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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 June 30, 2021

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

For the transition period from                      to                     

Commission File Number: 001-36329

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.)

 

 

1 E. Uwchlan Ave, Suite 112, Exton, Pennsylvania

19341

(Address of principal executive offices)

(Zip Code)

(770) 534-8239

(Registrant’s telephone number, including area code)

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

 

Title of each class

 

Trading symbol

 

Name of exchange on which registered

Common Stock, par value $0.01

 

REPH

 

The NASDAQ Stock Market LLC

 

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

None

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

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

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

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☒

Smaller reporting company

 

Emerging growth company

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

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

As of August 2, 2021, there were 46,515,916 shares of common stock, par value $0.01 per share, outstanding.

 


 

TABLE OF CONTENTS

 

 

Page

PART I. FINANCIAL INFORMATION

 

1

Item 1. Financial statements

 

1

Item 2. Management's discussion and analysis of financial condition and results of operations

 

16

Item 3. Quantitative and qualitative disclosures about market risk

 

23

Item 4. Controls and procedures

 

24

PART II. OTHER INFORMATION

 

25

Item 1. Legal proceedings

 

25

Item 1A. Risk factors

 

25

Item 2. Unregistered sales of equity securities and use of proceeds

 

25

Item 3. Defaults upon senior securities

 

25

Item 4. Mine safety disclosures

 

25

Item 5. Other information

 

25

Item 6. Exhibits

 

25

SIGNATURES

 

27

 

 


 

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)

June 30, 2021

 

 

December 31, 2020

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

45,724

 

 

$

23,760

 

Accounts receivable

 

12,813

 

 

 

9,033

 

Contract asset

 

7,350

 

 

 

7,330

 

Inventory

 

7,878

 

 

 

11,612

 

Prepaid expenses and other current assets

 

2,028

 

 

 

2,334

 

Total current assets

 

75,793

 

 

 

54,069

 

Property, plant and equipment, net

 

41,867

 

 

 

43,841

 

Intangible assets, net

 

 

 

 

700

 

Goodwill

 

4,319

 

 

 

4,319

 

Other assets

 

451

 

 

 

486

 

Total assets

$

122,430

 

 

$

103,415

 

Liabilities and shareholders’ equity (deficit)

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

$

1,155

 

 

$

1,804

 

Current portion of debt

 

 

 

 

1,474

 

Accrued expenses and other current liabilities

 

4,148

 

 

 

4,525

 

Total current liabilities

 

5,303

 

 

 

7,803

 

Debt, net

 

89,780

 

 

 

108,097

 

Other liabilities

 

931

 

 

 

1,615

 

Total liabilities

 

96,014

 

 

 

117,515

 

Commitments and contingencies (note 8)

 

 

 

 

 

Shareholders’ equity (deficit):

 

 

 

 

 

Preferred stock, $0.01 par value. 10,000,000 shares authorized, none issued or outstanding

 

 

 

 

 

Common stock, $0.01 par value. 95,000,000 shares authorized, 46,501,849 and 28,601,358 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively

 

465

 

 

 

286

 

Additional paid-in capital

 

265,862

 

 

 

219,998

 

Accumulated deficit

 

(239,911

)

 

 

(234,384

)

Total shareholders’ equity (deficit)

 

26,416

 

 

 

(14,100

)

Total liabilities and shareholders’ equity (deficit)

$

122,430

 

 

$

103,415

 

 

See accompanying notes to consolidated financial statements.

1


 

RECRO PHARMA, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)

 

Three months ended June 30,

 

 

Six months ended June 30,

 

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

2021

 

 

2020

 

 

2021

 

 

2020

 

Revenue

$

18,017

 

 

$

15,522

 

 

$

34,820

 

 

$

37,299

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of sales (excluding amortization of intangible assets)

 

12,334

 

 

 

11,634

 

 

 

26,671

 

 

 

29,888

 

Selling, general and administrative

 

3,787

 

 

 

4,259

 

 

 

8,470

 

 

 

9,705

 

Amortization of intangible assets

 

54

 

 

 

646

 

 

 

700

 

 

 

1,292

 

Total operating expenses

 

16,175

 

 

 

16,539

 

 

 

35,841

 

 

 

40,885

 

Operating income (loss)

 

1,842

 

 

