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

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

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

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

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

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

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

As of ~~August 5,~~November 2, 2020, there were ~~23,640,494~~23,644,631 shares of common stock, par value $0.01 per share, outstanding.

(amounts in thousands, except share and per share data)	June 30, 2020			December 31, 2019			September 30, 2020			December 31, 2019
Assets
Current assets:
Cash and cash equivalents	$	22,787		$	19,148		$	21,487		$	19,148
Accounts receivable		11,584			14,389			13,634			14,389
Contract asset		8,911			8,851			9,728			8,851
Inventory		11,772			15,072			11,580			15,072
Prepaid expenses and other current assets		2,986			2,700			2,492			2,700
Total current assets		58,040			60,160			58,921			60,160
Property, plant and equipment, net		42,448			42,212			43,480			42,212
Intangible assets, net		1,991			3,283			1,345			3,283
Goodwill		4,319			4,319			4,319			4,319
Other assets		399			485			503			485
Total assets	$	107,197		$	110,459		$	108,568		$	110,459
Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable	$	871		$	989		$	657		$	989
Accrued expenses and other current liabilities		4,870			4,324			4,802			4,324
Current portion of debt		7,289			—			9,458			—
Liabilities of discontinued operation		—			1,172			—			1,172
Total current liabilities		13,030			6,485			14,917			6,485
Debt, net		109,265			110,319			108,399			110,319
Other liabilities		313			367			385			367
Total liabilities		122,608			117,171			123,701			117,171
Commitments and contingencies (note 11)
Commitments and contingencies (note 10)
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
Common stock, $0.01 par value. 50,000,000 shares authorized, 23,644,631 issued and outstanding at September 30, 2020 and 23,312,928 shares issued and outstanding at December 31, 2019								236			233
Additional paid-in capital		204,940			199,938			207,345			199,938
Accumulated deficit		(220,587	)		(206,883	)		(222,714	)		(206,883	)
Total stockholders’ deficit		(15,411	)		(6,712	)		(15,133	)		(6,712	)
Total liabilities and stockholders’ deficit	$	107,197		$	110,459		$	108,568		$	110,459

	Three months ended June 30,						Six months ended June 30,						Three months ended September 30,						Nine months ended September 30,
(amounts in thousands, except share and per share data)	2020			2019			2020			2019			2020			2019			2020			2019
Revenue	$	15,522		$	31,256		$	37,299		$	56,322		$	19,287		$	25,255		$	56,586		$	81,576
Operating expenses:
Cost of sales (excluding amortization of intangible assets)		11,634			14,100			29,888			28,491			11,741			11,027			41,629			39,518
Selling, general and administrative		4,259			5,533			9,705			12,037			4,418			3,990			14,123			16,028
Amortization of intangible assets		646			646			1,292			1,292			646			646			1,938			1,938
Change in warrant valuation		—			1,041			—			779			—			160			—			938
Total operating expenses		16,539			21,320			40,885			42,599			16,805			15,823			57,690			58,422
Operating income (loss) from continuing operations		(1,017	)		9,936			(3,586	)		13,723			2,482			9,432			(1,104	)		23,154
Interest expense		(4,995	)		(5,176	)		(10,118	)		(8,766	)		(4,609	)		(5,057	)		(14,727	)		(13,823	)
(Loss) income from continuing operations		(6,012	)		4,760			(13,704	)		4,957			(2,127	)		4,375			(15,831	)		9,331
Loss on discontinued operations		—			(7,596	)		—			(9,771	)		—			(8,680	)		—			(18,450	)
Net loss	$	(6,012	)	$	(2,836	)	$	(13,704	)	$	(4,814	)	$	(2,127	)	$	(4,305	)	$	(15,831	)	$	(9,119	)

