10-Q

(1) Background

Recro Pharma, Inc. (the “Company”) was incorporated in the Commonwealth of Pennsylvania on November 15, 2007. The Company is a dedicated contract development and manufacturing organization (“CDMO”) solving complex formulation and manufacturing challenges for companies developing oral solid dose drug products. It leverages its formulation and development expertise to develop and manufacture pharmaceutical products using proprietary delivery technologies and know-how for commercial partners who commercialize or plan to commercialize these products. The Company operates in one segment.

The Company has incurred net losses since inception and has an accumulated deficit of $239,911 as of June 30, 2021, which is primarily related to the activities of its former research and development business, which was spun-out in 2019. The Company’s future operations are highly dependent on the continued profitability of its manufacturing operations. Management believes that it is probable that the Company will be able to meet its obligations as they become due within at least one year after the date the financial statements are issued.

(2) Summary of significant accounting principles

Basis of presentation and principles of consolidation

The accompanying unaudited consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. In accordance with Securities and Exchange Commission ("SEC") rules for interim financial statements, certain information required by U.S. GAAP may be condensed or omitted. The Company’s consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. In the opinion of management, the accompanying consolidated financial statements include all normal and recurring adjustments (which consist primarily of accruals, estimates and assumptions that impact the financial statements) considered necessary to present fairly the Company’s results for the interim periods. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.

The accompanying unaudited interim consolidated financial statements should be read in conjunction with the annual audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Use of estimates

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

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.

Property, plant and equipment

Property, plant and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, which are as follows: three to ten years for furniture, office and computer equipment; six to ten years for manufacturing equipment; 40 years for buildings; and the shorter of the lease term or useful life for leasehold improvements. Repairs and maintenance costs are expensed as incurred. The Company reviews the carrying value of property, plant and equipment for recoverability whenever events occur or changes in circumstances indicate that the carrying amount of individual assets or asset groups may not be recoverable.

Goodwill and intangible assets

Goodwill represents the excess of purchase price over the fair value of net assets acquired by the Company. Goodwill is not amortized but assessed for impairment on an annual basis or more frequently if impairment indicators exist.

The impairment analysis for goodwill consists of an optional qualitative assessment potentially followed by a quantitative analysis. If the Company determines that the carrying value of its reporting unit exceeds its fair value, an impairment charge is recorded for the excess.

The Company performs its annual goodwill impairment test as of November 30th, or whenever an event or change in circumstances occurs that would require reassessment of the recoverability of goodwill. In performing the evaluation, the Company assesses qualitative factors such as overall financial performance, anticipated changes in industry and market conditions, and competitive environments.

Definite-lived intangible assets are amortized on a straight-line basis over their estimated useful life. The Company is required to review the carrying value of definite-lived intangible assets for recoverability whenever events occur or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.

Revenue recognition

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

Manufacturing

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

Profit-sharing

In addition to manufacturing and packaging revenue, certain customer agreements may have intellectual property sales-based profit-sharing and/or royalties consideration, collectively referred to as profit-sharing, computed on the net product sales of the commercial partner. Profit-sharing revenues are generally recognized under the terms of the applicable license, development and/or supply agreement. For arrangements that include sales-based profit-sharing where the license for intellectual property is deemed to be the predominant item to which the profit-sharing relates, the Company recognizes revenue when the related sales occur by the commercial partner. For arrangements that include sales-based profit-sharing where the license for intellectual property is not deemed to be the predominant item to which the profit-sharing relates, the Company recognizes revenue upon transfer of control of the manufactured product. In these cases, significant judgment is required to calculate the estimated variable consideration from such profit-sharing using the expected value method based on historical commercial partner pricing and deductions. Estimated variable consideration is partially constrained due to the uncertainty of price adjustments made by the Company’s commercial partners, which are outside of the Company’s control. Factors causing price adjustments by the Company’s commercial partners include increased competition in the products’ markets, mix of volume between the commercial partners’ customers, and changes in government pricing.

