UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the Quarterly Period Ended: March 31, 2020

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

Commission File Number: 001-39101

 

Baudax Bio, Inc.

(Exact name of registrant as specified in its charter)

 

Pennsylvania

47-4639500

(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) 395-2440

(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

BXRX

Nasdaq Capital Market

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

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

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

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

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

  

Smaller reporting company

 

 

 

 

 

 

Emerging growth company

 

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

 

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

As of May 6, 2020, there were 17,569,988 shares of common stock, par value $0.01 per share, outstanding.

 

 

 


 

TABLE OF CONTENTS

Index

 

 

 

 

 

 

Page

 

 

 

PART I. FINANCIAL INFORMATION

 

3

 

 

 

 

 

 

 

Item 1.

 

Consolidated and Combined Financial Statements (Unaudited)

 

3

 

 

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

21

 

 

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

28

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

28

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

30

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

30

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

30

 

 

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

31

 

 

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

31

 

 

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

31

 

 

 

 

 

 

 

Item 5.

 

Other Information

 

31

 

 

 

 

 

 

 

Item 6.

 

Exhibits

 

32

 

 

 

 

 

 

SIGNATURES

 

34

 

 

 

 

 

 

 

2

 


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BAUDAX BIO, INC.

Consolidated Balance Sheets

(Unaudited)

 

(amounts in thousands)

 

March 31, 2020

 

 

December 31, 2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

38,284

 

 

$

17,740

 

Prepaid expenses and other current assets

 

 

2,211

 

 

 

2,395

 

Total current assets

 

 

40,495

 

 

 

20,135

 

Property, plant and equipment, net

 

 

4,716

 

 

 

4,821

 

Right-of-use asset

 

 

631

 

 

 

730

 

Intangible assets, net

 

 

26,185

 

 

 

26,400

 

Goodwill

 

 

2,127

 

 

 

2,127

 

Total assets

 

$

74,154

 

 

$

54,213

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,062

 

 

$

271

 

Accrued expenses and other current liabilities

 

 

3,842

 

 

 

3,532

 

Current portion of operating lease liability

 

 

278

 

 

 

318

 

Current portion of contingent consideration

 

 

12,523

 

 

 

3,592

 

Total current liabilities

 

 

18,705

 

 

 

7,713

 

Long-term operating lease liability

 

 

391

 

 

 

455

 

Warrant liability

 

 

9,489

 

 

 

 

Long-term portion of contingent consideration

 

 

81,461

 

 

 

62,766

 

Total liabilities

 

 

110,046

 

 

 

70,934

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

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

   outstanding

 

 

 

 

 

 

Common stock, $0.01 par value. Authorized, 100,000,000 shares; issued and

   outstanding, 17,569,988 shares at March 31, 2020 and 9,350,709 shares at

   December 31, 2019

 

 

176

 

 

 

94

 

Additional paid-in capital

 

 

40,450

 

 

 

19,405

 

Accumulated deficit

 

 

(76,518

)

 

 

(36,220

)

Total shareholders’ equity (deficit)

 

 

(35,892

)

 

 

(16,721

)

Total liabilities and shareholders’ equity

 

$

74,154

 

 

$

54,213

 

 

See accompanying notes to consolidated and combined financial statements.

3

 


 

BAUDAX BIO, INC.

Consolidated and Combined Statements of Operations

(Unaudited)

 

 

 

For the Three Months Ended March 31,

 

(amounts in thousands)

 

2020

 

 

2019

 

Revenue

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Cost of sales

 

 

 

 

 

 

Research and development

 

 

3,070

 

 

 

9,554

 

Selling, general and administrative

 

 

8,046

 

 

 

9,835

 

Amortization of intangible assets

 

 

215

 

 

 

 

Change in warrant valuation

 

 

1,378

 

 

 

 

Change in contingent consideration valuation

 

 

27,626

 

 

 

(15,091

)

Total operating expenses

 

 

40,335

 

 

 

4,298

 

Operating loss

 

 

(40,335

)

 

 

(4,298

)

Other income (expense):

 

 

 

 

 

 

 

 

Other income (expense)

 

 

37

 

 

 

(37

)

Net loss

 

$

(40,298

)

 

$

(4,335

)

 

 

 

 

 

 

 

 

 

Per share information:

 

 

 

 

 

 

 

 

Net loss per share of common stock, basic and diluted

 

$

(4.03

)

 

$

(0.46

)

Weighted average common shares outstanding, basic and diluted

 

 

10,001,228

 

 

 

9,350,709

 

 

See accompanying notes to consolidated and combined financial statements.

4

 


 

BAUDAX BIO, INC.

Consolidated and Combined Statements of Shareholders’ Equity

(Unaudited)

 

For the Three Months Ended March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

 

 

 

(amounts in thousands)

 

Shares

 

 

Amount

 

 

paid-in

capital

 

 

Accumulated

Deficit

 

 

Total

 

Balance, December 31, 2019

 

 

9,350,709

 

 

$

94

 

 

$

19,405

 

 

$

(36,220

)

 

$

(16,721

)

Recro Pharma allocation - stock-based compensation

 

 

 

 

 

 

 

 

456

 

 

 

 

 

 

456

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

2,177

 

 

 

 

 

 

2,177

 

Issuance of common stock and warrants for

   public offering, net

 

 

7,692,308

 

 

 

77

 

 

 

14,899

 

 

 

 

 

 

14,976

 

Sale of common stock under equity

   facility, net of transaction costs

 

 

441,967

 

 

 

4

 

 

 

3,608

 

 

 

 

 

 

3,612

 

Issuance of common stock upon separation

 

 

