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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, 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 August 5, 2020, there were 23,640,494 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

 

24

 

 

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

33

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

34

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

35

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

35

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

35

 

 

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

36

 

 

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

36

 

 

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

36

 

 

 

 

 

 

 

Item 5.

 

Other Information

 

36

 

 

 

 

 

 

 

Item 6.

 

Exhibits

 

37

 

 

 

 

 

 

SIGNATURES

 

39

 

 

 

 

 

 

 

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)

 

June 30, 2020

 

 

December 31, 2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

22,787

 

 

$

19,148

 

Accounts receivable

 

 

11,584

 

 

 

14,389

 

Contract asset

 

 

8,911

 

 

 

8,851

 

Inventory

 

 

11,772

 

 

 

15,072

 

Prepaid expenses and other current assets

 

 

2,986

 

 

 

2,700

 

Total current assets

 

 

58,040

 

 

 

60,160

 

Property, plant and equipment, net

 

 

42,448

 

 

 

42,212

 

Intangible assets, net

 

 

1,991

 

 

 

3,283

 

Goodwill

 

 

4,319

 

 

 

4,319

 

Other assets

 

 

399

 

 

 

485

 

Total assets

 

$

107,197

 

 

$

110,459

 

Liabilities and stockholders’ deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

871

 

 

$

989

 

Accrued expenses and other current liabilities

 

 

4,870

 

 

 

4,324

 

Current portion of debt

 

 

7,289

 

 

 

 

Liabilities of discontinued operation

 

 

 

 

 

1,172

 

Total current liabilities

 

 

13,030

 

 

 

6,485

 

Debt, net

 

 

109,265

 

 

 

110,319

 

Other liabilities

 

 

313

 

 

 

367

 

Total liabilities

 

 

122,608

 

 

 

117,171

 

Commitments and contingencies (note 11)

 

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

Common stock, $0.01 par value. 50,000,000 shares authorized, 23,638,906 issued and outstanding at June 30, 2020 and 23,312,928 shares issued and outstanding at December 31, 2019

 

 

236

 

 

 

233

 

Additional paid-in capital

 

 

204,940

 

 

 

199,938

 

Accumulated deficit

 

 

(220,587

)

 

 

(206,883

)

Total stockholders’ deficit

 

 

(15,411

)

 

 

(6,712

)

Total liabilities and stockholders’ deficit

 

$

107,197

 

 

$

110,459

 

See accompanying notes to consolidated financial statements.

3

 


 

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)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenue

 

$

15,522

 

 

$

31,256

 

 

$

37,299

 

 

$

56,322

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales (excluding amortization of intangible assets)

 

 

11,634

 

 

 

14,100

 

 

 

29,888

 

 

 

28,491

 

Selling, general and administrative

 

 

4,259

 

 

 

5,533

 

 

 

9,705

 

 

 

12,037

 

Amortization of intangible assets

 

 

646

 

 

 

646

 

 

 

1,292

 

 

 

1,292

 

Change in warrant valuation

 

 

 

 

 

1,041

 

 

 

 

 

 

779

 

Total operating expenses

 

 

16,539

 

 

 

21,320

 

 

 

40,885

 

 

 

42,599

 

Operating income (loss) from continuing operations

 

 

(1,017

)

 

 

9,936

 

 

 

(3,586

)

 

 

13,723

 

Interest expense

 

 

(4,995

)

 

 

(5,176

)

 

 

(10,118

)

 

 

(8,766

)

(Loss) income from continuing operations

 

 

(6,012

)

 

 

4,760

 

 

 

(13,704

)

 

 

4,957

 

Loss on discontinued operations

 

 

 

 

 

(7,596

)

 

 

 

 

 

(9,771

)

Net loss

 

$

(6,012

)

 

$

(2,836

)

 

$

(13,704

)

 

$

(4,814

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per share information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.25

)

 

$

0.21

 

 

$

(0.58

)

 

$

0.22

 

Discontinued operations

 

 

 

 

 

(0.34

)

 

 

 

 

 

(0.44

)

Total

 

$

(0.25

)

 

$

(0.13

)

 

$

(0.58

)

 

$

(0.22

)

Weighted average shares outstanding

 

 

23,577,255

 

 

 

22,265,612

 

 

 

23,486,011

 

 

 

22,092,853

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.25

)

 

$

0.21

 

 

$

(0.58

)

 

$

0.22

 

Discontinued operations

 

 

 

 

 

(0.33

)

 

 

 

 

 

(0.43

)

Total

 

$

(0.25

)

 

$

(0.12

)

 

$

(0.58

)

 

$

(0.21

)

Weighted average shares outstanding

 

 

23,577,255

 

 

 

22,926,402

 

 

 

23,486,011

 

 

 

22,825,910

 

See accompanying notes to consolidated financial statements.

