UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the Quarterly Period Ended: September 30, 2019

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 November 5, 2019, there were 22,730,347 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

 

30

 

 

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

41

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

41

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

42

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

42

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

42

 

 

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

43

 

 

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

43

 

 

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

43

 

 

 

 

 

 

 

Item 5.

 

Other Information

 

43

 

 

 

 

 

 

 

Item 6.

 

Exhibits

 

43

 

 

 

 

 

 

SIGNATURES

 

45

 

 

 

 

 

 

 

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)

 

September 30, 2019

 

 

December 31, 2018

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

37,944

 

 

$

38,514

 

Accounts receivable

 

 

16,216

 

 

 

12,866

 

Contract asset

 

 

10,643

 

 

 

5,201

 

Inventory

 

 

12,921

 

 

 

10,699

 

Prepaid expenses and other current assets

 

 

3,784

 

 

 

3,861

 

Total current assets

 

 

81,508

 

 

 

71,141

 

Property, plant and equipment, net

 

 

48,067

 

 

 

45,640

 

Right-of-use asset

 

 

1,366

 

 

 

 

Intangible assets, net

 

 

30,329

 

 

 

32,266

 

Goodwill

 

 

6,446

 

 

 

6,446

 

Total assets

 

$

167,716

 

 

$

155,493

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,017

 

 

$

4,510

 

Accrued expenses and other current liabilities

 

 

8,556

 

 

 

14,165

 

Current operating lease liability

 

 

525

 

 

 

 

Current portion of contingent consideration

 

 

 

 

 

10,354

 

Total current liabilities

 

 

10,098

 

 

 

29,029

 

Long-term debt, net

 

 

108,859

 

 

 

64,243

 

Warrants and other long-term liabilities

 

 

2,040

 

 

 

1,163

 

Long-term operating lease liability

 

 

915

 

 

 

 

Long-term portion of contingent consideration

 

 

65,671

 

 

 

80,558

 

Total liabilities

 

 

187,583

 

 

 

174,993

 

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, 22,614,113 shares at September 30, 2019 and 21,799,961 shares at

   December 31, 2018

 

 

226

 

 

 

218

 

Additional paid-in capital

 

 

177,281

 

 

 

168,535

 

Accumulated deficit

 

 

(197,374

)

 

 

(188,253

)

Accumulated other comprehensive loss

 

 

 

 

 

 

Total shareholders’ equity

 

 

(19,867

)

 

 

(19,500

)

Total liabilities and shareholders’ equity

 

$

167,716

 

 

$

155,493

 

 

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 September 30,

 

 

For the Nine Months Ended September 30,

 

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

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenue

 

$

25,255

 

 

$

18,283

 

 

$

81,577

 

 

$

59,564

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales (excluding amortization of intangible assets)

 

 

11,027

 

 

 

8,472

 

 

 

39,518

 

 

 

31,033

 

Research and development

 

 

1,845

 

 

 

11,348

 

 

 

18,578

 

 

 

29,947

 

General and administrative

 

 

6,879

 

 

 

6,969

 

 

 

31,055

 

 

 

29,442

 

Amortization of intangible assets

 

 

646

 

 

 

646

 

 

 

1,938

 

 

 

1,938

 

Change in warrant valuation

 

 

160

 

 

 

287

 

 

 

939

 

 

 

(78

)

Change in contingent consideration valuation

 

 

3,909

 

 

 

4,115

 

 

 

(15,241

)

 

 

7,030

 

Total operating expenses

 

 

24,466

 

 

 

31,837

 

 

 

76,787

 

 

 

99,312

 

Operating income (loss)

 

 

789

 

 

 

(13,554

)

 

 

4,790

 

 

 

(39,748

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

323

 

 

 

126

 

 

 

642

 

 

 

382

 

Interest expense

 

 

(5,417

)

 

 

(2,198

)

 

 

(14,553

)

 

 

(6,490

)

Net loss before income taxes

 

 

(4,305

)

 

 

(15,626

)

 

 

(9,121

)

 

 

(45,856

)

Income tax benefit

 

 

 

 

 

2,370

 

 

 

 

 

 

7,430

 

Net loss

 

$

(4,305

)

 

$

(13,256

)

 

$

(9,121

)

 

$

(38,426

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share of common stock, basic and diluted

 

$

(0.19

)

 

$

(0.64

)

 

$

(0.41

)

 

$

(1.91

)

Weighted average common shares outstanding, basic and diluted

 

 

22,505,723

 

 

 

20,721,330

 

 

 

22,231,990

 

 

 

20,122,569

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(4,305

)

 

$

(13,256

)

 

$

(9,121

)

 

$

(38,426

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on available-for-sale securities

 

 

 

 

 

 

 

 

(1

)

 

 

1

 

Comprehensive loss

 

$

(4,305

)

 

$

(13,256

)

 

$

(9,122

)

 

$

(38,425

)

 

See accompanying notes to consolidated financial statements.