 

(1,017

)

 

 

(1,021

)

 

 

(3,586

)

Interest expense

 

(3,960

)

 

 

(4,995

)

 

 

(7,858

)

 

 

(10,118

)

Gain on extinguishment of debt

 

3,352

 

 

 

 

 

 

3,352

 

 

 

 

Net income (loss)

$

1,234

 

 

$

(6,012

)

 

$

(5,527

)

 

$

(13,704

)

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per share, basic and diluted

$

0.03

 

 

$

(0.25

)

 

$

(0.16

)

 

$

(0.58

)

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

Basic

 

39,018,730

 

 

 

23,577,255

 

 

 

34,403,935

 

 

 

23,486,011

 

Diluted

 

39,352,054

 

 

 

23,577,255

 

 

 

34,403,935

 

 

 

23,486,011

 

 

See accompanying notes to consolidated financial statements.

2


 

RECRO PHARMA, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity (Deficit)

(Unaudited)

 

 

Common stock

 

 

Additional paid-in capital

 

 

Accumulated deficit

 

 

Total 

 

(amounts in thousands, except share data)

 

Shares 

 

 

Amount 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2020

 

 

28,601,358

 

 

$

286

 

 

$

219,998

 

 

$

(234,384

)

 

$

(14,100

)

Issuance of common stock, net of costs

 

 

2,202,420

 

 

 

22

 

 

 

9,318

 

 

 

 

 

 

9,340

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

3,133

 

 

 

 

 

 

3,133

 

Vesting of restricted stock units, net

 

 

209,541

 

 

 

2

 

 

 

(338

)

 

 

 

 

 

(336

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(6,761

)

 

 

(6,761

)

Balance, March 31, 2021

 

 

31,013,319

 

 

 

310

 

 

 

232,111

 

 

 

(241,145

)

 

 

(8,724

)

Issuance of common stock, net of costs

 

 

15,333,332

 

 

 

153

 

 

 

31,950

 

 

 

 

 

 

32,103

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,929

 

 

 

 

 

 

1,929

 

Vesting of restricted stock units, net

 

 

155,198

 

 

 

2

 

 

 

(128

)

 

 

 

 

 

(126

)

Net income

 

 

 

 

 

 

 

 

 

 

 

1,234

 

 

 

1,234

 

Balance, June 30, 2021

 

 

46,501,849

 

 

$

465

 

 

$

265,862

 

 

$

(239,911

)

 

$

26,416

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2019

 

 

23,312,928

 

 

$

233

 

 

$

199,938

 

 

$

(206,883

)

 

$

(6,712

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

3,231

 

 

 

 

 

 

3,231

 

Exercise of stock options, net

 

 

37,063

 

 

 

 

 

 

(105

)

 

 

 

 

 

(105

)

Vesting of restricted stock units, net

 

 

105,242

 

 

 

1

 

 

 

(917

)

 

 

 

 

 

(916

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(7,692

)

 

 

(7,692

)

Balance, March 31, 2020

 

 

23,455,233

 

 

 

234

 

 

 

202,147

 

 

 

(214,575

)

 

 

(12,194

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

2,446

 

 

 

 

 

 

2,446

 

Exercise of stock options, net

 

 

105,606

 

 

 

1

 

 

 

378

 

 

 

 

 

 

379

 

Vesting of restricted stock units, net

 

 

78,067

 

 

 

1

 

 

 

(31

)

 

 

 

 

 

(30

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(6,012

)

 

 

(6,012

)

Balance, June 30, 2020

 

 

23,638,906

 

 

$

236

 

 

$

204,940

 

 

$

(220,587

)

 

$

(15,411

)

See accompanying notes to consolidated financial statements.