45,874

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Issuance of restricted stock units, net of

   shares withheld for income taxes

 

 

39,130

 

 

 

 

 

 

(95

)

 

 

 

 

 

(95

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(40,298

)

 

 

(40,298

)

Balance, March 31, 2020

 

 

17,569,988

 

 

$

176

 

 

$

40,450

 

 

$

(76,518

)

 

$

(35,892

)

 

 

For the Three Months Ended March 31, 2019

 

 

 

 

 

 

Parent Company

 

(amounts in thousands)

 

Net Investment

 

Balance, December 31, 2018

 

$

(68,347

)

Net loss

 

 

(4,335

)

Net transfer from parent

 

 

19,823

 

Parent allocation - share-based compensation

 

 

1,527

 

Balance, March 31, 2019

 

$

(51,332

)

 

See accompanying notes to consolidated and combined financial statements.

5

 


 

BAUDAX BIO, INC.

Consolidated and Combined Statements of Cash Flows

(Unaudited)

 

 

 

For the Three Months Ended March 31,

 

(amounts in thousands)

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(40,298

)

 

$

(4,335

)

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

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

2,633

 

 

 

1,527

 

Depreciation expense

 

 

105

 

 

 

123

 

Amortization

 

 

215

 

 

 

 

Change in warrant valuation

 

 

1,378

 

 

 

 

Change in contingent consideration valuation

 

 

27,626

 

 

 

(15,091

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

184

 

 

 

(145

)

Right-of-use asset

 

 

99

 

 

 

118

 

Accounts payable, accrued expenses and other liabilities

 

 

1,848

 

 

 

3,459

 

Operating lease liability

 

 

(104

)

 

 

(118

)

Net cash used in operating activities

 

 

(6,314

)

 

 

(14,462

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

 

 

 

(279

)

Acquisition of license agreement

 

 

 

 

 

(82

)

Net cash used in investing activities

 

 

 

 

 

(361

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from public offering, net of transaction costs

 

 

23,341

 

 

 

 

Proceeds from equity facility, net of transaction costs

 

 

3,612

 

 

 

 

Investment from parent company

 

 

 

 

 

19,823

 

Payments of withholdings on shares withheld for income taxes

 

 

(95

)

 

 

 

Payment of contingent consideration

 

 

 

 

 

(5,000

)

Net cash provided by financing activities

 

 

26,858

 

 

 

14,823

 

Net increase in cash and cash equivalents

 

 

20,544

 

 

 

 

Cash and cash equivalents, beginning of period

 

 

17,740

 

 

 

 

Cash and cash equivalents, end of period

 

$

38,284

 

 

$

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

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

   accounts payable

 

$

 

 

$

933

 

Fair value of warrants issued for public offering

 

$

8,111

 

 

$

 

Offering costs included in accounts payable and accrued expenses

 

$

254

 

 

$

 

 

See accompanying notes to consolidated and combined financial statements.

 

 


6

 


 

BAUDAX BIO, INC.

Notes to the Consolidated and Combined Financial Statements

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

(Unaudited)

(1)

Background

Business

Baudax Bio, Inc. (Baudax Bio or the Company) is a pharmaceutical company primarily focused on developing and commercializing innovative products for acute care settings. Baudax Bio believes it can bring valuable therapeutic options for patients, prescribers and payers, such as its lead product, ANJESO™ (meloxicam) injection, to the acute care markets.

On February 20, 2020, the Company announced that the U.S. Food and Drug Administration (FDA) approved the New Drug Application (NDA) for ANJESO, which is indicated for the management of moderate to severe pain, alone or in combination with other non-NSAID analgesics. The Company expects to execute commercial launch for ANJESO by June 2020.

 

The Separation

 

Pursuant to the Separation Agreement between Recro Pharma, Inc. (Recro) and Baudax Bio, Recro transferred the assets, liabilities, and operations of its Acute Care business to the Company (the Separation) and, on November 21, 2019, the distribution date, each Recro shareholder received one share of the Company’s common stock for every two and one-half shares of Recro common stock held of record at the close of business on November 15, 2019, the record date for the distribution (the Distribution).  Additionally, Recro contributed $19,000 of cash to Baudax Bio in connection with the Separation. Following the Distribution and Separation, Baudax Bio operates as a separate, independent company. References to “the Company” represent Baudax Bio or the Acute Care Business of Recro for periods prior to the Separation.

 

Basis of Presentation Related to the Separation

 

For all periods prior to the Separation, the accompanying combined financial statements represent the Acute Care Business of Recro and are derived from Recro’s consolidated financial statements. The Acute Care Business of Recro did not consist of a separate, standalone group of legal entities for public company reporting and certain other corporate functions in the periods prior to the Separation and, accordingly, allocations were required through the Distribution date. These combined financial statements, prior to the Separation, reflect the Company’s historical financial position, results of operations and cash flows as the business was operated as part of Recro prior to the Separation, in conformity with U.S. generally accepted accounting principles (U.S. GAAP). See Note 12 for a description of the agreements entered into between Recro and Baudax Bio following the Separation.

 

Prior to the Separation, the combined financial statements include certain assets and liabilities that have historically been held at the Recro corporate level, but which are specifically identifiable or allocable to the Company. All intracompany transactions and accounts have been eliminated. All intercompany transactions between the Company and Recro are considered to be effectively settled in the combined financial statements at the time the transaction was recorded. The total net effect of the settlement of these intercompany transactions was reflected in the combined statements of cash flows as a financing activity and in the combined balance sheet as parent company net investment. The Company does not record interest expense on amounts funded by Recro. Long-term debt held at the Recro corporate level was retained by Recro and was not assumed by the Company.

