(1)Background

~~(1)~~

~~Background~~

Use of estimates

~~(b)~~

~~Use of Estimates~~

Cash and cash equivalents

~~(c)~~

~~Cash and Cash Equivalents~~

~~(d)~~

~~Property and Equipment~~

Goodwill and intangible assets

~~(e)~~

~~Goodwill and Intangible Assets~~

Revenue recognition

Since the last annual test, the Company has only identified the ongoing novel strain of coronavirus (“COVID-19”) pandemic as a potential indicator of impairment. The Company has performed periodic interim impairment testing that has resulted in 0 impairment of goodwill or other assets. The Company continues to monitor the impact of the COVID-19 pandemic.

~~(f)~~

~~Revenue Recognition~~

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

Manufacturing ~~revenue~~

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

~~Royalty Revenue~~Profit-sharing

In addition to manufacturing and packaging revenue, certain customer agreements may have intellectual property sales-based ~~royalties~~profit-sharing and/or ~~profit-sharing~~royalties consideration, collectively referred to as ~~royalties,~~profit-sharing, computed on the net product sales of the commercial partner. ~~Royalty~~Profit-sharing revenues are generally recognized under the terms of the applicable license, development and/or supply agreement. For arrangements that include sales-based ~~royalties~~profit-sharing where the license for intellectual property is deemed to be the predominant item to which the ~~royalties relate,~~profit-sharing relates, the Company recognizes revenue when the related sales occur by the commercial partner. For arrangements that include sales-based ~~royalties~~profit-sharing where the license for intellectual property is not deemed to be the predominant item to which the ~~royalties relate,~~profit-sharing relates, the Company recognizes revenue upon transfer of control of the manufactured product. In these cases, significant judgment is required to calculate ~~this~~the estimated variable consideration from such profit-sharing using

the ~~most-likely amount~~expected value method based on historical ~~customer~~commercial partner pricing and ~~deductions and~~deductions. Estimated variable consideration is partially constrained due to ~~items that are outside of the Company’s control including~~ the uncertainty of ~~the timing of future commercial partner sales, mix of volume, customer stocking and ordering patterns, as well as unforeseen~~ price adjustments made by the Company’s commercial ~~partners.~~partners, which are outside of the Company’s control. Factors causing price adjustments by the Company’s commercial partners include increased competition in the products’ markets, mix of volume between the commercial partners’ customers, and changes in government pricing.

Research and ~~Development~~development

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

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

6

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

Concentration of credit risk

~~(g)~~

~~Concentration of Credit Risk~~

Stock-based compensation expense

~~(h)~~

~~Stock-based Compensation Expense~~

Income taxes

~~(i)~~

~~Income Taxes~~

Income or loss per share

~~(j)~~

~~Income or Loss Per Share~~


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

Three months ended June 30, 2019

Six months ended June 30, 2019

Weighted average shares outstanding, basic

22,265,612

22,092,853

Dilutive impact of:

Restricted stock units

218,745

303,326

Stock options

360,899

359,077

Warrants

81,146

70,654

Weighted average shares outstanding, diluted

22,926,402

22,825,910

~~(k)~~

~~Recent Accounting Pronouncements~~

(3)Fair value of financial instruments including trade receivables and available-for-sale debt securities. ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including those interim periods within those fiscal years. The Company is currently assessing the impact of adopting this standard, but based on a preliminary assessment, does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

~~(3)~~

~~Discontinued Operations~~

On November 21, 2019 (the “Distribution Date”), the Company completed the separation (the “Separation”) of its former Acute Care business by distributing to the Company’s shareholders on a pro rata basis all of the issued and outstanding common stock of Baudax Bio, the entity the Company incorporated to hold such businesses. To effect the Separation, the Company distributed to its shareholders 1 share of Baudax Bio common stock for every 2.5 shares of the Company’s common stock outstanding as of November 15, 2019, the record date for the distribution. Fractional shares of Baudax Bio common stock that otherwise would have been distributed were aggregated and sold into the public market and the proceeds distributed to the Company’s shareholders. Additionally, in connection with the

Separation, the Company contributed $19,000 of cash to Baudax Bio, the Company retained significant net operating loss carryforwards, and the Company was released from significant milestone and royalty payment obligations.

The accounting requirements for reporting the Separation of Baudax Bio as a discontinued operation were met when the Separation was completed. Accordingly, the accompanying consolidated financial statements for all periods presented reflect this business as a discontinued operation.

In connection with the Separation, the Company and Baudax Bio entered into various agreements to effect the Separation and provide a framework for their relationship after the Separation, including a transition services agreement, an employee matters agreement, a tax matters agreement and an intellectual property matters agreement. These agreements provide for the allocation between the Company and Baudax Bio of assets, employees, liabilities and obligations (including investments, property and employee benefits and tax-related assets and liabilities) attributable to periods prior to, at, and after Baudax Bio’s separation from the Company and govern certain relationships between the Company and Baudax Bio after the Separation.

The historical consolidated balance sheet and statements of operations of the Company and the related notes to the consolidated financial statements have been presented as discontinued operations in the consolidated financial statements and prior periods have been recast. Discontinued operations include results of the Company’s Acute Care business except for certain corporate overhead costs and certain costs associated with transition services provided by Baudax Bio to the Company, following the Separation, which are included in continuing operations.

The Separation and Distribution Agreement with Baudax Bio sets forth, among other things, the assets that were transferred, the liabilities assumed, and the contracts that were assigned to each of Baudax Bio and the Company as part of the Separation of the Company into two companies, and provided for when and how these transfers, assumptions and assignments were to occur.

The tax matters agreement governs the respective rights, responsibilities and obligations of Baudax Bio and the Company with respect to taxes (including taxes arising in the ordinary course of business and taxes, if any, incurred as a result of any failure of the Distribution and certain related transactions to qualify as tax-free for U.S. federal income tax purposes), tax attributes, uncertain tax positions, tax returns, tax proceedings and certain other tax matters.

The employee matters agreement governs certain compensation and employee benefit obligations and allocates liabilities and responsibilities relating to employment matters, employee compensation and benefit plans and programs and other related matters, including the transfer or assignment of employees from the Company to Baudax Bio.

As of December 31, 2019, certain current liabilities of discontinued operations remained on the Company’s consolidated balance sheet due to timing of payment, which consisted of $22 of accounts payable and $1,150 of accrued expenses, which were paid in the quarter ended March 31, 2020.

~~The following is a summary of the Acute Care business expenses for the three and six months ended June 30, 2019:~~

Three months ended June 30, 2019

Six months ended June 30, 2019

Operating expenses:

Research and development
$
7,180

$
16,734

Selling, general and administrative

4,464

12,138

Change in contingent consideration valuation

(4,059
)

(19,150
)
Total operating expenses

7,585

9,722

Other income (expense), net

(11
)

(49
)
Loss on discontinued operations
$
(7,596
)

$
(9,771
)

~~(4)~~

~~Fair Value of Financial Instruments~~

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

•

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

•

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

•

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

•

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

~~The Company has classified~~ assets and liabilities, inputs that are quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are either directly or indirectly observable; and

(4)Inventory

~~(5)~~

~~Cash Equivalents~~

~~The following is a summary of the Company’s cash equivalents:~~

June 30, 2020

Amortized

Gross unrealized

Estimated

cost

Gain

Loss

fair value

Money market mutual funds
$
15,347

$
—

$
—

$
15,347

Total investments
$
15,347

$
—

$
—

$
15,347

December 31, 2019

Amortized

Gross unrealized

Estimated

cost

Gain

Loss

fair value

Money market mutual funds
$
11,609

$
—

$
—

$
11,609

Total investments
$
11,609

$
—

$
—

$
11,609

~~(6)~~

~~Inventory~~

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

Inventory was as follows:

June 30, 2020

December 31, 2019

Raw materials

$
3,298

$
3,240

Work in process

4,537

6,430

Finished goods

4,402

5,892

Inventory, prior to provision

12,237

15,562

Provision for inventory obsolescence

(465
)

(490
)
Inventory

$
11,772

$
15,072


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

(5)Property, plant and equipment

~~(7)~~

~~Property, Plant and Equipment~~

(6)Intangible assets

~~(8)~~

~~Intangible Assets~~

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


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

(7)Accrued expenses and other current liabilities

June 30, 2020

December 31, 2019

Cost

$
15,500

$
15,500

Accumulated amortization

(13,509
)

(12,217
)
Net intangible assets

$
1,991

$
3,283

~~Amortization expense was $646 for the three months ended June 30, 2020 and 2019 and $1,292 for the six months ended June 30, 2020 and 2019.~~

~~As of June 30, 2020, future amortization expense is as follows:~~

Amortization

Remainder of 2020
$
1,291

2021

700

Total
$
1,991

~~(9)~~

~~Accrued Expenses and Other Current Liabilities~~

Accrued expenses and other current liabilities consist of the following:

June 30, 2020

December 31, 2019

Contract liabilities (see note 14)
$
1,727

$
337

Payroll and related costs

1,383

2,958

Property, plant and equipment

1,002

88

Professional and consulting fees

221

370

Other

537

571

Total
$
4,870

$
4,324

~~(10)~~

~~Debt~~

~~The carrying value of debt consists of the following as of June 30, 2020:~~

Term loans under Credit Agreement

PPP Note

Total

Principal balance outstanding
$
125,000

$
3,316

$
128,316

Unamortized deferred issuance costs

(12,333
)

—

(12,333
)
Exit fee accretion

571

—

571

Total debt

113,238

3,316

116,554

Current portion of debt

(6,000
)

(1,289
)

(7,289
)
Debt, net
$
107,238

$
2,027

$
109,265

~~The following table presents the maturity of debt principal (including exit fee):~~

Term loans under Credit Agreement

PPP Note

Total

Remainder of 2020
$
—

$
184

$
184

2021

12,000

2,210

14,210

2022

114,250

922

115,172

Total debt
$
126,250

$
3,316

$
129,566

~~Term Loans under Credit Agreement~~

On November 17, 2017, the Company entered into a $100,000 Credit Agreement (the “Credit Agreement”) with Athyrium Opportunities III Acquisition LP (“Athyrium”). The Credit Agreement provided for a term loan in the original principal amount of $60,000 funded at closing. In December 2018, the Company amended the Credit Agreement (the “First Amendment”). Pursuant to the First Amendment, the $20,000 term B loan and $20,000 term C loan provided for under the Credit Agreement, which were contingent on the Company receiving approval of IV meloxicam (developed by the Company’s Acute Care segment) by December 31, 2018, were restructured into (i) a $10,000 term B-1 loan, funded on December 28, 2018; (ii) a $15,000 term B-2 loan; and (iii) a $15,000 term C loan.

On February 28, 2019, the Company entered into a Second Amendment to Credit Agreement (the “Second Amendment”) with Athyrium. Pursuant to the Second Amendment, (i) the total commitments of the term loan credit facility governed by the Credit Agreement was increased from $100,000 to $125,000, (ii) the $15,000 term B-2 loan and $15,000 term C loan provided for under the Credit Agreement were restructured into a $55,000 term B-2 loan, which was funded on the date of execution of the Second Amendment and (iii) the maturity date was extended to March 31, 2023 (the “Maturity Date”). Beginning on March 31, 2021, the Company must repay the outstanding principal amount in quarterly installments of $3,000 with the outstanding principal balance due on the Maturity Date.

On October 22, 2019, the Company entered into a Third Amendment to Credit Agreement (the “Third Amendment”) with Athyrium. The Third Amendment authorized the release of two of the Company’s subsidiaries, Baudax Bio and Baudax Bio N.A. LLC (formerly known as Recro N.A. LLC) (“Baudax Bio N.A.”), from their respective obligations as guarantors and the release of any liens granted to or held by Athyrium on collateral provided by or equity interests in Baudax Bio and Baudax Bio N.A., including the security interest in Baudax Bio Limited (formerly Recro Ireland Limited) (the “Release”) under the Credit Agreement, as amended. The Release was applicable only to Baudax Bio and Baudax Bio N.A. and did not affect or modify any obligations of the Company or the Guarantors (other than Baudax Bio and Baudax Bio N.A.) under the Credit Agreement, except that it increased the permitted leverage ratio (which is the Company’s indebtedness under the Credit Agreement divided by EBITDA, each as defined) to 5.00:1.00.

~~The term loans bear interest at a rate equal to the three-month LIBOR rate, with a 1% floor plus 9.75% per annum.~~ In addition, in accordance with the Credit Agreement, as amended (the “Amended Credit Agreement”) the Company will have to pay a 1% exit fee, which is $1,250 at the current outstanding loan balance and is being accreted to the carrying amount of the debt using the effective interest method over the term of the loan. In addition, if there is an early repayment, there is a sliding scale of prepayment penalties beginning with a 10% penalty and including a make-whole interest payment. NaN prepayment penalties are assessed for payments made after March 31, 2022.

