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, 2020

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)

 

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

Nasdaq Capital Market

 

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 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 7, 2020, there were 23,565,735 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 (Unaudited)

 

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

 

27

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

27

 

 

 

 

 

 

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

 

30

 

 

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

30

 

 

 

 

 

 

 

Item 5.

 

Other Information

 

30

 

 

 

 

 

 

 

Item 6.

 

Exhibits

 

30

 

 

 

 

 

 

SIGNATURES

 

32

 

 

 

 

 

 

 

2

 


 

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, 2020

 

 

December 31, 2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

19,873

 

 

$

19,148

 

Accounts receivable

 

 

14,486

 

 

 

14,389

 

Contract asset

 

 

9,752

 

 

 

8,851

 

Inventory

 

 

12,044

 

 

 

15,072

 

Prepaid expenses and other current assets

 

 

1,622

 

 

 

2,700

 

Total current assets

 

 

57,777

 

 

 

60,160

 

Property, plant and equipment, net

 

 

41,746

 

 

 

42,212

 

Right-of-use asset

 

 

438

 

 

 

485

 

Intangible assets, net

 

 

2,637

 

 

 

3,283

 

Goodwill

 

 

4,319

 

 

 

4,319

 

Total assets

 

$

106,917

 

 

$

110,459

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,136

 

 

$

989

 

Accrued expenses and other current liabilities

 

 

5,140

 

 

 

4,176

 

Current portion of long-term debt

 

 

3,000

 

 

 

 

Current portion of operating lease liability

 

 

132

 

 

 

148

 

Current liabilities of discontinued operation

 

 

 

 

 

1,172

 

Total current liabilities

 

 

9,408

 

 

 

6,485

 

Long-term debt, net

 

 

108,779

 

 

 

110,319

 

Long-term portion of operating lease liability and other

 

 

924

 

 

 

367

 

Total liabilities

 

 

119,111

 

 

 

117,171

 

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, 23,455,233 shares at March 31, 2020 and 23,312,928 shares at

   December 31, 2019

 

 

234

 

 

 

233

 

Additional paid-in capital

 

 

202,147

 

 

 

199,938

 

Accumulated deficit

 

 

(214,575

)

 

 

(206,883

)

Total shareholders’ equity

 

 

(12,194

)

 

 

(6,712

)

Total liabilities and shareholders’ equity

 

$

106,917

 

 

$

110,459

 

 

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)

 

2020

 

 

2019

 

Revenue

 

$

21,777

 

 

$

25,065

 

Operating expenses:

 

 

 

 

 

 

 

 

Cost of sales (excluding amortization of intangible assets)

 

 

18,254

 

 

 

14,391

 

Selling, general and administrative

 

 

5,446

 

 

 

6,505

 

Amortization of intangible assets

 

 

646

 

 

 

646

 

Change in warrant valuation

 

 

 

 

 

(263

)

Total operating expenses

 

 

24,346

 

 

 

21,279

 

Operating income (loss) from continuing operations

 

 

(2,569

)

 

 

3,786

 

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

 

30

 

 

 

175

 

Interest expense

 

 

(5,153

)

 

 

(3,765

)

            Net income (loss) from continuing operations

 

 

(7,692

)

 

 

196

 

Loss on discontinued operations

 

 

 

 

 

(2,173

)

Net loss

 

$

(7,692

)

 

$

(1,977

)

 

 

 

 

 

 

 

 

 

Per share information:

 

 

 

 

 

 

 

 

Net income (loss) per share from continuing operations, basic

 

$

(0.33

)

 

$

0.01

 

Net loss per share from discontinued operations, basic

 

 

 

 

 

(0.10

)

Net loss per share, basic

 

$

(0.33

)

 

$

(0.09

)

Weighted average common shares outstanding, basic

 

 

23,394,767

 

 

 

21,918,175

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share from continuing operations, diluted

 

$

(0.33

)

 

$

(0.00

)

Net loss per share from discontinued operations, diluted

 

 

 

 

 

(0.10

)

Net loss per share, diluted

 

$

(0.33

)

 

$

(0.10

)

Weighted average common shares outstanding, diluted

 

 

23,394,767

 

 

 

21,978,606

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(7,692

)

 

$

(1,977

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

Unrealized gain/(loss) on available-for-sale securities

 

 

 

 

 

(1

)

Comprehensive loss

 

$

(7,692

)

 

$

(1,978

)

See accompanying notes to consolidated financial statements.

