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, 2017

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

Commission File Number: 001-36329

 

Recro Pharma, Inc.

(Exact name of registrant as specified in its charter)

 

Pennsylvania

26-1523233

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

490 Lapp Road, Malvern, Pennsylvania

19355

(Address of principal executive offices)

(Zip Code)

 

(484) 395-2470

(Registrant’s telephone number, including area code)

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

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

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

 

 

Emerging growth company

 

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

 

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

As of August 9, 2017, there were 19,059,604 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

 

26

 

 

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

36

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

36

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

38

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

38

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

38

 

 

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

38

 

 

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

38

 

 

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

38

 

 

 

 

 

 

 

Item 5.

 

Other Information

 

38

 

 

 

 

 

 

 

Item 6.

 

Exhibits

 

38

 

 

 

 

 

 

SIGNATURES

 

40

 

 

 

 

 

 

EXHIBIT INDEX

 

41

 

 

 


 

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, 2017

 

 

December 31, 2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

8,728

 

 

$

64,483

 

Short-term investments

 

 

41,517

 

 

 

 

Accounts receivable

 

 

10,102

 

 

 

10,411

 

Inventory

 

 

6,888

 

 

 

8,746

 

Prepaid expenses and other current assets

 

 

2,572

 

 

 

1,118

 

Total current assets

 

 

69,807

 

 

 

84,758

 

Property, plant and equipment, net

 

 

37,638

 

 

 

37,300

 

Deferred income taxes

 

 

19,777

 

 

 

17,060

 

Intangible assets, net

 

 

36,141

 

 

 

37,433

 

Goodwill

 

 

6,446

 

 

 

6,446

 

Total assets

 

$

169,809

 

 

$

182,997

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,421

 

 

$

4,132

 

Accrued expenses and other current liabilities

 

 

6,551

 

 

 

9,893

 

Current portion of long-term debt, net

 

 

2,057

 

 

 

2,236

 

Total current liabilities

 

 

12,029

 

 

 

16,261

 

Long-term debt, net

 

 

22,657

 

 

 

22,152

 

Warrants and other long-term liabilities

 

 

2,788

 

 

 

3,397

 

Contingent consideration

 

 

75,347

 

 

 

69,574

 

Total liabilities

 

 

112,821

 

 

 

111,384

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value. Authorized, 10,000,000 shares; none issued and

   outstanding

 

 

 

 

 

 

Common stock, $0.01 par value. Authorized, 50,000,000 shares; issued and

   outstanding, 19,054,566 shares at June 30, 2017 and 19,043,216 shares at

   December 31, 2016

 

 

191

 

 

 

190

 

Additional paid-in capital

 

 

135,083

 

 

 

132,691

 

Accumulated deficit

 

 

(78,210

)

 

 

(61,268

)

Accumulated other comprehensive loss

 

 

(76

)

 

 

 

Total shareholders’ equity

 

 

56,988

 

 

 

71,613

 

Total liabilities and shareholders’ equity

 

$

169,809

 

 

$

182,997

 

See accompanying notes to consolidated financial statements.

3


 

RECRO PHARMA, INC. AND SUBSIDIARIES

Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

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

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Manufacturing, royalty and profit sharing revenue

 

$

16,750

 

 

$

16,933

 

 

$

34,878

 

 

$

34,072

 

Research and development revenue

 

 

184

 

 

 

346

 

 

 

798

 

 

 

949

 

Total revenues

 

 

16,934

 

 

 

17,279

 

 

 

35,676

 

 

 

35,021

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales (excluding amortization of intangible assets)

 

 

10,448

 

 

 

9,547

 

 

 

20,946

 

 

 

19,818

 

Research and development

 

 

7,073

 

 

 

8,320

 

 

 

14,836

 

 

 

16,129

 

General and administrative

 

 

6,322

 

 

 

2,763

 

 

 

10,354

 

 

 

5,421

 

Amortization of intangible assets

 

 

646

 

 

 

646

 

 

 

1,292

 

 

 

1,291

 

Change in warrant valuation

 

 

(1,084

)

 

 

1,240

 

 

 

(793

)

 

 

(354

)

Change in contingent consideration valuation

 

 

2,959

 

 

 

1,534

 

 

 

5,773

 

 

 

4,512

 

Total operating expenses

 

 

26,364

 

 

 

24,050

 

 

 

52,408

 

 

 

46,817

 

Operating loss

 

 

(9,430

)

 

 

(6,771

)

 

 

(16,732

)

 

 

(11,796

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

117

 

 

 

8

 

 

 

222

 

 

 

17

 

Interest expense

 

 

(1,207

)

 

 