 

Historically, certain corporate level activity costs have been incurred and reported within the legal entity that includes the Recro Acute Care Business. The Company’s combined financial statements, prior to the Separation, include an allocation of these expenses related to these certain Recro corporate functions, including senior management, legal, human resources, finance, and information technology through the distribution date. These expenses are included in selling, general and administrative expense and have been allocated based on direct usage or benefit where identifiable, with the remainder allocated on a pro rata basis of expenses, headcount, or other measures. The Company considers the expense allocation methodology and results to be reasonable for all periods presented prior to the Separation, however, the allocations may not be indicative of the actual expense that would have been incurred had the Company operated as an independent, publicly-traded company for the periods presented prior to the Separation. For the three months ended March 31, 2019 (prior to the Separation), a total of $3,382 of costs have been allocated to Recro’s contract manufacturing and development segment (the CDMO business).

 

The income tax amounts in the combined financial statements for periods prior to the Separation have been calculated based on a separate return methodology and are presented as if the Company was a standalone taxpayer in each of its tax jurisdictions prior to the Separation. Because of the Company’s history of losses as a standalone entity, a full valuation allowance is recorded against deferred tax assets in all periods presented.

 

7

 


 

Upon the Separation, the Company adopted its own share‑based compensation plan. Recro maintains its stock-based compensation plan at a corporate level. The Company’s employees participated in Recro’s stock-based compensation plans prior to the Separation and a portion of the cost of those plans is included in the Company’s combined financial statements using an allocation methodology similar to the methodology used to allocate the cash compensation of the related employees.

 

The parent company net investment balances in these combined financial statements represents the accumulated deficit of the Recro Acute Care Business and the net funding provided to the Company, which are reflected as net transfers from parent in the Combined Statements of Parent Company Net Investment prior to the Separation.

 

Subsequent to the Separation, the accompanying consolidated financial statements are presented on a consolidated basis and include all of the accounts and operations of Baudax Bio and its subsidiaries. The consolidated financial statements reflect the financial position, results of operations and cash flows of Baudax Bio in accordance with U.S. GAAP. All significant intercompany accounts and transactions are eliminated in consolidation.

 

The Company has determined that it operates in a single segment involved in the commercialization and development of innovative products for hospital and other acute care settings.

(2)

Development-Stage Risks and Liquidity

 

The Company has incurred losses from operations since inception and has an accumulated deficit of $76,518 as of March 31, 2020.

 

The Company has a history of operating losses and negative cash flows while operating as part of Recro and, accordingly, was dependent upon Recro for its capital funding and liquidity needs. Recro contributed $19,000 to the Company immediately prior to the Distribution. Recro has not committed any additional funding to the Company beyond the $19,000 that was contributed as of the Distribution date and the Company will be required to raise additional funds needed to operate as a standalone entity. The Company’s ability to generate cash inflows is highly dependent on the commercialization of ANJESO and there can be no assurance that ANJESO can be successfully commercialized. In addition, development activities, clinical and pre-clinical testing and commercialization of the Company’s product candidates, if approved, will require significant additional funding. The Company could delay clinical trial activity or reduce funding of specific programs in order to reduce cash needs. Insufficient funds may cause the Company to delay, reduce the scope of or eliminate one or more of its development, commercialization, or expansion activities. The Company may raise such funds, if available, through debt financings, bank or other loans, through strategic research and development, licensing (including out-licensing) and/or marketing arrangements 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 debt or equity financing, if available, may be dilutive to holders of its common stock and may involve significant cash payment obligations and covenants that restrict the Company’s ability to operate its business.  Management believes that cash and cash equivalents as of March 31, 2020 are sufficient to maintain operations through at least May 9, 2021, however, the Company would be required to significantly reduce expenses thereby adjusting the timing and scale of the commercial launch of ANJESO and/or consider out-licensing if additional funds are not available during such period.

(3)

Summary of Significant Accounting Principles

 

(a)

Basis of Presentation

The accompanying unaudited consolidated and combined financial statements of the Company and its subsidiaries have been prepared in accordance with 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. In the opinion of management, the accompanying consolidated and combined financial statements include all normal and recurring adjustments (which consist primarily of accruals, estimates and assumptions that impact the financial statements) considered necessary to present fairly the Company’s results for the interim periods. Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2020.

The accompanying unaudited interim consolidated and combined financial statements should be read in conjunction with the annual audited financial statements and related notes as of and for the year ended December 31, 2019 included in the Company’s Form 10-K.

8

 


 

 

(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. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which are as follows: three to seven years for furniture and office equipment; six to ten years for manufacturing equipment; 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 (FASB), Accounting Standards Codification (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 and contingent consideration.  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 (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 and Combined 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 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.  The Company has one reporting unit.

As of March 31, 2020, the Company’s intangible asset is classified as an asset resulting from R&D activities. Historically, prior to receiving FDA approval, the intangible asset was classified as an IPR&D asset. 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 and Combined Statements of Operations. For those compounds that reach commercialization, the IPR&D assets will be amortized over their estimated useful lives. The Company determined the useful life of its asset resulting from R&D activities to be approximately 10 years, which is based on the remaining patent life and will be amortized on a straight-line basis. The Company is required to review the carrying value of assets resulting from R&D activities for recoverability whenever events occur or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.

 

9

 


 

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 of its reporting unit, anticipated changes in industry and market conditions, intellectual property protection, and competitive environments. Due to the global market disruption from COVID-19 in March 2020, an indicator of potential impairment, the Company performed an impairment test as of March 31, 2020, which indicated that there was no impairment of goodwill or intangible assets resulting from R&D activities as of March 31, 2020. The Company will perform its annual goodwill impairment test as of November 30, 2020.