Income (loss) per share information:
(Loss) income per share information:
Basic:
Continuing operations	$	(0.25	)	$	0.21		$	(0.58	)	$	0.22		$	(0.09	)	$	0.19		$	(0.67	)	$	0.42
Discontinued operations		—			(0.34	)		—			(0.44	)		—			(0.38	)		—			(0.83	)
Total	$	(0.25	)	$	(0.13	)	$	(0.58	)	$	(0.22	)	$	(0.09	)	$	(0.19	)	$	(0.67	)	$	(0.41	)
Weighted average shares outstanding		23,577,255			22,265,612			23,486,011			22,092,853			23,641,973			22,505,723			23,538,378			22,231,990
Diluted:
Continuing operations	$	(0.25	)	$	0.21		$	(0.58	)	$	0.22		$	(0.09	)	$	0.18		$	(0.67	)	$	0.40
Discontinued operations		—			(0.33	)		—			(0.43	)		—			(0.36	)		—			(0.79	)
Total	$	(0.25	)	$	(0.12	)	$	(0.58	)	$	(0.21	)	$	(0.09	)	$	(0.18	)	$	(0.67	)	$	(0.39	)
Weighted average shares outstanding		23,577,255			22,926,402			23,486,011			22,825,910			23,641,973			23,650,113			23,538,378			23,102,158

	Common stock				Additional paid-in capital			Accumulated deficit						Common stock				Additional paid-in capital			Accumulated deficit			Total
(amounts in thousands, except share data)	Shares		Amount		Additional paid-in capital			Accumulated deficit			Total			Shares		Amount		Additional paid-in capital			Accumulated deficit			Total
Balance, December 31, 2019		23,312,928	$	233	$	199,938		$	(206,883	)	$	(6,712	)		23,312,928	$	233	$	199,938		$	(206,883	)	$	(6,712	)
Stock-based compensation expense		—		—		3,231			—			3,231			—		—		3,231			—			3,231
Exercise of stock options, net		37,063		—		(105	)		—			(105	)		37,063		—		(105	)		—			(105	)
Vesting of restricted stock units, net		105,242		1		(917	)		—			(916	)		105,242		1		(917	)		—			(916	)
Net loss		—		—		—			(7,692	)		(7,692	)		—		—		—			(7,692	)		(7,692	)
Balance, March 31, 2020		23,455,233		234		202,147			(214,575	)		(12,194	)		23,455,233		234		202,147			(214,575	)		(12,194	)
Stock-based compensation expense		—		—		2,446			—			2,446			—		—		2,446			—			2,446
Exercise of stock options, net		105,606		1		378			—			379			105,606		1		378			—			379
Vesting of restricted stock units, net		78,067		1		(31	)		—			(30	)		78,067		1		(31	)		—			(30	)
Net loss		—		—		—			(6,012	)		(6,012	)		—		—		—			(6,012	)		(6,012	)
Balance, June 30, 2020		23,638,906	$	236	$	204,940		$	(220,587	)	$	(15,411	)		23,638,906		236		204,940			(220,587	)		(15,411	)
Stock-based compensation expense															—		—		2,409			—			2,409
Vesting of restricted stock units, net															5,725		—		(4	)		—			(4	)
Net loss															—		—		—			(2,127	)		(2,127	)
Balance, September 30, 2020															23,644,631	$	236	$	207,345		$	(222,714	)	$	(15,133	)

	Common stock				Additional paid-in capital			Accumulated deficit						Common stock				Additional paid-in capital			Accumulated deficit			Total
(amounts in thousands, except share data)	Shares		Amount		Additional paid-in capital			Accumulated deficit			Total			Shares		Amount		Additional paid-in capital			Accumulated deficit			Total
Balance, December 31, 2018		21,799,961	$	218	$	168,535		$	(188,253	)	$	(19,500	)		21,799,961	$	218	$	168,535		$	(188,253	)	$	(19,500	)
Stock-based compensation expense		—		—		2,826			—			2,826			—		—		2,826			—			2,826
Exercise of stock options, net		29,750		—		185			—			185			29,750		—		185			—			185
Vesting of restricted stock units, net		268,915		3		(865	)		—			(862	)		268,915		3		(865	)		—			(862	)
Issuance of common stock for equity facility		34,762		—		301			—			301			34,762		—		301			—			301
Net loss		—		—		—			(1,978	)		(1,978	)		—		—		—			(1,978	)		(1,978	)
Balance, March 31, 2019		22,133,388		221		170,982			(190,231	)		(19,028	)		22,133,388		221		170,982			(190,231	)		(19,028	)
Stock-based compensation expense		—		—		2,359			—			2,359			—		—		2,359			—			2,359
Exercise of stock options, net		206,625		2		907			—			909			206,625		2		907			—			909
Vesting of restricted stock units, net		74,594		1		(114	)		—			(113	)		74,594		1		(114	)		—			(113	)
Net loss		—		—		—			(2,836	)		(2,836	)		—		—		—			(2,836	)		(2,836	)
Balance, June 30, 2019		22,414,607	$	224	$	174,134		$	(193,067	)	$	(18,709	)		22,414,607		224		174,134			(193,067	)		(18,709	)
Stock-based compensation expense															—		—		1,741			—			1,741
Exercise of stock options, net															186,947		2		1,463			—			1,465
Vesting of restricted stock units, net															12,559		—		(57	)		—			(57	)
Net loss															—		—		—			(4,305	)		(4,305	)
Balance, September 30, 2019															22,614,113	$	226	$	177,281		$	(197,372	)	$	(19,865	)

