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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

 

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

For the Quarterly Period Ended: September 30, 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 November 5, 2020, there were 26,238,825 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

 

26

 

 

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

36

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

37

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

38

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

38

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

38

 

 

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

38

 

 

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

38

 

 

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

39

 

 

 

 

 

 

 

Item 5.

 

Other Information

 

39

 

 

 

 

 

 

 

Item 6.

 

Exhibits

 

39

 

 

 

 

 

 

SIGNATURES

 

41

 

 

 

 

 

 

 

2

 


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BAUDAX BIO, INC.

Consolidated Balance Sheets

(Unaudited)

 

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

 

September 30, 2020

 

 

December 31, 2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

24,608

 

 

$

17,740

 

Inventory

 

 

1,784

 

 

 

 

Prepaid expenses and other current assets

 

 

2,563

 

 

 

2,395

 

Total current assets

 

 

28,955

 

 

 

20,135

 

Property, plant and equipment, net

 

 

4,835

 

 

 

4,821

 

Intangible assets, net

 

 

24,898

 

 

 

26,400

 

Goodwill

 

 

2,127

 

 

 

2,127

 

Other long-term assets

 

 

652

 

 

 

730

 

Total assets

 

$

61,467

 

 

$

54,213

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,782

 

 

$

271

 

Accrued expenses and other current liabilities

 

 

7,292

 

 

 

3,850

 

Current portion of long-term debt, net

 

 

171

 

 

 

 

Current portion of contingent consideration

 

 

10,677

 

 

 

3,592

 

Total current liabilities

 

 

19,922

 

 

 

7,713

 

Long-term debt, net

 

 

8,753

 

 

 

 

Warrant liability

 

 

10,228

 

 

 

 

Long-term portion of contingent consideration

 

 

67,433

 

 

 

62,766

 

Other long-term liabilities

 

 

361

 

 

 

455

 

Total liabilities

 

 

106,697

 

 

 

70,934

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

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, 18,374,604 shares at September 30, 2020 and 9,350,709 shares at

   December 31, 2019

 

 

184

 

 

 

94

 

Additional paid-in capital

 

 

49,864

 

 

 

19,405

 

Accumulated deficit

 

 

(95,278

)

 

 

(36,220

)

Total shareholders’ equity (deficit)

 

 

(45,230

)

 

 

(16,721

)

Total liabilities and shareholders’ equity

 

$

61,467

 

 

$

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 September 30,

 

 

For the Nine Months Ended September 30,

 

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

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenue, net

 

$

68

 

 

$

 

 

$

417

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

540

 

 

 

 

 

 

1,190

 

 

 

 

Research and development

 

 

1,469

 

 

 

1,845

 

 

 

5,889

 

 

 

18,578

 

Selling, general and administrative

 

 

13,763

 

 

 

4,524

 

 

 

33,026

 

 

 

21,809

 

Amortization of intangible assets

 

 

643

 

 

 

 

 

 

1,502

 

 

 

 

Change in warrant valuation

 

 

(11,182

)

 

 

 

 

 

2,863

 

 

 

 

Change in contingent consideration valuation

 

 

(17,427

)

 

 

3,909

 

 

 

14,252

 

 

 

(15,241

)

Total operating expenses

 

 

(12,194

)

 

 

10,278

 

 

 

58,722

 

 

 

25,146

 

Operating income (loss)

 

 

12,262

 

 

 

(10,278

)

 

 

(58,305

)

 

 

(25,146

)

Other expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expense

 

 

(577

)

 

 

(37

)

 

 

(753

)

 

 

(86

)

Net income (loss)

 

$

11,685

 

 

$

(10,315

)

 

$

(59,058

)

 

$

(25,232

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share of common stock, basic

 

$

0.64

 

 

$

(1.10

)

 

$

(3.84

)

 

$

(2.70

)

Net income (loss) per share of common stock, dilutive

 

$

0.62

 

 

$

(1.10

)

 

$

(3.84

)

 

$

(2.70

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, basic

 

 

18,374,604

 

 

 

9,350,709

 

 

 

15,366,861

 

 

 

9,350,709

 

Weighted average common shares outstanding, diluted

 

 

18,768,376

 

 

 

9,350,709

 

 

 

15,366,861

 

 

 

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 Nine Months Ended September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

 

 

 

(amounts in thousands, except share data)