 

(g)

Concentration of Credit Risk

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

 

(h)

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.

 

(i)

Stock-Based Awards

Baudax Awards

Share-based compensation included in the consolidated financial statements following the Separation is based upon the Baudax Bio, Inc. 2019 Equity Incentive Plan, or the 2019 Plan. The plan includes grants of stock options, time-based vesting restricted stock units (RSUs) and performance-based RSUs. 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 an average of its peer group’s volatility 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.

Recro Awards

The Recro Pharma, Inc. 2018 Amended and Restated Equity Incentive Plan, or the Recro Plan, includes stock options, time-based vesting RSUs and performance-based vesting RSUs granted to the Company’s employees prior to the Separation. The consolidated and combined financial statements reflect share-based compensation expense based on an allocation of a portion of Recro share-based compensation issued to the Company’s employees based on where their services are performed.

Recro 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. Forfeitures are accounted for as they occur.

10

 


 

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. Recro 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 Recro 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, Recro 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.

 

(j)

Income Taxes

The income tax amounts in these consolidated and combined financial statements for periods prior to the Separation have been calculated based on a separate return methodology and presented as if the Company was a standalone taxpayer in each of its tax jurisdictions. 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. Because of the Company’s history of losses as a standalone entity, a full valuation allowance is recorded against deferred tax assets in all periods presented.

Unrecognized income tax benefits represent income tax positions taken on income tax returns that have not been recognized in the consolidated and combined 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.

 

(k)

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 the three months ended March 31, 2020 and 2019, 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.

Prior to the distribution date of November 21, 2019, there were no Baudax Bio shares outstanding, as such, the shares outstanding immediately after the Distribution were used to calculate the net loss per share for all pre-Separation periods presented.

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

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Basic and Diluted Loss Per Share

 

 

 

 

 

 

 

 

Net loss

 

$

(40,298

)

 

$

(4,335

)

Weighted average common shares outstanding, basic and diluted

 

 

10,001,228

 

 

 

9,350,709

 

Net loss per share of common stock, basic and diluted

 

$

(4.03

)

 

$

(0.46

)

 

 

11

 


 

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

 

 

 

March 31,

 

 

 

2020

 

Options and restricted stock units outstanding

 

 

2,320,480

 

Warrants

 

 

15,384,616

 

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

 

(l)

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, “Leases (Topic 842),” or ASU 2016-02. ASU 2016-02 establishes a wholesale change to lease accounting and introduces a lease model that brings most leases on the balance sheet. It also eliminates the required use of bright-line tests in current U.S. GAAP for determining lease classification. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), Targeted Improvements, which provides an alternative transition method permitting the recognition of a cumulative-effect adjustment on the date of adoption rather than restating comparative periods in transition as originally prescribed by Topic 842. The new guidance is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. The Company adopted this guidance as of January 1, 2019. The Company elected the optional transition method to account for the impact of the adoption with a cumulative-effect adjustment in the period of adoption and did not restate prior periods. The Company opted to elect the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs, and certain other practical expedients, including the use of hindsight to determine the lease term for existing leases and in assessing impairment of the right-of-use asset, and the exception for short-term leases. For its current classes of underlying assets, the Company did not elect the practical expedient under which the lease components would not be separated from the nonlease components. At January 1, 2019, the Company recorded a right-of-use asset of $1,174 and an operating lease liability of $1,219. For additional information regarding how the Company is accounting for leases under the new guidance, refer to Note 9(d).

 

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement,” or ASU 2018-13. ASU 2018-13 removes, modifies and adds certain disclosure requirements in Topic 820 “Fair Value Measurement”. ASU 2018-13 eliminates certain disclosures related to transfers and the valuations process, clarifies the measurement uncertainty disclosure, and requires additional disclosures for Level 3 fair value measurements, including the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 with early adoption permitted. The Company adopted this guidance as of January 1, 2020. The adoption did not have a material impact to the Company or its disclosures.

Accounting Pronouncements Not Yet Adopted

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

(4)

Fair Value of Financial Instruments

The Company follows the provisions of FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” for fair value measurement recognition and disclosure purposes for its financial assets and financial liabilities that are remeasured and reported at fair value each reporting period. The Company measures certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents and 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:

 

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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.

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

 

 

 

Fair value measurements at reporting date using

 

 

 

Quoted prices

in active

markets for

identical

assets

(Level 1)

 

 

Significant

other

observable

inputs

(Level 2)

 

 

Significant

unobservable

inputs

(Level 3)

 

At March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents (See Note 5)

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds

 

$

22,700

 

 

$

 

 

$

 

Total cash equivalents

 

$

22,700

 

 

$

 

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Warrants (See Note 10(c))

 

$

 

 

$

 

 

$

9,489

 

Contingent consideration (See Note 9(b))

 

$

 

 

$

 

 

$

93,984

 

 

 

$

 

 

$

 

 

$

103,473

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents (See Note 5)

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds

 

$

16,514

 

 

$

 

 

$

 

Total cash equivalents

 

$

16,514

 

 

$

 

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration (See Note 9(b))

 

$

 

 

$

 

 

$

66,358

 

 

 

$

 

 

$

 

 

$

66,358

 

 

The reconciliation of liabilities measured at fair value on a recurring basis using unobservable inputs (Level 3) is as follows:

 

 

 

Warrants

 

 

Contingent

Consideration

 

Balance at December 31, 2019

 

$

 

 

$

66,358

 

Additions

 

 

8,111

 

 

 

 

Remeasurement

 

 

1,378

 

 

 

27,626

 

Total at March 31, 2020

 

$

9,489

 

 

$

93,984

 

 

 

 

 

 

 

 

 

 

Current portion as of March 31, 2020

 

 

 

 

 

12,523

 

Long-term portion as of March 31, 2020

 

$

9,489

 

 

$

81,461

 

 

The current portion of the contingent consideration represents the estimated probability adjusted fair value that is expected to become payable within one year as of March 31, 2020.