Research and development

Research and development revenue includes services associated with formulation, process development, clinical trials materials services, as well as custom development of manufacturing processes and analytical methods for a customer’s non-clinical, clinical and commercial products. Such revenues are recognized at a point in time or over time depending on the nature and particular facts and circumstances associated with the contract terms.

In contracts that specify milestones, the Company evaluates whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. Milestone payments related to arrangements under which the Company has continuing performance obligations are deferred and recognized over the period of performance. Milestone payments that are not within the Company’s control, such as submission for approval to regulators by a commercial partner or approvals from regulators, are not considered probable of being achieved until those submissions are submitted by the customer or approvals are received.

In contracts that require revenue recognition over time, the Company utilizes input or output methods, depending on the specifics of the contract, that compare the cumulative work-in-process to date to the most current estimates for the entire performance obligation. Under these contracts, the customer typically owns the product details and process, which have no alternative use. These projects are customized to each customer to meet its specifications and typically only one performance obligation is included. Each project represents a distinct service that is sold separately and has stand-alone value to the customer. The customer also retains control of its product as the product is being created or enhanced by the Company’s services and can make changes to its process or specifications upon request.

Concentration of credit risk

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

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

The Company is dependent on its relationships with a small number of commercial partners, with its three largest customers having generated 90% or more of its revenues for the periods presented.

Stock-based compensation expense

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

Determining the appropriate fair value of stock options requires the input of subjective assumptions, including the expected life of the option and expected stock price volatility. The Company uses the Black-Scholes option pricing model to value its stock option awards. The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and/or management uses different assumptions, stock-based compensation expense could be materially different for future awards.

The expected life of stock options was estimated using the “simplified method,” which is based on the average of the vesting tranches and the contractual life of each grant. For stock price volatility, the Company uses the historical volatility of its publicly traded stock in order to estimate future stock price trends. The risk-free interest rate is based on U.S. Treasury notes with a term approximating the expected life of the option.

Upon exercise of stock options or vesting of restricted stock units, the holder may elect to cover tax withholdings by forfeiting shares of an equivalent value. In such cases, the Company issues net new shares to the holder, pays the tax withholding on behalf of the participant and presents the payment similar to a capital distribution: a reduction to additional paid-in-capital and a financing cash outflow in the consolidated financial statements.

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

Income taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. A valuation allowance is recorded to the extent it is more likely than not that some portion or all of the deferred tax assets will not be realized. A full valuation allowance was recorded as of June 30, 2021 and December 31, 2020.

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

Income or loss per share

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

To calculate diluted income or loss per share, the numerator and denominator are adjusted to eliminate the income or loss and the dilutive effects on shares, respectively, caused by outstanding common stock options, warrants and unvested restricted stock units, using the treasury stock method, if the inclusion of such instruments would be dilutive.

For the three months ended June 30, 2021, there was no difference in the net income used to calculate basic and diluted per share results. The following table reconciles the difference in weighted average shares outstanding used for basic and diluted per share results:


Weighted average shares outstanding, basic		39,018,730
Dilutive impact of:
Restricted stock units		218,253
Stock options		4,024
Warrants		111,047
Weighted average shares outstanding, diluted		39,352,054

For the six months ended June 30, 2021 and for both of the 2020 periods presented, the Company incurred a net loss. In periods of net loss, the inclusion of dilutive securities would be antidilutive because it would reduce the amount of loss incurred per share. As a result, no additional dilutive shares were included in diluted loss per share, and there were no differences between basic and diluted loss per share.

The following table presents the potentially dilutive securities that were excluded from the computations of diluted loss per share:


	Three months ended June 30,				Six months ended June 30,
	2021		2020		2021		2020
Restricted stock units		540,942		913,220		456,344		744,185
Stock options		4,465,348		3,586,726		4,337,299		2,278,411
Warrants		348,664		348,664		348,664		348,664

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

Recently adopted accounting pronouncements

On January 1, 2020, the Company adopted ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement,” or ASU 2018-13. ASU 2018-13 removes, modifies and adds certain disclosure requirements in Topic 820 “Fair Value Measurement”. There was no impact upon adoption because the Company is not currently required to provide any of the disclosures impacted by the new standard.