~~The Amended Credit Agreement contains certain usual~~


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

(8)Commitments and ~~customary affirmative and negative covenants, as well as financial covenants that the Company will need to satisfy on a monthly and quarterly basis. As of June 30, 2020, the Company was in compliance with the covenants.~~contingencies

In connection with the Credit Agreement, the Company issued warrants to each of Athyrium and its affiliate, Athyrium Opportunities II Acquisition LP (“Athyrium II”), to purchase an aggregate of 348,664 shares of the Company’s common stock with an exercise price of $8.6043 per share. ~~In connection with the First Amendment, the warrants were amended to decrease the exercise price to $6.84 per share.~~ ~~See note 12(d) for additional information. The warrants are exercisable through November 17, 2024. The initial fair value of the warrant~~ ~~and revaluation adjustment from the repricing of the warrants~~ ~~of $2,232 was recorded as a debt issuance cost.~~

~~In addition, the Company recorded debt issuance costs for the~~ ~~Amended Credit Agreement~~ ~~of $4,439~~ ~~at original signing, an amendment fee of $500 as well as certain other fees and expenses in December 2018, and recorded debt~~

issuance costs for the Second Amendment consisting of a $2,500 amendment fee, $436 closing fee and $11,400 original issue discount which, along with the fair value of warrants, are being amortized using the effective interest method over the term of the Amended Credit Agreement. Debt issuance cost amortization is included in interest expense within the Consolidated Statements of Operations. As of June 30, 2020, the effective interest rate was 15.98%, which takes into consideration the non-cash accretion of the exit fee, the amortization of the debt issuance cost and the original issue discount.Litigation

The Company recorded debt issuance cost amortization related to the Amended Credit Agreement of $1,384 for the three months ended June 30, 2020 and 2019 and $2,768 and $2,362 for the six months ended June 30, 2020 and 2019, respectively.

~~Paycheck Protection Program (“PPP”) Note~~

On May 12, 2020, the Company entered into a $4,416 promissory note with PNC Bank under the Small Business Administration (“SBA”) Paycheck Protection Program of the Coronavirus Aid, Relief and Economic Security Act of 2020 (the “CARES Act,” collectively the “PPP Note”). The note has a ~~two-year~~ term, matures on May 12, 2022 and bears interest at a stated rate of 1.0% per annum. Monthly principal and interest payments, less the amount of any potential forgiveness (discussed below), will commence on December 15, 2020. The note requires no collateral or guarantees, nor did the Company pay any fees to acquire the note. The note provides for customary events of default, including, among others, failure to make payment, bankruptcy, breaches of representations and material adverse effects. The Company may prepay the principal of the PPP Note at any time without incurring any prepayment charges. On May 18, 2020, which fell within a safe-harbor period established by the SBA, the Company prepaid $1,100 of the note in order to comply with the SBA’s limitations on the amount that could be borrowed at that time. Certifications made with respect to loan amounts repaid during this safe harbor period are deemed to have been made in good faith.

The PPP Note may be partially or fully forgiven if the Company complies with the provisions of the CARES Act, including the use of note proceeds for payroll costs, rent, utilities and other expenses, and at least 60% of the note proceeds must be used for payroll costs as defined by the CARES Act. Any forgiveness of the note will be subject to approval by the SBA and PNC Bank, and will require the Company to apply for such treatment in the future. Should the Company meet the requirements for forgiveness, it would extinguish the note upon receiving legal release from PNC Bank and record a gain on extinguishment in that period.

~~(11)~~

~~Commitments and Contingencies~~

~~Litigation~~

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

10

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

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

Purchase ~~Commitments~~commitments

As of June 30, ~~2020,~~2021, the Company had outstanding cancelable and non-cancelable purchase commitments in the aggregate amount of ~~$10,721~~ $5,512related to inventory, capital expenditures ~~transition services agreement~~ and other goods and services.

Employment agreements and certain other contingencies

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

(9)Debt

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


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

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

Term loans under Credit Agreement

~~(12)~~

~~Capital Structure~~

~~(a)~~

~~Common Stock~~

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

11

The Credit Agreement has been amended from time to ~~50,000,000~~time. An amendment in February 2021 resulted in a reduction of $16,000 principal, a reduction of 1.5% in the stated interest rate, and a $160 settlement of accrued exit fees in exchange for $10,100 of cash and $9,271, or 2,202,420 shares, of common stock issued, as well as certain other changes to the terms of the debt. Of the total common stock issued, $6,060 was applied to the principal balance and accrued exit fee, and substantially all of the remainder was added to unamortized deferred financing costs and will be amortized as interest over the remaining term of the debt.

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

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

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

In connection with the Credit Agreement and five subsequent amendments, the Company has paid financing costs, has incurred costs to record and subsequently to adjust the value of ~~$0.01~~the warrants described above and has been accreting the exit fee described above. These costs are being recognized in interest expense using the effective interest method over the term of the Credit Agreement, resulting in non-cash interest expense of $1,618 and $1,459 in the second quarters of 2021 and 2020, respectively, and $3,080 and $2,919 in the first six months of 2021 and 2020, respectively.

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

Paycheck Protection Program (“PPP”) note

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

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

(10)Shareholders’ equity or deficit

Capital raises

The following table presents the Company’s capital raises since its initial public ~~offering (“IPO”):~~offering:

~~On March 12, 2014, the Company completed an IPO in which the Company sold 4,312,500 shares of~~


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

Aspire common stock ~~at $8.00 per share, resulting in gross proceeds of $34,500. In connection with the IPO, the~~purchase agreement

The Company paid $4,244 in underwriting discounts, commissions and offering expenses, resulting in net proceeds of $30,256. Also, in connection with the IPO, all of the outstanding shares of the Company’s Series A Redeemable Convertible Preferred Stock, including accreted dividends, and certain bridge notes, including accrued interest, were converted into common stock.

~~On July 7, 2015, the Company closed a private placement with certain accredited investors in which the Company sold 1,379,311 shares of~~is currently party to an amended common stock at a price of $11.60 per share, for net proceeds of $14,812. The Company paid the placement agents a fee equal to 6.0% of the aggregate gross proceeds from the private placement, plus reimbursement of certain expenses.

On August 19, 2016, the Company closed an underwritten public offering in which the company sold 1,986,666 shares of common stock at a price per share of $7.50, for net proceeds of $13,367 after deducting underwriting discounts, commissions and offering expenses.

On December 16, 2016, the Company closed an underwritten public offering in which the company sold 6,670,000 shares of common stock at a price per share of $6.00, for net proceeds of $36,888 after deducting underwriting discounts, commissions and offering expenses.

~~On December 29, 2017, the Company entered into a sales~~purchase agreement or the Sales Agreement, with Cowen and Company, LLC, or Cowen, pursuant to which the Company may sell from time to time, at its option, shares of its common stock, $0.01 par value per share, having an aggregate offering price of up to $40,000 through Cowen, as the placement agent. As of June 30, 2020, the Company did not have any sales of common stock under the Sales Agreement. The Sales Agreement will terminate on August 11, 2020.

~~(b)~~

~~Common Stock Purchase Agreement~~

~~On March 2, 2018, the Company entered into a Common Stock Purchase Agreement (the “2018 Purchase Agreement”)~~ with Aspire Capital Fund LLC (“Aspire Capital”)~~, which~~ originally entered into during 2019, and most recently amended in February 2021 (as amended, the “2019 Common Stock Purchase Agreement”). The 2019 Common Stock Purchase Agreement provides that, upon the terms and subject to the conditions and limitations set forth in the ~~2018 Purchase Agreement,~~agreement, Aspire Capital is committed to purchase, at the Company’s sole election, up to an aggregate value of $20,000 of shares of the Company’s common stock over the approximately 30-month term of the 2018 Purchase Agreement. On the execution of the 2018 Purchase Agreement, the Company agreed to issue 33,040$41,172 in shares of common ~~stock to Aspire Capital as consideration for entering into the 2018 Purchase Agreement.~~stock. As of June 30, ~~2020, the Company sold 1,950,000~~2021, there is availability to issue up to $30,000 or 6,199,299 shares of common stock under the ~~2018~~2019 Common Stock Purchase ~~Agreement for proceeds of $16,999, at an average per share price of $8.72, all of which transactions occurred during 2018. The Amended Purchase Agreement, as defined below, replaces the 2018 Purchase~~ Agreement.

OnAthyrium stock issuance agreement

In February ~~19, 2019,~~2021, the Company entered into a ~~common~~ stock ~~purchase~~issuance agreement ~~(the “2019 Purchase Agreement”)~~ with ~~Aspire Capital, which provides that, upon the terms and subject~~Athyrium in connection with an amendment to ~~the conditions and limitations set forth in the 2019 Purchase Agreement, Aspire Capital is committed~~its Credit Agreement. See note 9 for additional details.

Warrants

At June 30, 2021, warrants to purchase ~~at the Company’s sole election, up to an aggregate of $20,000 of its~~348,664 shares of common stock over the approximately 30-month term of the 2019 Purchase Agreement. On the execution of the 2019 Purchase Agreement, the Company agreed to issue 34,762 shares of common stock to Aspire Capital as consideration for entering into the 2019 Purchase Agreement. As of June 30, 2020, the Company did not have any sales of common stock under the 2019 Purchase

Agreement. On August 7, 2020, the Company entered into a First Amendment to the 2019 Purchase Agreement with Aspire Capital (the “Amended Purchase Agreement”) which amended the 2019 Purchase Agreement to, among other things, increase the aggregate amount of shares of common stock Aspire is committed to purchase to $~~30,000~~ ~~and extend the term of the 2019 Purchase Agreement to March 20, 2022.~~

~~(c)~~

~~Preferred Stock~~

were outstanding. The ~~Company is authorized to issue 10,000,000 shares of preferred stock, with a par value of $0.01 per share. As of June 30, 2020, 0 preferred stock was issued or outstanding.~~

~~(d)~~

~~Warrants~~

~~As of June 30, 2020, the Company had the following~~ warrants ~~outstanding to purchase shares of the Company’s common stock:~~

Number of Shares

Exercise Price per Share

Expiration Date
348,664

$
6.84

November 2024

The warrant to purchase 348,664 shares related to Athyrium is equity classified. During March 2019, the warrant to purchase 140,000 shares originally issued to Aegis Capital Corporation, which was equity classified, was forfeited upon expiration.

In November 2019, the warrant to purchase 350,000 shares issued to Alkermes, which was liability classified as it contained a contingent net cash settlement feature, was exercised on a cashless basis, with Alkermes surrendering 165,673 shares to cover the aggregate exercise price, resulting in the issuance of 184,327 shares of common stock based on the closing bid price of the Company’s common stock on November 8, 2019 of $17.45.

~~(13)~~

~~Stock-Based Compensation~~

In October 2013, the Company established the 2013 Equity Incentive Plan (the “2013 Plan”), which allows for the grant of stock options, stock appreciation rights and stock awards for a total of 600,000 shares of common stock. In June 2015, the Company’s shareholders approved the Amended and Restated Equity Incentive Plan (the “2015 A&R Plan”), which amended and restated the 2013 Plan and increased the aggregate amount of shares available for issuance to 2,000,000. In May 2018, the Company’s shareholders approved the 2018 Amended and Restated Equity Incentive Plan (the “A&R Plan”) which amended and restated the 2015 A&R Plan to increase the aggregate amount of shares available for issuance to 8,119,709. At June 30, 2020, the total number of shares authorized under the A&R Plan was 9,281,402, of which 3,369,127 shares were available for future grants. On December 1^st of each year, pursuant to the “Evergreen” provision of the A&R Plan, the number of shares available under the plan may be increased by the board of directors by an amount equal to 5% of the outstanding common stock on December 1^st ~~of that year.~~

~~Stock options~~

~~Stock options~~ are ~~exercisable generally for a period of 10 years from the date of grant and generally vest over four years.~~

The weighted average grant-date fair value of the options awarded to employees during the six months ended June 30, 2020 and 2019 was $8.24 and $5.60, respectively. The fair value of the options was estimated on the date of grant using a Black-Scholes option pricing model with the following assumptions:

June 30,

2020

2019

Range of expected option life

5.5 - 6 years

5.5 - 6 years

Expected volatility

75.34% - 81.09%

79.11% - 81.54%

Risk-free interest rate

0.34 - 1.40%

1.82 - 2.66%

Expected dividend yield

—

—

~~The intrinsic value of options exercised during the six months ended June 30, 2020 and 2019 was $1,058 and $1,033, respectively.~~

~~The following table summarizes stock option activity during the six months ended June 30, 2020:~~

Number of shares

Weighted average exercise price

Aggregate intrinsic value

Weighted average remaining contractual life
Balance, December 31, 2019

3,695,649

$
7.97

Granted

347,750

12.34

Exercised

(178,747
)

4.52

Forfeited or expired

(111,579
)

8.25

Balance, June 30, 2020

3,753,073

8.53

$
304

6.8 years
Exercisable

2,407,433

8.11

304

6.0 years

Included in the table above are 438,000 options outstanding as of June 30, 2020 that were granted outside the plan. The grants were made pursuant to the NASDAQ inducement grant exception in accordance with NASDAQ Listing Rule 5635(c)(4).

~~Restricted stock units~~

Restricted stock units (“RSUs”) generally vest over four years. The fair value of RSUs on the date of grant is measured as the closing price of our common stock on that date. The weighted average grant-date fair value of RSUs awarded to employees during the six months ended June 30, 2020 and 2019 was $15.11 and $8.12, respectively. The fair value of RSUs vested during the six months ended June 30, 2020 and 2019 was $3,227 and $3,952, respectively.