4

 


 

RECRO PHARMA, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

(Unaudited)

 

For the Nine Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

Accumulated

other

 

 

 

 

 

(amounts in thousands, except share data)

 

Shares

 

 

Amount

 

 

paid-in

capital

 

 

Accumulated

Deficit

 

 

comprehensive

loss

 

 

Total

 

Balance, December 31, 2018

 

 

21,799,961

 

 

$

218

 

 

$

168,535

 

 

$

(188,253

)

 

$

 

 

$

(19,500

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

2,826

 

 

 

 

 

 

 

 

 

2,826

 

Stock option exercise

 

 

29,750

 

 

 

 

 

 

185

 

 

 

 

 

 

 

 

 

185

 

Issuance of restricted stock units, net of

   shares withheld for income taxes

 

 

268,915

 

 

 

3

 

 

 

(865

)

 

 

 

 

 

 

 

 

(862

)

Issuance of common stock for equity

   facility

 

 

34,762

 

 

 

 

 

 

301

 

 

 

 

 

 

 

 

 

301

 

Change in other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

(1

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(1,977

)

 

 

 

 

 

(1,977

)

Balance, March 31, 2019

 

 

22,133,388

 

 

$

221

 

 

$

170,982

 

 

$

(190,230

)

 

$

(1

)

 

$

(19,028

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

2,359

 

 

 

 

 

 

 

 

 

2,359

 

Stock option exercise

 

 

206,625

 

 

 

2

 

 

 

907

 

 

 

 

 

 

 

 

 

909

 

Issuance of restricted stock units, net of

   shares withheld for income taxes

 

 

74,594

 

 

 

1

 

 

 

(114

)

 

 

 

 

 

 

 

 

(113

)

Change in other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

1

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(2,839

)

 

 

 

 

 

(2,839

)

Balance, June 30, 2019

 

 

22,414,607

 

 

$

224

 

 

$

174,134

 

 

$

(193,069

)

 

$

 

 

$

(18,711

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,741

 

 

 

 

 

 

 

 

 

1,741

 

Stock option exercise

 

 

186,947

 

 

 

2

 

 

 

1,463

 

 

 

 

 

 

 

 

 

1,465

 

Issuance of restricted stock units, net of

   shares withheld for income taxes

 

 

12,559

 

 

 

 

 

 

(57

)

 

 

 

 

 

 

 

 

(57

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(4,305

)

 

 

 

 

 

(4,305

)

Balance, September 30, 2019

 

 

22,614,113

 

 

$

226

 

 

$

177,281

 

 

$

(197,374

)

 

$

 

 

$

(19,867

)

5

 


 

 

 

For the Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

Accumulated

other

 

 

 

 

 

(amounts in thousands, except share data)

 

Shares

 

 

Amount

 

 

paid-in

capital

 

 

Accumulated

Deficit

 

 

comprehensive

loss

 

 

Total

 

Balance, December 31, 2017

 

 

19,127,435

 

 

$

191

 

 

$

140,006

 

 

$

(111,348

)

 

$

(1

)

 

$

28,848

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,584

 

 

 

 

 

 

 

 

 

1,584

 

Stock option exercise

 

 

14,575

 

 

 

 

 

 

65

 

 

 

 

 

 

 

 

 

65

 

Issuance of restricted stock units, net of

   shares withheld for income taxes

 

 

25,364

 

 

 

 

 

 

(86

)

 

 

 

 

 

 

 

 

(86

)

Sale of common stock under equity

   facility, net of transaction costs

 

 

383,040

 

 

 

4

 

 

 

3,798

 

 

 

 

 

 

 

 

 

3,802

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(12,457

)

 

 

 

 

 

(12,457

)

Cumulative effect of adoption of new

   accounting standards, net of tax

 

 

 

 

 

 

 

 

 

 

 

2,818

 

 

 

 

 

 

2,818

 

Balance, March 31, 2018

 

 

19,550,414

 

 

$

195

 

 

$

145,367

 

 

$

(120,987

)

 

$

(1

)

 

$

24,574

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,719

 

 

 

 

 

 

 

 

 

1,719

 

Stock option exercise

 

 

159,786

 

 

 

2

 

 

 

960

 

 

 

 

 

 

 

 

 

962

 

Issuance of restricted stock units, net of

   shares withheld for income taxes

 

 

91,354

 

 

 

1

 

 

 

(2

)

 

 

 

 

 

 

 

 

(1

)

Sale of common stock under equity

   facility, net of transaction costs

 

 

700,000

 

 

 

7

 

 

 

7,350

 

 

 

 

 

 

 

 

 

7,357

 