4

 


 

RECRO PHARMA, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

(Unaudited)

 

For the Three Months Ended March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

Accumulated

other

 

 

 

 

 

(amounts in thousands, except share data)

 

Shares

 

 

Amount

 

 

paid-in

capital

 

 

Accumulated

Deficit

 

 

comprehensive

loss

 

 

Total

 

Balance, December 31, 2019

 

 

23,312,928

 

 

$

233

 

 

$

199,938

 

 

$

(206,883

)

 

$

 

 

$

(6,712

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

3,231

 

 

 

 

 

 

 

 

 

3,231

 

Stock option exercise

 

 

21,141

 

 

 

 

 

 

130

 

 

 

 

 

 

 

 

 

130

 

Exercise of stock options, net

     of 36,078 shares withheld for

     exercise price and income taxes

 

 

15,922

 

 

 

 

 

 

(235

)

 

 

 

 

 

 

 

 

(235

)

Issuance of restricted stock units, net

     of shares withheld for income taxes

 

 

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

)

 

For the Three Months Ended March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

Accumulated

other

 

 

 

 

 

(amounts in thousands, except share data)

 

Shares

 

 

Amount

 

 

paid-in

capital

 

 

Accumulated

Deficit

 

 

comprehensive

loss

 

 

Total

 

Balance, December 31, 2018

 

 

21,799,961

 

 

$

218

 

 

$

168,535

 

 

$

(188,253

)

 

$

 

 

$

(19,500

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

2,826

 

 

 

 

 

 

 

 

 

2,826

 

Stock option exercise

 

 

29,750

 

 

 

 

 

 

185

 

 

 

 

 

 

 

 

 

185

 

Issuance of restricted stock units, net

     of shares withheld for income taxes

 

 

268,915

 

 

 

3

 

 

 

(865

)

 

 

 

 

 

 

 

 

(862

)

Issuance of common stock for equity facility

 

 

34,762

 

 

 

 

 

 

301

 

 

 

 

 

 

 

 

 

301

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

(1

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(1,977

)

 

 

 

 

 

(1,977

)

Balance, March 31, 2019

 

 

22,133,388

 

 

$

221

 

 

$

170,982

 

 

$

(190,230

)

 

$

(1

)

 

$

(19,028

)

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)

 

2020

 

 

2019

 

Cash flows from operating activities, continuing operations:

 

 

 

 

 

 

 

 

Net loss

 

$

(7,692

)

 

$

(1,977

)

Loss on discontinued operations

 

 

 

 

 

2,173

 

Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operating activities from continuing operations:

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

3,231

 

 

 

1,814

 

Non-cash interest expense

 

 

1,460

 

 

 

1,017

 

Depreciation expense

 

 

1,500

 

 

 

1,317

 

Amortization of intangible assets

 

 

646

 

 

 

646

 

Change in warrant valuation

 

 

 

 

 

(263

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Inventory

 

 

3,028

 

 

 

531

 

Contract asset

 

 

(901

)

 

 

93

 

Prepaid expenses and other current assets

 

 

1,078

 

 

 

(692

)

Right-of-use asset

 

 

47

 

 

 

55

 

Accounts receivable

 

 

(97

)

 

 

(3,352

)

Accounts payable, accrued expenses and other liabilities

 

 

1,286

 

 

 

401

 

Operating lease liability

 

 

(48

)

 

 

(56

)

Net cash provided by operating activities, continuing operations

 

 

3,538

 

 

 

1,707

 

Cash flows from investing activities, continuing operations:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(620

)

 

 

(2,649

)

Purchases of short-term investments

 