The fair value of the contingent consideration liability is measured as the reporting date using inputs and assumptions as of the date of the financial statements.  Events and circumstances impacting the fair value of the liability that occur after the balance sheet date, but before the date that the financial statements are available to be issued are adjusted in the period during which such events and circumstances occur.  The fair value of the second contingent consideration component is estimated by applying a risk-adjusted discount rate to the probability-adjusted contingent payments and the expected approval dates. The fair value of the third contingent consideration component is estimated using the Monte Carlo simulation method and applying a risk-adjusted discount rate to the potential payments resulting from probability-weighted revenue projections based upon the expected revenue target attainment dates. The fair value of the fourth contingent consideration component is estimated by applying a risk-adjusted discount rate to the

13

 


 

potential payments resulting from probability-weighted revenue projections and the defined royalty percentage. As of March 31, 2020, the fair value calculations used discount rates in the range of 15.08% to 33.74%, with a weighted average of 24.09%.

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.

The Company follows the disclosure provisions of FASB ASC Topic 825, “Financial Instruments” (ASC 825), for disclosure purposes for financial assets and financial liabilities that are not measured at fair value. As of March 31, 2020, the financial assets and liabilities recorded on the Consolidated Balance Sheets that are not measured at fair value on a recurring basis include accounts payable and accrued expenses and approximate fair value due to the short-term nature of these instruments.

(5)

Cash Equivalents

Cash equivalents as of March 31, 2020 include money market funds. The following is a summary of cash equivalents:

 

 

 

March 31, 2020

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Estimated

 

Description

 

Cost

 

 

Gain

 

 

Loss

 

 

Fair Value

 

Money market mutual funds

 

$

22,700

 

 

$

 

 

$

 

 

$

22,700

 

Total cash equivalents

 

$

22,700

 

 

$

 

 

$

 

 

$

22,700

 

 

 

 

 

December 31, 2019

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Estimated

 

Description

 

Cost

 

 

Gain

 

 

Loss

 

 

Fair Value

 

Money market mutual funds

 

$

16,514

 

 

$

 

 

$

 

 

$

16,514

 

Total cash equivalents

 

$

16,514

 

 

$

 

 

$

 

 

$

16,514

 

 

(6)

Property, Plant and Equipment

Property, plant and equipment consists of the following:

 

 

 

March 31, 2020

 

 

December 31, 2019

 

Building and improvements

 

$

196

 

 

$

196

 

Furniture, office and computer equipment

 

 

1,518

 

 

 

1,518

 

Manufacturing equipment

 

 

101

 

 

 

101

 

Construction in progress

 

 

3,846

 

 

 

3,846

 

 

 

 

5,661

 

 

 

5,661

 

Less: accumulated depreciation and amortization

 

 

945

 

 

 

840

 

Property, plant and equipment, net

 

$

4,716

 

 

$

4,821

 

 

Depreciation expense for the three months ended March 31, 2020 and 2019 was $105 and $123, respectively.

(7)

Intangible Assets

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

 

 

 

Cost

 

 

Accumulated Amortization

 

 

Net Intangible Assets

 

Asset resulting from R&D activities

 

$

26,400

 

 

$

215

 

 

$

26,185

 

Total

 

$

26,400

 

 

$

215

 

 

$

26,185

 

 

Amortization expense for the three months ended March 31, 2020 was $215. There was no amortization expense for the three months ended March 31, 2019.

 

 

 

 

 

 

 

14

 


 

As of March 31, 2020, future amortization expense is as follows:

 

 

Amortization

 

Remainder of 2020

$

1,932

 

2021

 

2,576

 

2022

 

2,576

 

2023

 

2,576

 

2024 and thereafter

 

16,525

 

Total

$

26,185

 

 

 

(8)

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Payroll and related costs

 

$

1,197

 

 

$

2,181

 

Professional and consulting fees

 

 

1,196

 

 

 

209

 

Commercialization scale-up costs

 

 

166

 

 

 

 

Other research and development costs

 

 

538

 

 

 

538

 

Guarantee liability

 

 

543

 

 

 

548

 

Other

 

 

202

 

 

 

56

 

 

 

$

3,842

 

 

$

3,532

 

 

(9)

Commitments and Contingencies

 

(a)

Licenses and Supply Agreements

The Company is party to an exclusive license with Orion for the development and commercialization of Dexmedetomidine for use in the treatment of pain in humans in any dosage form for transdermal, transmucosal (including sublingual and intranasal), topical, enteral or pulmonary (inhalational) delivery, but specifically excluding delivery vehicles for administration by injection or infusion, worldwide, except for Europe, Turkey and the CIS (currently includes Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine and Uzbekistan), referred to herein as the Territory. The Company is required to pay Orion lump sum payments of up to €20,500 ($22,548 as of March 31, 2020) on the achievement of certain developmental and commercial milestones, as well as a royalty on net sales during the term, which varies from 10% to 20% depending on annual sales levels. Through March 31, 2020, no such milestones have been achieved.