Cashless exercise of warrants

 

 

214,715

 

 

 

2

 

 

 

2,587

 

 

 

 

 

 

 

 

 

2,589

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

1

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(12,713

)

 

 

 

 

 

(12,713

)

Balance, June 30, 2018

 

 

20,716,269

 

 

$

207

 

 

$

157,981

 

 

$

(133,700

)

 

$

 

 

$

24,488

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,947

 

 

 

 

 

 

 

 

 

1,947

 

Stock option exercise

 

 

5,201

 

 

 

 

 

 

31

 

 

 

 

 

 

 

 

 

31

 

Issuance of restricted stock units, net of

   shares withheld for income taxes

 

 

6,028

 

 

 

 

 

 

(4

)

 

 

 

 

 

 

 

 

(4

)

Sale of common stock under equity

   facility, net of transaction costs

 

 

 

 

 

 

 

 

341

 

 

 

 

 

 

 

 

 

341

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(13,256

)

 

 

 

 

 

(13,256

)

Balance, September 30, 2018

 

 

20,727,498

 

 

$

207

 

 

$

160,296

 

 

$

(146,956

)

 

$

 

 

$

13,547

 

 

See accompanying notes to consolidated financial statements.

6

 


 

RECRO PHARMA, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

For the Nine Months Ended September 30,

 

(amounts in thousands)

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(9,121

)

 

$

(38,426

)

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

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

6,926

 

 

 

5,250

 

Non-cash interest expense

 

 

3,872

 

 

 

968

 

Depreciation expense

 

 

4,656

 

 

 

3,819

 

Amortization

 

 

1,938

 

 

 

1,938

 

Change in warrant valuation

 

 

939

 

 

 

(78

)

Change in contingent consideration valuation

 

 

(15,241

)

 

 

7,030

 

Deferred income taxes

 

 

 

 

 

(7,430

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Inventory

 

 

(2,223

)

 

 

(343

)

Contract asset

 

 

(5,442

)

 

 

(3,710

)

Prepaid expenses and other current assets

 

 

384

 

 

 

170

 

Right-of-use asset

 

 

500

 

 

 

 

Accounts receivable

 

 

(3,351

)

 

 

(2,059

)

Accounts payable, accrued expenses and other liabilities

 

 

(6,360

)

 

 

(2,192

)

Operating lease liability

 

 

(506

)

 

 

 

Net cash used in operating activities

 

 

(23,029

)

 

 

(35,063

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(9,643

)

 

 

(4,363

)

Purchase of short-term investments

 

 

(12,020

)

 

 

(6,225

)

Proceeds from maturity of investments

 

 

12,100

 

 

 

8,500

 

Acquisition of license agreement

 

 

(165

)

 

 

(82

)

Net cash (used in)/provided by investing activities

 

 

(9,728

)

 

 

(2,170

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

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

 

 

43,600

 

 

 

 

Payment of deferred financing costs

 

 

(2,936

)

 

 

(261

)

Proceeds from sale of common stock, net of transaction costs

 

 

 

 

 

11,331

 

Payments of withholdings on shares withheld for income taxes

 

 

(1,029

)

 

 

(91

)

Payment of contingent consideration

 

 

(10,000

)

 

 

 

Proceeds from option exercise

 

 

2,552

 

 

 

1,058

 

Net cash provided by financing activities

 

 

32,187

 

 

 

12,037

 

Net decrease in cash and cash equivalents

 

 

(570

)

 

 

(25,196

)

Cash and cash equivalents, beginning of period

 

 

38,514

 

 

 

60,984

 

Cash and cash equivalents, end of period

 

$

37,944

 

 

$

35,788

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

10,601

 

 

$

6,214

 

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

   accounts payable

 

$

21

 

 

$

3,185

 

Common stock issued in connection with equity facility

 

$

301

 

 

$

357

 

 

See accompanying notes to consolidated financial statements.

 

 


7

 


 

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 pharma services and pharmaceutical company that operates through two business segments: a revenue-generating contract development and manufacturing, or CDMO, segment and an Acute Care segment. Each of these segments are deemed to be reportable segments (see Note 3(m) and Note 18). The CDMO segment 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 and the Acute Care segment develops proprietary product candidates including intravenous, or IV, Meloxicam, for which the Company is pursuing resolution of a Complete Response Letter, or CRL, received from the U.S. Food and Drug Administration, or FDA, regarding the New Drug Application, or NDA, for IV meloxicam. On October 31, 2019, the Company announced that it had received a written decision from the FDA granting its appeal of the Complete Response Letter relating to the NDA seeking approval for IV meloxicam.  See Note 23.