3


 

RECRO PHARMA, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

 

Six months ended June 30,

 

(amounts in thousands)

2021

 

 

2020

 

Cash flows from operating activities, continuing operations:

 

 

 

 

 

Net loss

$

(5,527

)

 

$

(13,704

)

Adjustments to reconcile net loss to net cash provided by operating activities, continuing operations:

 

 

 

 

 

Stock-based compensation expense

 

5,062

 

 

 

5,677

 

Non-cash interest expense

 

3,080

 

 

 

2,919

 

Depreciation expense

 

3,033

 

 

 

3,008

 

Amortization of intangible assets

 

700

 

 

 

1,292

 

Gain on extinguishment of debt

 

(3,352

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(3,780

)

 

 

2,805

 

Contract asset

 

(20

)

 

 

(60

)

Inventory

 

3,734

 

 

 

3,300

 

Prepaid expenses and other assets

 

426

 

 

 

(200

)

Accounts payable, accrued expenses and other liabilities

 

(621

)

 

 

(631

)

Net cash provided by operating activities, continuing operations

 

2,735

 

 

 

4,406

 

Cash flows from investing activities

 

 

 

 

 

Purchases of property and equipment

 

(2,112

)

 

 

(2,239

)

Net cash used in investing activities

 

(2,112

)

 

 

(2,239

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of common stock, net of costs

 

32,103

 

 

 

 

Proceeds from issuance of debt

 

 

 

 

4,416

 

Repayments of debt

 

(10,100

)

 

 

(1,100

)

Payment of deferred financing costs

 

(200

)

 

 

 

Net payments related to vesting of restricted stock units

 

(462

)

 

 

(1,181

)

Net proceeds related to exercise of stock options

 

 

 

 

509

 

Net cash provided by financing activities

 

21,341

 

 

 

2,644

 

Net increase in cash and cash equivalents from continuing operations

 

21,964

 

 

 

4,811

 

Cash flows used in discontinued operating activities

 

 

 

 

(1,172

)

Cash and cash equivalents, beginning of period

 

23,760

 

 

 

19,148

 

Cash and cash equivalents, end of period

$

45,724

 

 

$

22,787

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid for interest

$

4,833

 

 

$

7,228

 

Issuance of common stock to reduce debt principal and accrued exit fees

 

6,060

 

 

 

 

Issuance of common stock to settle interest obligations

 

3,211

 

 

 

 

Purchases of property, plant and equipment included in accrued expenses and accounts payable

 

191

 

 

 

1,293

 

See accompanying notes to consolidated financial statements.

4


 

RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to consolidated financial statements

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

(Unaudited)

(1)Background

Recro Pharma, Inc. (the “Company”) was incorporated in the Commonwealth of Pennsylvania on November 15, 2007. The Company is a dedicated contract development and manufacturing organization (“CDMO”) solving complex formulation and manufacturing challenges for companies developing oral solid dose drug products. It leverages its formulation and development expertise to develop and manufacture pharmaceutical products using proprietary delivery technologies and know-how for commercial partners who commercialize or plan to commercialize these products. The Company operates in one segment.

The Company has incurred net losses since inception and has an accumulated deficit of $239,911 as of June 30, 2021, which is primarily related to the activities of its former research and development business, which was spun-out in 2019. The Company’s future operations are highly dependent on the continued profitability of its manufacturing operations. Management believes that it is probable that the Company will be able to meet its obligations as they become due within at least one year after the date the financial statements are issued.

(2)Summary of significant accounting principles

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 (“U.S. GAAP”) for interim financial information. In accordance with Securities and Exchange Commission ("SEC") rules for interim financial statements, certain information required by U.S. GAAP may be condensed or omitted. 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 results for the interim periods. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.

The accompanying unaudited interim consolidated financial statements should be read in conjunction with the annual audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Use of estimates

The preparation of financial statements and the notes to the 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.

Cash and cash equivalents

Cash and cash equivalents represent cash in banks and highly liquid short-term investments that have maturities of three months or less when acquired. These highly liquid short-term investments are both readily convertible to known amounts of cash and so near to their maturity that they present insignificant risk of changes in value because of the changes in interest rates.

Property, plant and equipment

Property, plant 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, office and computer equipment; six to ten years for manufacturing equipment; 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. The Company reviews the carrying value of property, plant and equipment for recoverability whenever events occur or changes in circumstances indicate that the carrying amount of individual assets or asset groups may not be recoverable.

5


 

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 analysis for goodwill consists of an optional qualitative assessment potentially followed by a quantitative analysis. If the Company determines that the carrying value of its reporting unit exceeds its fair value, an impairment charge is recorded for the excess.

The Company performs its annual goodwill impairment test as of November 30th, or whenever an event or change in circumstances occurs that would require reassessment of the recoverability of goodwill. In performing the evaluation, the Company assesses qualitative factors such as overall financial performance, anticipated changes in industry and market conditions, and competitive environments.