(1,317

)

 

 

(2,390

)

 

 

(2,829

)

Net loss before income taxes

 

 

(10,520

)

 

 

(8,080

)

 

 

(18,900

)

 

 

(14,608

)

Income tax benefit

 

 

1,665

 

 

 

195

 

 

 

1,958

 

 

 

184

 

Net loss

 

$

(8,855

)

 

$

(7,885

)

 

$

(16,942

)

 

$

(14,424

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share of common stock, basic

 

$

(0.46

)

 

$

(0.83

)

 

$

(0.89

)

 

$

(1.53

)

Net loss per share of common stock, diluted

 

$

(0.48

)

 

$

(0.83

)

 

$

(0.89

)

 

$

(1.53

)

Weighted average common shares outstanding, basic

 

 

19,052,430

 

 

 

9,544,629

 

 

 

19,050,931

 

 

 

9,398,288

 

Weighted average common shares outstanding, diluted

 

 

19,220,700

 

 

 

9,544,629

 

 

 

19,220,175

 

 

 

9,398,288

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on available-for-sale securities

 

 

(19

)

 

 

 

 

 

(76

)

 

 

 

Comprehensive loss

 

$

(8,874

)

 

$

(7,885

)

 

$

(17,018

)

 

$

(14,424

)

See accompanying notes to consolidated financial statements.

4


 

RECRO PHARMA, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

For the Six Months Ended June 30, 2017

(Unaudited)

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

Accumulated other

 

 

 

 

 

(amounts in thousands, except share data)

 

Shares

 

 

Amount

 

 

paid-in

capital

 

 

Accumulated

Deficit

 

 

comprehensive

loss

 

 

Total

 

Balance, December 31, 2016

 

 

19,043,216

 

 

 

190

 

 

 

132,691

 

 

 

(61,268

)

 

 

 

 

 

71,613

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

2,370

 

 

 

 

 

 

 

 

 

2,370

 

Stock option exercise

 

 

3,600

 

 

 

1

 

 

 

22

 

 

 

 

 

 

 

 

 

23

 

Issuance of restricted stock units

 

 

7,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(76

)

 

 

(76

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

(16,942

)

 

 

 

 

 

(16,942

)

Balance, June 30, 2017

 

 

19,054,566

 

 

$

191

 

 

$

135,083

 

 

$

(78,210

)

 

$

(76

)

 

$

56,988

 

 

See accompanying notes to consolidated financial statements.

5


 

RECRO PHARMA, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

For the Six Months Ended June 30,

 

(amounts in thousands)

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(16,942

)

 

$

(14,424

)

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

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

2,370

 

 

 

1,430

 

Non-cash interest expense

 

 

326

 

 

 

449

 

Depreciation expense

 

 

2,424

 

 

 

2,511

 

Amortization

 

 

1,292

 

 

 

1,291

 

Acquired in-process research & development charges

 

 

766

 

 

 

 

Change in warrant valuation

 

 

(793

)

 

 

(354

)

Change in contingent consideration valuation

 

 

5,773

 

 

 

4,512

 

Deferred income taxes

 

 

(2,717

)

 

 

(1,007

)

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

 

 

 

 

 

 

 

 

Inventory

 

 

1,858

 

 

 

2,254

 

Prepaid expenses and other current assets

 

 

(1,454

)

 

 

(1,098

)

Accounts receivable

 

 

309

 

 

 

(2,887

)

Accounts payable, accrued expenses and other liabilities

 

 

(4,194

)

 

 

1,928

 

Net cash used in operating activities

 

 

(10,982

)

 

 

(5,395

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(3,185

)

 

 

(1,081

)

Purchase of short-term investments

 

 

(53,593

)

 

 

 

Proceeds from maturity/redemption of investments

 

 

12,000

 

 

 

 

Acquisition of license agreement

 

 

(18

)

 

 

 

Net cash used in investing activities

 

 

(44,796

)

 

 

(1,081

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from Aspire facility

 

 

 

 

 

4,175

 

Payments on long-term debt

 

 

 

 

 

(2,633

)

Proceeds from option exercise

 

 

23

 

 

 

 

Net cash provided by financing activities

 

 

23

 

 

 

1,542

 

Net decrease in cash and cash equivalents

 

 

(55,755

)

 

 

(4,934

)

Cash and cash equivalents, beginning of period

 

 

64,483

 

 

 

19,779

 

Cash and cash equivalents, end of period

 

$

8,728

 

 

$

14,845

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

2,064

 

 

$

2,373

 

Cash paid for taxes

 

$

467

 

 

$

166

 

Unrealized loss on available-for-sale securities

 

$

76

 