 

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

)

Recro Pharma allocation - stock-based compensation

 

 

 

 

 

 

 

 

445

 

 

 

 

 

 

445

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,864

 

 

 

 

 

 

1,864

 

Stock issuance costs

 

 

 

 

 

 

 

 

(3

)

 

 

 

 

 

(3

)

Warrants issued in connection with financing facility

 

 

 

 

 

 

 

 

1,423

 

 

 

 

 

 

1,423

 

Exercise of warrants

 

 

804,616

 

 

 

8

 

 

 

3,196

 

 

 

 

 

 

3,204

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(30,445

)

 

 

(30,445

)

Balance, June 30, 2020

 

 

18,374,604

 

 

$

184

 

 

$

47,375

 

 

$

(106,963

)

 

$

(59,404

)

Recro Pharma allocation - stock-based compensation

 

 

 

 

 

 

 

 

444

 

 

 

 

 

 

444

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

2,045

 

 

 

 

 

 

2,045

 

Net income

 

 

 

 

 

 

 

 

 

 

 

11,685

 

 

 

11,685

 

Balance, September 30, 2020

 

 

18,374,604

 

 

$

184

 

 

$

49,864

 

 

$

(95,278

)

 

$

(45,230

)

 

 

For the Nine Months Ended September 30, 2019

 

 

 

 

 

 

Parent Company

 

(amounts in thousands, except share data)

 

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

)

Net loss

 

 

(10,582

)

Net transfer from parent

 

 

31,052

 

Parent allocation - share-based compensation

 

 

1,675

 

Balance, June 30, 2019

 

$

(29,187

)

Net loss

 

 

(10,315

)

Net transfer from parent

 

 

3,027

 

Parent allocation - share-based compensation

 

 

1,052

 

Balance, September 30, 2019

 

$

(35,423

)

 

See accompanying notes to consolidated and combined financial statements.

5

 


 

BAUDAX BIO, INC.

Consolidated and Combined Statements of Cash Flows

(Unaudited)

 

 

 

For the Nine Months Ended September 30,

 

(amounts in thousands)

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(59,058

)

 

$

(25,232

)

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

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

7,431

 

 

 

4,254

 

Non-cash interest expense

 

 

306

 

 

 

 

Depreciation expense

 

 

315

 

 

 

369

 

Amortization

 

 

1,502

 

 

 

 

Change in warrant valuation

 

 

2,863

 

 

 

 

Change in contingent consideration valuation

 

 

14,252

 

 

 

(15,241

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Inventory

 

 

(1,784

)

 

 

 

Prepaid expenses and other current assets

 

 

(90

)

 

 

1,199

 

Accounts payable, accrued expenses and other liabilities

 

 

4,837

 

 

 

(7,453

)

Net cash used in operating activities

 

 

(29,426

)

 

 

(42,104

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(307

)

 

 

(1,633

)

Acquisition of license agreement

 

 

 

 

 

(165

)

Net cash used in investing activities

 

 

(307

)

 

 

(1,798

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt, net of transaction costs

 

 

10,041

 

 

 

 

Proceeds from public offering, net of transaction costs

 

 

23,085

 

 

 

 

Proceeds from equity facility, net of transaction costs

 

 

3,612

 

 

 

 

Proceeds from warrant exercises

 

 

2,458

 

 

 

 

Investment from parent company

 

 

 

 

 

53,902

 

Payments of withholdings on shares withheld for income taxes

 

 

(95

)

 

 

 

Payment of contingent consideration

 

 

(2,500

)

 

 

(10,000

)

Net cash provided by financing activities

 

 

36,601

 

 

 

43,902

 

Net increase in cash and cash equivalents

 

 

6,868

 

 

 

 

Cash and cash equivalents, beginning of period

 

 

17,740

 

 

 

 

Cash and cash equivalents, end of period

 

$

24,608

 

 

$

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

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

   accounts payable

 

$

22

 

 

$

 

Fair value of warrants issued in connection with public offering

 

$

8,111

 

 

$

 

Fair value of warrants issued in connection with financing facility

 

$

1,423

 

 

$

 

 

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. On June 15, 2020, Baudax Bio announced the commercial launch of ANJESO and that the Centers for Medicare and Medicaid Services (“CMS”) approved transitional pass-through status and established a new reimbursement C-code for ANJESO.

