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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 September 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 November 2, 2021, there were 46,614,535 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

 

19

Item 3. Quantitative and qualitative disclosures about market risk

 

28

Item 4. Controls and procedures

 

28

PART II. OTHER INFORMATION

 

29

Item 1. Legal proceedings

 

29

Item 1A. Risk factors

 

29

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

 

30

Item 3. Defaults upon senior securities

 

31

Item 4. Mine safety disclosures

 

31

Item 5. Other information

 

31

Item 6. Exhibits

 

31

SIGNATURES

 

33

 

 


 

PART I.FINANCIAL INFORMATION

Item 1.Financial statements

RECRO PHARMA, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

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

September 30, 2021

 

 

December 31, 2020

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

23,490

 

 

$

23,760

 

Accounts receivable

 

13,746

 

 

 

9,033

 

Contract asset

 

7,314

 

 

 

7,330

 

Inventory

 

9,440

 

 

 

11,612

 

Prepaid expenses and other current assets

 

2,101

 

 

 

2,334

 

Total current assets

 

56,091

 

 

 

54,069

 

Property, plant and equipment, net

 

50,021

 

 

 

43,841

 

Operating lease asset

 

5,963

 

 

 

486

 

Intangible assets, net

 

5,993

 

 

 

700

 

Goodwill

 

39,568

 

 

 

4,319

 

Other assets

 

146

 

 

 

 

Total assets

$

157,782

 

 

$

103,415

 

Liabilities and shareholders’ equity (deficit)

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

$

1,916

 

 

$

1,804

 

Current portion of debt

 

 

 

 

1,474

 

Current portion of related party debt

 

2,039

 

 

 

 

Current portion of operating lease liability

 

1,049

 

 

 

145

 

Accrued expenses and other current liabilities

 

7,856

 

 

 

4,380

 

Total current liabilities

 

12,860

 

 

 

7,803

 

Debt, net of current portion

 

91,029

 

 

 

108,097

 

Related party debt, net of current portion

 

3,259

 

 

 

 

Operating lease liability, net of current portion

 

4,947

 

 

 

366

 

Other liabilities

 

1,203

 

 

 

1,249

 

Total liabilities

 

113,298

 

 

 

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, 46,614,535 and 28,601,358 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively

 

466

 

 

 

286

 

Additional paid-in capital

 

287,415

 

 

 

219,998

 

Accumulated deficit

 

(243,397

)

 

 

(234,384

)

Total shareholders’ equity (deficit)

 

44,484

 

 

 

(14,100

)

Total liabilities and shareholders’ equity (deficit)

$

157,782

 

 

$

103,415

 

 

See accompanying notes to consolidated financial statements.

1


 

RECRO PHARMA, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

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

2021

 

 

2020

 

 

2021

 

 

2020

 

Revenue

$

18,237

 

 

$

19,287

 

 

$

53,057

 

 

$

56,586

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of sales (excluding amortization of intangible assets)

 

13,160

 

 

 

11,741

 

 

 

39,831

 

 

 

41,629

 

Selling, general and administrative

 

4,606

 

 

 

4,418

 

 

 

13,076

 

 

 

14,123

 

Amortization of intangible assets

 

135

 

 

 

646

 

 

 

835

 

 

 

1,938

 

Total operating expenses

 

17,901

 

 

 

16,805

 

 

 

53,742

 

 

 

57,690

 

Operating income (loss)

 

336

 

 

 

2,482

 

 

 

(685

)

 

 

(1,104

)

Interest expense

 

(3,822

)

 

 

(4,609

)

 

 

(11,680

)

 

 

(14,727

)

Gain on extinguishment of debt

 

 

 

 

 

 

 

3,352

 

 

 

 

Net loss

$

(3,486

)

 

$

(2,127

)

 

$

(9,013

)

 

$

(15,831

)

 

 

 

 

 

 

 

 

 

 

 

 

Loss per share, basic and diluted

$

(0.07

)

 

$

(0.09

)

 

$

(0.22

)

 

$

(0.67

)

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

51,416,388

 

 

 

23,641,973

 

 

 

40,137,069

 

 

 

23,538,378

 

Diluted

 

51,416,388

 

 

 

23,641,973

 

 

 

40,137,069

 

 

 

23,538,378

 

 

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

 

 

Accumulated

 

 

 

 

(amounts in thousands, except share data)

 

Shares

 

 

Amount

 

 

capital

 

 

deficit

 

 

Total

 

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

 

Fair value of shares issuable to former equity holders of IriSys, net of costs

 

 

 

 

 

 

 

 

20,328

 

 

 

 

 

 

20,328

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,319

 

 

 

 

 

 