The Company is also party to an exclusive license agreement with Orion for the development and commercialization of Fadolmidine for use as a human therapeutic, in any dosage form in the Territory. The Company is required to pay Orion lump sum payments of up to €12,200 ($13,420 as of March 31, 2020) on achievement of certain developmental and commercial milestones, as well as a royalty on net sales during the term, which varies from 10% to 15% depending on annual sales levels. Through March 31, 2020, no such milestones have been achieved.

In June 2017, the Company acquired the exclusive global rights to two novel neuromuscular blocking agents, or NMBAs, and a proprietary reversal agent from Cornell University, or Cornell. The NMBAs and reversal agent are referred to herein as the NMBA Related Compounds. The NMBA Related Compounds include one novel intermediate-acting NMBA that has initiated Phase I clinical trials and two other agents, a novel short-acting NMBA, and a rapid-acting reversal agent specific to these NMBAs. In addition, the Company is obligated to make: (i) an annual license maintenance fee payment until the first commercial sale of the NMBA Related Compounds; and (ii) milestone payments upon the achievement of certain milestones, up to a maximum, for each NMBA, of $5,000 for U.S. regulatory approval and commercialization milestones and $3,000 for European regulatory approval and commercialization milestones. The Company is also obligated to pay Cornell royalties on net sales of the NMBA Related Compounds at a rate ranging from low to mid-single digits, depending on the applicable NMBA 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 NMBA Related Compounds.

The Company is party to a Master Manufacturing Services Agreement and Product Agreement with Patheon, collectively the Patheon Agreements, pursuant to which Patheon provides sterile fill-finish of injectable meloxicam drug product at its

15

 


 

Monza, Italy manufacturing site. We have agreed to purchase a certain percentage of our annual requirements of finished injectable meloxicam from Patheon during the term of the Patheon Agreements. 

 

(b)

Contingent Consideration for the Alkermes Transaction

On April 10, 2015, Recro completed the acquisition of a manufacturing facility in Gainesville, Georgia and the licensing and commercialization rights to injectable meloxicam (the Alkermes Transaction). Pursuant to the purchase and sale agreement and subsequent amendment with Alkermes plc, or Alkermes, governing the Alkermes Transaction, the Company agreed to pay to Alkermes up to an additional $140,000 in milestone payments including $50,000 upon regulatory approval payable over a seven-year period, as well as net sales milestones related to injectable meloxicam and royalties on future product sales of injectable meloxicam.

Based on the amended terms of the Alkermes agreement, the contingent consideration consists of four separate components. The first component is (i) a $5,000 payment made in the first quarter of 2019 and (ii) a $5,000 payment made in the second quarter of 2019. The second components are payable upon regulatory approval and include (i) a $5,000 payment due within 180 days following regulatory approval for ANJESO and (ii) $45,000 payable in seven equal annual payments of approximately $6,400 beginning on the first anniversary of such approval. The third component consists of three potential payments, based on the achievement of specified annual revenue targets, the last of which represents over 60% of these milestone payments and currently does not have a fair value assigned to its achievement. The fourth component consists of a royalty payment between 10% and 12% (subject to a 30% reduction when no longer covered by patent) for a defined term on future injectable meloxicam net sales. As of March 31, 2020, the Company has paid $10,000 in milestone payments to Alkermes.

The Company is party to a Development, Manufacturing and Supply Agreement (Supply Agreement), with Alkermes (through a subsidiary of Alkermes), pursuant to which Alkermes will (i) provide clinical and commercial bulk supplies of ANJESO formulation and (ii) provide development services with respect to the Chemistry, Manufacturing and Controls section of an NDA for ANJESO. Pursuant to the Supply Agreement, Alkermes will supply the Company with such quantities of bulk ANJESO formulation as shall be reasonably required for the completion of clinical trials of ANJESO. During the term of the Supply Agreement, the Company will purchase its clinical and commercial supplies of bulk ANJESO formulation exclusively from Alkermes, subject to certain exceptions, for a period of time.

 

(c)

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, or the Securities Litigation, was filed against Recro and certain of Recro’s officers and directors in the U.S. District Court for the Eastern District of Pennsylvania (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 Exchange Act and Rule 10(b)(5) promulgated thereunder, based on statements made by Recro concerning the NDA for ANJESO. The complaint seeks unspecified damages, interest, attorneys’ fees and other costs. On December 10, 2018, 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, Recro filed its response and briefing was completed on the motion to dismiss. In response to questions from the Judge, the parties submitted supplemental briefs with regard to the motion to dismiss the amended complaint during the fall of 2019. On February 18, 2020, the motion to dismiss was granted without prejudice. On April 25, 2020, the plaintiff filed a second amended complaint. The Company intends to file a motion to dismiss as to this complaint.  In connection with the Separation, the Company accepted assignment by Recro of all of Recros obligations in connection with the Securities Litigation and agreed to indemnify Recro for all liabilities related to the Securities Litigation. The Company has recorded a liability equal to the estimated fair value of the indemnification to Recro related to this Securities Litigation. The Company believes that the lawsuit is without merit and intends to vigorously defend against it. At this time, no assessment can be made as to its likely outcome or whether the outcome will be material to the Company.

 

(d)

Leases

The Company is a party to various operating leases in Malvern, Pennsylvania, and Dublin, Ireland for office space and office equipment.

16

 


 

The Company determines if an arrangement is a lease at inception. The arrangement is a lease if it conveys the right to the Company to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. Lease terms vary based on the nature of operations, however, all leased facilities are classified as operating leases with remaining lease terms between less than one year and 3 years. Most leases contain specific renewal options where notice to renew must be provided in advance of lease expiration or automatic renewals where no advance notice is required. Periods covered by an option to extend the lease were included in the non-cancellable lease term when exercise of the option was determined to be reasonably certain. Costs determined to be variable and not based on an index or rate were not included in the measurement of operating lease liabilities. As most leases do not provide an implicit rate, the Company's effective interest rate was used to discount its lease liabilities.