 

 

 

 

(12,021

)

Net cash used in investing activities, continuing operations

 

 

(620

)

 

 

(14,670

)

Cash flows from financing activities, continuing operations:

 

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt, net of original issue discount of $11,400

 

 

 

 

 

43,600

 

Payment of deferred financing costs

 

 

 

 

 

(2,936

)

Payments of withholdings on shares withheld for income taxes

 

 

(1,151

)

 

 

(864

)

Proceeds from option exercises

 

 

130

 

 

 

186

 

Net cash provided by/(used in) financing activities, continuing operations

 

 

(1,021

)

 

 

39,986

 

Net increase in cash and cash equivalents from continuing operations

 

 

1,897

 

 

 

27,023

 

Discontinued Operations:

 

 

 

 

 

 

 

 

Cash flows used in operating activities

 

 

(1,172

)

 

 

(14,197

)

Cash flows used in investing activities

 

 

 

 

 

(359

)

Cash flows used in financing activities

 

 

 

 

 

(5,000

)

Net decrease in cash and cash equivalents from discontinued operations

 

 

(1,172

)

 

 

(19,556

)

Cash and cash equivalents, beginning of period

 

 

19,148

 

 

 

38,514

 

Cash and cash equivalents, end of period

 

$

19,873

 

 

$

45,981

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

3,693

 

 

$

2,734

 

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

   accounts payable

 

$

702

 

 

$

1,138

 

Common stock issued in connection with equity facility

 

$

 

 

$

301

 

 

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)

(Unaudited)

(1)

Background

Recro Pharma, Inc., or the Company, was incorporated in Pennsylvania on November 15, 2007.  The Company is a leading contract development and manufacturing organization, or CDMO, with integrated solutions for the development, formulation, regulatory support, manufacturing, and packaging of 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.

In November 2019, the Company’s former Acute Care business was spun-out through its former wholly-owned subsidiary, Baudax Bio, Inc., or Baudax Bio, when the Company completed a special dividend distribution of all the outstanding shares of common stock of Baudax Bio to its shareholders. See Note 3 to the consolidated financial statements for additional information on the spin-off of Baudax Bio.

 

The Company has incurred losses from operations since inception and has an accumulated deficit of $214,575 as of March 31, 2020, which is mostly related to activities that are presented as discontinued operations upon completion of the spin-off as Baudax Bio.  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 one year after the date the financial statements are issued.

(2)

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 and with the instructions of Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all of the information and notes required by U.S. GAAP for complete annual financial statements. 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 the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2020.

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, 2019 included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

 

(b)

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.

 

(c)

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.

 

(d)

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

7

 


 

years for furniture and office equipment; six to ten years for manufacturing equipment; two to five years for vehicles; 35 to 40 years for buildings; and the shorter of the lease term or useful life for leasehold improvements. Repairs and maintenance costs are expensed as incurred.

 

(e)

Business Combinations

In accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 805, “Business Combinations,” or ASC 805, the Company allocates the purchase price of acquired companies to the tangible and intangible 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 significant 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 management of the acquired companies and expectations of future cash flows. Transaction costs and restructuring costs associated with the transaction are expensed as incurred.

 

(f)

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 one-step method for determining impairment.

The one-step quantitative test calculates 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.

Intangible assets include the Company’s royalties and contract manufacturing relationships assets. 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.  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. There were no triggering events as of March 31, 2020.

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. The Company performed its impairment test as of November 30, 2019 and noted there have been no triggering events or indicators of impairment for goodwill as of December 31, 2019.  Due to the COVID-19 pandemic that has evolved in 2020 being a potential indicator of impairment, the Company performed an impairment test which indicated there was no impairment to goodwill as of March 31, 2020. The Company continues to monitor the COVID-19 pandemic’s impact.  The Company will perform its annual test as of November 30, 2020.

 

(g)

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 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.

