

 

 

Number of

shares

 

 

Weighted

average

exercise

price

 

 

Weighted

average

remaining

contractual life

Balance, December 31, 2016

 

 

2,611,929

 

 

$

7.01

 

 

 

Granted

 

 

509,500

 

 

 

7.36

 

 

 

Exercised

 

 

 

 

 

 

 

 

Expired/forfeited/cancelled

 

 

(21,768

)

 

 

8.20

 

 

 

Balance, March 31, 2017

 

 

3,099,661

 

 

$

7.06

 

 

7.6 years

Vested

 

 

1,569,164

 

 

$

6.52

 

 

6.2 years

Vested and expected to vest

 

 

2,995,062

 

 

$

7.02

 

 

7.6 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).

The following table summarizes restricted stock units activity during the three months ended March 31, 2017.

 

 

Number of shares

 

Balance, December 31, 2016

 

7,750

 

Granted

 

238,550

 

Vested

 

(7,750

)

Expired/forfeited/cancelled

 

(750

)

Balance, March 31, 2017

 

237,800

 

Expected to vest

 

237,800

 

 

 

In January 2017, the Company granted 91,150 performance-based restricted stock units, or RSU’s, which vest based on attaining clinical and operational goals during 2017, as well as 147,400 time-based RSU’s, which vest over four years.

Stock-based compensation expense for the three months ended March 31, 2017 and 2016 was $892 and $701, respectively.

As of March 31, 2017, there was $10,693 of unrecognized compensation expense related to unvested options and RSUs that are expected to vest and will be expensed over a weighted average period of 2.9 years.

The aggregate intrinsic value represents the total amount by which the fair value of the common stock subject to options exceeds the exercise price of the related options. As of March 31, 2017, the aggregate intrinsic value of the vested and unvested options was $3,953 and $2,336, respectively.

(14)

Segment Reporting

The Company operates through two business segments: an Acute Care segment and a revenue-generating CDMO segment. The Acute Care segment is primarily focused on developing innovative products for hospital and related settings, and the CDMO

19


RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

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

 

segment leverages the Company’s formulation expertise to develop and manufacture pharmaceutical products using the Company’s proprietary delivery technologies for commercial partners who commercialize or plan to commercialize these products. Acute Care has no revenue, and its costs consist primarily of expenses incurred in conducting the Company’s clinical and preclinical studies, acquiring clinical trial materials, regulatory activities, personnel costs and pre-commercialization of meloxicam. CDMO revenue streams are derived from manufacturing, royalty and profit-sharing revenues, as well as CDMO’s research and development of services performed for commercial partners.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 3). The Company evaluates performance of its reportable segments based on revenue and operating income (loss). The Company does not allocate interest income, interest expense or income taxes to its operating segments.

The following table summarizes segment information as of and for the three months ended March 31, 2017 and 2016:

 

 

 

For the Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Revenues:

 

 

 

 

 

 

 

 

CDMO

 

$

18,742

 

 

$

17,742

 

Acute Care

 

 

 

 

 

 

Total

 

$

18,742

 

 

$

17,742

 

 

 

 

 

 

 

 

 

 

Operating income (loss):

 

 

 

 

 

 

 

 

CDMO

 

$

6,199

 

 

$

5,644

 

Acute Care

 

 

(13,501

)

 

 

(10,669

)

Total

 

$

(7,302

)

 

$

(5,025

)

 

 

 

 

 

 

 

 

 

Depreciation and amortization:

 

 

 

 

 

 

 

 

CDMO

 

$

1,837

 

 

$

1,917

 

Acute Care