 

$

 

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

   payable

 

$

385

 

 

$

129

 

Amortization of deferred equity costs

 

$

 

 

$

224

 

 

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 specialty pharmaceutical company that operates through two business divisions: an Acute Care division and a revenue-generating contract development and manufacturing, or CDMO division. Each of these divisions are deemed to be reportable segments (see Note 3(m) and Note 17). The Acute Care division is primarily focused on developing innovative products for hospital and other acute care settings, and the CDMO division leverages the Company’s formulation expertise to develop and manufacture pharmaceutical products using the Company’s proprietary delivery technologies for commercial partners who commercialize or plan to commercialize these products. On April 10, 2015, the Company acquired from Alkermes plc, or Alkermes, worldwide rights to intravenous and intramuscular, or injectable, meloxicam, a proprietary long-acting preferential COX-2 inhibitor being developed for the management of moderate to severe pain, as well as a contract manufacturing facility, royalty and formulation business in Gainesville, Georgia. The acquisition is referred to herein as the Gainesville Transaction. In July 2017, the Company submitted a New Drug Application, or NDA, to the U.S. Food and Drug Administration for our lead investigational product candidate intravenous, or IV meloxicam 30 mg for the management of moderate to severe pain.

(2)

Development-Stage Risks and Liquidity

 

The Company has incurred losses from operations since inception and has an accumulated deficit of $78,210 as of June 30, 2017. Though its CDMO segment has been profitable, the Company anticipates incurring additional losses until such time, if ever, that it can generate significant sales of its products currently in development. Substantial additional financing will be needed by the Company to fund its operations and to commercially develop its product candidates, including the payment of the Gainesville Transaction contingent payments, which may become due upon achievement of certain development and commercialization milestones for meloxicam (see Note 4). The Company’s future operations are highly dependent on a combination of factors, including (i) the continued profitability of the CDMO segment; (ii) the timely and successful completion of additional financing and/or alternative sources of capital, debt or partnering transactions; (iii) the success of its research and development, including the results and timing of its clinical trials; (iv) the development of competitive therapies by other biotechnology and pharmaceutical companies; and, ultimately, (v) regulatory approval and market acceptance of the Company’s proposed future products. Management believes that the Company’s existing cash, cash equivalents and short-term investments as of June 30, 2017 will be sufficient to fund its operations through mid-year 2018.

(3)

Summary of Significant Accounting Principles

 

(a)

Basis of Presentation and Principles of Consolidation

The accompanying unaudited consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, for interim financial information 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 the 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 and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2017.

The accompanying unaudited interim consolidated financial statements should be read in conjunction with the annual audited financial statements and related notes as of and for the year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

 

(b)

Use of Estimates

The preparation of financial statements 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.

7


RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

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

(Unaudited)

 

 

(c)

Cash, Cash Equivalents

Cash and cash equivalents represents cash in banks and highly liquid short-term investments that have maturities of three months or less when acquired to be cash equivalents. These highly liquid short-term investments are both readily convertible to known amounts of cash and so near 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 years for furniture and office equipment; six to ten or more years for manufacturing equipment; two to five years for vehicles; 35 to 40 years for buildings; and the shorter of the lease term or useful life for leasehold improvements. Repairs and maintenance cost are expensed as incurred.

 

(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. In-process research and development, or IPR&D, is the value assigned to those projects for which the related products have not received regulatory approval and have no alternative future use. Determining the portion of the purchase price allocated to IPR&D requires the Company to make significant estimates. In a business combination, the Company capitalizes IPR&D as an intangible asset, and for an asset acquisition the Company expenses IPR&D in the Consolidated Statements of Operations on the acquisition date.

 

(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 two-step method for determining impairment.

The first step compares a reporting unit’s fair value to its carrying amount to identify potential goodwill impairment. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, the second step of the impairment test must be completed to measure the amount of the reporting unit’s goodwill impairment loss, if any. Step two requires an assignment of the reporting unit’s fair value to the reporting unit’s assets and liabilities to determine the implied fair value of the reporting unit’s goodwill. The implied fair value of the reporting unit’s goodwill is then compared with the carrying amount of the reporting unit’s goodwill to determine the goodwill impairment loss to be recognized, if any.

Intangible assets include the Company’s royalties and contract manufacturing relationships intangible asset as well as an IPR&D asset. The royalties and contract manufacturing relationships intangible asset is considered a definite-lived intangible asset and is amortized on a straight-line basis over a useful life of six years.