4

 


 

RECRO PHARMA, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Deficit

(Unaudited)

 

 

 

Common stock

 

 

Additional paid-in capital

 

 

Accumulated deficit

 

 

 

 

 

(amounts in thousands, except share data)

 

Shares

 

 

Amount

 

 

 

 

 

 

Total

 

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

)

 

 

 

Common stock

 

 

Additional paid-in capital

 

 

Accumulated deficit

 

 

 

 

 

(amounts in thousands, except share data)

 

Shares

 

 

Amount

 

 

 

 

 

 

Total

 

Balance, December 31, 2018

 

 

21,799,961

 

 

$

218

 

 

$

168,535

 

 

$

(188,253

)

 

$

(19,500

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

2,826

 

 

 

 

 

 

2,826

 

Exercise of stock options, net

 

 

29,750

 

 

 

 

 

 

185

 

 

 

 

 

 

185

 

Vesting of restricted stock units, net

 

 

268,915

 

 

 

3

 

 

 

(865

)

 

 

 

 

 

(862

)

Issuance of common stock for equity facility

 

 

34,762

 

 

 

 

 

 

301

 

 

 

 

 

 

301

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(1,978

)

 

 

(1,978

)

Balance, March 31, 2019

 

 

22,133,388

 

 

 

221

 

 

 

170,982

 

 

 

(190,231

)

 

 

(19,028

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

2,359

 

 

 

 

 

 

2,359

 

Exercise of stock options, net

 

 

206,625

 

 

 

2

 

 

 

907

 

 

 

 

 

 

909

 

Vesting of restricted stock units, net

 

 

74,594

 

 

 

1

 

 

 

(114

)

 

 

 

 

 

(113

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(2,836

)

 

 

(2,836

)

Balance, June 30, 2019

 

 

22,414,607

 

 

$

224

 

 

$

174,134

 

 

$

(193,067

)

 

$

(18,709

)

See accompanying notes to consolidated financial statements.

5

 


 

RECRO PHARMA, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

Six months ended June 30,

 

(amounts in thousands)

 

2020

 

 

2019

 

Cash flows from operating activities, continuing operations:

 

 

 

 

 

 

 

 

Net loss

 

$

(13,704

)

 

$

(4,814

)

Loss on discontinued operations

 

 

 

 

 

9,771

 

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

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

5,677

 

 

 

3,541

 

Non-cash interest expense

 

 

2,919

 

 

 

2,414

 

Depreciation expense

 

 

3,008

 

 

 

2,784

 

Amortization of intangible assets

 

 

1,292

 

 

 

1,292

 

Change in warrant valuation

 

 

 

 

 

779

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

2,805

 

 

 

(4,930

)

Contract asset

 

 

(60

)

 

 

(2,953

)

Inventory

 

 

3,300

 

 

 

1,060

 

Prepaid expenses and other assets

 

 

(200

)

 

 

(1,896

)

Accounts payable, accrued expenses and other liabilities

 

 

(631

)

 

 

(453

)

Net cash provided by operating activities, continuing operations

 

 

4,406

 

 

 

6,595

 

Cash flows from investing activities, continuing operations:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(2,239

)

 

 

(7,462

)

Purchases of short-term investments

 

 

 

 

 

(12,021

)

Proceeds from maturity of investments

 

 

 

 

 

10,100

 

Net cash used in investing activities, continuing operations

 

 

(2,239

)

 

 

(9,383

)

Cash flows from financing activities, continuing operations:

 

 

 

 

 

 

 

 

Proceeds from issuance of debt, net of original issue discount of $11,400 for the six months ended June 30, 2019

 

 

4,416

 

 

 

43,600

 

Repayments of debt

 

 

(1,100

)

 

 

 

Payment of deferred financing costs

 

 

 

 

 

(2,936

)

Net payments related to vesting of restricted stock units

 

 

(1,181

)

 

 

(974

)

Net proceeds related to exercise of stock options

 

 

509

 

 

 

1,094

 

Net cash provided by financing activities, continuing operations

 

 

2,644

 

 

 

40,784

 

Net increase in cash and cash equivalents from continuing operations

 

 

4,811

 

 

 

37,996

 

Discontinued operations:

 