The Company’s leases with an initial term of 12 months or less that do not have a purchase option or extension that is reasonably certain to be exercised are not included in the right of use asset or lease liability on the Consolidated Balance Sheets. Lease expense is recognized on a straight-line basis over the lease term.

As of March 31, 2020, undiscounted future lease payments for non-cancellable operating leases are as follows:

 

 

 

Lease payments

 

Remainder of 2020

 

$

289

 

2021

 

 

367

 

2022

 

 

373

 

Total lease payments

 

 

1,029

 

Less imputed interest

 

 

(360

)

Total operating liabilities

 

$

669

 

 

For the three months ended March 31, 2020, the weighted average remaining lease term was 3 years and the weighted average discount rate was 16%.

The components of the Company’s lease cost were as follows:

 

 

 

For the three months ended March 31, 2020

 

 

For the three months ended March 31, 2019

 

Operating lease cost

 

$

122

 

 

$

121

 

Short-term lease cost

 

 

-

 

 

 

7

 

Total lease cost

 

$

122

 

 

$

128

 

 

(e)

Purchase Commitments

As of March 31, 2020, the Company had outstanding non-cancelable and cancelable purchase commitments in the aggregate amount of $7,930 related to inventory and other goods and services, including commercial activities and manufacturing scale-up. The timing of certain purchase commitments cannot be estimated as it is dependent on timing of commercialization or the outcome of other strategic evaluations and agreements.

 

(f)

Certain Compensation and Employment Agreements

The Company has entered into employment agreements with certain of its named executive officers. As of March 31, 2020, these employment agreements provided for, among other things, annual base salaries in an aggregate amount of not less than $1,327, from that date through September 2021.

(10)

Capital Structure

 

(a)

Common Stock

 

On November 21, 2019, the Company separated from Recro as a result of a special dividend distribution of all the outstanding shares of its common stock to Recro shareholders. On the distribution date, each Recro shareholder received one share of Baudax Bio’s common stock for every two and one-half shares of Recro common stock held of record at the close of business on November 15, 2019. Upon the Distribution, 9,396,583 shares of common stock were issued, of which 45,874 were distributed after December 31, 2019.

 

The Company is authorized to issue 100,000,000 shares of common stock, with a par value of $0.01 per share.

17

 


 

 

On February 13, 2020, the Company entered into a Sales Agreement (the “Sales Agreement”) with JMP Securities LLC, as sales agent (the “Agent”), pursuant to which the Company may, from time to time, issue and sell shares of its common stock, par value $0.01 per share, in an aggregate offering price of up to $25,000 through the Agent. As of March 31, 2020, 441,967 shares have been sold under the Sales Agreement for net proceeds of $3,612.

 

On March 26, 2020, the Company closed an underwritten public offering of 7,692,308 shares of its common stock, Series A warrants to purchase 7,692,308 shares of common stock and Series B warrants to purchase 7,692,308 shares of common stock, at an exercise price of $4.59 per share for Series A Warrants and at an exercise price of $3.25 per share for Series B Warrants, for net proceeds to the Company of approximately $23,100, after deducting underwriting discounts and commissions and estimated offering expenses, of which certain expenses are expected to be paid in the second quarter of 2020.

 

 

(b)

Preferred Stock

 

The Company is authorized to issue 10,000,000 shares of preferred stock, with a par value of $0.01 per share. As of December 31, 2019, no preferred stock was issued or outstanding.

 

 

(c)

Warrants

 

As of March 31, 2020, the Company had the following warrants outstanding to purchase shares of the Company’s common

stock, all of which are liability classified:

 

Number of Shares

 

 

Exercise Price per Share

 

 

Expiration Date

 

7,692,308

 

 

$

4.59

 

 

March 24, 2025

 

7,692,308

 

 

$

3.25

 

 

April 24, 2021

The following table summarizes the fair value and the assumptions used for the Black-Scholes option-pricing model for the liability classified warrants for the three months ended March 31, 2020:

 

 

 

March 31, 2020

 

 

Series A Warrants

 

 

 

Series B Warrants

 

 

Fair value

 

$

6,143

 

 

 

$

3,346

 

 

Expected dividend yield

 

 

 

%

 

 

 

%

Expected volatility

 

73.59

 

%

 

83.79

 

%

Risk-free interest rates

 

.37

 

%

 

.17

 

%

Remaining contractual term

 

5 years

 

 

 

1 year

 

 

Each of the warrant agreements include usual and customary standard antidilution provisions as well as antidilution provisions that do not meet the standard definition of antidilution provisions, which require the Company to classify the warrants as liabilities.

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Stock-Based Compensation

In connection with the Separation, the Company adopted the 2019 Plan, which allows for the grant of stock options, stock appreciation rights and stock awards for a total of 3,000,000 shares of common stock. On December 1st of each year, pursuant to the “Evergreen” provision of the 2019 Plan, the number of shares available under the plan shall be increased by an amount equal to 5% of the outstanding common stock on December 1st of that year or such lower amount as determined by the Board of Directors. In December 2019, the number of shares available for issuance under the 2019 Plan was increased by 467,535. The total number of shares authorized for issuance under the 2019 plan as of March 31, 2020 is 3,467,535. As of March 31, 2020, 1,346,496 shares are available for future grants under the 2019 Plan.