~~The following table summarizes RSU activity during the six months ended June 30, 2020:~~

Number of
shares

Weighted average grant date fair value

Balance, December 31, 2019

1,197,502

$
10.92

Granted

274,775

15.11

Vested

(243,682
)

9.23

Forfeited

(295,611
)

8.73

Balance, June 30, 2020

932,984

13.29

Included in the table above are 15,000 time-based RSUs outstanding as of June 30, 2020 that were granted outside the plan. The grants were made pursuant to the NASDAQ inducement grant exception in accordance with NASDAQ Listing Rule 5635(c)(4).

~~Other information~~

Stock-based compensation expense from continuing operations for the six months ended June 30, 2020 and 2019 was $5,677 and $3,541, respectively. Of these amounts, $1,991 and $845, respectively, were classified as cost of sales and $3,686 and $2,696, respectively, were classified as selling, general and administrative expenses.

For the six months ended June 30, 2020, this represents stock-based compensation expense for the Company’s employees as well as Baudax Bio employees that continue to provide services to the Company through the transition services agreement (See note 3). For the six months ended June 30, 2019, additional stock-based compensation expense of $1,644 is included in amounts presented in the line item “Loss from discontinued operations” on the Company’s Consolidated Statements of Operations.

In conjunction with the Separation, the employment of certain of the Company’s employees was transferred to Baudax Bio pursuant to the Employee Matters Agreement dated November 20, 2019 by and between the Company and Baudax Bio. In accordance with the terms of the Employee Matters Agreement, the Recro equity grants held by ~~such former employees continue to vest~~Athyrium, equity-classified, exercisable at $1.73 per share and expire in accordance with their respective vesting schedules. Any stock-based compensation expense with respect to former employees who no longer provide services to the Company is reflected in Baudax Bio’s financial statements.November 2024. See note 9 for additional details.

(11)Revenue recognition

As of June 30, 2020, there was $11,106 of unrecognized compensation expense related to unvested options and time-based RSUs that are expected to vest and will be expensed over a weighted average period of 2.2 years. As of June 30, 2020, there was $2,707 of unrecognized compensation expense related to unvested performance-based RSUs. The performance-based RSUs will be expensed if the performance criteria are achieved or become probable of being achieved.

~~(14)~~

~~Revenue Recognition~~

Contract assets represent revenue recognized for performance obligations completed before an unconditional right to payment exists, and therefore invoicing or associated reporting from the customer regarding the computation of the net product sales has not yet occurred. ~~Contract assets were $8,911 and $8,851 at June 30, 2020 and December 31, 2019, respectively.~~ Generally, the contract assets balance is impacted by the recognition of additional contract assets, offset by amounts invoiced to customers or actual net product sale amounts reported by the commercial partner for the period.

The following table presents changes in ~~the Company’s~~ contract assets and ~~liabilities for the six months ended June 30, 2020:~~liabilities:


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

Contract assets

Contract liabilities

Balance at beginning of period

$
8,851

$
(337
)
Changes to the beginning balance of contract assets arising from:

Reclassification to receivables as a result of rights to consideration becoming unconditional

(9,559
)

—

Changes in estimate related to the transaction price

2,700

—

Contract assets recognized since beginning of period, net of reclassification to receivables and changes in estimates

6,919

Changes to contract liabilities:

Cash received in advance of contract performance

—

(2,434
)
Revenue recognized

—

1,044

Balance at end of period

$
8,911

$
(1,727
)

The following table disaggregates revenue by timing of revenue recognition:

Three months ended June 30,

Six months ended June 30,

2020

2019

2020

2019

Point in time

$
14,365

$
30,432

$
35,420

$
55,382

Over time

1,157

824

1,879

940

Total

$
15,522

$
31,256

$
37,299

$
56,322


	Three months ended June 30,				Six months ended June 30,
	2021		2020		2021		2020
Point in time	$	16,439	$	14,365	$	31,586	$	35,420
Over time		1,578		1,157		3,234		1,879
Total	$	18,017	$	15,522	$	34,820	$	37,299

The Company’s payment terms for manufacturing revenue and development services are typically 30 to 45 days. ~~Royalty~~Profit-sharing revenue is recorded to accounts receivable in the quarter that the product is sold by the commercial partner upon reporting from the commercial partner and payment terms are generally 45 days after quarter end.

(12)Stock-based compensation

In October 2013, the Company established an equity incentive plan that has been subsequently amended and restated to become the 2018 Amended and Restated Equity Incentive Plan (the “A&R Plan”) At June 30, 2021, a total of 2,811,406 shares were available for future grants under the A&R Plan. On December 1st of each year, pursuant to the “Evergreen” provision of the A&R Plan, the number of shares available under the A&R Plan may be increased by the board of directors by an amount equal to 5% of the outstanding common stock on December 1st of that year.

Stock options

Stock options are exercisable generally for a period of 10 years from the date of grant and generally vest over four years.

~~(15)~~

~~Leases~~

The following table presents information about the fair value of stock options granted:

14


	Six months ended June 30,
	2021		2020
Weighted average grant date fair value	$	1.90	$	8.24
Assumptions used to determine fair value:
Range of expected option life	5.5 - 6 years		5.5 - 6 years
Expected volatility	79 - 81%		75 - 81%
Risk-free interest rate	0.7 - 1.2%		0.3 - 1.4%
Expected dividend yield		0		0

The ~~Company is a party~~intrinsic value of options exercised was $1,058 in the first half of 2020. NaN options were exercised in the first half of 2021.

The following table presents information about stock option balances and activity:


	Number of shares			Weighted average exercise price		Aggregate intrinsic value		Weighted average remaining contractual life
Balance, December 31, 2020		3,907,010		$	8.03
Granted		932,004			2.81
Forfeited or expired		(108,040	)		8.04
Balance, June 30, 2021		4,730,974			7.00	$	7	5.7 years
Exercisable		3,160,459			8.12		1	4.0 years

Included in the table above are 761,848 options outstanding as of June 30, 2021 that were granted outside the A&R Plan. The grants were made pursuant to ~~various operating leases~~the NASDAQ inducement grant exception in ~~Georgia for office, manufacturing, chemistry, and manufacturing and controls development space. The Company is also a party~~accordance with NASDAQ Listing Rule 5635(c)(4).

Restricted stock units

Restricted stock units (“RSUs”) vest over six months to leases for office equipment and storage. Operating lease assets, current lease liabilities and noncurrent lease liabilities are classified as other assets, other current liabilities and other liabilities, respectively,four years depending on the ~~Consolidated Balance Sheets.~~purpose of the award. The fair value of RSUs on the date of grant is measured as the closing price of the Company's common stock on that date. The weighted average grant-date fair value of RSUs awarded to employees was $3.49 in the first half of 2021 and $15.11 in the first half of 2020. The fair value of RSUs vested was $1,537 in the first half of 2021 and $3,227 in the first half of 2020.

The following table presents information about recent RSU activity:


	Number of shares			Weighted average grant date fair value
Balance, December 31, 2020		1,516,819		$	5.67
Granted		743,956			3.49
Vested		(526,191	)		8.91
Forfeited		(92,408	)		10.30
Balance, June 30, 2021		1,642,176			3.39

Included in the table above are 232,822 time-based RSUs outstanding at June 30, 2021 that were granted outside of the A&R Plan. The grants were made pursuant to the NASDAQ inducement grant exception in accordance with NASDAQ Listing Rule 5635(c)(4).

Other information

The following table presents the classification of stock-based compensation expense:


	Six months ended June 30,
	2021		2020
Cost of sales	$	2,375	$	1,991
Selling, general and administrative expenses		2,687		3,686
Total	$	5,062	$	5,677

As of June 30, 2021, there was $9,050 of unrecognized compensation expense related to unvested options and RSUs that are expected to vest and will be expensed over a weighted average period of 2.4 years.

(13)Leases

The Company determines if an arrangement is a lease at inception. The arrangement is a lease if it conveys the right to the Company to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. Lease terms vary based on the nature of operations, however, all leased facilities are classified as operating leases with remaining lease terms between less than one year and 5 years. Most leases contain specific renewal options where notice to renew must be provided in advance of lease expiration or automatic renewals where no advance notice is required. Periods covered by an optionOptions to extend the lease ~~were~~are included in the ~~non-cancellable~~ lease term ~~when exercise of~~if the option was determined to be reasonably certain. Costs determined to be variable and not based on an index or rate were not included in the measurement of operating lease liabilities. As most leases do not provide an implicit rate, the Company's incremental borrowing rate was used to discount its lease liabilities.

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

AsThe following table presents the operating lease amounts recognized on the consolidated balance sheets:


	Balance sheet classification	June 30, 2021		December 31, 2020
Asset	Other assets	$	449	$	486
Liabilities:
Current	Accrued expenses and other current liabilities		145		145
Noncurrent	Other liabilities		327		366

The Company is a party to a seven-year operating lease for a development facility in the State of ~~June 30, 2020, undiscounted~~Georgia that ends in 2025 and immaterial operating leases for a storage area and office equipment. The development facility lease includes options to extend the lease for up to 15 additional years, none of which are included in the lease term. Short-term and variable lease costs were not material for the periods presented. The development facility lease does not provide an implicit rate, so the Company uses its incremental borrowing rate to discount the lease liability.

Undiscounted future lease payments for ~~non-cancellable operating leases are~~the development lease, which was the only material noncancelable lease at March 31, 2021, were as follows:

Lease payments

Remainder of 2020

$
80

2021

160

2022

156

2023

156

2024

156

2025 and thereafter

91

Total lease payments

799

Less imputed interest

(373
)
Total operating lease liabilities

$
426


	June 30, 2021
Remainder of 2021	$	78
2022		156
2023		156
2024		156
2025 and thereafter		91
Total lease payments		637
Less imputed interest		(165	)
Total operating lease liabilities	$	472

At June 30, ~~2020,~~2021, the weighted average remaining lease term was 54.0 years, and the weighted average discount rate was ~~16%~~16%.

~~The components of~~ For the ~~Company’s~~second quarter, total lease cost ~~were as follows:~~

Three months ended June 30,

Six months ended June 30,

2020

2019

2020

2019

Operating lease cost

$
56

$
50

$
113

$
113

Short-term lease cost

1

20

16

28

Variable lease cost

3

1

9

9

Total lease cost

$
60

$
71

$
138

$
150

~~(16)~~

~~Related Party Transactions~~

~~Baudax Bio is a related party to~~was $85 in 2021 and $80 in 2020. For the Company. As part of the Separation, the Company entered into a transition services agreement with Baudax Bio. Under the transition services agreement, Baudax Bio provides certain services to the Company, each related to corporate functions which are charged to the Company. Additionally, the Company may incur expenses that are directly related to Baudax Bio after the Separation, which are billed to Baudax Bio. Our continuing involvement with Baudax Bio as a result of the transition services agreement is expected to end by late 2020, unless extended. During the three andfirst six months ended June 30, ~~2020, the Company recorded expense of $516~~total lease cost was $186 in 2021 and ~~$1,032, respectively, related to its transition services agreement with Baudax Bio. These expenses are included~~$158 in selling, general and administrative expenses on the Company’s Consolidated Statements of Operations. The Company recorded a net receivable of $33 and a net payable of $273 for such activities and other activity with Baudax Bio as of June 30, 2020 and December 31, 2019, respectively.2020.

~~(17)~~

~~Retirement Plan~~

The Company has a voluntary 401(k) Savings Plan (the 401(k) Plan) in which all employees are eligible to participate. The Company’s policy is to match 100% of the employee contributions up to a maximum of 5% of employee compensation. Total Company contributions to the 401(k) plan for the three months ended June 30, 2020 and 2019 were $223 and $237, respectively. Total Company contributions to the 401(k) plan for the six months ended June 30, 2020 and 2019 were $539 and $528, respectively.

~~Item 2.~~

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

~~The~~Item 2.Management’s discussion and analysis of financial condition and results of operations

You should read the following ~~Management’s Discussion~~discussion and ~~Analysis~~analysis of ~~Financial Condition~~our financial condition and ~~Results~~results of ~~Operations should be read in conjunction~~operations together with ~~the interim~~our unaudited consolidated financial statements ~~contained~~and notes thereto in Part I, Item 1 of this Quarterly Report on Form 10-Q, or Quarterly Report, and the audited consolidated financial statements and notes thereto for the year ended December 31, ~~2019~~2020 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 filed with the SEC on ~~March 4, 2020. As used~~February 26, 2021, or Annual Report.

In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions and other factors that could cause actual results to differ materially from those made, projected or implied in ~~this report, unless~~ the ~~context suggests otherwise, “we,” “us,” “our,” “the Company”~~forward-looking statements. Our actual results may differ materially from those discussed below. Please see “Forward-Looking Statements” and “Risk Factors” included in Part I, Item 1A of our Annual Report for factors that could cause or ~~“Recro” refer~~contribute to ~~Recro Pharma, Inc. and its consolidated subsidiaries.~~such differences.