On January 1, 2021, the Company adopted ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” or ASU 2016-13, a new standard for measuring expected credit losses. That guidance impacts the measurement of doubtful accounts receivable, among other things. There was no impact upon adoption because the Company does not currently have any significant exposure to credit losses.

(3) Fair value of financial instruments

The Company follows the provisions of FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” for fair value measurement recognition and disclosure purposes for its financial assets and financial liabilities that are remeasured and reported at fair value each reporting period. The Company measures certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents, short-term investments and certain warrants. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of financial assets and financial liabilities and their placement within the fair value hierarchy. Categorization is based on a three-tier valuation hierarchy, which prioritizes the inputs used in measuring fair value, as follows:

•

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities;

•

Level 2: Inputs that are other than quoted prices in active markets for identical assets and liabilities, inputs that are quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are either directly or indirectly observable; and

•

Level 3: Unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

Items measured at fair value on a recurring basis

Cash equivalents of $41,411 at June 30, 2021 and $6,583 at December 31, 2020 consisted entirely of money market mutual funds whose fair value were determined using Level 1 measurements.

Fair value disclosures

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, 2021, the financial assets and liabilities recorded on the consolidated balance sheets that are not measured at fair value on a recurring basis include accounts receivable, accounts payable and accrued expenses. The carrying values of these accounts approximate fair value due to their short-term nature.

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 its debt, a level 2 measurement, approximated fair value at June 30, 2021 due to the February 2021 amendment of the Credit Agreement and taking into consideration management's current evaluation of market conditions.

(4) Inventory

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

Inventory was as follows:


	June 30, 2021			December 31, 2020
Raw materials	$	2,749		$	3,373
Work in process		1,633			5,061
Finished goods		3,826			3,544
Inventory, prior to provision		8,208			11,978
Provision for inventory obsolescence		(330	)		(366	)
Inventory	$	7,878		$	11,612

Adjustments to inventory are determined at the raw materials, work-in-process, and finished good levels to reflect obsolescence or impaired balances. Inventory is primarily ordered to meet specific customer orders and largely reflects demand. Factors influencing inventory obsolescence include changes in demand, product life cycle, product pricing, physical deterioration and quality concerns.

(5) Property, plant and equipment

Property, plant and equipment consists of the following:


	June 30, 2021			December 31, 2020
Land	$	3,263		$	3,263
Building and improvements		20,947			20,924
Furniture, office and computer equipment		5,826			5,879
Manufacturing equipment		45,339			39,349
Construction in progress		614			5,568
Property, plant and equipment, gross		75,989			74,983
Less: accumulated depreciation		(34,122	)		(31,142	)
Property, plant and equipment, net	$	41,867		$	43,841

In the first six months of 2021, $65 of interest expense was capitalized to construction in process.

(6) Intangible assets

The following table presents the components of the profit-sharing and contract manufacturing relationships asset, which was the only class of intangible asset for the periods presented:


	June 30, 2021			December 31, 2020
Cost	$	15,500		$	15,500
Accumulated amortization		(15,500	)		(14,800	)
Net intangible assets	$	—		$	700

These assets were amortized over a six-year estimated useful life that ended in April 2021.

(7) Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consist of the following:


	June 30, 2021		December 31, 2020
Payroll and related costs	$	1,931	$	1,481
Current portion of contract liabilities (see note 11)		1,068		1,447
Property, plant and equipment		105		551
Professional and consulting fees		201		432
Other		843		614
Total	$	4,148	$	4,525

(8) Commitments and contingencies

Litigation

The Company is involved, from time to time, in various claims and legal proceedings arising in the ordinary course of its business. Except as disclosed below, the Company is not currently a party to any such claims or proceedings that, if decided adversely to it, would either individually or in the aggregate have a material adverse effect on its business, financial condition or results of operations.