Intangible assets related to IPR&D are considered indefinite-lived intangible assets and are assessed for impairment annually or more frequently if impairment indicators exist. If the associated research and development effort is abandoned, the related assets will be written-off, and the Company will record a noncash impairment loss on its consolidated statements of operations. For those compounds that reach commercialization, the IPR&D assets will be amortized over their estimated useful lives.

The impairment test for indefinite-lived intangible assets is a one-step test, which compares the fair value of the intangible asset to its carrying value. If the carrying value exceeds its fair value, an impairment loss is recognized in an amount equal to the excess. Based on accounting standards, it is required that these assets be assessed at least annually for impairment

8


RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

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

(Unaudited)

 

unless a triggering event occurs between annual assessments, which would then require an assessment in the period which a triggering event occurred. The most recent tests as of November 30, 2016, indicated that goodwill and indefinite-lived intangible assets were not impaired. There were no indicators of impairment as of June 30, 2017.

 

(g)

Revenue Recognition

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

Manufacturing and other related services revenue is recognized when persuasive evidence of an arrangement exists, shipment has occurred and the title to the product and associated risk of loss has passed to the customer, the sales price is fixed or determinable and collectability is reasonably assured.

In addition to manufacturing and packaging revenue, the customer agreements have royalties and/or profit sharing payments, computed on the net product sales of the commercial partner. Royalty and profit sharing revenues are generally recognized under the terms of the applicable license, development and/or supply agreement in the period the products are sold and when collectability is reasonably assured.

Revenues related to research and development are generally recognized as the related services or activities are performed, in accordance with the contract terms. To the extent that the agreements specify services are to be performed on a fixed basis, revenues are recognized consistent with the pattern of the work performed. In agreements which specify milestones, the related revenues are recognized upon the achievement of a substantive milestone.

 

(h)

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash, cash equivalents, short-term investments and accounts receivable. The Company manages its cash, cash equivalents and short-term investments based on established guidelines relative to diversification and maturities to maintain safety and liquidity.

The Company’s accounts receivable balances are concentrated amongst approximately five 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.

 

(i)

Research and Development

Research and development costs for the Company’s proprietary products/product candidates are charged to expense as incurred. Research and development expenses consist primarily of funds paid to third parties for the provision of services for pre-commercialization and manufacturing scale-up activities, drug development, clinical trials, statistical analysis and report writing and regulatory filing fees and compliance costs. At the end of the reporting period, the Company compares payments made to third-party service providers to the estimated progress toward completion of the research or development objectives. Such estimates are subject to change as additional information becomes available. Depending on the timing of payments to the service providers and the progress that the Company estimates has been made as a result of the service provided, the Company may record net prepaid or accrued expenses relating to these costs.

Upfront and milestone payments made to third parties who perform research and development services on the Company’s behalf are expensed as services are rendered. Costs incurred in obtaining product technology licenses are charged to research and development expense as acquired IPR&D if the technology licensed has not reached technological feasibility and has no alternative future use.

 

(j)

Stock-Based Awards

The Company measures employee stock-based awards at grant-date fair value and recognizes employee compensation expense on a straight-line basis over the vesting period of the award.

Determining the appropriate fair value of stock options requires the input of subjective assumptions, including the expected life of the option and expected stock price volatility. The Company uses the Black-Scholes option pricing model

9


RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

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

(Unaudited)

 

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 exercise patterns and post-vesting employment termination behavior for its stock options grants. The simplified method is based on the average of the vesting tranches and the contractual life of each grant. For stock price volatility, the Company uses comparable public companies as a basis for its expected volatility to calculate the fair value of options grants. The risk-free interest rate is based on U.S. Treasury notes with a term approximating the expected life of the option.

Non-employee stock-based awards are revalued until an award vests and the Company recognizes compensation expense on a straight-line basis over the vesting period of each separated vesting tranche of the award, which is known as the accelerated attribution method. The estimation of the number of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from the Company’s current estimates, such amounts are recognized as an adjustment in the period in which estimates are revised.

 

(k)

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. A valuation allowance is recorded to the extent it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Unrecognized income tax benefits represent income tax positions taken on income tax returns that have not been recognized in the consolidated financial statements. The Company recognizes the benefit of an income tax position only if it is more likely than not (greater than 50%) that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position. Otherwise, no benefit is recognized. The tax benefits recognized are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company accrues interest, and related penalties are classified as income tax expense in the Consolidated Statements of Operations. The Company does not anticipate significant changes in the amount of unrecognized income tax benefits over the next year.

 

(l)

Net Loss Per Common Share

Basic net loss per common share is determined by dividing net loss applicable to common shareholders by the weighted average common shares outstanding during the period.  For all periods presented, the outstanding common stock options and unvested restricted stock units have been excluded from the calculation of diluted net loss per share because their effect would be anti-dilutive.  

