UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the Quarterly Period Ended: September 30, 2019March 31, 2020

Commission File Number: 001-39101

Baudax Bio, Inc.

(Exact name of registrant as specified in its charter)

(484) 395-2440

(Registrant’s telephone number, including area code)

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

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.

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 12, 2019,May 6, 2020, there were 10017,569,988 shares of common stock, par value $0.01 per share, outstanding.

TABLE OF CONTENTS

Index

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BAUDAX BIO, INC.

CombinedConsolidated Balance Sheets

(Unaudited)

See accompanying notes to consolidated and combined financial statements.

BAUDAX BIO, INC.

Consolidated and Combined Statements of Operations

(Unaudited)

See accompanying notes to consolidated and combined financial statements.

BAUDAX BIO, INC.

Consolidated and Combined Statements of Parent Company Net InvestmentShareholders’ Equity

(Unaudited)

See accompanying notes to consolidated and combined financial statements.

BAUDAX BIO, INC.

Consolidated and Combined Statements of Cash Flows

(Unaudited)

See accompanying notes to consolidated and combined financial statements.

BAUDAX BIO, INC.

Notes to the Consolidated and Combined Financial Statements

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

(Unaudited)

Business

Baudax Bio, Inc. (Baudax Bio or the Company) represents the Acute Care Business of Recro Pharma, Inc. (Recro) and will beis a pharmaceutical company primarily focused on developing and commercializing innovative products for acute care settings andsettings. Baudax Bio believes it can bring valuable therapeutic options for patients, prescribers and payers, such as its lead product, candidate, intravenous (IV) meloxicam,ANJESO™ (meloxicam) injection, to the acute care markets followingmarkets.

On February 20, 2020, the spin-offCompany 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 Baudax Biomoderate to severe pain, alone or in combination with other non-NSAID analgesics. The Company expects to execute commercial launch for ANJESO by Recro. June 2020.

The Separation

Pursuant to the Separation Agreement to be entered into between Recro Pharma, Inc. (Recro) and Baudax Bio, Recro will transfertransferred 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 will receivereceived 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 will operateoperates 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.

The

Basis of Presentation Related to the Separation

For all periods prior to the Separation, the accompanying unaudited combined financial statements represent the Acute Care Business of Recro and are derived from Recro’s consolidated financial statements and accounting records and should be read in conjunction with the annual audited financial statements and related notes as of and for the year ended December 31, 2018 included in Recro’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and the Company’s Registration Statement on Form 10, as amended and filed with the Securities and Exchange Commission.statements. The Recro 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 presentedprior to the Separation and, accordingly, allocations were required.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 planned spin-off,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.

The Company has determined that it operates in a single segment involved in

Prior to the development of innovative products for hospital and other acute care settings.

TheSeparation, 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 iswas recorded. The total net effect of the settlement of these intercompany transactions iswas 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 will bewas retained by Recro and willwas not be 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. A portion of these costs have been allocated out and theThe Company’s combined financial statements, prior to the Separation, include a remainingan allocation of these expenses related to these certain Recro corporate functions, including senior management, legal, human resources, finance, and information technology.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.presented prior to the Separation. For the three and nine months ended September 30,March 31, 2019 (prior to the Separation), a total of $1,516 and $6,467, respectively,$3,382 of costs have been allocated to Recro’s contract manufacturing and development segment (the CDMO business). For the three and nine months ended September 30, 2018, a total of $1,151 and $3,760, respectively, of costs have been allocated to the CDMO business.

The income tax amounts in thesethe 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.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.

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 participateparticipated in those programsRecro’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 combinedCombined 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 parent company net investment.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.

In April 2019, after receipt of

The Company has determined that it operates in a Complete Response Letter (CRL), received from the U.S. Food and Drug Administration (FDA), regarding the New Drug Application (NDA), for IV meloxicam, the Company announced it had implemented a strategic

restructuring initiative, and corresponding reductionsingle segment involved in the Acute Care segment workforce, aimed at reducing operating expenses, while maintaining key personnel needed to partnercommercialization and obtain FDA approvaldevelopment of IV meloxicam.