In April 2019, after receipt of the second CRL for IV meloxicam, the Company announced it had implemented a strategic restructuring initiative, and corresponding reduction in the Acute Care segment workforce, aimed at reducing operating expenses, while maintaining key personnel needed to obtain FDA approval and advance IV meloxicam.  The Company anticipates the completion of the spin-off of its Acute Care business into a standalone, publicly-traded company, Baudax Bio, Inc. (Baudax Bio), to Recro shareowners by the end of the fourth quarter 2019.  See Note 22.

(2)

Development-Stage Risks and Liquidity

 

The Company has incurred losses from operations since inception and has an accumulated deficit of $197,374 as of September 30, 2019. Although its CDMO segment has been profitable, the Company anticipates incurring additional losses until such time when its development costs are reduced and/or alternative structures have been put in place for its Acute Care product candidates. Additional financing may be needed by the Company to fund its operations and to repay the principal on its debt. The Company may raise such capital through debt refinancing, bank or other loans, sale of assets, spin-off transactions, strategic research and development, licensing and/or through public or private sales of equity or debt securities from time to time. Financing may not be available on acceptable terms, or at all, and failure to raise capital when needed could materially adversely impact the Company’s growth plans and its financial condition or results of operations. Additional equity financing, if available, may be dilutive to the holders of its common stock and may involve significant cash payment obligations and covenants that restrict the Company’s ability to operate its business. 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, spin-off transactions, or out-licensing transactions; (iii) the development of competitive therapies by other biotechnology and pharmaceutical companies; and, ultimately, (iv) regulatory approval and market acceptance of the Company’s proposed future products, including IV meloxicam. 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.

(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 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 nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2019.

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, 2018 included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

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(b)

Use of Estimates

The preparation of financial statements and the notes to the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from such estimates.

 

(c)

Cash and Cash Equivalents

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

 

(d)

Property and Equipment

Property and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, which are as follows: three to ten 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 costs are expensed as incurred.

 

(e)

Business Combinations

In accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 805, “Business Combinations,” or ASC 805, the Company allocates the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. Valuations are performed to assist in determining the fair values of assets acquired and liabilities assumed, which requires management to make significant estimates and assumptions, in particular with respect to intangible assets. Management makes estimates of fair value based upon assumptions believed to be reasonable. These estimates are based in part on historical experience and information obtained from management of the acquired companies and expectations of future cash flows. Transaction costs and restructuring costs associated with the transaction are expensed as incurred. 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 and Comprehensive Loss 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 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 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.

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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 and Comprehensive Loss. 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 unless a triggering event occurs between annual assessments, which would then require an assessment in the period which a triggering event occurred.

The Company performs its annual goodwill and indefinite-lived intangible asset impairment test as of November 30th, or whenever an event or change in circumstances occurs that would require reassessment of the recoverability of those assets. In performing the evaluation, the Company assesses qualitative factors such as overall financial performance of its reporting units, anticipated changes in industry and market conditions, including recent tax reform, intellectual property protection, market, regulatory and financing risks and competitive environments. Due to the receipt of the CRL in March 2019, an indicator of potential impairment, the Company performed an impairment test as of March 31, 2019, which indicated that there was no impairment to goodwill or indefinite-lived intangible assets. There have been no additional triggering events as of September 30, 2019.  The Company will perform its annual test as of November 30, 2019.

 

(g)

Revenue Recognition

The Company generates revenues from manufacturing, packaging, research and development, 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, sales-based royalties and/or profit-sharing components.  The Company’s revenue policies listed below are reflective of Accounting Standards Update, or ASU, No. 2014-09, “Revenue from Contracts with Customers,” or ASU 2014-09, which the Company adopted effective January 1, 2018.

 

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

 

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

 

Revenues related to research and development for our CDMO segment are generally recognized over-time as the related services or activities are performed using the output method and in accordance with the contract terms. In agreements which specify milestones, the Company evaluates whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. Milestone payments related to arrangements under which the Company has continuing performance obligations would be deferred and recognized over the period of performance. Milestone payments that are not within the control of the Company, such as submission for approval to regulators by a commercial partner or approvals from regulators, are not considered probable of being achieved until those submissions are submitted by the customer or approvals are received.

 

(h)

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash, cash equivalents, 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.

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

The Company’s CDMO segment is dependent on its relationships with a small number of commercial partners, with its four largest customers having generated 96% and 97% of its revenues for three and nine months ended September 30, 2019, respectively. A portion of the Company’s revenues is dependent on U.S. based customers selling to end-users outside the United States.

 

(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, pre-clinical activities, 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. 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 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 the historical volatility of our publicly traded stock in order to estimate future stock price trends. The risk-free interest rate is based on U.S. Treasury notes with a term approximating the expected life of the option.

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

 

(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 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.

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.

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(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, warrants 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. There are no dilutive common stock equivalents for the three and nine months ended September 30, 2019 and 2018.

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

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,