For purposes of calculating diluted loss per common share, the denominator includes both the weighted average common shares outstanding and the number of common stock equivalents if the inclusion of such common stock equivalents would be dilutive.  Dilutive common stock equivalents for the three and six months ended June 30, 2017 include warrants using the treasury stock method.  The diluted loss per common share calculation is further affected by an add-back of change in fair value of warrant liability to the numerator, net of tax, under the assumption that the change in fair value of warrant liability would not have been incurred if the warrants had been converted into common stock.

The following table sets forth the computation of basic earnings per share and diluted earnings per share:

 

10


RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

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

(Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Basic Earnings Per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(8,855

)

 

$

(7,885

)

 

$

(16,942

)

 

$

(14,424

)

Weighted average common shares outstanding, basic

 

 

19,052,430

 

 

 

9,544,629

 

 

 

19,050,931

 

 

 

9,398,288

 

Net loss per share of common stock, basic

 

$

(0.46

)

 

$

(0.83

)

 

$

(0.89

)

 

$

(1.53

)

Diluted Earnings Per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(8,855

)

 

$

(7,885

)

 

$

(16,942

)

 

$

(14,424

)

Add change in warrant valuation

 

 

(341

)

 

 

 

 

 

(234

)

 

 

 

Diluted net loss

 

$

(9,196

)

 

$

(7,885

)

 

$

(17,176

)

 

$

(14,424

)

Weighted average common shares outstanding, basic

 

 

19,052,430

 

 

 

9,544,629

 

 

 

19,050,931

 

 

 

9,398,288

 

Add shares from outstanding warrants

 

 

168,270

 

 

 

 

 

 

169,244

 

 

 

 

Weighted average common shares outstanding, diluted

 

 

19,220,700

 

 

 

9,544,629

 

 

 

19,220,175

 

 

 

9,398,288

 

Net loss per share of common stock, diluted

 

$

(0.48

)

 

$

(0.83

)

 

$

(0.89

)

 

$

(1.53

)

 

The following potentially dilutive securities have been excluded from the computations of diluted weighted average shares outstanding as of June 30, 2017 and 2016, as they would be anti-dilutive:

 

 

 

June 30,

 

 

 

2017

 

 

2016

 

Options and restricted stock units outstanding

 

 

3,680,799

 

 

 

2,229,343

 

Warrants

 

 

490,000

 

 

 

784,928

 

 

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

 

(m)

Segment Information

The Company determined its reportable segments based on its strategic business units, the commonalities among the products and services within each segment and the manner in which the Company reviews and evaluates operating performance. The Company has identified CDMO and Acute Care as reportable segments. Segment disclosures are included in Note 17. Segment operating profit (loss) is defined as segment revenue less segment operating expenses (segment operating expenses consist of general and administrative expenses, research and development expenses, and the change in valuation of contingent consideration and warrants). The following items are excluded from segment operating profit (loss): interest income and expense, and income tax benefit (expense). Segment assets are those assets and liabilities that are recorded and reported by segment operations. Segment operating capital employed represents segment assets less segment liabilities.

 

(n)

Recent Accounting Pronouncements

In July 2017, the FASB issued Accounting Standards Update, or ASU, No. 2017-11 “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): Accounting for Certain Financial Instruments with Down Round Features,” or ASU 2017-11. ASU 2017-11 simplifies the accounting for certain financial instruments with down round features, as equity-linked instruments or embedded equity-linked features will not be accounted for as a liability solely because there is a down-round feature. The amendments are effective for public companies for annual and interim periods beginning after December 15, 2018. The Company is currently evaluating the effect that this guidance may have on its consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Stock Compensation - Scope of Modification Accounting.  ASU 2017-09 provides guidance on which changes to the terms or conditions of a share-based payment award require an entity to

11


RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

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

(Unaudited)

 

apply modification accounting. The new standard is effective for fiscal years beginning after December 15, 2017. The Company is currently evaluating the effect that this guidance may have on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04 “Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment,” or ASU 2017-04. ASU 2017-04 allows companies to apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The amendments of the ASU are effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the effect that this guidance may have on its consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15 “Classification of Certain Cash Receipts and Cash Payments,” or ASU 2016-15. ASU 2016-15 provides guidance in the classification of certain cash receipts and payments in the statement of cash flows where diversity in practice exists. This new guidance is effective for annual periods beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

In 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. The new guidance is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect that this guidance may have on its consolidated financial statements.