Cautionary ~~Note Regarding Forward-Looking Statements~~note regarding forward-looking statements

This ~~Quarterly Report on Form 10-Q, or~~ Quarterly Report contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this Quarterly Report regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. ~~We may, in some cases, use terms such as~~The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,”

16

“would” “could,” “should,” ~~“expect,~~“potential,” ~~“plan,~~“seek,” ~~“anticipate,~~“evaluate,” ~~“could,~~“pursue,” ~~“intend,~~“continue,” “design,” “impact,” “affect,” “forecast,” “target,” ~~“project,~~“outlook,” ~~“contemplates,~~“initiative,” ~~“believes,~~“objective,” ~~“estimates,~~“designed,” ~~“predicts,~~“priorities,” ~~“potential,~~“goal,” or ~~“continue,”~~ the ~~negatives thereof~~negative of such terms and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Such statements are based on assumptions and expectations that may not be realized and are inherently subject to risks, uncertainties and other ~~words that convey uncertainty~~factors, many of ~~future events or outcomes to identify these forward-looking statements.~~which cannot be predicted with accuracy and some of which might not even be anticipated.

~~These~~The forward-looking statements in this Quarterly Report include, among other things, statements about:

•

~~our estimates regarding expenses, future revenue, cash flow, capital requirements and timing and availability of and the need for additional financing;~~



our estimates regarding expenses, future revenue, cash flow, capital requirements and timing and availability of and the need for additional financing;

•

our ability to maintain our relationships, profitability and contracts with our key commercial partners, including the impact of changes in consumer demand for the products we manufacture for our commercial partners;



our ability to maintain or expand our relationships, profitability and contracts with our key commercial partners, including the impact of changes in consumer demand for the products we manufacture for our commercial partners;

•

~~our ability to grow and diversify our business with new customers, including our ability to meet desired project outcomes with development customers;~~



our ability to grow and diversify our business with new customers, including our ability to meet desired project outcomes with development customers;

•

~~the extent to which the ongoing COVID-19 pandemic disrupts~~

the extent to which the ongoing COVID-19 pandemic continues to disrupt our business operations and financial condition and the business operations and financial condition of our customers and suppliers;



our ability to operate under increased leverage and associated lending covenants; to pay existing required interest and principal amortization payments when due; and/or to obtain acceptable refinancing alternatives;



the performance of third-party suppliers upon which we depend for Active Pharmaceutical Ingredients, or APIs, excipients, capsules, reagents, etc., and other third parties involved with maintenance of our facilities and equipment;



our ability to obtain and maintain patent protection for applicable products and defend our intellectual property rights against third-parties;



pharmaceutical industry market forces that may impact our commercial customers’ success and continued demand for the products we produce;



our ability to recruit or retain key scientific, technical, business development, and management personnel and our executive officers; and



our ability to comply with stringent U.S. and foreign government regulation in the manufacture of pharmaceutical products, including Good Manufacturing Practice, or cGMP, compliance and U.S. Drug Enforcement Agency, or DEA, compliance and other relevant regulatory authoritiesapplicable to our business.

We may not achieve the plans, intentions or expectations disclosed in our ~~operations and financial condition and the operations and financial condition of our customers;~~

•

~~our ability to comply with the regulatory schemes applicable to our business and other regulatory developments in the United States and foreign countries;~~

•

our ability to operate under increased leverage and associated lending covenants; to pay existing required interest and principal amortization payments when due; and/or to obtain acceptable refinancing alternatives;

•

the performance of third-party suppliers upon which we depend for Active Pharmaceutical Ingredients, or APIs, excipients, capsules, reagents, etc., and other third-parties involved with maintenance of our facilities and equipment;

•

~~our ability to obtain and maintain patent protection for applicable products and defend our intellectual property rights against third-parties;~~

•

~~pharmaceutical market forces that may impact our commercial customers’ success and continued demand for the products we produce;~~

•

~~our ability to recruit or retain key scientific, technical, business development, and management personnel and our executive officers; and~~

•

our ability to comply with stringent U.S. and foreign government regulation in the manufacture of pharmaceutical products, including Good Manufacturing Practice, or cGMP, compliance and U.S. Drug Enforcement Agency, or DEA, compliance and other relevant regulatory authorities.

~~Any~~ forward-looking statements, that we make in this Quarterly Report speak only as of the date of such statement, and we undertake no obligation to update such statements to reflect events or circumstances after the date of this Quarterly Report or to reflect the occurrence of unanticipated events. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.

You should also read carefully the factors described in the “Risk Factors” included in Part II, Item 1A of this Quarterly Report, Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the SEC on March 4, 2020, or the 2019 Annual Report, and Part II, Item 1A of our Quarterly Report on Form 10-Q for the three months ended March 31, 2020 filed with the SEC on May 11, 2020, or the Q1 Quarterly Report, to better understand significant risks and uncertainties inherent in our business and underlying any forward-looking statements. As a result of these factors, actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements in this report and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the Annual Report, particularly under “Risk Factors,” that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, collaborations or investments we may make. You should read this Quarterly Report and the documents that we incorporate by reference herein completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements.

~~Overview~~17

Overview

We are a ~~leading~~dedicated contract development and manufacturing organization, or CDMO, ~~with integrated solutions~~solving complex formulation and manufacturing challenges for ~~the development, formulation, regulatory support, manufacturing and packaging of~~companies developing oral solid dose drug products. We have operated through a single CDMO business segment since the completion of the spin-off of our historical Acute Care business segment, which developed products for hospital and other acute care settings, on November 21, 2019.

We leverage our formulation and development expertise to develop and manufacture pharmaceutical products using proprietary delivery technologies and know-how for ~~commercial~~ partners who develop and commercialize or plan to commercialize these products. ~~These collaborations can result in revenue streams including manufacturing, royalties, profit sharing,~~In 2020, we launched our clinical trials support services capabilities, which includes preparation of clinical trial supplies, as well as specialized services dedicated to the development and ~~development.~~Good Manufacturing Practices, or GMP, of high-potency products. We operate a 97,000 square foot, DEA-licensed manufacturing facility in Gainesville, Georgia, as well as a 24,000 square foot development, high-potency product and ~~high potency product~~clinical packaging facility in Gainesville, ~~Georgia.~~Georgia that we opened in October 2018. We currently develop and/or manufacture the following key products with our key commercial partners: Ritalin LA®, Focalin XR®, Verelan PM®, Verelan SR®, Verapamil PM and Verapamil SR, ~~and Zohydro ER®,~~ as well as ~~CDMO services for~~ supporting development stage products.

Our manufacturing and development capabilities include formulation, product development from formulation through clinical trial and commercial manufacturing, and specialized capabilities for solid oral dosage forms, extended release and controlled substance manufacturing, as well as high potency development and manufacturing. In a typical collaboration, we work with our partners to develop product candidates, or new formulations of existing product candidates, and may license certain intellectual property to such partners. We also typically exclusively manufacture and supply clinical and commercial supplies of these proprietary products and product candidates.

We have used cash flow generated by our business primarily to fund ~~operations at~~the growth of our ~~Gainesville, Georgia manufacturing facilities,~~CDMO business, to fund ~~our~~a historical ~~Acute Care~~acute care research and development business that was spun off in 2019, and to make payments under our credit facility. We believe our business will continue to contribute cash ~~for future operations at~~to fund our ~~Gainesville facilities~~growth, make payments under our credit facility and other general corporate purposes.

In November 2019, our former Acute Care business was spun-out from us through our former wholly-owned subsidiary, Baudax Bio, Inc., or Baudax Bio, when we completed a special dividend distribution of all the outstanding shares of common stock of Baudax Bio to our shareholders. On November 21, 2019, the distribution date, each of our shareholders received one share of Baudax Bio’s common stock, or the Distribution, for every two and one-half shares of our common stock held of record at the close of business on November 15, 2019, the record date for the Distribution. Additionally, we contributed $19 million of cash to Baudax Bio in connection with the separation, retained significant net operating loss carryforwards, and were released from significant milestone and royalty payment obligations. As a result of the Distribution, Baudax Bio is now an independent public company whose shares of common stock are trading under the symbol “BXRX” on The Nasdaq Capital Market, or Nasdaq.

In the second quarter of 2020, we launched a new clinical trial material offering, or CTM. Our capabilities include on-demand services for innovative trial design and direct-to-patient supply logistics. We also can provide non-clinical formulations, Active Pharmaceutical Ingredient (API) characterization, over-encapsulation and manufacturing, in addition to clinical and commercial packaging services. We also made additional capital improvements to support a new tech transfer project for a commercial product and also believe the equipment will be useful for future commercial projects.

Our consolidated results of operations and financial position included in this Quarterly Report reflect the financial results of Baudax Bio as a discontinued operation for all periods presented. For additional information on the spin-off of Baudax Bio please read note 4, Discontinued Operations, to our consolidated financial statements included in the Company’s 2019 Annual Report.

COVID-19

We continue to closely monitor developments related to the COVID-19 pandemic, which continues to have adverse effects on the U.S. and world economies, including the commercial activities of our customers and their peers. While we are committed to continue providing essential pharmaceutical products to our customers, we are also taking all necessary measures to protect the health and safety of our employees. These developments include:

~~Operations:~~Operations. We ~~have instituted~~are continuing to follow appropriate safety protocols ~~to have appropriate personnel work remotely and have implemented~~including strict social distancing and other protective measures for ~~those~~ employees ~~continuing to support~~supporting essential operations at our plant. We are also supporting continued remote work ~~locations in order~~arrangements for other personnel not required to ~~ensure the health of our employees while continuing~~work on site.

Business development. We continue to provide critical products. Our sales, manufacturing and development efforts have continued since the outbreak of the pandemic. Our cost of sales has increased as a percentage of revenues in part due to lower production volumes, resulting in manufacturing variances, and there are some incremental expenses associated with safe practices for our organization due to COVID-19.

~~Business Development: We successfully launched our new CTM offering in the second quarter and secured new customers. In other sectors, we have experienced~~experience lower than expected ~~new~~growth in our development business, ~~growth,~~ which we believe is ~~primarily~~partially attributable to COVID-19. ~~Concerns surrounding COVID-19~~We have ~~resulted in our adoption of~~responded to these challenges by adopting new methods for meeting and contacting customers. Meanwhile, some customers have ~~slowed customer access, and have caused delays in plans for development services by some~~begun easing restrictions, but these measures vary among customers and ~~prospects~~from state to state. Other customers continue to delay their development plans for a variety of reasons such as concerns about the timing of clinical trials.

Manufacturing ~~Demand:~~demand. We believe that there ~~has been~~continues to be lower end-user demand for some of the commercial products we manufacture ~~for our customers due~~as compared to periods prior to the ~~effects~~onset of ~~COVID-19.~~the COVID-19 pandemic. Third party national data demonstrates that there ~~has been~~was a meaningful impact of COVID-19 on the reduction of total prescriptions filled by patients across most therapeutic areas, including chronic cardiovascular and pediatric ~~medications, etc.~~medications.

Our sales and manufacturing operations ~~could be further~~for the first half of 2021 were disrupted as a result of the pandemic because of production slowdowns, stoppages orand decreased demand for the products we manufacture. ~~Given the uncertain scope and duration of~~While we are not currently expecting that future results will be materially impacted by the pandemic, there can be no assurance that such future results will not be impacted. While vaccines have proven effective in reducing the ~~extent~~severity and mortality of COVID-19, including the variants that have evolved to ~~which~~date, the overall vaccination rate in the United States has not reached the level required for herd immunity. Certain variants of COVID-19, such as the delta variant, are proving to be more easily spread than earlier variants. We may also be adversely impacted by broader economic effects associated with the pandemic such as inflation, changes in laws and general volatility in the markets. The continued low vaccination rate, and the emergence of new variants, which could prove resistant to existing vaccines, could again result in major disruptions to businesses and markets worldwide and our business, results of operations and financial condition could be materially and adversely affected. We will continue to ~~impact our financial results remains uncertain in terms~~closely monitor any developments.

18

Financial overview

Revenues

We recognize three types of revenue: manufacturing, ~~volumes~~profit-sharing and certain profit sharing results, even when our partners have not experienced loss of market share, in part due to reduced total prescription (TRx) rates for many chronic therapeutics. However, we will continue to monitor the situation closely, we have taken steps to reduce costsresearch and ~~drive more new business, and we are actively evaluating various ways to further conserve operational resources.~~development.

~~Financial Overview~~Manufacturing

~~Recent Developments~~

~~Some recent developments have occurred that have impacted and are expected to continue to impact full year expected results, including:~~

•

Third party data has shown a decrease in prescriptions filled during COVID-19 for the first half of 2020 for a number of the commercial products we manufacture for our customers. We expect this could result in continued lower demand for our manufacturing services with respect to these products, especially since COVID-19 impacts are not predictable at this time.

•

The previously reported return to the market of a competitor to one of our key customers for certain product strengths that had previously been out of the market. This product has recovered to an observed percentage of approximately 50% market share. While total unit volumes have declined during COVID-19, relative market share has remained steady for both parties. This has impacted both anticipated manufacturing volumes and profit sharing for this key customer.