Definite-lived intangible assets are amortized on a straight-line basis over their estimated useful life. The Company is required to review the carrying value of definite-lived intangible assets for recoverability whenever events occur or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.

Revenue recognition

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

Manufacturing

Manufacturing and other related services revenue is recognized upon transfer of control of a product to a customer, generally upon shipment, based on a transaction price that reflects the consideration the Company expects to be entitled to as specified in the agreement with the commercial partner, which could include pricing and volume-based adjustments.

Profit-sharing

In addition to manufacturing and packaging revenue, certain customer agreements may have intellectual property sales-based profit-sharing and/or royalties consideration, collectively referred to as profit-sharing, computed on the net product sales of the commercial partner. Profit-sharing revenues are generally recognized under the terms of the applicable license, development and/or supply agreement. For arrangements that include sales-based profit-sharing where the license for intellectual property is deemed to be the predominant item to which the profit-sharing relates, the Company recognizes revenue when the related sales occur by the commercial partner. For arrangements that include sales-based profit-sharing where the license for intellectual property is not deemed to be the predominant item to which the profit-sharing relates, the Company recognizes revenue upon transfer of control of the manufactured product. In these cases, significant judgment is required to calculate the estimated variable consideration from such profit-sharing using the expected value method based on historical commercial partner pricing and deductions. Estimated variable consideration is partially constrained due to the uncertainty of price adjustments made by the Company’s commercial partners, which are outside of the Company’s control. Factors causing price adjustments by the Company’s commercial partners include increased competition in the products’ markets, mix of volume between the commercial partners’ customers, and changes in government pricing.

Research and development

Research and development revenue includes services associated with formulation, process development, clinical trials materials services, as well as custom development of manufacturing processes and analytical methods for a customer’s non-clinical, clinical and commercial products. Such revenues are recognized at a point in time or over time depending on the nature and particular facts and circumstances associated with the contract terms.

In contracts that specify milestones, the Company evaluates whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. Milestone payments related to arrangements under which the Company has continuing performance obligations are deferred and recognized over the period of performance. Milestone payments that are not within the Company’s control, such as submission for approval to regulators by a commercial partner or approvals from regulators, are not considered probable of being achieved until those submissions are submitted by the customer or approvals are received.

6


 

In contracts that require revenue recognition over time, the Company utilizes input or output methods, depending on the specifics of the contract, that compare the cumulative work-in-process to date to the most current estimates for the entire performance obligation. Under these contracts, the customer typically owns the product details and process, which have no alternative use. These projects are customized to each customer to meet its specifications and typically only one performance obligation is included. Each project represents a distinct service that is sold separately and has stand-alone value to the customer. The customer also retains control of its product as the product is being created or enhanced by the Company’s services and can make changes to its process or specifications upon request.

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 manages its cash and cash equivalents based on established guidelines relative to diversification and maturities to maintain safety and liquidity.

The Company’s accounts receivable balances are primarily concentrated among three customers. If any of these customers’ receivable balances should be deemed uncollectible, it could have a material adverse effect on the Company’s results of operations and financial condition.

The Company is dependent on its relationships with a small number of commercial partners, with its three largest customers having generated 90% or more of its revenues for the periods presented.

Stock-based compensation expense

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. The Company accounts for forfeitures as they occur.

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/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,” which is based on the average of the vesting tranches and the contractual life of each grant. For stock price volatility, the Company uses the historical volatility of its publicly traded stock in order to estimate future stock price trends. The risk-free interest rate is based on U.S. Treasury notes with a term approximating the expected life of the option.

Upon exercise of stock options or vesting of restricted stock units, the holder may elect to cover tax withholdings by forfeiting shares of an equivalent value. In such cases, the Company issues net new shares to the holder, pays the tax withholding on behalf of the participant and presents the payment similar to a capital distribution: a reduction to additional paid-in-capital and a financing cash outflow in the consolidated financial statements.

For non-employee stock-based awards, 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.

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 basis, operating losses 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. A full valuation allowance was recorded as of June 30, 2021 and December 31, 2020.

7


 

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 does not anticipate significant changes in the amount of unrecognized income tax benefits over the next year.