1,319

 

Vesting of restricted stock units, net

 

 

112,606

 

 

 

1

 

 

 

(94

)

 

 

 

 

 

(93

)

Exercise of stock options

 

 

80

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(3,486

)

 

 

(3,486

)

Balance, September 30, 2021

 

 

46,614,535

 

 

$

466

 

 

$

287,415

 

 

$

(243,397

)

 

$

44,484

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

2,409

 

 

 

 

 

 

2,409

 

Vesting of restricted stock units, net

 

 

5,725

 

 

 

 

 

 

(4

)

 

 

 

 

 

(4

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(2,127

)

 

 

(2,127

)

Balance, September 30, 2020

 

 

23,644,631

 

 

$

236

 

 

$

207,345

 

 

$

(222,714

)

 

$

(15,133

)

See accompanying notes to consolidated financial statements.

3


 

RECRO PHARMA, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

 

Nine months ended September 30,

 

(amounts in thousands)

2021

 

 

2020

 

Cash flows from operating activities, continuing operations:

 

 

 

 

 

Net loss

$

(9,013

)

 

$

(15,831

)

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

 

 

 

 

 

Stock-based compensation expense

 

6,381

 

 

 

8,086

 

Non-cash interest expense

 

4,531

 

 

 

4,222

 

Depreciation expense

 

4,803

 

 

 

4,581

 

Amortization of intangible assets

 

835

 

 

 

1,938

 

Gain on extinguishment of debt

 

(3,352

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(3,801

)

 

 

755

 

Contract asset

 

521

 

 

 

(877

)

Inventory

 

2,857

 

 

 

3,492

 

Prepaid expenses and other assets

 

491

 

 

 

268

 

Accounts payable, accrued expenses and other liabilities

 

2,162

 

 

 

(234

)

Net cash provided by operating activities, continuing operations

 

6,415

 

 

 

6,400

 

Cash flows from investing activities

 

 

 

 

 

Acquisition of IriSys, net of cash acquired

 

(24,006

)

 

 

 

Purchases of property and equipment

 

(2,765

)

 

 

(5,451

)

Net cash used in investing activities

 

(26,771

)

 

 

(5,451

)

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 financing costs

 

(1,362

)

 

 

(78

)

Net payments related to vesting of restricted stock units

 

(555

)

 

 

(1,185

)

Net proceeds related to exercise of stock options

 

 

 

 

509

 

Net cash provided by financing activities

 

20,086

 

 

 

2,562

 

Net (decrease) increase in cash and cash equivalents from continuing operations

 

(270

)

 

 

3,511

 

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

$

23,490

 

 

$

21,487

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid for interest

$

7,462

 

 

$

10,662

 

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

 

158

 

 

 

686

 

Fair value of shares issuable to former equity holders of IriSys

 

20,931

 

 

 

 

Fair value of note issued to former equity holder of IriSys

 

5,240

 

 

 

 

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

 

6,060

 

 

 

 

Issuance of common stock to settle interest obligations

 

3,211

 

 

 

 

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 dedicated to solving complex formulation and manufacturing challenges primarily in small molecule therapeutic development. The Company leverages its formulation and development expertise to develop and manufacture pharmaceutical products using proprietary delivery technologies and know-how for partners who develop and 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 $243,397 as of September 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 financial statements included herein 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.

Business combinations

The Company measures the purchase price paid for acquired companies based on fair value and allocates that purchase price to the assets acquired and liabilities assumed based on their estimated fair values. Valuations are performed to assist in determining the fair values of assets acquired and liabilities assumed, which requires management to make estimates and assumptions, in particular with respect to intangible assets. Management makes estimates of fair value based upon assumptions believed to be reasonable. These estimates are based in part on historical experience and information obtained from the acquired companies and expectations of future cash flows. Costs associated with the transaction are expensed as incurred as selling, general and administrative expenses.

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 due to changes in interest rates.

5


 

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.

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 circumstance 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.

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.

6


 

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.

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. The Company's three largest customers generated 81% and 88% of its revenues for the three and nine months ended September 30, 2021, respectively.

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.

7


 

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 September 30, 2021 and December 31, 2020.

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). Additionally, the weighted average common shares outstanding for the three- and nine-month periods ended September 30, 2021 include 9,302,718 shares issuable to the former equity holders of IriSys since the acquisition date (see note 10).