 

 

 

 

 

18

 


 

Stock Options:

Stock options are exercisable generally for a period of 10 years from the date of grant and generally vest over four years. The weighted average grant-date fair value of the Baudax Bio options awarded to employees during three months ended March 31, 2020 was $1.58. Under the 2019 Plan, the fair value of the Baudax Bio options was estimated on the date of grant using a Black-Scholes option pricing model with the following assumptions:

 

 

 

 

March 31,

 

 

 

2020

 

Range of expected option life

 

6 years

 

Expected volatility

 

72.85%

 

Risk-free interest rate

 

.46%

 

Expected dividend yield

 

 

 

 

Certain employees of the Company participated in Recro’s stock-based compensation plan, which provides for the grants of stock options and RSUs. The combined financial statements prior to the Separation reflect stock-based compensation expense related to Recro stock options and RSUs issued to the Company’s employees as well an allocation of a portion of Recro share-based compensation issued to corporate employees and members of the Board of Directors until the Separation date. The weighted average grant-date fair value of the options awarded to employees under the Recro Plan during the three months ended March 31, 2019 was $5.49.

 

Under the Recro Plan for the three months ended March 31, 2019, the fair value of the options granted to employees of the Company was estimated on the date of grant using a Black-Scholes option pricing model with the following assumptions:

 

 

 

March 31,

 

 

 

2019

 

Range of expected option life

 

6 years

 

Expected volatility

 

79.11% - 81.54%

 

Risk-free interest rate

 

2.27% – 2.66%

 

Expected dividend yield

 

 

 

 

The following table summarizes Baudax Bio stock option activity during the three months ended March 31, 2020:

 

 

 

Number of

shares

 

 

Weighted

average

exercise

price

 

 

Weighted

average

remaining

contractual life

Balance, December 31, 2019

 

 

643,879

 

 

$

6.33

 

 

9.9 years

Granted

 

 

227,187

 

 

 

2.48

 

 

 

Balance, March 31, 2020

 

 

871,066

 

 

$

5.33

 

 

9.8 years

Vested

 

 

40,236

 

 

$

6.33

 

 

9.7 years

Vested and expected to vest

 

 

871,066

 

 

$

5.33

 

 

9.8 years

 

Included in the table above are 182,187 stock options outstanding as of March 31, 2020 that were granted outside of the plan. The grants were made pursuant to the NASDAQ inducement grant exception in accordance with NASDAQ Listing Rule 5635(c)(4).

 

Restricted Stock Units (RSUs):

The following table summarizes the Baudax Bio RSUs activity during the three months ended March 31, 2020:

 

 

 

Number of

shares

 

Balance, December 31, 2019

 

 

1,380,030

 

Granted

 

 

119,624

 

Vested and settled

 

 

(50,240

)

Balance, March 31, 2020

 

 

1,449,414

 

Expected to vest

 

 

1,449,414

 

 

 

Included in the table above are 56,384 time-based RSUs outstanding as of March 31, 2020 that were granted outside of the plan. The grants were made pursuant to the NASDAQ inducement grant exception in accordance with NASDAQ Listing Rule 5635(c)(4).

19

 


 

 

Stock-Based Compensation Expense:

Stock-based compensation expense for the three months ended March 31, 2020 and 2019 was $2,633 and $1,527, respectively. For the current year, this represents stock-based compensation from the 2019 Plan as well as stock-based compensation from the Recro Plan for certain Baudax Bio employees who are continuing to vest in their Recro awards but are not performing services to Recro. For the prior year, this represents the allocated portion of Recro stock-based compensation expense for employees of the Company.

As of March 31, 2020, there was $13,178 of unrecognized compensation expense related to unvested options and time-based RSUs that are expected to vest and will be expensed over a weighted average period of 2.4 years, which includes stock-based compensation from the 2019 plan as well as the Recro equity plan for certain employees of the Company.

The aggregate intrinsic value represents the total amount by which the fair value of the common stock subject to options exceeds the exercise price of the related options. As of March 31, 2020, there was no aggregate intrinsic value of the vested and unvested options.

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Related Party Transactions

A Non-Executive Director of the Company’s Irish subsidiary is a Managing Director and a majority shareholder of HiTech Health Ltd (HiTech Health), a consultancy firm for the biotech, pharmaceutical and medical device industry. Since 2016, HiTech Health has provided the Company with certain consulting services and in November 2017 both parties entered into a Service Agreement to engage in both regulatory and supply chain project support and consultancy. In consideration for such services, the Company recorded $88 and $75 for the three months ended March 31, 2020 and 2019, respectively. A portion of the amount relates to consultancy services provided by the Non-Executive Director.

Recro became a related party to the Company following the Separation. As part of the Separation, the Company entered into a transition services agreement with Recro. Under the transition services agreement, the Company provides certain services to Recro, each related to corporate functions, and are charged to Recro. Additionally, Recro may incur expenses that are directly related to the Company after the Separation, which are billed to the Company. For the three months ended March 31, 2020, the Company recorded income of $516 related to the transition services agreement, which is recorded as a reduction in selling, general and administrative expenses. The Company recorded a net receivable of $63 for such activities and other activity with Recro as of March 31, 2020.

In connection with the Separation, Recro and Baudax entered into an Employee Matters Agreement. The Employee Matters Agreement allocates liabilities and responsibilities relating to employee compensation and benefits plans and programs and other related matters in connection with the Distribution including, without limitation, the treatment of outstanding Recro equity awards.

In connection with the Separation, Recro and Baudax entered into a Tax Matters Agreement that governs the parties’ respective rights, responsibilities and obligations with respect to taxes, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings and other matters regarding taxes for any tax period ending on or before the Distribution date, as well as tax periods beginning after the Distribution date.

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