In addition to manufacturing and packaging revenue, certain customer agreements may have intellectual property sales-based royalties and/or profit-sharing consideration, collectively referred to as royalties, computed on the net product sales of the commercial partner. Royalty revenues are generally recognized under the terms of the applicable license, development and/or supply agreement. For arrangements that include sales-based royalties where the license for intellectual property is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue when the related sales occur by the commercial partner.  For arrangements that include sales-based royalties where the license for intellectual property is not deemed to be the predominant item to which the royalties relate, the Company recognizes revenue upon transfer of control of the manufactured product.  In these cases, significant judgment is required to calculate this estimated variable consideration using the most-likely amount method based on historical customer pricing and deductions and is partially constrained due to items that are outside of the Company’s control including the uncertainty of the timing of future commercial partner sales, mix of volume, customer stocking and ordering patterns, as well as unforeseen price adjustments made by the Company’s commercial partners. 

8

 


 

Revenues related to research and development are generally recognized over-time as the related services or activities are performed using the output method and in accordance with the contract terms. In agreements which 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 would be deferred and recognized over the period of performance. Milestone payments that are not within the control of the Company, 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.

 

(h)

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 amongst four customers and 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 four largest customers having generated 97% and 98% of its revenues in the three months ended March 31, 2020 and 2019, respectively. A portion of the Company’s revenues are dependent on U.S. based customers selling to end-users outside the United States.

 

(i)

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. 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.

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.  

 

(j)

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 March 31, 2020 and December 31, 2019.

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.  

9

 


 

 

(k)

Net Income (Loss) Per Common Share

 

Basic net income (loss) per common share is determined by dividing net income (loss) applicable to common shareholders by the weighted average common shares outstanding during the period.

For purposes of calculating diluted net income (loss) per common share, the denominator includes both the weighted average common shares outstanding and the dilutive effect of outstanding common stock options, warrants and unvested restricted stock units, using the treasury stock method, if the inclusion of such instruments would be dilutive.

The following table sets forth the computation of basic and diluted income (loss) per share:

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Basic Income (Loss) Per Share

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

$

(7,692

)

 

$

196

 

Net loss on discontinued operations

 

 

 

 

 

(2,173

)

Net loss

 

$

(7,692

)

 

$

(1,977

)

 

 

 

 

 

 

 

 

 

Net income (loss) per share from continuing operations

 

$

(0.33

)

 

$

0.01

 

Net loss per share from discontinued operations

 

 

 

 

 

(0.10

)

Net loss per share of common stock, basic

 

$

(0.33

)

 

$

(0.09

)

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, basic

 

 

23,394,767

 

 

 

21,918,175

 

 

 

 

 

 

 

 

 

 

Diluted Income (Loss) Per Share

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

$

(7,692

)

 

$

196

 

Change in warrant valuation

 

 

 

 

 

(263

)

Diluted net loss from continuing operations

 

$

(7,692

)

 

$

(67

)

Net loss from discontinued operations

 

 

 

 

 

(2,173

)

Net loss, diluted

 

$

(7,692

)

 

$

(2,240

)

 

 

 

 

 

 

 

 

 

Net loss per share from continuing operations

 

$

(0.33

)

 

$

(0.00

)

Net loss per share from discontinued operations

 

 

 

 

 

(0.10

)

Net loss per share of common stock, diluted

 

$

(0.33

)

 

$

(0.10

)

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, basic

 

 

23,394,767

 

 

 

21,918,175

 

Dilutive securities - warrants

 

 

 

 

 

60,431

 

Weighted average common shares outstanding, diluted

 

 

23,394,767

 

 

 

21,978,606

 

 

The following potentially dilutive securities have been excluded from the computations of diluted weighted average shares outstanding as of March 31, 2020 and 2019, as they would be anti-dilutive:

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Options and restricted stock units outstanding

 

 

4,759,956

 

 

 

6,249,662

 

Warrants

 

 

 

 

 

350,000

 

 

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

 

(l)

Segment Information

The Company determined it operates in a single segment.