•

We received notification reported in the first quarter of 2020 from two of our key customers of discontinuations for two commercial product lines. As we announced in May in connection with our first quarter earnings results, we anticipate that these discontinuances will decrease revenues by approximately $4 million for 2020 and approximately $7 to $8 million for 2021.

•

We have experienced slower than expected new project starts, which we believe is primarily attributable to the COVID-19 pandemic. Concerns surrounding COVID-19 have resulted in delays in plans for development services by some customers and prospects for a variety of reasons, such as concerns about timing of clinical trials, etc.

As a result of these recent events, we implemented operating improvement initiatives including two separate reduction in force actions during the first half of 2020 as well as other initiatives. We estimate that these initiatives will provide an annual savings of approximately $3.4 million in fiscal year 2021. Additional cost saving measures continue to be assessed.

~~Revenues~~

~~During the periods presented, we recognized revenues from three revenue streams: manufacturing revenue, royalty revenue and development revenue.~~

~~Manufacturing Revenue~~

We recognize manufacturing revenue from the sale of products we manufacture for our commercial partners. Manufacturing revenues are recognized upon transfer of control of a product to a customer, generally upon shipment, based on a transaction price that reflects the consideration we expect to be entitled to as specified in the agreement with the commercial partner, which could include pricing and volume-based adjustments.

~~Royalty~~Profit-sharing~~Revenue~~

We recognize ~~royalty~~profit-sharing or ~~profit-sharing~~royalty revenue, collectively referred to as ~~royalty~~profit-sharing revenue, related to the sale of products by our commercial partners that incorporate our ~~technologies. Royalty~~ technologies. Profit-sharing revenues are generally recognized under the terms of the applicable license, development and/or supply agreement. For arrangements that include sales-based ~~royalties~~profit-sharing and the license is deemed to be the predominant item to which the ~~royalties relate,~~profit-sharing relates, we recognize revenue when the related sales occur by the commercial partner. For arrangements that include sales-based ~~royalties~~profit-sharing and the license is not deemed to be the predominant item to which the ~~royalties relate,~~profit-sharing relates, we recognize revenue when the performance obligation to which the ~~royalty~~profit-sharing has been allocated has been satisfied, which is upon transfer of control of a product to a customer. In ~~this case,~~these cases, significant judgment is ~~used in~~required to calculate the ~~estimation of these royalties~~estimated variable consideration from such profit-sharing using the expected value method based on historical ~~customer~~commercial partner pricing and ~~deductions and~~deductions. Estimated variable consideration is partially constrained due to ~~items that are outside of our control including~~ the uncertainty of ~~the timing of future commercial partner sales, mix of volume, customer stocking and ordering patterns, as well as unforeseen~~ price adjustments made by our commercial ~~partners.~~partners, which are outside of our control. Factors causing price adjustments by our commercial partners include increased competition in the products’ markets, mix of volume between the commercial partners’ customers, and changes in government pricing.

Research and ~~Development Revenue~~development

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

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

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

~~Selling, General and Administrative Expenses~~

Cost of sales and selling, general and administrative expenses

Cost of sales consists of inventory costs, including production wages, material costs and overhead, and other costs related to the recognition of revenue. Selling, general and administrative expenses ~~consist~~consists of salaries and related costs for corporate administrative, public company costs, ~~and~~ business development personnel as well as legal, patent-related expenses and consulting fees. Public company costs include compliance, auditing services, tax services, insurance and investor relations.

We expect our business development expenses to increase in ~~2020, compared to prior year,~~2021 as we continue to expand our sales team in various geographies, in ~~support of our new offerings, in~~ anticipation of business growth from new formulation ~~development~~ and ~~CTM~~development capabilities.

19

For the first half of 2021, we qualified for approximately $2.7 million of federal employee retention credits. The employee retention credits are recognized as offsets to our expenses in the same period that the related employee expenditures are recognized. The expense offset for the three and six months ended June 30, 2021 was approximately $1.1 million and $1.8 million, respectively. Based on the current form of the credits, we could qualify for an additional $1 million to $3 million during the remainder of 2021. However, any future changes to our business or to the rules surrounding the credit could impact our ability to receive and recognize those future credits.

Amortization of ~~Intangible Assets~~intangible assets

We ~~recognize~~recognized amortization expense related to ~~the~~an intangible asset for our profit-sharing and contract manufacturing relationships on a straight-line basis over an estimated useful life of six years. Amortization stopped when the intangible asset reached the end of its useful life in April 2021.

~~Change in Fair Value of Warrants~~Interest expense

We had previously classified as liabilities certain warrants then outstanding that contained a contingent net cash settlement feature, upon a change in control. The fair value of these warrants was remeasured through settlement or expiration with changes in fair value recognized as a period charge within the Consolidated Statements of Operations. There are no remaining liability classified warrants as the last of these warrants were exercised in November 2019. A fair value determination at the time of the exercise occurred and was included in the change in warrant valuation for the year ended December 31, 2019.

~~Interest Expense~~

Interest expense for the periods presented primarily ~~includes interest expense incurred on~~relates to our Athyrium senior secured term loans and the amortization of related financing ~~costs~~costs.

Net operating losses and interest expense on a promissory note with PNC Bank under the Small Business Administration, or “SBA, Paycheck Protection Program of the Coronavirus Aid, Relief and Economic Security Act of 2020, or the CARES Act, and collectively the PPP note.tax carryforwards

~~Net Operating Losses and Tax Carryforwards~~

As of December 31, ~~2019,~~2020, we had ~~approximately $121.6 million of~~ federal net operating loss, ~~carryforwards. We also had~~or NOL, carry forwards of approximately $130.6 million, $122.4 million of which have an indefinite carry forward period. The remaining $8.2 million of federal NOL carry forwards, $127.4 million of state NOL carry forwards and federal and state research and development tax credit carryforwards of $4.4 million are also available to offset future taxable income. U.S. tax laws limit the time during which these carryforwards may be utilized against future taxes. With the exception of the 2019 and 2018 federal net operating losses, which have an indefinite carry forward period, these federal and state net operating loss and federal and state tax credit carryforwardsincome, but they will begin to expire at various dates beginning in 2028 if not utilized. We believe that it is more likely than not that the deferred income tax assets associated with our U.S. operations will not be realized, and as such, there is a full valuation allowance against our U.S. deferred tax assets.

Results of ~~Operations~~operations

Comparison of ~~the Three Months Ended June 30,~~second quarters 2021 and 2020 ~~and 2019~~

Three months ended June 30,

(amounts in thousands)

2020

2019

Revenue

$
15,522

$
31,256

Operating expenses:

Cost of sales (excluding amortization of intangible assets)

11,634

14,100

Selling, general and administrative

4,259

5,533

Amortization of intangible assets

646

646

Change in warrant valuation

—

1,041

Total operating expenses

16,539

21,320

Operating income from continuing operations

(1,017
)

9,936

Interest expense

(4,995
)

(5,176
)
(Loss) income from continuing operations

(6,012
)

4,760

Loss on discontinued operations

—

(7,596
)
Net loss

$
(6,012
)

$
(2,836
)


	Three months ended June 30,
(in millions)	2021			2020
Revenue	$	18.0		$	15.5
Operating expenses:
Cost of sales (excluding amortization of intangible assets)		12.3			11.6
Selling, general and administrative		3.8			4.3
Amortization of intangible assets		0.1			0.6
Total operating expenses		16.2			16.5
Operating income (loss)		1.8			(1.0	)
Interest expense		(4.0	)		(5.0	)
Gain on extinguishment of debt		3.4			—
Net income (loss)	$	1.2		$	(6.0	)

Revenue. The ~~decrease~~increase of ~~$15.7~~$2.5 million was primarily the result of increased product sales from one of our commercial partners as well as higher revenues from our clinical trial materials business including revenue from a new commercial product tech transfer project. These increases were partially offset by decreases in product sales due to the discontinuation of two commercial product lines by our commercial partners.

Cost of sales. The increase of $0.7 million was primarily due to ~~decreased product sales~~higher commercial manufacturing volumes and ~~royalties recognized from three of our commercial partners. The first key customer experienced~~is partially offset by lower ~~market share compared to 2019~~costs due to the re-entry of a competitor to the market but has maintained its market share since the first quarter of 2020. The second key customer saw decreased sales that reduced our royalties and manufacturing volumes as a result of market forces. The third key customer decreased sales due to the impact of a combination of the overall market forces and the discontinuation of a commercial product linecertain employment incentive tax credits in ~~the first quarter of 2020. We also experienced slower than expected new business project starts and overall growth due to the impacts of COVID-19.~~

We expect that the return of a competitor to the market experienced by one of our commercial partners, overall COVID-19 market force impacts to all of our customers, discontinuations of product lines by two of our customers, slower than expected new project starts and potential delays in customers programs may continue to impact our revenue in the third and fourth quarters of 2020. We are continuing to monitor the impacts of these events and the COVID-19 pandemic on our business and revenues.

~~Cost of sales.~~ Cost of sales decreased $2.5 million and was not proportionate to the decrease in revenues, primarily due to lower commercial volumes and slower than anticipated new project starts (including $0.2 million related to the second reduction in force associated with continued revised commercial volume and development revenue). Annual savings from this reduction in force and an earlier reduction in force are estimated to be $3.4 million in fiscal year 2021.

Selling, general and administrative. The decrease of ~~$1.3~~$0.5 million was primarily related to lower public company costs and lower travel and marketing costs driven by the COVID-19 pandemic, which were partially offset by higher selling costs due to increased headcount and associated personnel costs focused on business development, as well as completion of readiness for the CTM business.stock based compensation expense.

Amortization of intangible assets. ~~Amortization expense~~The decrease of $0.5 million was ~~$0.6 million for both three-month periods ended June 30, 2020 and 2019 which was related to~~because the amortization of ~~the~~ CDMO royalties and contract manufacturing relationships ~~intangible asset over its estimated useful life.~~acquired in 2015 ended on April 10, 2021.

~~Change in warrant valuation.~~ ~~Previously, certain warrants were outstanding whose fair value was remeasured each period with changes in fair value recognized in earnings. The last of those warrants were exercised in November 2019.~~

Interest expense. The decrease of ~~$0.2~~$1.0 million was primarily due to reduced term loan borrowings under the Credit Agreement with Athyrium as well as a ~~slight~~ decrease in the LIBOR base rate of interest on our term loans under the Credit ~~Agreement with Athyrium.~~Agreement.

~~Discontinued operations.~~20

Gain on extinguishment of debt. In ~~November 2019, our former Acute Care business~~June 2021, the PPP Note and all accrued interest thereon was ~~spun-out from us through our former wholly-owned subsidiary, Baudax Bio. As a result, that business’s results are included in the 2019 period but not the 2020 period.~~forgiven.

Comparison of ~~the Six Months Ended June 30,~~first six months 2021 and 2020 ~~and 2019~~

Six months ended June 30,

(amounts in thousands)

2020

2019

Revenue

$
37,299

$
56,322

Operating expenses:

Cost of sales (excluding amortization of intangible assets)

29,888

28,491

Selling, general and administrative

9,705

12,037

Amortization of intangible assets

1,292

1,292

Change in warrant valuation

—

779

Total operating expenses

40,885

42,599

Operating (loss) income from continuing operations

(3,586
)

13,723

Interest expense

(10,118
)

(8,766
)
(Loss) income from continuing operations

(13,704
)

4,957

Loss on discontinued operations

—

(9,771
)
Net loss

$
(13,704
)

$
(4,814
)


	Six months ended June 30,
(in millions)	2021			2020
Revenue	$	34.8		$	37.3
Operating expenses:
Cost of sales (excluding amortization of intangible assets)		26.7			29.9
Selling, general and administrative		8.5			9.7
Amortization of intangible assets		0.7			1.3
Total operating expenses		35.9			40.9
Operating loss		(1.1	)		(3.6	)
Interest expense		(7.8	)		(10.1	)
Gain on extinguishment of debt		3.4			—
Net loss	$	(5.5	)	$	(13.7	)

Revenue. The decrease of ~~$19.0~~$2.5 million ~~in revenue~~ was primarily ~~due to decreased product sales and royalties recognized from three of our commercial partners. The first key customer experienced lower market share compared to 2019 due to~~ the re-entry of a competitor to the market but has maintained its market share since the first quarter of 2020. The second key customer saw decreased sales that reduced our royalties and manufacturing volumes as a result of ~~market forces. The third key customer decreased sales due to the impact of a combination of the overall market forces and~~ the discontinuation of atwo commercial product ~~line~~lines by our commercial partners announced in the first quarter of 2020. ~~We also experienced slower than expected new business project starts and overall growth due to~~During the ~~impacts of COVID-19.~~

~~We expect that the return of a competitor to the market experienced by one~~2021 period, increased product sales from two of our commercial partners, ~~overall COVID-19 market force impacts to all of~~as well as higher revenues from our ~~customers, discontinuations of product lines by two of our customers, slower than expected~~clinical trial materials new ~~project starts and potential delays in customers programs may continue to impact our revenue in~~business growth activities, have partially offset the ~~third and fourth quarters of 2020. We are continuing to monitor the impacts of these events and the COVID-19 pandemic on our business and revenues.~~decrease.