Income or loss per share

Basic income or loss per share is determined by dividing net income or loss (the numerator) by the weighted average common shares outstanding during the period (the denominator).

To calculate diluted income or loss per share, the numerator and denominator are adjusted to eliminate the income or loss and the dilutive effects on shares, respectively, caused by outstanding common stock options, warrants and unvested restricted stock units, using the treasury stock method, if the inclusion of such instruments would be dilutive.

For the three months ended June 30, 2021, there was no difference in the net income used to calculate basic and diluted per share results. The following table reconciles the difference in weighted average shares outstanding used for basic and diluted per share results:

Weighted average shares outstanding, basic

 

39,018,730

 

Dilutive impact of:

 

 

Restricted stock units

 

218,253

 

Stock options

 

4,024

 

Warrants

 

111,047

 

Weighted average shares outstanding, diluted

 

39,352,054

 

For the six months ended June 30, 2021 and for both of the 2020 periods presented, the Company incurred a net loss. In periods of net loss, the inclusion of dilutive securities would be antidilutive because it would reduce the amount of loss incurred per share. As a result, no additional dilutive shares were included in diluted loss per share, and there were no differences between basic and diluted loss per share.

The following table presents the potentially dilutive securities that were excluded from the computations of diluted loss per share:

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Restricted stock units

 

540,942

 

 

 

913,220

 

 

 

456,344

 

 

 

744,185

 

Stock options

 

4,465,348

 

 

 

3,586,726

 

 

 

4,337,299

 

 

 

2,278,411

 

Warrants

 

348,664

 

 

 

348,664

 

 

 

348,664

 

 

 

348,664

 

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

Recently adopted accounting pronouncements

On January 1, 2020, the Company adopted ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement,” or ASU 2018-13. ASU 2018-13 removes, modifies and adds certain disclosure requirements in Topic 820 “Fair Value Measurement”. There was no impact upon adoption because the Company is not currently required to provide any of the disclosures impacted by the new standard.

On January 1, 2021, the Company adopted ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” or ASU 2016-13, a new standard for measuring expected credit losses. That guidance impacts the measurement of doubtful accounts receivable, among other things. There was no impact upon adoption because the Company does not currently have any significant exposure to credit losses. 

8


 

(3)Fair value of financial instruments

The Company follows the provisions of FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” for fair value measurement recognition and disclosure purposes for its financial assets and financial liabilities that are remeasured and reported at fair value each reporting period. The Company measures certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents, short-term investments and certain warrants. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of financial assets and financial liabilities and their placement within the fair value hierarchy. Categorization is based on a three-tier valuation hierarchy, which prioritizes the inputs used in measuring fair value, as follows:

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2: Inputs that are other than quoted prices in active markets for identical assets and liabilities, inputs that are quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are either directly or indirectly observable; and
Level 3: Unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

Items measured at fair value on a recurring basis

Cash equivalents of $41,411 at June 30, 2021 and $6,583 at December 31, 2020 consisted entirely of money market mutual funds whose fair value were determined using Level 1 measurements.

Fair value disclosures

The Company follows the disclosure provisions of FASB ASC Topic 825, “Financial Instruments” (ASC 825), for disclosure purposes for financial assets and financial liabilities that are not measured at fair value. As of June 30, 2021, the financial assets and liabilities recorded on the consolidated balance sheets that are not measured at fair value on a recurring basis include accounts receivable, accounts payable and accrued expenses. The carrying values of these accounts approximate fair value due to their short-term nature.

The fair value of long-term debt, where a quoted market price is not available, is evaluated based on, among other factors, interest rates currently available to the Company for debt with similar terms, remaining payments and considerations of the Company’s creditworthiness. The Company determined that the recorded book value of its debt, a level 2 measurement, approximated fair value at June 30, 2021 due to the February 2021 amendment of the Credit Agreement and taking into consideration management's current evaluation of market conditions.

(4)Inventory

Inventory is stated at the lower of cost or net realizable value. Included in inventory are raw materials and work-in-process used in the production of commercial products. Items are issued out of inventory using the first-in, first-out method.