 

 

 

 

 

 

 

Cash flows used in operating activities

 

 

(1,172

)

 

 

(34,382

)

Cash flows used in investing activities

 

 

 

 

 

(1,728

)

Cash flows used in financing activities

 

 

 

 

 

(10,000

)

Net decrease in cash and cash equivalents from discontinued operations

 

 

(1,172

)

 

 

(46,110

)

Cash and cash equivalents, beginning of period

 

 

19,148

 

 

 

38,514

 

Cash and cash equivalents, end of period

 

$

22,787

 

 

$

30,400

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

7,228

 

 

$

6,644

 

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

 

 

1,293

 

 

 

257

 

Common stock issued in connection with equity facility

 

 

 

 

 

301

 

See accompanying notes to consolidated financial statements.

6

 


 

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 Pennsylvania on November 15, 2007. The Company is a leading contract development and manufacturing organization (“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. The Company operates in one segment.

In November 2019, the Company’s former Acute Care business, which developed products for hospital and other acute care settings, was spun-out through its former wholly-owned subsidiary, Baudax Bio, Inc. (“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 about the spin-off of Baudax Bio.

The Company has incurred net losses since inception and has an accumulated deficit of $220,587 as of June 30, 2020, which is mostly related to activities that are presented as discontinued operations as a result of the spin-off of 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 (“U.S. GAAP”) for interim financial information. In accordance with 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 the three and six months ended June 30, 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 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.

7

 


 

 

(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 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.

 

(e)

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.

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 last annual impairment test as of November 30, 2019.

Since the last annual test, the Company has only identified the ongoing novel strain of coronavirus (“COVID-19”) pandemic as a potential indicator of impairment. The Company has performed periodic interim impairment testing that has resulted in no impairment of goodwill or other assets. The Company continues to monitor the impact of the COVID-19 pandemic.

 

(f)

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 revenue

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.

Royalty Revenue

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

8

 


 

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.

Research and Development

Research and development revenue includes services associated with formulation, process development, CTM 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 we have continuing performance obligations would be deferred and recognized over the period of performance. Milestone payments that are not within our 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.

 

(g)

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 four 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 four largest customers having generated 95% or more of its revenues for the periods presented. A portion of the Company’s revenues are dependent on U.S. based customers selling to end-users outside the United States.

 

(h)

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,” as the Company has limited historical information to develop reasonable expectations about future stock option exercise patterns, which is

9

 


 

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 as both 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.

 

(i)

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, 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.

 

(j)

Income or Loss Per Share

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

For purposes of calculating diluted income or loss per common share, the numerator and denominator of basic income or loss per share 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.

There were no differences in the basic and diluted calculations for the three and six months ended June 30, 2020 because the Company reported net losses for those periods. There were also no differences in the income or loss used to calculate basic and diluted per share results in either of the three- or six-month periods ended June 30, 2019.


10

 


 

The following table presents the reconciliation of weighted average shares outstanding used for basic and diluted per share results for the three and six months ended June 30, 2019:

 

Three months ended June 30, 2019

 

 

Six months ended June 30, 2019

 

Weighted average shares outstanding, basic

 

22,265,612

 

 

 

22,092,853

 

Dilutive impact of:

 

 

 

 

 

 

 

Restricted stock units

 

218,745

 

 

 

303,326

 

Stock options

 

360,899

 

 

 

359,077

 

Warrants

 

81,146

 

 

 

70,654

 

Weighted average shares outstanding, diluted

 

22,926,402

 

 

 

22,825,910

 

 

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

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Options and restricted stock units outstanding

 

 

4,371,266

 

 

 

3,267,522

 

 

 

2,433,452

 

 

 

3,488,802

 

Warrants

 

 

348,664

 

 

 

350,000

 

 

 

174,332

 

 

 

350,000

 

 

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

 

(k)

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

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

11

 


 

Separation, the Company contributed $19,000 of cash to Baudax Bio, the Company retained significant net operating loss carryforwards, and the Company was released from significant milestone and royalty payment obligations.

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 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 and six months ended June 30, 2019:

 

Three months ended June 30, 2019

 

 

Six months ended June 30, 2019

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

$

7,180

 

 

$

16,734

 

Selling, general and administrative

 

4,464

 

 

 

12,138

 

Change in contingent consideration valuation

 

(4,059

)

 

 

(19,150

)

Total operating expenses

 

7,585

 

 

 

9,722

 

Other income (expense), net

 

(11

)

 

 

(49

)

Loss on discontinued operations

$