On May 31, 2018, a securities class action lawsuit (the “Securities Litigation”) was filed against the Company and certain of its officers and directors (collectively, the "Defendants") in the U.S. District Court for the Eastern District of Pennsylvania (the "Court") (Case No. 2:18-cv-02279-MMB) that purported to state a claim for alleged violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10(b)(5) promulgated thereunder, based on statements made by the Company concerning the New Drug Application (“NDA”) for IV meloxicam. The complaint seeks unspecified damages, interest, attorneys’ fees and other costs. On December 10, 2018, the lead plaintiff filed an amended complaint that asserted the same claims and sought the same relief but included new allegations and named additional officers as defendants. On February 8, 2019, the Company filed a motion to dismiss the amended complaint in its entirety, which the lead plaintiff opposed on April 9, 2019. On May 9, 2019, the Company filed its response and briefing was completed on the motion to dismiss. In response to questions from the Court, the parties submitted supplemental briefs regarding the motion to dismiss the amended complaint during the fall of 2019. On February 18, 2020, the motion to dismiss was granted by the Court without prejudice. On April 25, 2020, the plaintiff filed a second amended complaint. The Company filed a motion to dismiss the second amended complaint on June 18, 2020. The plaintiff filed an opposition to the Company’s motion to dismiss on August 17, 2020. On September 16, 2020, the Company filed a reply in support of its motion to dismiss. On March 1, 2021, the Court denied the Company’s second motion to dismiss. On June 21, 2021, the Defendants filed an answer and affirmative defenses to the second amended complaint. The parties are in the beginning stages of discovery. A Preliminary Pretrial Conference before the Court occurred on August 3, 2021.

In connection with the separation of the Company's former acute care research and development business into a new standalone entity named Baudax Bio, Inc. ("Baudax Bio"), Baudax Bio accepted assignment by the Company of all of its obligations in connection with the Securities Litigation and agreed to indemnify it for all liabilities related to the Securities Litigation. The Company and Baudax Bio believe that the lawsuit is without merit and intend to vigorously defend against it, unless and until a resolution satisfactory to the Company can be achieved.

Purchase commitments

As of June 30, 2021, the Company had outstanding cancelable and non-cancelable purchase commitments in the aggregate amount of $5,512 related to inventory, capital expenditures and other goods and services.

Employment agreements and certain other contingencies

The Company has entered into employment agreements with each of its named executive officers that provide for, among other things, severance commitments of up to $1,250 should the Company terminate the named executive officers for convenience or if certain events occur following a change in control. In addition, the Company is subject to other contingencies of up to $3,566 in the aggregate if certain events occur following a change in control.

(9) Debt

The carrying value of debt consists of the following as of June 30, 2021:


	Term loans under Credit Agreement
Principal balance outstanding	$	100,000
Unamortized deferred issuance costs		(10,795	)
Exit fee accretion		575
Total		89,780

The principal balance and exit fee due of $101,000 matures and must be repaid in 2023.

Term loans under Credit Agreement

The Company is currently party to a credit agreement (the “Credit Agreement”) with Athyrium Opportunities III Acquisition LP (“Athyrium”). The Credit Agreement has been fully drawn in the form of $48,000 of term A loans and $52,000 of term B loans, all of which mature on March 31, 2023.

The Credit Agreement has been amended from time to time. An amendment in February 2021 resulted in a reduction of $16,000 principal, a reduction of 1.5% in the stated interest rate, and a $160 settlement of accrued exit fees in exchange for $10,100 of cash and $9,271, or 2,202,420 shares, of common stock issued, as well as certain other changes to the terms of the debt. Of the total common stock issued, $6,060 was applied to the principal balance and accrued exit fee, and substantially all of the remainder was added to unamortized deferred financing costs and will be amortized as interest over the remaining term of the debt.