In September 2015, the FASB issued ASU No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments,” or ASU 2015-16. ASU 2015-16 addresses the accounting for and disclosure of measurement-period adjustments that occur in periods after a business combination is consummated. This update requires that the acquirer recognize measurement-period adjustments in the reporting period in which they are determined. Prior period information should not be revised. This update also requires an entity to present separately on the face of the income statement or disclose in the notes the amount recorded in the current-period income statement that would have been recorded in previous reporting periods if the adjustments had been recognized as of the acquisition date. The updated guidance is effective for annual and interim periods beginning after December 15, 2016. The Company adopted the guidance effective January 1, 2017. The guidance did not have a material impact to the consolidated financial statements upon adoption.

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory,” or ASU 2015-11. ASU 2015-11 addresses changes in the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. The amendments in this guidance do not apply to inventory that is measured using last-in, first-out, or LIFO, or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out or average cost methods. Within the scope of this new guidance, an entity should measure inventory at the lower of cost and net realizable value; where net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The new guidance is effective for annual periods beginning after December 15, 2016, with early adoption permitted. The new guidance must be applied on a prospective basis. The Company adopted the guidance effective January 1, 2017. The guidance did not have a material impact to the consolidated financial statements upon adoption.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” or ASU 2014-09. ASU 2014-09 represents the accounting for and disclosures of revenue recognition, with an effective date for annual and interim periods beginning after December 15, 2016. The update provides a single comprehensive model for accounting for revenue from contracts with customers. The model requires that revenue recognized reflect the actual consideration to which the entity expects to be entitled in exchange for the goods or services defined in the contract, including in situations with multiple performance obligations. In July 2015, the FASB deferred the effective date by one year. The guidance will be effective for annual and interim periods beginning after December 15, 2017. The new standard permits two methods of adoption: the full retrospective method, which requires the standard to be applied to each prior period presented, or the modified retrospective method, which requires the cumulative effect of adoption to be recognized as an adjustment to opening retained earnings in the period of adoption. The Company currently anticipates adopting the standard using the modified retrospective method. The Company plans to complete an analysis of existing contracts with its customers and to assess the differences in accounting for such contracts under ASU 2014-09 compared with current revenue accounting standards by the end of the third quarter. The new standard will result in additional revenue-related disclosures in the

12


RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

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

(Unaudited)

 

footnotes to the consolidated financial statements. The Company will continue to assess new customer contracts during 2017. Adoption of this standard will require changes to business processes, systems and controls to support the additional required disclosures. The Company is in the process of identifying such changes.

(4)

Acquisition of Gainesville Facility and Meloxicam

On April 10, 2015, the Company completed the Gainesville Transaction. The consideration paid in connection with the Gainesville Transaction consisted of $50.0 million cash at closing, a $4.0 million working capital adjustment and a seven-year warrant to purchase 350,000 shares of the Company’s common stock at an exercise price of $19.46 per share. In addition, the Company may be required to pay up to an additional $125.0 million in milestone payments (including, at the Company’s election, either (i) $10 million upon a new drug application, or NDA, filing and $30 million upon regulatory approval or (ii) an aggregate of $45 million upon regulatory approval, as well as net sales milestones related to injectable meloxicam) and a percentage of future product net sales related to injectable meloxicam between 10% and 12% (subject to a 30% reduction when no longer covered by patent). Under the acquisition method of accounting, the consideration paid and the fair value of the contingent consideration and royalties are allocated to the fair value of the assets acquired and liabilities assumed. The contingent consideration obligation is remeasured each reporting date with changes in fair value recognized as a period charge within the statement of operations (see Note 6 for further information regarding fair value).

The contingent consideration consists of three separate components. The first component consists of two potential payments, which will be payable upon the submission of the NDA for meloxicam and the related regulatory approval or one payment upon regulatory approval. The second component consists of three potential payments, based on the achievement of specified annual revenue targets. The third component consists of a royalty payment for a defined term on future meloxicam net sales.

The fair value of the first contingent consideration component recognized on the acquisition date was estimated by applying a risk-adjusted discount rate to the probability-adjusted contingent payments and the expected approval dates. The fair value of the second contingent consideration component recognized on the acquisition date was estimated by applying a risk-adjusted discount rate to the potential payments resulting from probability-weighted revenue projections and expected revenue target attainment dates. The fair value of the third contingent consideration component recognized on the acquisition date was estimated by applying a risk-adjusted discount rate to the potential payments resulting from probability-weighted revenue projections and the defined royalty percentage.

These fair values are based on significant inputs not observable in the market, which are referred to in the guidance as Level 3 inputs. The contingent consideration components are classified as liabilities and are subject to the recognition of subsequent changes in fair value through the results of operations.