10

 


 

 

(m)

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” or ASU 2016-02. ASU 2016-02 establishes 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. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), Targeted Improvements, which provides an alternative transition method permitting the recognition of a cumulative-effect adjustment on the date of adoption rather than restating comparative periods in transition as originally prescribed by Topic 842. The new guidance is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. The Company adopted this guidance as of January 1, 2019. The Company elected the optional transition method to account for the impact of the adoption with a cumulative-effect adjustment in the period of adoption and did not restate prior periods. The Company opted to elect the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs, and certain other practical expedients, including the use of hindsight to determine the lease term for existing leases and in assessing impairment of the right-of-use asset, and the exception for short-term leases. For its current classes of underlying assets, the Company did not elect the practical expedient under which the lease components would not be separated from the nonlease components. At January 1, 2019, the Company recorded a right-of-use asset of $692 and an operating lease liability of $728. For additional information regarding how the Company is accounting for leases under the new guidance, refer to Note 11(b).

In August 2018, the FASB issued 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”. ASU 2018-13 eliminates certain disclosures related to transfers and the valuations process, clarifies the measurement uncertainty disclosure, and requires additional disclosures for Level 3 fair value measurements, including the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. On January 1, 2020, the Company adopted this standard which did not have any impact on the Company’s consolidated financial statements or disclosures.

Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” or ASU 2016-13. ASU 2016-13 requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires consideration of a range of reasonable information to estimate credit losses on certain types of financial instruments, including trade receivables and available-for-sale debt securities.  ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including those interim periods within those fiscal years. The Company is currently assessing the impact of adopting this standard, but based on a preliminary assessment, does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

(3)

Discontinued Operations

On November 21, 2019 (the “Distribution Date”), the Company completed the separation (the “Separation”) of its former Acute Care business by distributing to the Company’s shareholders on a pro rata basis all of the issued and outstanding common stock of Baudax Bio, the entity the Company incorporated to hold such businesses. To effect the Separation, the Company distributed to its shareholders 1 share of Baudax Bio common stock for every 2.5 shares of the Company’s common stock outstanding as of November 15, 2019, the record date for the distribution. Fractional shares of Baudax Bio common stock that otherwise would have been distributed were aggregated and sold into the public market and the proceeds distributed to the Company’s shareholders. Additionally, in connection with the Separation, the Company contributed $19,000 of cash to Baudax Bio.

The accounting requirements for reporting the Separation of Baudax Bio as a discontinued operation were met when the Separation was completed. Accordingly, the accompanying consolidated financial statements for all periods presented reflect this business as a discontinued operation.

In connection with the Separation, the Company and Baudax Bio entered into various agreements to effect the Separation and provide a framework for their relationship after the Separation, including a transition services agreement, an employee matters agreement, a tax matters agreement and an intellectual property matters agreement. These agreements provide for the allocation between the Company and Baudax Bio of assets, employees, liabilities and obligations (including investments, property and employee benefits and tax-related assets and liabilities) attributable to periods prior to, at, and after Baudax Bio’s separation from the Company and govern certain relationships between the Company and Baudax Bio after the Separation.

The historical consolidated balance sheet and statements of operations of the Company and the related notes to the consolidated financial statements have been presented as discontinued operations in the consolidated financial statements and prior periods have

11

 


 

been recast.  Discontinued operations include results of the Company’s Acute Care business except for certain corporate overhead costs and certain costs associated with transition services provided by Baudax Bio to the Company, following the Separation, which are included in continuing operations.  

The Separation and Distribution Agreement with Baudax Bio sets forth, among other things, the assets that were transferred, the liabilities assumed, and the contracts that were assigned to each of Baudax Bio and the Company as part of the Separation of the Company into two companies, and provided for when and how these transfers, assumptions and assignments were to occur.

The tax matters agreement governs the respective rights, responsibilities and obligations of Baudax Bio and the Company with respect to taxes (including taxes arising in the ordinary course of business and taxes, if any, incurred as a result of any failure of the Distribution and certain related transactions to qualify as tax-free for U.S. federal income tax purposes), tax attributes, uncertain tax positions, tax returns, tax proceedings and certain other tax matters.