The term loans under the Credit Agreement included a rate of interest equal to the three-month LIBOR rate, with a 1% floor plus 8.25% per annum. The term loans require the Company to pay a 1% exit fee on all repayments. At June 30, 2021, the aggregate exit fee payable was $1,000, and the cumulative exit fee accreted was $575. The exit fees are being accreted to the carrying amount of the debt using the effective interest method over the term of the loan. In addition, if the Company makes any prepayments prior to maturity, the Company would be subject to the following prepayment premiums as a percentage of the amount repaid: (i) term A loans at 2.5% through March 31, 2022 with no penalty thereafter; and (ii) term B loans at 5.0% through March 31, 2022 and 2.5% thereafter.

The Credit Agreement contains certain usual and customary affirmative and negative covenants, as well as financial covenants that the Company will need to satisfy on a monthly and quarterly basis, including maintaining a permitted net leverage ratio (which is the Company’s indebtedness under the Credit Agreement, net of cash and cash equivalents, divided by EBITDA, each as defined in the Credit Agreement) and liquidity amount. As of June 30, 2021, the Company was in compliance with its covenants under the Credit Agreement.

In connection with the Credit Agreement, the Company issued warrants to each of Athyrium and its affiliate, Athyrium Opportunities II Acquisition LP (“Athyrium II”), to purchase an aggregate of 348,664 shares of the Company’s common stock with an exercise price of $1.73 per share. See note 10 for additional information. The warrants are exercisable through November 17, 2024.

In connection with the Credit Agreement and five subsequent amendments, the Company has paid financing costs, has incurred costs to record and subsequently to adjust the value of the warrants described above and has been accreting the exit fee described above. These costs are being recognized in interest expense using the effective interest method over the term of the Credit Agreement, resulting in non-cash interest expense of $1,618 and $1,459 in the second quarters of 2021 and 2020, respectively, and $3,080 and $2,919 in the first six months of 2021 and 2020, respectively.

At June 30, 2021, the overall effective interest rate, including cash paid for interest and non-cash interest expense, was 15.65%.

Paycheck Protection Program (“PPP”) note

In May 2020, the Company entered into a $4,416 promissory note with PNC Bank under the Small Business Administration (“SBA”) Paycheck Protection Program of the Coronavirus Aid, Relief and Economic Security Act of 2020 (the “PPP Note”). Shortly after entering into the note, the Company prepaid $1,100 of principal to comply with guidance from the SBA that limited the amount that could be borrowed at that time. The note had a two-year term and a stated rate of interest of 1.0% per annum, which accrued and would have become payable beginning September 2021.

In October 2020, the Company submitted a forgiveness application for the PPP Note, and in June 2021, the PPP Note and all accrued interest thereon was forgiven. Upon receiving the decision, the Company recorded a gain on extinguishment of debt of $3,352, consisting of forgiveness of $3,316 of principal and $36 of accrued interest.

(10) Shareholders’ equity or deficit

Capital raises

The following table presents the Company’s capital raises since its initial public offering:


	Date or period	Shares of common stock issued		Gross proceeds		Offering expenses			Net proceeds
Initial public offering	March 12, 2014		4,312,500	$	34,500	$	(4,244	)	$	30,256
Private placement	July 7, 2015		1,379,311		16,000		(1,188	)		14,812
Underwritten public offering	August 19, 2016		1,986,666		14,900		(1,533	)		13,367
Underwritten public offering	December 16, 2016		6,670,000		40,020		(3,132	)		36,888
2018 common stock purchase agreement with Aspire Capital	Year ended December 31, 2018		1,950,000		16,999		—			16,999
2019 common stock purchase agreement with Aspire Capital	Fourth quarter 2020		4,690,972		11,172		(78	)		11,094
Underwritten public offering	May 12, 2021		15,333,332		34,500		(2,397	)		32,103

Aspire common stock purchase agreement

The Company is currently party to an amended common stock purchase agreement with Aspire Capital Fund LLC (“Aspire Capital”) originally entered into during 2019, and most recently amended in February 2021 (as amended, the “2019 Common Stock Purchase Agreement”). The 2019 Common Stock Purchase Agreement provides that, upon the terms and subject to the conditions and limitations set forth in the agreement, Aspire Capital is committed to purchase, at the Company’s sole election, up to an aggregate value of $41,172 in shares of common stock. As of June 30, 2021, there is availability to issue up to $30,000 or 6,199,299 shares of common stock under the 2019 Common Stock Purchase Agreement.