On October 31, 2019, the Company announced that it had received a written decision from the FDA granting its appeal of the CRL relating to the NDA seeking approvalinnovative products for IV meloxicam. The FDA granted the Company’s appealhospital and indicated that the Company’s application provides sufficient evidence of effectiveness and safety to support approval.  The Company is now in the process of preparing a comprehensive response to the FDA that includes proposed labeling that aligns with the FDA guidance received in the written decision letter.other acute care settings.

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 will contributecontributed $19,000 to the Company immediately prior to the Distribution, which management believes is sufficient to maintain operations of the Company for at least one year from the date of the spin-off.Distribution. Recro has not committed any additional funding to the Company beyond the $19,000 to bethat was contributed as of the Distribution date and the Company maywill be required to raise additional funds needed to operate as a standalone entity beyond one year from the Distribution date.entity. The Company’s ability to generate cash inflows is highly dependent on the approval and commercialization of IV meloxicamANJESO and there can be no assurance that such approval will be obtained or that IV meloxicamANJESO 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 future holders of its common stock and may involve significant cash payment obligations and covenants that restrict the Company’s ability to operate its business.  TheManagement 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 maywould be required to wind down operationssignificantly reduce expenses thereby adjusting the timing and scale of the commercial launch of ANJESO and/or consider out-licensing if IV meloxicam isadditional funds are not approved or cannot be successfully commercialized.available during such period.

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 and nine months ended September 30, 2019March 31, 2020 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2019.2020.

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, 20182019 included in the Company’s Form 10.10-K.

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

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

Property 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.

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.

Goodwill represents the excess of purchase price over the fair value of net assets acquired by the Company (see Note 4).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.

TheAs 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 impairment test for indefinite-lived intangible assetsCompany 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 one-step test, which compares the fair value of the intangible assetstraight-line basis. The Company is required to its carrying value. Ifreview the carrying value exceeds its fair value,of assets resulting from R&D activities for recoverability whenever events occur or changes in circumstances indicate that the carrying amount of an impairment loss is recognized in an amount equal to the excess.asset or asset group may not be recoverable.

The Company performs its annual goodwill and indefinite-lived intangible asset impairment test as of November 30^th, or whenever an event or change in circumstances occurs that would require reassessment of the recoverability of those assets.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, including recent tax reform, intellectual property protection, and competitive environments. Due to the receipt of the CRLglobal market disruption from COVID-19 in March 2019,2020, an indicator of potential impairment, the Company performed an impairment test as of March 31, 2019,2020, which indicated that there was no impairment toof goodwill or indefinite-lived intangible assets. There have been no additional triggering eventsassets resulting from R&D activities as of September 30, 2019.March 31, 2020. The Company will perform its annual goodwill impairment test as of November 30, 2019.2020.

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.

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.

Baudax Awards

Share-based compensation included in the consolidated financial statements following the Separation is based upon the Recro share-based compensation plan.Baudax Bio, Inc. 2019 Equity Incentive Plan, or the 2019 Plan. The Recro plan includes grants of stock options, time-based vesting restricted stock units (RSUs) and performance-based vesting RSUs. These carve out financial statements reflect share-based compensation related to stock options and RSUs issued to Baudax Bio employees as well as an allocation of a portion of share-based compensation issued to corporate employees and members of the Board of Directors.

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.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.

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 ourits 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.  option.

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. 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. 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.

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:

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:

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

Recently Adopted Accounting Pronouncements

In June 2018, the FASB issued ASU No. 2018-07, “Compensation – Stock Compensation (Topic 718)” or ASU 2018-07. ASU 2018-07 simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The new guidance expands the scope of ASC 718 “Compensation—Stock Compensation” to include share-based payments granted to nonemployees in exchange for goods or services used or consumed in an entity’s own operations and supersedes the guidance in ASC 505-50 “Equity-Based Payments to Non-Employees”. The guidance is effective for public business entities in annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted, including in an interim period for which financial statements have not been issued, but not before an entity adopts ASU 2014-09 “Revenue from Contracts with Customers (Topic 606)”. The Company adopted this guidance effective June 30, 2018. There was no impact upon adoption.