Inventory was as follows:

 

 

June 30, 2021

 

 

December 31, 2020

 

Raw materials

$

2,749

 

 

$

3,373

 

Work in process

 

1,633

 

 

 

5,061

 

Finished goods

 

3,826

 

 

 

3,544

 

Inventory, prior to provision

 

8,208

 

 

 

11,978

 

Provision for inventory obsolescence

 

(330

)

 

 

(366

)

Inventory

$

7,878

 

 

$

11,612

 

 

Adjustments to inventory are determined at the raw materials, work-in-process, and finished good levels to reflect obsolescence or impaired balances. Inventory is primarily ordered to meet specific customer orders and largely reflects demand. Factors influencing inventory obsolescence include changes in demand, product life cycle, product pricing, physical deterioration and quality concerns.

9


 

(5)Property, plant and equipment

Property, plant and equipment consists of the following:

 

 

June 30, 2021

 

 

December 31, 2020

 

Land

$

3,263

 

 

$

3,263

 

Building and improvements

 

20,947

 

 

 

20,924

 

Furniture, office and computer equipment

 

5,826

 

 

 

5,879

 

Manufacturing equipment

 

45,339

 

 

 

39,349

 

Construction in progress

 

614

 

 

 

5,568

 

Property, plant and equipment, gross

 

75,989

 

 

 

74,983

 

Less: accumulated depreciation

 

(34,122

)

 

 

(31,142

)

Property, plant and equipment, net

$

41,867

 

 

$

43,841

 

 

In the first six months of 2021, $65 of interest expense was capitalized to construction in process.

(6)Intangible assets

The following table presents the components of the profit-sharing and contract manufacturing relationships asset, which was the only class of intangible asset for the periods presented:

 

 

June 30, 2021

 

 

December 31, 2020

 

Cost

$

15,500

 

 

$

15,500

 

Accumulated amortization

 

(15,500

)

 

 

(14,800

)

Net intangible assets

$

 

 

$

700

 

 

These assets were amortized over a six-year estimated useful life that ended in April 2021.

(7)Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consist of the following:

 

 

June 30, 2021

 

 

December 31, 2020

 

Payroll and related costs

$

1,931

 

 

$

1,481

 

Current portion of contract liabilities (see note 11)

 

1,068

 

 

 

1,447

 

Property, plant and equipment

 

105

 

 

 

551

 

Professional and consulting fees

 

201

 

 

 

432

 

Other

 

843

 

 

 

614

 

Total

$

4,148

 

 

$

4,525

 

 

(8)Commitments and contingencies

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.

10


 

On May 31, 2018, a securities class action lawsuit (the “Securities Litigation”) was filed against the Company and certain of its officers and directors (collectively, the "Defendants") in the U.S. District Court for the Eastern District of Pennsylvania (the "Court") (Case No. 2:18-cv-02279-MMB) that purported to state a claim for alleged violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10(b)(5) promulgated thereunder, based on statements made by the Company concerning the New Drug Application (“NDA”) for IV meloxicam. The complaint seeks unspecified damages, interest, attorneys’ fees and other costs. On December 10, 2018, the lead plaintiff filed an amended complaint that asserted the same claims and sought the same relief but included new allegations and named additional officers as defendants. On February 8, 2019, the Company filed a motion to dismiss the amended complaint in its entirety, which the lead plaintiff opposed on April 9, 2019. On May 9, 2019, the Company filed its response and briefing was completed on the motion to dismiss. In response to questions from the Court, the parties submitted supplemental briefs regarding the motion to dismiss the amended complaint during the fall of 2019. On February 18, 2020, the motion to dismiss was granted by the Court without prejudice. On April 25, 2020, the plaintiff filed a second amended complaint. The Company filed a motion to dismiss the second amended complaint on June 18, 2020. The plaintiff filed an opposition to the Company’s motion to dismiss on August 17, 2020. On September 16, 2020, the Company filed a reply in support of its motion to dismiss. On March 1, 2021, the Court denied the Company’s second motion to dismiss. On June 21, 2021, the Defendants filed an answer and affirmative defenses to the second amended complaint. The parties are in the beginning stages of discovery. A Preliminary Pretrial Conference before the Court occurred on August 3, 2021.

In connection with the separation of the Company's former acute care research and development business into a new standalone entity named Baudax Bio, Inc. ("Baudax Bio"), Baudax Bio accepted assignment by the Company of all of its obligations in connection with the Securities Litigation and agreed to indemnify it for all liabilities related to the Securities Litigation. The Company and Baudax Bio believe that the lawsuit is without merit and intend to vigorously defend against it, unless and until a resolution satisfactory to the Company can be achieved.