(5)

NMB Related License Agreement

In June 2017, the Company acquired the exclusive global rights to two novel neuromuscular blocking agents, or NMBs, and a proprietary chemical reversal agent from Cornell University, or Cornell. The NMBs and reversal agent are referred to herein as the NMB Related Compounds. The NMB Related Compounds include one novel intermediate-acting NMB that has initiated Phase I clinical trials and two other agents, a novel short-acting NMB, and a rapid-acting reversal agent proprietary to these NMB Related Compounds.

The transaction was accounted for as an asset acquisition, with the total cost of the acquisition of $766 allocated to acquired IPR&D. The Company recorded an upfront payment obligation of $350 that is included within Accounts payable, as well as operational liabilities and acquisition-related costs of $416, primarily consisting of reimbursement to Cornell for specified past patent, legal and pre-clinical costs, each of which is reported as a component of Accrued expenses and other current liabilities and Other non-current liabilities on the Consolidated Balance Sheet as of June 30, 2017.

In addition, the Company is obligated to make: (i) an annual license maintenance fee payment until the first commercial sale of the NMB Related Compounds; and (ii) milestone payments upon the achievement of certain milestones, up to a maximum, for each NMB, of $5 million for U.S. regulatory approval and commercialization milestones and $3 million for European regulatory approval and commercialization milestones. The Company is also obligated to pay Cornell royalties on net sales of the NMB Related Compounds at a rate ranging from low to mid-single digits, depending on the applicable NMB Related Compounds and whether there is a valid patent claim in the applicable country, subject to an annual minimum royalty amount. Further, the Company will reimburse Cornell ongoing patent costs related to prosecution and maintenance of the patents related to the Cornell patents for the NMB Related Compounds.

13


RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

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

(Unaudited)

 

The Company accounted for the transaction as an asset acquisition based on an evaluation of the accounting guidance (ASC Topic 805) and considering the early clinical stage of the novel and unproven NMB Related Compounds. The Company concluded that the acquired IPR&D of Cornell did not constitute a business as defined under ASC 805 due to the incomplete nature of the inputs and the absence of processes from a market participant perspective. Substantial additional research and development will be required to develop any NMB Related Compounds into a commercially viable drug candidate, including completion of pre-clinical testing and clinical trials, and, if such clinical trials are successful, application for regulatory approvals and manufacturing repeatability and scale-up. There is risk that a marketable compound may not be well tolerated and may never be approved.

Acquired IPR&D in the asset acquisition was accounted for in accordance with FASB ASC Topic 730, “Research and Development.” At the date of acquisition, the Company determined that the development of the projects underway at Cornell had not yet reached technological feasibility and that the research in process had no alternative future uses.  Accordingly, the acquired IPR&D was charged to expense in the Consolidated Statements of Operations on the acquisition date. The acquired IPR&D charge is expected to be deductible over a 15-year period for income tax purposes.

(6)

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, warrants and the contingent consideration. 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.

14


RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

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

(Unaudited)

 

The Company has classified assets and liabilities measured at fair value on a recurring basis as follows:

 

 

 

Fair value measurements at reporting

date using

 

 

 

Quoted prices

in active

markets for

identical

assets

(Level 1)

 

 

Significant

other

observable

inputs

(Level 2)

 

 

Significant

unobservable

inputs

(Level 3)

 

At December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds (See Note 7)

 

$

37,079

 

 

$

 

 

$

 

U.S. Treasury obligations (See Note 7)

 

 

20,517

 

 

 

 

 

 

 

Cash equivalents

 

$

57,596

 

 

$

 

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Warrants (See Note 14(d))

 

 

 

 

 

 

 

$

3,397

 

Contingent consideration (See Note 4)

 

 

 

 

 

 

 

 

69,574

 

 

 

$

 

 

$

 

 

$

72,971

 

At June 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds (See Note 7)

 

$

6,043

 

 

$

 

 

$

 

Total cash equivalents

 

$

6,043

 

 

$

 

 

$

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury obligations (See Note 7)

 

$

41,517

 

 

$

 

 

$

 

Total financial assets

 

$

47,560

 

 

$

 

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Warrants (See Note 14(d))

 

 

 

 

 

 

 

$

2,604

 

Contingent consideration (See Note 4)

 

 

 

 

 

 

 

 

75,347

 

 

 

$

 

 

$

 

 

$

77,951

 

 

The Company developed its own assumptions to determine the value of the warrants that do not have observable inputs or available market data to support the fair value. This method of valuation involves using inputs such as the fair value of the Company’s common stock, stock price volatility, the contractual term of the warrants, risk free interest rates and dividend yield. Due to the nature of these inputs, the valuation of the warrants is considered a Level 3 measurement.  