Athyrium stock issuance agreement

In February 2021, the Company entered into a stock issuance agreement with Athyrium in connection with an amendment to its Credit Agreement. See note 9 for additional details.

Warrants

At June 30, 2021, warrants to purchase 348,664 shares of common stock were outstanding. The warrants are held by Athyrium, equity-classified, exercisable at $1.73 per share and expire in November 2024. See note 9 for additional details.

(11) Revenue recognition

Contract assets represent revenue recognized for performance obligations completed before an unconditional right to payment exists, and therefore invoicing or associated reporting from the customer regarding the computation of the net product sales has not yet occurred. Generally, the contract assets balance is impacted by the recognition of additional contract assets, offset by amounts invoiced to customers or actual net product sale amounts reported by the commercial partner for the period.

The following table presents changes in contract assets and liabilities:


	Contract assets			Contract liabilities
Balance at December 31, 2020	$	7,330		$	2,695
Changes to the beginning balance of contract assets arising from:
Reclassification to receivables as a result of rights to consideration becoming unconditional		(8,825	)		—
Changes in estimate		1,502			—
Contract assets recognized since beginning of period, net of reclassification to receivables and changes in estimates		7,343			—
Changes to contract liabilities:
Cash received in advance of contract performance		—			2,212
Revenue recognized		—			(3,234	)
Balance at June 30, 2021	$	7,350		$	1,673
Less: noncurrent portion		—			(605	)
Current portion	$	7,350		$	1,068

The following table disaggregates revenue by timing of revenue recognition:


	Three months ended June 30,			Six months ended June 30,
	2021		2020	2021	2020
Point in time	$	16,439	$


Pennsylvania	26-1523233
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1 E. Uwchlan Ave, Suite 112, Exton, Pennsylvania	19341
(Address of principal executive offices)	(Zip Code)


Title of each class	Trading symbol	Name of exchange on which registered
Common Stock, par value $0.01	REPH	The NASDAQ Stock Market LLC


Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
	Emerging growth company ☐


		Page
PART I. FINANCIAL INFORMATION		1
Item 1. Financial statements		1
Item 2. Management's discussion and analysis of financial condition and results of operations		16
Item 3. Quantitative and qualitative disclosures about market risk		23
Item 4. Controls and procedures		24
PART II. OTHER INFORMATION		25
Item 1. Legal proceedings		25
Item 1A. Risk factors		25
Item 2. Unregistered sales of equity securities and use of proceeds		25
Item 3. Defaults upon senior securities		25
Item 4. Mine safety disclosures		25
Item 5. Other information		25
Item 6. Exhibits		25
SIGNATURES		27


(amounts in thousands, except share and per share data)	June 30, 2021			December 31, 2020
Assets
Current assets:
Cash and cash equivalents	$	45,724		$	23,760
Accounts receivable		12,813			9,033
Contract asset		7,350			7,330
Inventory		7,878			11,612
Prepaid expenses and other current assets		2,028			2,334
Total current assets		75,793			54,069
Property, plant and equipment, net		41,867			43,841
Intangible assets, net		—			700
Goodwill		4,319			4,319
Other assets		451			486
Total assets	$	122,430		$	103,415
Liabilities and shareholders’ equity (deficit)
Current liabilities:
Accounts payable	$	1,155		$	1,804
Current portion of debt		—			1,474
Accrued expenses and other current liabilities		4,148			4,525
Total current liabilities		5,303			7,803
Debt, net		89,780			108,097
Other liabilities		931			1,615
Total liabilities		96,014			117,515
Commitments and contingencies (note 8)
Shareholders’ equity (deficit):
Preferred stock, $0.01 par value. 10,000,000 shares authorized, none issued or outstanding		—			—
Common stock, $0.01 par value. 95,000,000 shares authorized, 46,501,849 and 28,601,358 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively		465			286
Additional paid-in capital		265,862			219,998
Accumulated deficit		(239,911	)		(234,384	)
Total shareholders’ equity (deficit)		26,416			(14,100	)
Total liabilities and shareholders’ equity (deficit)	$	122,430		$	103,415