In May 2017, the FASB issued ASU No. 2017-09, “Stock Compensation – Scope of Modification Accounting” or ASU 2017-09.  ASU 2017-09 provides guidance on which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The new standard was effective for fiscal years beginning after December 15, 2017. The Company adopted the guidance effective January 1, 2018. There was no impact upon adoption.

In January 2017, the FASB issued ASU No. 2017-04 “Intangibles – Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment,” or ASU 2017-04. ASU 2017-04 allows companies to apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The amendments of the ASU are effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company adopted this guidance as of October 1, 2018 and there was no impact on its combined financial statements.

In February 2016, the FASB issued ASUAccounting 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 10 (d)9(d).

Accounting Pronouncements Not Yet Adopted

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 is currently evaluatingadopted this guidance as of January 1, 2020. The adoption did not have a material impact to the potential impact onCompany 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, 2019,2022, 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 combinedconsolidated financial statements.

On April 10, 2015, Recro completedThe Company follows the acquisitionprovisions 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 manufacturing facility in Gainesville, Georgia and the licensing and commercialization rightsparticular input to IV meloxicam (the Gainesville Transaction). The consideration paid in connection with the Gainesville Transaction consisted of $50,000 cash at closing, a $4,000 working capital adjustment and a seven-year warrant to purchase 350,000 shares of Recro’s common stock at an exercise price of $19.46 per share. In addition, the Company may be required to pay up to an additional $125,000 in milestone payments including $45,000 upon regulatory approval of IV meloxicam, as well as net sales milestones related to IV meloxicam and a percentage of future product net sales related to IV meloxicam between 10% and 12% (subject to a 30% reduction when no longer covered by patent). Under the acquisition method of accounting, the consideration paid and the fair value 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:

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

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

The current portion of the contingent consideration and royalties were allocated torepresents the estimated probability adjusted fair value that is expected to become payable within one year as of the assets acquired and liabilities assumed. The contingent consideration obligation is remeasured each reporting date with changes in fair value recognized as a period charge within the statement of operations (see Note 6 for further information regarding fair value).March 31, 2020.

The assets acquired, including goodwill, and liabilities assumed in the Gainesville Transaction were allocated to Recro’s reporting units as of the date of the acquisition. The accompanying combined financial statements reflect the IPR&D asset of $26,400 and goodwill of $2,127 that were recorded by Baudax Bio related to the Gainesville transaction. The liability for the contingent consideration will be assumed by Baudax Bio following the spin-off and is included in the Company’s Combined Balance Sheets.

The warrant associated with the transaction remains on Recro’s Consolidated Balance Sheets with no allocation to the Company as it is a warrant to purchase Recro common stock.

In December 2018, Recro entered into a second amendment to the purchase and sale agreement among Alkermes Pharma Ireland Limited, Alkermes US Holdings (together with Alkermes Pharma Ireland Limited, Alkermes), Daravita Limited, Recro and Recro Gainesville LLC (Recro Gainesville) that restructured the $45,000 milestone to $60,000 therefore increasing the amount the Company may be required to pay Alkermes to $140,000, however, the amendment spread the payments of the development milestone over a seven-year period. In addition, Recro amended the warrant agreement with Alkermes, which decreased the exercise price of the warrant to $8.26 per share.

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 will be payable upon certain regulatory approval and include (i) a $5,000 payment due within 180 days following regulatory approval for IV meloxicam 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 meloxicam net sales. During the nine months ended September 30, 2019, the Company paid the first component consisting of two payments of $5,000 each to Alkermes.

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

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.

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

Property, plant and equipment consists of the following:

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

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

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.

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

Accrued expenses and other current liabilities consist of the following:

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.

The transaction was accounted for as an asset acquisition, with the total cost of the acquisition of $766 allocated to acquired IPR&D. The Company recorded an upfront payment obligation of $350, as well as operational liabilities and acquisition-related costs of $416, primarily consisting of reimbursement to Cornell for specified past patent, legal and pre-clinical costs.