 

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

 

 

 

Warrants

 

 

Contingent Consideration

 

Balance at December 31, 2016

 

$

3,397

 

 

$

69,574

 

Additions

 

 

 

 

 

 

Remeasurement

 

 

(793

)

 

 

5,773

 

Balance at June 30, 2017

 

$

2,604

 

 

$

75,347

 

 

The Company follows the disclosure provisions of FASB ASC Topic 825, “Financial Instruments” (ASC 825), for disclosure purposes for financial assets and financial liabilities that are not measured at fair value. As of June 30, 2017, 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, accrued expenses and current debt obligations 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 June 30, 2017 due to the estimated amount of the Excess Cash Flow payments and terms of the debt.

15


RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

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

(Unaudited)

 

 

(7)

Short-term Investments

Short-term investments as of June 30, 2017 consist of government money market funds and U.S. Treasury obligations. In accordance with FASB ASC Topic 320, “Investments – Debt and Equity Securities,” or ASC 320, the Company has classified its entire investment portfolio as available-for-sale securities with secondary or resale markets, and, as such, its portfolio is reported at fair value with unrealized gains and losses included in Comprehensive Income in stockholders’ equity and realized gains and losses included in other income/expense. The following is a summary of available-for-sale securities as of June 30, 2017.

 

 

 

June 30, 2017

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Estimated

 

Description

 

Cost

 

 

Gain

 

 

Loss

 

 

Fair Value

 

Money market mutual funds

 

$

6,043

 

 

$

 

 

$

 

 

$

6,043

 

U.S. Treasury obligations

 

 

41,593

 

 

 

 

 

 

(76

)

 

 

41,517

 

Total Investments

 

$

47,636

 

 

$

 

 

$

(76

)

 

$

47,560

 

 

As of June 30, 2017, the Company’s investments had maturities ranging from one to six months. As of December 31, 2016, all of the Company’s investments in US. Treasury obligations had original maturities of less than three months. The fair value of the Company’s U.S. Treasury obligations is determined by taking into consideration valuations obtained from third-party pricing services. The third-party pricing services utilize industry standard valuation models, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities, issuer credit spreads, benchmark securities, and other observable inputs.

Certain investment securities as of June 30, 2017 had fair values less than their amortized costs and, therefore, contained unrealized losses. The Company has evaluated these investments and has determined that the decline in value was not related to any Company or industry specific event. As of June 30, 2017, there were 23 U.S. Treasury investments with unrealized losses. The gross unrealized losses related to these investments were due to changes in interest rates. Given that the Company has no intent to sell any of these investments until a recovery of its fair value, which may be at maturity, and there are no current requirements to sell any of these investments, the Company did not consider these investments to be other-than-temporarily impaired as of June 30, 2017. The Company anticipates full recovery of amortized costs with respect to these investments at maturity or sooner in the event of a more favorable market interest rate environment. The duration of time the investments had been in a continuous unrealized loss position as of June 30, 2017 was less than 12 months.

(8)

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 as of June 30, 2017 and December 31, 2016:

 

 

 

June 30, 2017

 

 

December 31, 2016

 

Raw materials

 

$

2,371

 

 

$

2,618

 

Work in process

 

 

3,151

 

 

 

5,219

 

Finished goods

 

 

1,777

 

 

 

1,793

 

 

 

 

7,299

 

 

 

9,630

 

Provision for inventory obsolescence

 

 

(411

)

 

 

(884

)

 

 

$

6,888

 

 

$

8,746

 

16


RECRO PHARMA, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

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

(Unaudited)

 

 

The provision for inventory obsolescence decreased approximately $473 during the six months ended June 30, 2017, primarily due to the disposal of the fully reserved inventory at December 31, 2016. Adjustments to inventory are determined at the raw materials, work-in-process, and finished good levels to reflect obsolescence or impaired balances. Inventory is ordered to meet specific customer orders and largely reflects demand. Factors influencing inventory obsolescence include changes in demand, product life cycle, product pricing, physical deterioration and quality concerns.

(9)

Property, Plant and Equipment

Property, plant and equipment consists of the following:

 

 

 

June 30, 2017

 

 

December 31, 2016

 

Land

 

$

3,263

 

 

$

3,263

 

Building and improvements

 

 

15,757

 

 

 

15,613

 

Furniture, office and computer equipment

 

 

4,031

 

 

 

3,811

 

Vehicles

 

 

30

 

 

 

30

 

Manufacturing equipment

 

 

23,454

 

 

 

21,508

 

Construction in progress

 

 

2,650

 

 

 

2,198

 

 

 

 

49,185