	Common stock				Additional paid-in capital			Accumulated deficit			Total
(amounts in thousands, except share data)	Shares		Amount
Balance, December 31, 2020		28,601,358	$	286	$	219,998		$	(234,384	)	$	(14,100	)
Issuance of common stock, net of costs		2,202,420		22		9,318			—			9,340
Stock-based compensation expense		—		—		3,133			—			3,133
Vesting of restricted stock units, net		209,541		2		(338	)		—			(336	)
Net loss		—		—		—			(6,761	)		(6,761	)
Balance, March 31, 2021		31,013,319		310		232,111			(241,145	)		(8,724	)
Issuance of common stock, net of costs		15,333,332		153		31,950			—			32,103
Stock-based compensation expense		—		—		1,929			—			1,929
Vesting of restricted stock units, net		155,198		2		(128	)		—			(126	)
Net income		—		—		—			1,234			1,234
Balance, June 30, 2021		46,501,849	$	465	$	265,862		$	(239,911	)	$	26,416

Balance, December 31, 2019		23,312,928	$	233	$	199,938		$	(206,883	)	$	(6,712	)
Stock-based compensation expense		—		—		3,231			—			3,231
Exercise of stock options, net		37,063		—		(105	)		—			(105	)
Vesting of restricted stock units, net		105,242		1		(917	)		—			(916	)
Net loss		—		—		—			(7,692	)		(7,692	)
Balance, March 31, 2020		23,455,233		234		202,147			(214,575	)		(12,194	)
Stock-based compensation expense		—		—		2,446			—			2,446
Exercise of stock options, net		105,606		1		378			—			379
Vesting of restricted stock units, net		78,067		1		(31	)		—			(30	)
Net loss		—		—		—			(6,012	)		(6,012	)
Balance, June 30, 2020		23,638,906	$	236	$	204,940		$	(220,587	)	$	(15,411	)


	Six months ended June 30,
(amounts in thousands)	2021			2020
Cash flows from operating activities, continuing operations:
Net loss	$	(5,527	)	$	(13,704	)
Adjustments to reconcile net loss to net cash provided by operating activities, continuing operations:
Stock-based compensation expense		5,062			5,677
Non-cash interest expense		3,080			2,919
Depreciation expense		3,033			3,008
Amortization of intangible assets		700			1,292
Gain on extinguishment of debt		(3,352	)		—
Changes in operating assets and liabilities:
Accounts receivable		(3,780	)		2,805
Contract asset		(20	)		(60	)
Inventory		3,734			3,300
Prepaid expenses and other assets		426			(200	)
Accounts payable, accrued expenses and other liabilities		(621	)		(631	)
Net cash provided by operating activities, continuing operations		2,735			4,406
Cash flows from investing activities
Purchases of property and equipment		(2,112	)		(2,239	)
Net cash used in investing activities		(2,112	)		(2,239	)
Cash flows from financing activities:
Proceeds from issuance of common stock, net of costs		32,103			—
Proceeds from issuance of debt		—			4,416
Repayments of debt		(10,100	)		(1,100	)
Payment of deferred financing costs		(200	)		—
Net payments related to vesting of restricted stock units		(462	)		(1,181	)
Net proceeds related to exercise of stock options		—			509
Net cash provided by financing activities		21,341			2,644
Net increase in cash and cash equivalents from continuing operations		21,964			4,811
Cash flows used in discontinued operating activities		—			(1,172	)
Cash and cash equivalents, beginning of period		23,760			19,148
Cash and cash equivalents, end of period	$	45,724		$	22,787
Supplemental disclosures of cash flow information:
Cash paid for interest	$	4,833		$	7,228
Issuance of common stock to reduce debt principal and accrued exit fees		6,060			—
Issuance of common stock to settle interest obligations		3,211			—
Purchases of property, plant and equipment included in accrued expenses and accounts payable		191			1,293