Cost of sales. ~~Cost~~The decrease of ~~sales increased $1.4~~$3.2 million ~~and~~ was ~~not proportionate to the decrease in revenues,~~ primarily due to lower commercial manufacturing volumes and ~~slower than anticipated new project starts (including spending reductions that included $1.0 million related~~reflects lower costs due to ~~reductions in force associated with revised commercial volume and development revenue). Annual savings from these~~the prior year reduction in force ~~actions are estimated to be $3.4 million~~as well as certain employment incentive tax credits in ~~fiscal year~~ 2021.

Selling, general and administrative. The decrease of ~~$2.3~~$1.2 million was primarily related to lower public company costs and lower travel and marketing costs driven by the COVID-19 pandemic, which were partially offset by higher selling costs due to increased headcount and associated personnel costs focused on business development, as well as completion of readiness for the CTM business.stock based compensation expense.

Amortization of intangible assets. ~~Amortization expense~~The decrease of $0.5 million was ~~$1.3 million for both six-month periods ended June 30, 2020 and 2019, which was related to~~because the amortization of ~~the~~ CDMO royalties and contract manufacturing relationships ~~intangible asset over its estimated useful life.~~acquired in 2015 ended on April 10, 2021.

~~Change in warrant valuation.~~ ~~Previously, certain warrants were outstanding whose fair value was remeasured each period with changes in fair value recognized in earnings. The last of those warrants were exercised in November 2019.~~

Interest expense. The ~~increase~~decrease of ~~$1.4~~$2.3 million was primarily due to ~~additional~~reduced term loan borrowings under ~~its~~the Credit Agreement with Athyrium ~~in the first quarter of 2019, partially offset by~~as well as a decrease in the LIBOR base rate of interest on ~~those~~our term ~~loans.~~loans under the Credit Agreement.

~~Discontinued operations.~~Gain on extinguishment of debt. In ~~November 2019, our former Acute Care business~~June 2021, the PPP Note and all accrued interest thereon was ~~spun-out from us through our former wholly-owned subsidiary, Baudax Bio. As a result, that business’s results are included in the 2019 period but not the 2020 period.~~forgiven.

Liquidity and ~~Capital Resources~~capital resources

~~As of~~At June 30, ~~2020,~~2021, we had ~~$22.8~~$45.7 million in cash and cash equivalents.

Since our inception, ~~through June 30, 2020,~~ we have financed our ~~product development,~~ operations and capital expenditures primarily from ~~sales~~the issuance of equity and ~~debt securities, and term loans made under our previous and existing credit facilities.~~debt. During the ~~six months ended June 30, 2020,~~first half of 2021, our capital expenditures were ~~$2.2~~$2.1 million to scale and ~~primarily related~~support our expansion of capabilities.

We are party to ~~equipment~~a credit agreement with Athyrium, or the Credit Agreement, which has been fully drawn. The Credit Agreement requires us to repay the outstanding principal amount of $100.0 million on March 31, 2023. The Credit Agreement also includes certain financial covenants that the Company will need to satisfy on a monthly and ~~facility modifications~~quarterly basis, including: 1) maintaining a permitted net leverage ratio, calculated as our indebtedness, net of cash and cash equivalents, divided by EBITDA, each as defined in the Credit Agreement; and 2) a minimum amount of cash and cash equivalents on hand.

We are also party to ~~support a new customer.~~an amended common stock purchase agreement with Aspire Capital Fund LLC, or Aspire Capital. The amended agreement provides that, upon the terms and subject to the conditions and limitations set forth in the agreement, Aspire Capital is committed to purchase, at our sole election, up to an aggregate value of $41.2 million in shares of common stock. As of June 30, 2021, there is availability to issue up to $30.0 million or 6,199,299 shares of common stock under the 2019 Common Stock Purchase Agreement.

21

We may require additional financing and if we do, we may raise such additional funds through debt refinancing, bank or other loans, through strategic development, licensing ~~including out-licensing~~ activities, sale of assets 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 our failure to raise capital when needed could materially adversely impact our growth plans and our financial condition or results of operations. Further, our ability to access capital market or otherwise raise capital may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic. Additional debt or equity financing, if available, may be dilutive to the holders of our common stock and may involve significant cash payment obligations and covenants that restrict our ability to operate our business or to access to capital.

On November 17, 2017, we entered into our credit agreement with Athyrium, pursuant to which we drew upon an initial $60.0 million term loan. We used the proceeds from the initial term loan to (i) repay in full all outstanding indebtedness under our credit facility with OrbiMed of approximately $31.7 million, which included the remaining debt principal balance of $27.3 million and early termination charges of $4.4 million and (ii) pay transaction fees associated with the credit facility with Athyrium of approximately $4.2 million. In December 2018 we amended the credit agreement with Athyrium and drew upon a $10.0 million term B-1 loan. In February 2019, we entered into a second amendment to the credit agreement with Athyrium pursuant to which the credit facility was (i) expanded from $100.0 million to $125.0 million and (ii) the two additional $15.0 million tranches were restructured into a $55.0 million term B-2 loan, which was funded on the date of execution of the second amendment, net of the original issue discount of $11.4 million. On October 22, 2019, the Company entered into a third amendment that, among other things, released Baudax Bio from its obligations under the credit agreement and increased the permitted leverage ratio (which is our indebtedness under the Credit Agreement divided by EBITDA, each as defined) to 5.00:1.00. Beginning on March 31, 2021, we must repay the outstanding principal amount in quarterly installments of $3.0 million with the outstanding principal balance due on March 31, 2023. As of June 30, 2020, we had $125.0 million outstanding principal under our credit agreement with Athyrium.

On May 12, 2020, we entered into a $4.4 million PPP Note. The note has a two-year term, natures on May 12, 2022 and bears interest at a stated rate of 1.0% per annum. Monthly principal and interest payments, less the amount of any potential forgiveness (discussed below), will commence on December 15, 2020. The note requires no collateral or guarantees, nor did the Company pay any fees to acquire the note. The note provides for customary events of default, including, among others, failure to make payment, bankruptcy, breaches of representations and material adverse effects. The Company may prepay the principal of the Loan at any time without incurring any prepayment charges. On May 18, 2020 the Company prepaid $1.1 million of the note.

The PPP Note may be partially or fully forgiven if the Company complies with the provisions of the CARES Act, including the use of note proceeds for payroll costs, rent, utilities and mortgage interest, and at least 60% of the amount of the loan proceeds to be forgiven must be used for payroll costs as defined by the CARES Act. The SBA has announced its intention to audit loans in excess of $2.0 million, and any forgiveness of the Loan will be subject to approval by the SBA and PNC Bank. Forgiveness of the PPP Note will require the Company to apply for such treatment in the future. Should we meet the requirements for forgiveness, it would extinguish the note upon receiving legal release from PNC Bank and record a gain on extinguishment in that period. We expect that the full $3.3 million balance of the PPP Note will be forgiven, however, no assurance can be given that we will obtain forgiveness of the PPP Note in whole or in part.

Sources and ~~Uses~~uses of ~~Cash~~cash


	Six months ended June 30,
(amounts in millions)	2021			2020
Net cash provided by (used in) continuing operations:
Operating activities	$	2.7		$	4.4
Investing activities		(2.1	)		(2.2	)
Financing activities		21.3			2.6
Net cash provided by continuing operations	$	21.9		$	4.8

Net cash used in discontinued operations	$	—		$	(1.2	)

Cash ~~provided by~~flows from operating activities ~~continuing operations, was $4.4 million and $6.6 million for the six months ended June 30, 2020 and 2019, respectively, which represents~~represent our ~~income or~~net loss ~~from continuing operations~~ as adjusted for stock-based compensation, depreciation, non-cash interest expense, ~~changes in fair value of warrants and~~ amortization of intangibles, ~~as well as~~a gain on extinguishment of debt and changes in operating assets and liabilities. The decrease in cash flows from operations was primarily due to growth in accounts receivable due to timing of collections, which was partially offset by a decrease in operating loss.

~~Cash~~Net cash used in investing activities ~~continuing operations, was $2.2 million for the six months ended June 30, 2020, which related~~relates to capital expenditures to scale and support our expansion of capabilities. ~~Cash used in investing activities from continuing operations was $9.4 million for the six months ended June 30, 2019. The 2019 amount reflected~~

Net cash ~~used for net purchases of short-term investments and for the purchases of property and equipment.~~

~~Cash~~ provided by financing activities ~~continuing operations, was $2.6 million for~~in the ~~six months ended June 30, 2020, which~~first half of 2021 primarily included ~~$4.4 of~~net proceeds from a PPP Note offset by a $1.1 million repayment, which was within the safe harbor time period for repayment established by the Small Business Administration. Certifications made with respect to loan amounts repaid during this safe harbor period are deemed to have been made in good faith. Cash provided by financing activities from continuing operations was ~~$40.8 million, which primarily included proceeds from debt~~an issuance of ~~$43.6~~common stock of $32.1 million, partially offset by ~~deferred financing costs~~debt repayments of ~~$2.9~~$10.1 million made in connection with an amendment to our credit facility..

ONet cash used in discontinued operations during 2020 was to settle outstanding liabilities related to our former acute care research and development business.ur

Forward-looking factors

Our future use of operating cash and capital requirements will depend on many forward-looking factors, including the following:



the extent to which we in-license, acquire or invest in products, businesses and technologies;



the timing and extent of our manufacturing and capital expenditures;



our ability to maintain or expand our relationships and contracts with our commercial partners;



our ability to grow and diversify our business with new customers, including our ability to meet desired project outcomes with development customers;



our ability to regain profitability;



our ability to comply with stringent U.S. & foreign government regulation in the manufacture of pharmaceutical products, including cGMP and U.S. DEA requirements;



our ability to raise additional funds through equity or debt financings or sale of certain assets;



the costs of preparing, submitting and prosecuting patent applications and maintaining, enforcing and defending intellectual property claims; and

22



the extent to which health epidemics and other outbreaks of communicable diseases, including the ongoing COVID-19 pandemic, could disrupt our operations or materially and adversely affect our business and financial conditions.

•

~~the extent to which we in-license, acquire or invest in products, businesses and technologies;~~

•

~~the timing and extent of our manufacturing and capital expenditures;~~

•

~~our ability to maintain our relationships and contracts with our commercial partners;~~

•

~~our ability to grow and diversify our business with new customers, including our ability to meet desired project outcomes with development customers;~~

•

~~our ability to regain profitability;~~

•

~~our ability to comply with stringent U.S. & foreign government regulation in the manufacture of pharmaceutical products, including cGMP and U.S. DEA requirements;~~

•

~~our ability to raise additional funds through equity or debt financings or sale of certain assets;~~

•

~~the costs of preparing, submitting and prosecuting patent applications and maintaining, enforcing and defending intellectual property claims; and~~

•

the extent to which health epidemics and other outbreaks of communicable diseases, including the ongoing COVID-19 pandemic, could disrupt our operations or materially and adversely affect our business and financial conditions.

We might use existing cash and cash equivalents on hand, additional debt, equity financing, sale of assets or out-licensing revenue or a combination thereof to fund our operations or acquisitions. If we increase our debt levels, we might be restricted in our ability to raise additional capital and might be subject to financial and restrictive covenants. Our shareholders may experience dilution as a result of the issuance of additional equity or debt securities. This dilution may be significant depending upon the amount of equity or debt securities that we issue and the prices at which we issue any securities.

Contractual ~~Commitments~~commitments

The table below reflects our contractual commitments as of June 30, ~~2020:~~2021:


	Payments due by period
(in millions)	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Debt obligations (1):
Principal	$	101.0	$	—	$	101.0	$	—	$	—
Interest		16.2		9.4		6.8		—		—
Purchase obligations (2)		5.5		5.1		0.4		—		—
Operating leases (3)		0.6		0.2		0.3		0.1		—
Other long-term liabilities (4)		1.3		1.0		0.3		—		—
Total	$	124.6	$	15.7	$	108.8	$	0.1	$	—

Payments Due by Period (in 000s)

Total

Less than
1 year

1-3 years

3-5 years

More than
5 years

Debt obligations (1):

Principal
$
129,566

$
7,289

$
122,277

$
—

$
—

Interest

30,463

13,573

16,890

—

—

Purchase obligations (2):

10,721

10,721

—

—

—

Operating leases (3)

799

160

314

312

13

Total
$
171,549

$
31,743

$
139,481

$
312

$
13

(1)

Debt obligations consist of principal, an exit fee of 1% of that principal, and interest on $100.0 million of outstanding term loans under our credit facility with Athyrium. Because the Athyrium term loans bear interest at a variable rate based on LIBOR, we estimated future interest commitments utilizing the LIBOR rate as of June 30, 2021. In accordance with U.S. GAAP, the future interest obligations are not recorded on our consolidated balance sheet.

(2)

Purchase obligations consist of cancelable and non-cancelable purchase commitments related to inventory, capital expenditures and other goods or services. In accordance with U.S. GAAP, these obligations are not recorded on our consolidated balance sheets.