On August 6, 2020, the Company announced CMS established a new permanent J-code for ANJESO facilitating reimbursement in the hospital outpatient, ambulatory surgery center and physician office settings of care. The code, J1738 (Injection, meloxicam, 1 mg), took effect on October 1, 2020 and replaced the previously issued C-code.

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 15 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 had historically been held at the Recro corporate level, but which were 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 did 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 and nine months ended September 30, 2019, a total of $1,516 and $6,467, respectively, of these 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

7

 


 

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.

Upon the Separation, the Company adopted its own share‑based compensation plan. Recro maintains its stock-based compensation plan at a corporate level. Certain of 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 $95,278 as of September 30, 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. The Company has raised additional funds from debt and equity transactions as a standalone entity and will be required to raise additional funds to continue 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, if approved, commercialization of the Company’s other product candidates, 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 the Company’s common stock and may involve significant cash payment obligations and covenants that restrict the Company’s ability to operate its business. 

The Company follows the provisions of Financial Accounting Standards Board (“FASB”), Accounting Standards Codification (“ASC”), Topic 205-40, “Presentation of Financial Statements — Going Concern”, or ASC 205-40, which requires management to assess the Company’s ability to continue as a going concern for one year after the date the consolidated financial statements are issued. The Company expects to seek additional funding to sustain its future operations and while the Company has successfully raised capital in the past, the ability to raise capital in future periods is not assured. Based on the Company’s available cash as of September 30, 2020, management has concluded that substantial doubt exists about the Company’s ability to continue as a going concern for one year from the date these financial statements are issued. The consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

(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.

8

 


 

Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2020.

The accompanying unaudited interim consolidated 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.

 

(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 FASB ASC Topic 805, “Business Combinations,” 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 September 30, 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. There have been no additional triggering events as of September 30, 2020. The Company will perform its annual goodwill impairment test as of November 30, 2020.

 

(g)

Revenue Recognition

Subsequent to regulatory approval for ANJESO from the FDA, the Company began selling ANJESO in the U.S. through a single third-party logistics provider (“3PL”) which takes title to and control of the goods. The Company recognizes revenue from ANJESO product sales at the point the title to the product is transferred to the customer and the customer obtains control of the product. The transaction price that is recognized as revenue for products includes an estimate of variable consideration for reserves, which result from discounts, returns, chargebacks, rebates and other allowances that are offered within contracts between us and our end-customers, wholesalers, group purchasing organizations and other indirect customers. Our payment terms are generally between thirty to ninety days.

The Company’s estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of its anticipated performance and all information (historical, current and forecasted) that is reasonably available. These reserves reflect the Company’s best estimate of the amount of consideration to which the Company is entitled based on the terms of the contracts. The amount of variable consideration that is included in the transaction price may be constrained and is included in the net sales price only to the extent that is considered probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.

 

(h)

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 balance is compromised solely from transactions with the Company’s 3PL.

 

(i)

Research and Development

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

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

 

(j)

Stock-Based Awards

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 (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.

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. 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 (the “Recro Equity 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.

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.

 

(k)

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.

 

(l)

Net Income (Loss) Per Common Share

Basic net income (loss) per common share is determined by dividing net income (loss) applicable to common shareholders by the weighted average common shares outstanding during the period. Outstanding warrants, common stock options and unvested restricted stock units are excluded from the calculation of diluted net income (loss) per share when their effect would be anti-dilutive.

11

 


 

For purposes of calculating diluted income (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 reconciles the shares used in the calculation of basic net income per share to those used for diluted net income per share:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Basic and Diluted Income (Loss) Per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

11,685

 

 

$

(10,315

)

 

$

(59,058

)

 

$

(25,232

)

Weighted average common shares

    outstanding, basic

 

 

18,374,604

 

 

 

9,350,709

 

 

 

15,366,861

 

 

 

9,350,709

 

Dilutive effect of equity awards, based on the

    treasury stock method

 

 

393,772

 

 

 

 

 

 

 

 

 

 

Weighted average common shares

    outstanding, diluted

 

 

18,768,376

 

 

 

9,350,709

 

 

 

15,366,861

 

 

 

9,350,709

 

 

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

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Options and restricted stock units outstanding

 

 

2,098,316

 

 

 

 

 

 

1,694,889

 

 

 

 

Warrants

 

 

15,107,100