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

Acquired IPR&D in the asset acquisition was accounted for in accordance with FASB ASC Topic 730, “Research and Development.” At the date of acquisition, the Company determined that the development of the projects underway at Cornell had

not yet reached technological feasibility and that the research in process had no alternative future uses.  Accordingly, the acquired IPR&D was charged to expense in the Combined Statements of Operations on the acquisition date. The acquired IPR&D charge is expected to be deductible over a 15-year period for income tax purposes.

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:

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

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

The Company does not expect a portion of the contingent consideration to become payable within one year as of September 30, 2019 (see Note 4 for additional information). The Company plans to continue to reevaluate this classification and measurement as it progresses through discussions with the FDA regarding IV meloxicam.

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 September 30, 2019, the financial assets and liabilities recorded on the Combined 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.

Property, plant and equipment consists of the following:

Depreciation expense for the three and nine months ended September 30, 2019 was $123 and $369, respectively. Depreciation expense for three and nine months ended September 30, 2018 was $161 and $273, respectively.

The following represents the balance of the intangible assets at September 30, 2019 and December 31, 2018:

There was no amortization expense for the nine months ended September 30, 2019 or the nine months ended September 30, 2018.

Accrued expenses and other current liabilities consist of the following:

After the receipt of the second CRL, the Company incurred approximately $7,200 in restructuring costs (all which was incurred in the first half of 2019), of which $1,386 remains accrued and unpaid as of September 30, 2019.

Recro 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. Recro is required to pay Orion lump sum payments of up to €20,500 ($22,380 as of September 30, 2019) 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 September 30, 2019, no such milestones have been achieved.

Recro 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. Recro is required to pay Orion lump sum payments of up to €12,200 ($13,320 as of September 30, 2019) 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 September 30, 2019, no such milestones have been achieved.

Recro is party to a license agreementMaster Manufacturing Services Agreement and Product Agreement with Cornell forPatheon, collectively the exclusive licensePatheon Agreements, pursuant to which Patheon provides sterile fill-finish of injectable meloxicam drug product at its

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 NMBA Related Compounds. Under the terms of the agreement, Recro will pay Cornell an initial upfront fee and Cornell is also entitled to receive additional milestone payments, annual license maintenance fees as well as royalties. See Note 5 for further information regarding these payment obligations.

These obligations will be transferred to the Company in connection with the spin-off.Patheon Agreements. 

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 GainesvilleAlkermes Transaction, Recrothe Company agreed to pay to Alkermes up to an additional $140,000$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 IVinjectable meloxicam and royalties on future product sales of injectable meloxicammeloxicam.

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 September 30, 2019,March 31, 2020, the Company has paid $10,000 in milestone payments to Alkermes.

RecroThe 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 IV meloxicamANJESO formulation and (ii) provide development services with respect to the Chemistry, Manufacturing and Controls section of an NDA for IV meloxicam.ANJESO. Pursuant to the Supply Agreement, Alkermes will supply Recrothe Company with such quantities of bulk IV meloxicamANJESO formulation as shall be reasonably required for the completion of clinical trials of IV meloxicam.ANJESO. During the term of the Supply Agreement, Recrothe Company will purchase its clinical and commercial supplies of bulk IV meloxicamANJESO formulation exclusively from Alkermes, subject to certain exceptions, for a period of time.

These obligations will be transferred to the Company in connection with the spin-off.

Recro and theThe Company areis involved, from time to time, in various claims and legal proceedings arising in the ordinary course of its business. Except as disclosed below, Recro and the Company areis 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 itsRecro’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 IV meloxicam.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 and directors as defendants. On February 8, 2019, Recrothe 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. On June 26, 2019,In response to questions from the judge heard oral arguments onJudge, the parties submitted supplemental briefs with regard to the motion to dismiss.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 judge asked the plaintiffsCompany intends to file a supplemental briefmotion to dismiss as to this complaint.  In connection with the Separation, the Company accepted assignment by August 30, 2019, and Recro will have 30 days to submit a reply brief.  This matter will be transferred to the Companyof all of Recro’s obligations in connection with the spin-off.Securities Litigation and agreed to indemnify Recro andfor all liabilities related to the Securities Litigation. The Company believehas 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. The lawsuit is in the early stages and, atAt this time, no assessment can be made as to its likely outcome or whether the outcome will be material to Recro or the Company.

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