(3)

We are party to a seven-year operating lease for a development facility in Georgia that ends in 2025. The lease includes options to extend for up to 15 additional years at our discretion.

(4)

We have entered into employment agreements with each of our named executive officers that provide for, among other things, severance commitments of up to $1.3 million should we terminate the named executive officers for convenience or if certain events occur following a change in control. In addition, we would be subject to other contingencies of up to $3.6 million in the aggregate if certain events occur following a change in control; because these obligations are contingent, the amounts are not included in the table above.

Off-balance sheet arrangements

~~(1)~~

Debt obligations consist of principal, an exit fee of 1% of that principal, and interest on $125.0 million of outstanding term loans under our credit facility with Athyrium in addition to principal and interest on $3.3 of outstanding borrowings under the PPP Note. Because the Athyrium term loans bear interest at a variable rate based on LIBOR, we estimated future interest commitments utilizing the LIBOR rate as of June 30, 2020. In accordance with U.S. GAAP, the future interest obligations are not recorded on our Consolidated Balance Sheet. See note 10 to the Consolidated Financial Statements included in this Form 10-Q.

~~(2)~~

Purchase obligations consist of cancelable and non-cancelable purchase commitments related to inventory, capital expenditures, transition services agreement costs and other goods or services. In accordance with U.S. GAAP, these obligations are not recorded on our Consolidated Balance Sheets. See note 11 to the Consolidated Financial Statements included in this Form 10-Q.

~~(3)~~

We are party to certain operating leases for leased space in Gainesville, Georgia as well certain office equipment for which future undiscounted lease payments are presented. See note 15 to the Consolidated Financial Statements included in this Form 10-Q.

~~Off-Balance Sheet Arrangements~~

We do not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.

Critical ~~Accounting Policies~~accounting policies and ~~Estimates~~estimates

Our critical accounting policies and estimates are disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our ~~2019 Annual Report.~~ ~~In the six months ended June 30, 2020, there were no significant changes to the application of critical accounting policies previously disclosed in our 2019~~ Annual Report.

Item 3. Quantitative and qualitative disclosures about market risk

~~Item 3.~~

~~Quantitative and Qualitative Disclosures About Market Risk~~

There has been no material change in our assessment of ~~its~~our sensitivity to market risk described in the ~~“Quantitative and Qualitative Disclosures About Market Risk” section of our 2019~~ Annual Report.

23

Item 4. Controls and procedures

~~Item 4.~~

~~Controls and Procedures~~

Evaluation of ~~Disclosure Controls~~disclosure controls and ~~Procedures~~procedures

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of June 30, ~~2020.~~2021. We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.

A control system, no matter how well conceived and operated, can provide only reasonable, and not absolute, assurance that the objectives of the control system will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. However, our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. Based on the evaluation of our disclosure controls and procedures as of June 30, ~~2020,~~2021, our principal executive officer and principal financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in ~~Internal Control~~internal control over ~~Financial Reporting~~financial reporting

There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

24

PART II.OTHER INFORMATION

~~OTHER INFORMATION~~

Item 1. Legal proceedings.

Information regarding legal and regulatory proceedings is set forth in note 8 to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report, and is incorporated by reference herein.

~~Item 1.~~

~~Legal Proceedings.~~

We are ~~involved, from time to time,~~also engaged in various ~~claims and~~other legal ~~proceedings~~actions arising in the ordinary course of ~~its business. Except~~our business (such as, ~~disclosed below,~~for example, proceedings relating to employment matters or the initiation or defense of proceedings relating to intellectual property rights) and, while there can be no assurance, we ~~are~~believe that the ultimate outcome of these other legal actions will 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~~our business, results of operations, financial condition or ~~results of operations.~~cash flows.

On May 31, 2018, a securities class action lawsuit, or the Securities Litigation, was filed against the Company and certain of its 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 the Company concerning the NDA for IV meloxicam. The complaint seeks unspecified damages, interest, attorneys’ fees and other costs. On December 10, 2018, lead plaintiff filed an amended complaint that asserted the same claims and sought the same relief but included new allegations and named additional officers as defendants. On February 8, 2019, the Company filed a motion to dismiss the amended complaint in its entirety, which the lead plaintiff opposed on April 9, 2019. On May 9, 2019, the Company filed its response and briefing was completed on the motion to dismiss. In response to questions from the Judge, the parties submitted supplemental briefs with regard to the motion to dismiss the amended complaint during the fall of 2019. On February 18, 2020, the motion to dismiss was granted without prejudice. On April 25, 2020, the plaintiff filed a second amended complaint. The Company filed a motion to dismiss the second amended complaint on June 18, 2020. The plaintiff’s deadline to file an opposition to the Company’s motion to dismiss is August 17, 2020, and the Company will have thirty days from the filing of the plaintiff’s opposition to file a reply in support of the motion to dismiss. In connection with the separation of Baudax Bio, Baudax Bio accepted assignment by the Company of all of its obligations in connection with the Securities Litigation and agreed to indemnify it for all liabilities related to the Securities Litigation. The Company and Baudax Bio believe that the lawsuit is without merit and intend to vigorously defend against it.

Item 1A.~~Item 1A.~~

~~Risk Factors.~~

~~You should carefully consider the risk factors described in our 2019 Annual Report and our Q1 Quarterly Report under the caption “Item 1A.~~ Risk ~~Factors.” Except as set forth below, there~~factors.

There have been no material changes infrom our risk factors ~~disclosed~~as previously reported in our ~~2019~~ Annual ~~Report and our Q1 Quarterly~~ Report.

We may not be entitled to forgiveness of our recently received Paycheck Protection Program Loan, and our application for the Paycheck Protection Program Loan could in the future be determined to have been impermissible or could result in damage to our reputation.

On May 12, 2020, we received loan proceeds of approximately $4.4 million pursuant to the PPP under the CARES Act administered by the SBA. We intend to use the PPP Note to retain current employees, maintain payroll and make lease and utility payments. The PPP Note is evidenced by a promissory note, dated as of May 12, 2020, issued by PNC Bank, which contains customary events of default relating to, among other things, payment defaults and breaches of representations and warranties. The PPP Note is scheduled to mature on May 12, 2022, or the Maturity Date, bears interest at a rate of 1.00% per annum, and is subject to the standard terms and conditions applicable to loans administered by the SBA under the CARES Act. On May 18, 2020, we prepaid $1.1 million of the amount due under the PPP Note, which was within the safe harbor time period for repayment established by the Small Business Administration. Certifications made with respect to loan amounts repaid during this safe harbor period are deemed to have been made in good faith.

Commencing December 15, 2020, we are required to pay regular monthly payments in an amount equal to one month’s accrued interest under the PPP Note. All interest which accrues during the initial six months of the loan period will be deferred and payable on the Maturity Date. The amounts outstanding under the PPP Note may be prepaid by us at any time prior to maturity without penalty. Under the CARES Act, as amended in June 2020, loan forgiveness is generally available for the sum of documented payroll costs, covered rent payments, covered mortgage interest and covered utilities during the 24-week period beginning on the date of the first disbursement of the PPP Note. The amount of the PPP Note eligible to be forgiven may be reduced in certain circumstances, including as a result of certain headcount or salary reductions. We will be required to repay any portion of the outstanding principal that is not forgiven, along with accrued interest, and we cannot provide any assurance that we will be eligible for loan forgiveness, that we will apply for forgiveness, or that any amount of the PPP Note will ultimately be forgiven by the SBA.

In order to apply for the PPP Note, we were required to certify, among other things, that the current economic uncertainty made the PPP Note request necessary to support our ongoing operations. We made this certification in good faith after analyzing, among other things, the maintenance of our workforce, our need for additional funding to continue operations, and our ability to access alternative forms of capital in the current market environment in light of the uncertainty resulting from the COVID-19 pandemic. Following this analysis, we believe that we satisfied all eligibility criteria for the PPP Note, and that our receipt of the PPP Note is consistent with the broad objectives of the CARES Act. The certification described above did not contain any objective criteria and is subject to interpretation.

On April 23, 2020, the SBA issued new guidance that questioned whether a public company with substantial market value and access to capital markets would qualify to participate in the PPP. The SBA guidance further indicates that borrowers “must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.” Subsequently, on April 29, 2020 the SBA issued guidance that it will review all PPP loans of more than $2 million, including our PPP Note, following the lender’s submission of the borrower’s loan forgiveness application.

Under PPP, all or a portion of the PPP Note is eligible for forgiveness if we were eligible for the PPP Note, use the loan proceeds for eligible expenses and otherwise satisfy PPP requirements. While we believe we are eligible for the PPP Note, in the event it was determined that we were not eligible for the PPP Note, it is possible we would be required to repay the PPP Note on an accelerated basis, rather than over two years provided under the PPP Note, and at a higher interest rate than 1.000% per annum. If we receive an adverse finding in any audit related to the PPP Note, some or all of the PPP Note might not be forgiven and we could be required to return or repay some or all of the PPP Note, together with interest on the loan, which could reduce our liquidity, and potentially subject us to fines and penalties.

Item 2. Unregistered sales of equity securities and use of proceeds.

None.

~~Unregistered Sales of Equity Securities and Use of Proceeds.~~

~~None.~~

Item 3. Defaults upon senior securities.

None.

~~Defaults Upon Senior Securities.~~

~~None.~~

Item 4. Mine safety disclosures.

~~Item 4.~~

~~Mine Safety Disclosures.~~

Not applicable.

~~Item 5.~~

~~Other Information.~~

~~Aspire Capital Amended Purchase Agreement~~

On August 7, 2020, we entered into a First Amendment to our Common Stock Purchase Agreement with Aspire Capital Fund, LLC, or Aspire Capital, originally dated February 19, 2019, (as amended, the “Amended Purchase Agreement”) pursuant to which we have the right to sell to Aspire Capital Fund, LLC, or Aspire Capital, from time to time in our sole discretion up to $30.0 million in shares of our common stock through March 20, 2022, subject to certain limitations and conditions set forth in the Amended Purchase Agreement. The Amended Purchase Agreement also replaces our Common Stock Purchase Agreement, dated March 2, 2018, under which $3.0 million shares of our common stock were issuable as of June 30, 2020.

Under the Amended Purchase Agreement, on any trading day we select, following the filing of the prospectus supplement and the satisfaction of other closing conditions, we have the right, in our sole discretion, to present Aspire Capital with a purchase notice, or Purchase Notice, directing Aspire Capital (as principal) to purchase up to 75,000 shares of common stock per trading day, up to an aggregate of $30.0 million of common stock, at a per share price, or the Purchase Price, equal to the lesser of:

•

~~the lowest sale price of the common stock on the purchase date; or~~

•

~~the arithmetic average of the three lowest closing sale prices for our common stock during the 10 consecutive trading days ending on the trading day immediately preceding the purchase date.~~

The aggregate purchase price payable by Aspire Capital on any one purchase date may not exceed $500,000, unless otherwise mutually agreed, and upon mutual agreement we may issue up to 2,000,000 shares of common stock under a purchase notice.Item 5. Other information.

In addition, on any date on which we submit a purchase notice to Aspire Capital, we also have the right, in our sole discretion, to present Aspire Capital with a volume-weighted average price purchase notice, or VWAP Purchase Notice, directing Aspire Capital to purchase an amount of common stock equal to up to 30% of the aggregate shares of common stock traded on our principal market on the next trading day, or the VWAP Purchase Date, as we determine. The purchase price per share pursuant to such VWAP Purchase Notice is generally 97% of the volume-weighted average price for the common stock traded on our principal market on the VWAP Purchase Date.None.

We may deliver multiple Purchase Notices and VWAP Purchase Notices to Aspire Capital from time to time during the term of the Amended Purchase Agreement, so long as the most recent purchase has been completed.

The Amended Purchase Agreement provides that we and Aspire Capital will not affect any sales under the Amended Purchase Agreement on any purchase date where the closing sale price of our common stock is less than $0.50. There are no trading volume requirements or restrictions under the Amended Purchase Agreement, and we will control the timing and amount of sales of common stock to Aspire Capital.

The Amended Purchase Agreement provides that the number of shares that may be sold pursuant to the Amended Purchase Agreement will be limited to 4,725,734 shares, or the Exchange Cap, which represents 19.99% of our outstanding shares of common stock as of August 7, 2020, unless stockholder approval or an exception pursuant to the rules of the Nasdaq Capital Market is obtained to issue more than 19.99%. This limitation will not apply if, at any time the Exchange Cap is reached and at all times thereafter, the average price paid for all shares issued under the Amended Purchase Agreement is equal to or greater than $4.11, which was the closing sale price of our common stock immediately preceding the execution of the Amended Purchase Agreement. We are not required or permitted to issue any shares of common stock under the Amended Purchase Agreement if such issuance would breach our obligations under the rules or regulations of the Nasdaq Capital Market.

The Amended Purchase Agreement may be terminated by us at any time, at our discretion, without any cost to us. Aspire Capital has agreed that neither it nor any of its agents, representatives and affiliates shall engage in any direct or indirect short-selling or hedging of our common stock during any time prior to the termination of the Amended Purchase Agreement. Aspire Capital has no right to require any sales by us, but is obligated to make purchases from us as directed by us in accordance with the Amended Purchase Agreement. There are no limitations on use of proceeds, financial or business covenants, restrictions on future fundings, rights of first refusal, participation rights, penalties or liquidated damages in the Amended Purchase Agreement.