The employee matters agreement governs certain compensation and employee benefit obligations and allocates liabilities and responsibilities relating to employment matters, employee compensation and benefit plans and programs and other related matters, including the transfer or assignment of employees from the Company to Baudax Bio.

As of December 31, 2019, certain current liabilities of discontinued operations remained on the Company’s consolidated balance sheet due to timing of payment, which consisted of $22 of accounts payable and $1,150 of accrued expenses, which were paid in the quarter ended March 31, 2020.

The following is a summary of the Acute Care business expenses for the three months ended March 31, 2019:

 

Operating expenses:

 

 

 

 

Research and development

 

$

9,554

 

Selling, general and administrative

 

 

7,674

 

Change in contingent consideration valuation

 

 

(15,092

)

Total operating expenses

 

 

2,136

 

Other income (expense), net

 

 

(37

)

Loss on discontinued operations

 

$

(2,173

)

 

(4)

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 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.

12

 


 

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 March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents (See Note 5)

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds

 

$

9,842

 

 

$

 

 

$

 

Total cash equivalents

 

$

9,842

 

 

$

 

 

$

 

At December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents (See Note 5)

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds

 

$

11,609

 

 

$

 

 

$

 

Total cash equivalents

 

$

11,609

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 March 31, 2020, 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 and approximate fair value due to the short-term nature of these instruments. 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 long-term debt approximated fair value at March 31, 2020 due to the comparison of the terms of the debt to the terms that management believes are available as of March 31, 2020.

 

(5)

Cash Equivalents

The following is a summary of the Company’s cash equivalents:

 

 

 

March 31, 2020

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Estimated

 

Description

 

Cost

 

 

Gain

 

 

Loss

 

 

Fair Value

 

Money market mutual funds

 

$

9,842

 

 

$

 

 

$

 

 

$

9,842

 

Total investments

 

$

9,842

 

 

$

 

 

$

 

 

$

9,842

 

 

 

 

 

December 31, 2019

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Estimated

 

Description

 

Cost

 

 

Gain

 

 

Loss

 

 

Fair Value

 

Money market mutual funds

 

$

11,609

 

 

$

 

 

$

 

 

$

11,609

 

Total investments

 

$

11,609

 

 

$

 

 

$

 

 

$

11,609

 

 

13

 


 

(6)

Inventory

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

Inventory was as follows:

 

 

 

March 31, 2020

 

 

December 31, 2019

 

Raw materials

 

$

3,804

 

 

$

3,240

 

Work in process

 

 

6,657

 

 

 

6,430

 

Finished goods

 

 

2,289

 

 

 

5,892

 

 

 

 

12,750

 

 

 

15,562

 

Provision for inventory obsolescence

 

 

(706

)

 

 

(490

)

 

 

$

12,044

 

 

$

15,072

 

 

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.

(7)

Property, Plant and Equipment

Property, plant and equipment consists of the following:

 

 

 

March 31, 2020

 

 

December 31, 2019

 

Land

 

$

3,263

 

 

$

3,263

 

Building and improvements

 

 

20,900

 

 

 

20,900

 

Furniture, office and computer equipment

 

 

5,847

 

 

 

5,847

 

Manufacturing equipment

 

 

36,459

 

 

 

35,699

 

Construction in progress

 

 

1,003

 

 

 

729

 

 

 

 

67,472

 

 

 

66,438

 

Less: accumulated depreciation and amortization

 

 

25,726

 

 

 

24,226

 

Property, plant and equipment, net

 

$

41,746

 

 

$

42,212

 

 

Depreciation expense for the three months ended March 31, 2020 and 2019 was $1,500 and $1,317, respectively.

(8)

Intangible Assets

The following represents the balance of the intangible assets at March 31, 2020:

 

 

 

Cost

 

 

Accumulated Amortization

 

 

Net Intangible Assets

 

Royalties and contract manufacturing relationships

 

$

15,500

 

 

$

12,863

 

 

$

2,637

 

Total

 

$

15,500

 

 

$