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 all 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 September 30,

 

 

Nine months ended September 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Restricted stock units

 

708,965

 

 

 

896,537

 

 

 

377,437

 

 

 

703,679

 

Stock options

 

4,965,826

 

 

 

3,613,173

 

 

 

4,496,878

 

 

 

3,480,572

 

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” (“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” (“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


 

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting" ("ASU 2020-04"). This ASU provides temporary optional expedients and exceptions to the guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate and other interbank offered rates to alternative reference rates. In January 2021, the FASB issued ASU 2021-01, which refines the scope of Topic 848 and clarifies some of its guidance as part of the FASB’s monitoring of global reference rate activities. The new guidance was effective upon issuance, and the Company is allowed to elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact this standard will have on its consolidated financial statements. 

(3) Acquisition of IriSys

On August 13, 2021, the Company acquired all of the units of IriSys, LLC (“IriSys”) pursuant to a unit purchase agreement. IriSys provides contract pharmaceutical product development and manufacturing services, specializing in formulation research and development and good manufacturing practices of clinical trial materials and specialty pharmaceutical products. The acquisition advances the Company’s ongoing growth strategy and leads to key synergies within business development, clinical development and commercial scale-up, as well as a strong cultural alignment and fit between the companies.

The aggregate purchase price consideration was comprised of cash consideration, a subordinated promissory note and a contractual obligation to issue 9,302,718 shares of the Company’s common stock on the six-month anniversary of the closing, subject to a working capital adjustment. The following table summarizes the estimated consideration paid:

 

 August 13, 2021

 

Cash paid, net of cash acquired

$

24,006

 

Fair value of shares issuable to former equity holders of IriSys

 

20,931

 

Fair value of note with former equity holder of IriSys

 

5,240

 

Total estimated consideration

$

50,177

 

The fair value of the shares issuable was determined by using the price of the Company's common stock on the acquisition date, less a discount for lack of marketability due to the shares being unregistered shares of the Company. The fair value of the note was determined using a discounted cash flow analysis that incorporated an estimate of the market interest rate for debt of similar terms and credit risk on the acquisition date.

The Company incurred $1,211 in transaction costs related to the acquisition that were expensed as incurred and classified as selling, general and administrative expenses.

The following table summarizes the provisional fair values of the assets acquired and liabilities assumed at the date of acquisition:

9


 

 

 As of August 13, 2021

 

Assets acquired:

 

 

Accounts receivable

$

912

 

Contract assets

 

505

 

Inventory

 

685

 

Prepaid expenses and other assets

 

91

 

Property and equipment

 

9,304

 

Right of use assets

 

5,559

 

Intangible assets

 

6,128

 

Goodwill

 

35,249

 

Other noncurrent liabilities

 

146

 

    Total assets acquired

$

58,579

 

 

 

 

Liabilities assumed:

 

 

Accounts payable

$

730

 

Accrued expenses and other liabilities

 

1,512

 

Operating lease liability

 

5,559

 

Debt from finance loan

 

415

 

Other liabilities

 

186

 

     Total liabilities assumed

$

8,402

 

 

 

 

Net assets acquired

$

50,177

 

The amounts above represent the Company's current provisional fair value estimates and are subject to subsequent adjustments as additional information is obtained and valuations are finalized during the measurement period. The primary areas of estimates that are not yet finalized include the final outcome of the net working capital adjustment, certain tangible assets acquired and liabilities assumed, as well as the identifiable intangible assets. The purchase price was allocated to the tangible assets and identifiable intangible assets acquired and liabilities assumed based on their acquisition date estimated fair values. The identifiable intangible assets consisting of customer relationships, acquired backlog and trademark and tradename were assigned provisional fair values of $4,830, $957 and $341, respectively. Customer relationships, acquired backlog, and trademarks and trade names are subject to amortization on a straight-line basis and are being amortized over 12, 2.4 and 1.5 years, respectively.

The fair value of property, plant and equipment was determined using a cost approach valuation method. The customer relationships and acquired backlog were valued using the multi-period excess earnings method and trademarks and trade names were valued using the relief from royalty method. These methods require several judgments and assumptions to determine the fair value of intangible assets, including revenue growth rates, discount rates, EBITDA margins, and tax rates, among others. These nonrecurring fair value measurements are Level 3 measurements within the fair value hierarchy.

Goodwill represents the excess of the purchase price over the net identifiable tangible and intangible assets acquired. The goodwill related to the acquisition was attributable to expected synergies, the value of the assembled workforce as well as the collective experience of the management team with regards to its operations, customers, and industry. The goodwill is deductible for tax purposes.

Results for the three and nine months ended September 30, 2021 included revenue of $1,490 and net loss of $303 from IriSys. The following table presents unaudited supplemental pro forma financial information as if the IriSys acquisition had occurred on January 1, 2020:

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Revenue

$

19,102

 

 

$

21,977

 

 

$

60,742

 

 

$

62,844

 

Net loss

 

(3,821

)