Any proceeds we receive under the Amended Purchase Agreement are expected to be used for general corporate purposes, which may include increasing our working capital, acquisitions or investments in businesses and capital expenditures.

The foregoing description of the Amended Purchase Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Amended Purchase Agreement, which is attached hereto as Exhibit 10.2 and incorporated by reference herein.

Troutman Pepper Hamilton Sanders LLP, counsel to the Company, has issued an opinion to the Company, dated August 10, 2020, regarding the validity of the shares of common stock to be issued and sold pursuant to the Amended Purchase Agreement. A copy of the opinion is filed as Exhibit 5.1 to this Annual Report on Form 10-Q.

~~In connection with entering into the Amended Purchase Agreement, we terminated our sales agreement, dated December 29, 2017, with Cowen and Company, LLC, effective August 11, 2020.~~

Item 6. Exhibits.

(a)

The following exhibits are filed herewith or incorporated by reference herein:

25

~~Exhibits.~~

~~(a)~~

~~The following exhibits are filed herewith or incorporated by reference herein:~~

EXHIBIT INDEX


Exhibit No.	Description	Method of ~~Filing~~filing
10.1	Form of Non-Qualified Stock Option Inducement Award Agreement	Filed herewith
~~5.1~~10.2	~~Opinion~~Form of ~~Troutman Pepper Hamilton Sanders LLP~~Inducement Award Agreement for Restricted Stock Units	Filed ~~herewith.~~herewith
31.1
~~10.1~~	~~Note dated May 12, 2020, between Recro Pharma, Inc. and PNC Bank, National Association.~~	~~Incorporated by reference to exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 15, 2020.~~

~~10.2~~	~~First Amendment to Common Stock Purchase Agreement, by and between Aspire Capital Fund, LLC and Recro Pharma, Inc., dated August 7, 2020.~~	~~Filed herewith.~~

~~23.1~~	~~Consent of Troutman Pepper Hamilton Sanders LLP (included in Exhibit 5.1)~~	~~Filed herewith.~~

~~31.1~~	Rule 13a-14(a)/15d-14(a) certification of Principal Executive ~~Officer.~~Officer	Filed ~~herewith.~~herewith
31.2
~~31.2~~	Rule 13a-14(a)/15d-14(a) certification of Principal Financial and Accounting ~~Officer.~~Officer	Filed ~~herewith.~~herewith
32.1
~~32.1~~	Section 1350 certification, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002.~~2002	Filed ~~herewith.~~herewith
101 INS	XBRL Instance Document	Filed herewith
101 SCH	~~Inline~~ XBRL Taxonomy Extension Schema	Filed ~~herewith.~~herewith
101 CAL
~~101 CAL~~	~~Inline~~ XBRL Taxonomy Extension Calculation Linkbase	Filed ~~herewith.~~herewith
101 DEF
~~101 DEF~~	~~Inline~~ XBRL Taxonomy Extension Definition Linkbase	Filed ~~herewith.~~herewith
101 LAB
~~101 LAB~~	~~Inline~~ XBRL Taxonomy Extension Label Linkbase	Filed ~~herewith.~~herewith
101 PRE
~~101 PRE~~	~~Inline~~ XBRL Taxonomy Extension Presentation Linkbase Document	Filed ~~herewith.~~

~~104~~	~~Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)~~	~~Filed herewith.~~herewith

26

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.


	RECRO PHARMA, INC.

Date: August ~~10, 2020~~9, 2021	By:	/s/ ~~Gerri A. Henwood~~ J. David Enloe, Jr.
		~~Gerri A. Henwood~~J. David Enloe, Jr.
		President and Chief Executive Officer
		(Principal Executive Officer)

Date: August 9, 2021	By:

~~Date: August 10, 2020~~	~~By:~~	/s/ Ryan D. Lake
		Ryan D. Lake
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

3927


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

~~490 Lapp Road, Malvern,~~ 1 E. Uwchlan Ave, Suite 112, Exton, Pennsylvania	~~19355~~19341
(Address of principal executive offices)	(Zip Code)


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


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

(amounts in thousands, except share and per share data)	June 30, 2020			December 31, 2019
Assets
Current assets:
Cash and cash equivalents	$	22,787		$	19,148
Accounts receivable		11,584			14,389
Contract asset		8,911			8,851
Inventory		11,772			15,072
Prepaid expenses and other current assets		2,986			2,700
Total current assets		58,040			60,160
Property, plant and equipment, net		42,448			42,212
Intangible assets, net		1,991			3,283
Goodwill		4,319			4,319
Other assets		399			485
Total assets	$	107,197		$	110,459
Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable	$	871		$	989
Accrued expenses and other current liabilities		4,870			4,324
Current portion of debt		7,289			—
Liabilities of discontinued operation		—			1,172
Total current liabilities		13,030			6,485
Debt, net		109,265			110,319
Other liabilities		313			367
Total liabilities		122,608			117,171
Commitments and contingencies (note 11)
Stockholders’ deficit:
Preferred stock, $0.01 par value. 10,000,000 shares authorized, NaN issued or outstanding		—			—
Common stock, $0.01 par value. 50,000,000 shares authorized, 23,638,906 issued and outstanding at June 30, 2020 and 23,312,928 shares issued and outstanding at December 31, 2019		236			233
Additional paid-in capital		204,940			199,938
Accumulated deficit		(220,587	)		(206,883	)
Total stockholders’ deficit		(15,411	)		(6,712	)
Total liabilities and stockholders’ deficit	$	107,197		$	110,459

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

				~~Page~~
		Page
PART I. FINANCIAL INFORMATION		31
Item 1. Financial statements				1
	Item 1.		~~Consolidated Financial Statements (Unaudited)~~2. Management's discussion and analysis of financial condition and results of operations	316
Item 3. Quantitative and qualitative disclosures about market risk				23
	Item 2.		~~Management’s Discussion~~4. Controls and ~~Analysis of Financial Condition and Results of Operations~~procedures	24

	~~Item 3.~~		~~Quantitative and Qualitative Disclosures About Market Risk~~	33

	~~Item 4.~~		~~Controls and Procedures~~	34

PART II. OTHER INFORMATION		3525
Item 1. Legal proceedings				25
	Item 1.		~~Legal Proceedings~~1A. Risk factors	3525
Item 2. Unregistered sales of equity securities and use of proceeds				25
	Item ~~1A.~~		~~Risk Factors~~3. Defaults upon senior securities	3525
Item 4. Mine safety disclosures				25
	Item 2.		~~Unregistered Sales of Equity Securities and Use of Proceeds~~5. Other information	3625

	~~Item 3.~~		~~Defaults Upon Senior Securities~~	36

	~~Item 4.~~		~~Mine Safety Disclosures~~	36

	~~Item 5.~~		~~Other Information~~	36

	Item 6.		Exhibits	37
				25
SIGNATURES		39

	Six months ended June 30,
(amounts in thousands)	2020			2019
Cash flows from operating activities, continuing operations:
Net loss	$	(13,704	)	$	(4,814	)
Loss on discontinued operations		—			9,771
Adjustments to reconcile income or loss from continuing operations to net cash provided by operating activities, continuing operations:
Stock-based compensation expense		5,677			3,541
Non-cash interest expense		2,919			2,414
Depreciation expense		3,008			2,784
Amortization of intangible assets		1,292			1,292
Change in warrant valuation		—			779
Changes in operating assets and liabilities:
Accounts receivable		2,805			(4,930	)
Contract asset		(60	)		(2,953	)
Inventory		3,300			1,060
Prepaid expenses and other assets		(200	)		(1,896	)
Accounts payable, accrued expenses and other liabilities		(631	)		(453	)
Net cash provided by operating activities, continuing operations		4,406			6,595
Cash flows from investing activities, continuing operations:
Purchases of property and equipment		(2,239	)		(7,462	)
Purchases of short-term investments		—			(12,021	)
Proceeds from maturity of investments		—			10,100
Net cash used in investing activities, continuing operations		(2,239	)		(9,383	)
Cash flows from financing activities, continuing operations:
Proceeds from issuance of debt, net of original issue discount of $11,400 for the six months ended June 30, 2019		4,416			43,600
Repayments of debt		(1,100	)		—
Payment of deferred financing costs		—			(2,936	)
Net payments related to vesting of restricted stock units		(1,181	)		(974	)
Net proceeds related to exercise of stock options		509			1,094
Net cash provided by financing activities, continuing operations		2,644			40,784
Net increase in cash and cash equivalents from continuing operations		4,811			37,996
Discontinued operations:
Cash flows used in operating activities		(1,172	)		(34,382	)
Cash flows used in investing activities		—			(1,728	)
Cash flows used in financing activities		—			(10,000	)
Net decrease in cash and cash equivalents from discontinued operations		(1,172	)		(46,110	)
Cash and cash equivalents, beginning of period		19,148			38,514
Cash and cash equivalents, end of period	$	22,787		$	30,400
Supplemental disclosures of cash flow information:
Cash paid for interest	$	7,228		$	6,644
Purchases of property, plant and equipment included in accrued expenses and accounts payable		1,293			257
Common stock issued in connection with equity facility		—			301

	Three months ended June 30, 2019		Six months ended June 30, 2019
Weighted average shares outstanding, basic		22,265,612		22,092,853
Dilutive impact of:
Restricted stock units		218,745		303,326
Stock options		360,899		359,077
Warrants		81,146		70,654
Weighted average shares outstanding, diluted		22,926,402		22,825,910

	Fair value measurements at reporting date using
	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
At June 30, 2020:
Assets:
Cash equivalents (See note 5)
Money market mutual funds	$	15,347	$	—	$	—
Total cash equivalents	$	15,347	$	—	$	—
At December 31, 2019:
Assets:
Cash equivalents (See note 5)
Money market mutual funds	$	11,609	$	—	$	—
Total cash equivalents	$	11,609	$	—	$	—

	June 30, 2020
	Amortized		Gross unrealized				Estimated
	cost		Gain		Loss		fair value
Money market mutual funds	$	15,347	$	—	$	—	$	15,347
Total investments	$	15,347	$	—	$	—	$	15,347

	June 30, 2020			December 31, 2019
Land	$	3,263		$	3,263
Building and improvements		20,900			20,900
Furniture, office and computer equipment		5,869			5,847
Manufacturing equipment		36,573			35,699
Construction in progress		3,077			729
Property, plant and equipment, gross		69,682			66,438
Less: accumulated depreciation		(27,234	)		(24,226	)
Property, plant and equipment, net	$	42,448		$	42,212

	June 30, 2020		December 31, 2019
Contract liabilities (see note 14)	$	1,727	$	337
Payroll and related costs		1,383		2,958
Property, plant and equipment		1,002		88
Professional and consulting fees		221		370
Other		537		571
Total	$	4,870	$	4,324

	Term loans under Credit Agreement			PPP Note			Total
Principal balance outstanding	$	125,000		$	3,316		$	128,316
Unamortized deferred issuance costs		(12,333	)		—			(12,333	)
Exit fee accretion		571			—			571
Total debt		113,238			3,316			116,554
Current portion of debt		(6,000	)		(1,289	)		(7,289	)
Debt, net	$	107,238		$	2,027		$	109,265

Number of Shares		Exercise Price per Share				Expiration Date
348,664		$	6.84			November 2024

	June 30,
	2020		2019
Range of expected option life	5.5 - 6 years		5.5 - 6 years
Expected volatility	75.34% - 81.09%		79.11% - 81.54%
Risk-free interest rate	0.34 - 1.40%		1.82 - 2.66%
Expected dividend yield		—		—

	Number of shares			Weighted average grant date fair value
Balance, December 31, 2019		1,197,502		$	10.92
Granted		274,775			15.11
Vested		(243,682	)		9.23
Forfeited		(295,611	)		8.73
Balance, June 30, 2020		932,984			13.29

	Contract assets			Contract liabilities
Balance at beginning of period	$	8,851		$	(337	)
Changes to the beginning balance of contract assets arising from:
Reclassification to receivables as a result of rights to consideration becoming unconditional		(9,559	)		—
Changes in estimate related to the transaction price		2,700			—
Contract assets recognized since beginning of period, net of reclassification to receivables and changes in estimates		6,919
Changes to contract liabilities:
Cash received in advance of contract performance		—			(2,434	)
Revenue recognized		—			1,044
Balance at end of period	$	8,911		$	(1,727	)

	Lease payments
Remainder of 2020	$	80
2021		160
2022		156
2023		156
2024		156
2025 and thereafter		91
Total lease payments		799
Less imputed interest		(373	)
Total operating lease liabilities	$	426

	Payments Due by Period (in 000s)
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Debt obligations (1):
Principal	$	129,566	$	7,289	$	122,277	$	—	$	—
Interest		30,463		13,573		16,890		—		—
Purchase obligations (2):		10,721		10,721		—		—		—
Operating leases (3)		799		160		314		312		13
Total	$	171,549	$	31,743	$	139,481	$	312	$	13