Purchase commitments

As of June 30, 2021, the Company had outstanding cancelable and non-cancelable purchase commitments in the aggregate amount of $5,512 related to inventory, capital expenditures and other goods and services.

Employment agreements and certain other contingencies

The Company has entered into employment agreements with each of its named executive officers that provide for, among other things, severance commitments of up to $1,250 should the Company terminate the named executive officers for convenience or if certain events occur following a change in control. In addition, the Company is subject to other contingencies of up to $3,566 in the aggregate if certain events occur following a change in control.

(9)Debt

The carrying value of debt consists of the following as of June 30, 2021:

 

 

Term loans under Credit Agreement

 

Principal balance outstanding

$

100,000

 

Unamortized deferred issuance costs

 

(10,795

)

Exit fee accretion

 

575

 

Total

 

89,780

 

 

The principal balance and exit fee due of $101,000 matures and must be repaid in 2023.

Term loans under Credit Agreement

The Company is currently party to a credit agreement (the “Credit Agreement”) with Athyrium Opportunities III Acquisition LP (“Athyrium”). The Credit Agreement has been fully drawn in the form of $48,000 of term A loans and $52,000 of term B loans, all of which mature on March 31, 2023.

11


 

The Credit Agreement has been amended from time to time. An amendment in February 2021 resulted in a reduction of $16,000 principal, a reduction of 1.5% in the stated interest rate, and a $160 settlement of accrued exit fees in exchange for $10,100 of cash and $9,271, or 2,202,420 shares, of common stock issued, as well as certain other changes to the terms of the debt. Of the total common stock issued, $6,060 was applied to the principal balance and accrued exit fee, and substantially all of the remainder was added to unamortized deferred financing costs and will be amortized as interest over the remaining term of the debt.

The term loans under the Credit Agreement included a rate of interest equal to the three-month LIBOR rate, with a 1% floor plus 8.25% per annum. The term loans require the Company to pay a 1% exit fee on all repayments. At June 30, 2021, the aggregate exit fee payable was $1,000, and the cumulative exit fee accreted was $575. The exit fees are being accreted to the carrying amount of the debt using the effective interest method over the term of the loan. In addition, if the Company makes any prepayments prior to maturity, the Company would be subject to the following prepayment premiums as a percentage of the amount repaid: (i) term A loans at 2.5% through March 31, 2022 with no penalty thereafter; and (ii) term B loans at 5.0% through March 31, 2022 and 2.5% thereafter.

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, including maintaining a permitted net leverage ratio (which is the Company’s indebtedness under the Credit Agreement, net of cash and cash equivalents, divided by EBITDA, each as defined in the Credit Agreement) and liquidity amount. As of June 30, 2021, the Company was in compliance with its covenants under the Credit Agreement.

In connection with the Credit Agreement, the Company issued warrants to each of Athyrium and its affiliate, Athyrium Opportunities II Acquisition LP (“Athyrium II”), to purchase an aggregate of 348,664 shares of the Company’s common stock with an exercise price of $1.73 per share. See note 10 for additional information. The warrants are exercisable through November 17, 2024.

In connection with the Credit Agreement and five subsequent amendments, the Company has paid financing costs, has incurred costs to record and subsequently to adjust the value of the warrants described above and has been accreting the exit fee described above. These costs are being recognized in interest expense using the effective interest method over the term of the Credit Agreement, resulting in non-cash interest expense of $1,618 and $1,459 in the second quarters of 2021 and 2020, respectively, and $3,080 and $2,919 in the first six months of 2021 and 2020, respectively.

At June 30, 2021, the overall effective interest rate, including cash paid for interest and non-cash interest expense, was 15.65%.

Paycheck Protection Program (“PPP”) note

In May 2020, the Company entered into a $4,416 promissory note with PNC Bank under the Small Business Administration (“SBA”) Paycheck Protection Program of the Coronavirus Aid, Relief and Economic Security Act of 2020 (the “PPP Note”). Shortly after entering into the note, the Company prepaid $1,100 of principal to comply with guidance from the SBA that limited the amount that could be borrowed at that time. The note had a two-year term and a stated rate of interest of 1.0% per annum, which accrued and would have become payable beginning September 2021.

In October 2020, the Company submitted a forgiveness application for the PPP Note, and in June 2021, the PPP Note and all accrued interest thereon was forgiven. Upon receiving the decision, the Company recorded a gain on extinguishment of debt of $3,352, consisting of forgiveness of $3,316 of principal and $36 of accrued interest.

12


 

(10)Shareholders’ equity or deficit

Capital raises

The following table presents the Company’s capital raises since its initial public offering:

 

 

Date or period

 

Shares of common stock issued

 

 

Gross proceeds

 

 

Offering expenses

 

 

Net proceeds

 

Initial public offering

March 12, 2014

 

 

4,312,500

 

 

$

34,500

 

 

$

(4,244

)

 

$

30,256

 

Private placement

July 7, 2015

 

 

1,379,311

 

 

 

16,000

 

 

 

(1,188

)

 

 

14,812

 

Underwritten public offering

August 19, 2016

 

 

1,986,666

 

 

 

14,900

 

 

 

(1,533

)

 

 

13,367

 

Underwritten public offering

December 16, 2016

 

 

6,670,000

 

 

 

40,020

 

 

 

(3,132

)

 

 

36,888

 

2018 common stock purchase agreement with Aspire Capital

Year ended December 31, 2018

 

 

1,950,000

 

 

 

16,999

 

 

 

 

 

 

16,999

 

2019 common stock purchase agreement with Aspire Capital

Fourth quarter 2020

 

 

4,690,972

 

 

 

11,172

 

 

 

(78

)

 

 

11,094

 

Underwritten public offering

May 12, 2021

 

 

15,333,332

 

 

 

34,500

 

 

 

(2,397

)

 

 

32,103

 

 

Aspire common stock purchase agreement

The Company is currently party to an amended common stock purchase agreement with Aspire Capital Fund LLC (“Aspire Capital”) originally entered into during 2019, and most recently amended in February 2021 (as amended, the “2019 Common Stock Purchase Agreement”). The 2019 Common Stock Purchase Agreement provides that, upon the terms and subject to the conditions and limitations set forth in the agreement, Aspire Capital is committed to purchase, at the Company’s sole election, up to an aggregate value of $41,172 in shares of common stock. As of June 30, 2021, there is availability to issue up to $30,000 or 6,199,299 shares of common stock under the 2019 Common Stock Purchase Agreement.

Athyrium stock issuance agreement

In February 2021, the Company entered into a stock issuance agreement with Athyrium in connection with an amendment to its Credit Agreement. See note 9 for additional details.

Warrants

At June 30, 2021, warrants to purchase 348,664 shares of common stock were outstanding. The warrants are held by Athyrium, equity-classified, exercisable at $1.73 per share and expire in November 2024. See note 9 for additional details.

13


 

(11)Revenue recognition

Contract assets represent revenue recognized for performance obligations completed before an unconditional right to payment exists, and therefore invoicing or associated reporting from the customer regarding the computation of the net product sales has not yet occurred. Generally, the contract assets balance is impacted by the recognition of additional contract assets, offset by amounts invoiced to customers or actual net product sale amounts reported by the commercial partner for the period.

The following table presents changes in contract assets and liabilities:

 

 

Contract assets

 

 

Contract liabilities

 

Balance at December 31, 2020

$

7,330

 

 

$

2,695

 

Changes to the beginning balance of contract assets arising from:

 

 

 

 

 

Reclassification to receivables as a result of rights to consideration becoming unconditional

 

(8,825

)

 

 

 

Changes in estimate

 

1,502

 

 

 

 

Contract assets recognized since beginning of period, net of reclassification to receivables and changes in estimates

 

7,343

 

 

 

 

Changes to contract liabilities:

 

 

 

 

 

Cash received in advance of contract performance

 

 

 

 

2,212

 

Revenue recognized

 

 

 

 

(3,234

)

Balance at June 30, 2021

$

7,350

 

 

$

1,673

 

Less: noncurrent portion

 

 

 

 

(605

)

Current portion

$

7,350

 

 

$

1,068

 

 

The following table disaggregates revenue by timing of revenue recognition:

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Point in time

$

16,439

 

 

$