	Six months ended June 30,						Nine months ended September 30,
(amounts in thousands)	2020			2019			2020			2019
Cash flows from operating activities, continuing operations:
Net loss	$	(13,704	)	$	(4,814	)	$	(15,831	)	$	(9,119	)
Loss on discontinued operations		—			9,771			—			18,450
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			8,086			4,635
Non-cash interest expense		2,919			2,414			4,222			3,872
Depreciation expense		3,008			2,784			4,581			4,290
Amortization of intangible assets		1,292			1,292			1,938			1,938
Change in warrant valuation		—			779			—			938
Changes in operating assets and liabilities:
Accounts receivable		2,805			(4,930	)		755			(3,351	)
Contract asset		(60	)		(2,953	)		(877	)		(5,442	)
Inventory		3,300			1,060			3,492			(2,223	)
Prepaid expenses and other assets		(200	)		(1,896	)		268			(1,033	)
Accounts payable, accrued expenses and other liabilities		(631	)		(453	)		(234	)		1,287
Net cash provided by operating activities, continuing operations		4,406			6,595			6,400			14,242
Cash flows from investing activities, continuing operations:
Purchases of property and equipment		(2,239	)		(7,462	)		(5,451	)		(7,997	)
Purchases of short-term investments		—			(12,021	)		—			(12,020	)
Proceeds from maturity of investments		—			10,100			—			12,100
Net cash used in investing activities, continuing operations		(2,239	)		(9,383	)		(5,451	)		(7,917	)
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
Proceeds from issuance of debt, net of original issue discount of $11,400 for the nine months ended September 30, 2019								4,416			43,600
Repayments of debt		(1,100	)		—			(1,100	)		—
Payment of deferred financing costs		—			(2,936	)		(78	)		(2,936	)
Net payments related to vesting of restricted stock units		(1,181	)		(974	)
Net payments related to vesting and exercise of stock-based awards								(1,185	)		(1,029	)
Net proceeds related to exercise of stock options		509			1,094			509			2,552
Net cash provided by financing activities, continuing operations		2,644			40,784			2,562			42,187
Net increase in cash and cash equivalents from continuing operations		4,811			37,996			3,511			48,512
Discontinued operations:
Cash flows used in operating activities		(1,172	)		(34,382	)		(1,172	)		(37,271	)
Cash flows used in investing activities		—			(1,728	)		—			(1,811	)
Cash flows used in financing activities		—			(10,000	)		—			(10,000	)
Net decrease in cash and cash equivalents from discontinued operations		(1,172	)		(46,110	)		(1,172	)		(49,082	)
Cash and cash equivalents, beginning of period		19,148			38,514			19,148			38,514
Cash and cash equivalents, end of period	$	22,787		$	30,400		$	21,487		$	37,944
Supplemental disclosures of cash flow information:
Cash paid for interest	$	7,228		$	6,644		$	10,662		$	10,601
Purchases of property, plant and equipment included in accrued expenses and accounts payable		1,293			257			686			21
Common stock issued in connection with equity facility		—			301
Common stock issued under equity facility								—			301

Recro Pharma, Inc. (the “Company”) was incorporated in Pennsylvania on November 15, 2007. The Company is a leading contract development and manufacturing organization (“CDMO”) with integrated solutions for ~~the development,~~ formulation, analytical services, regulatory support, manufacturing, and packaging of both commercial and development stage oral solid dose drug products. It leverages its formulation and development expertise to develop and manufacture pharmaceutical products using proprietary delivery technologies and know-how for commercial partners who commercialize or plan to commercialize these products. The Company operates in 1 segment.

In November 2019, the Company’s former Acute Care business, which developed products for hospital and other acute care settings, was spun-out through its former wholly-owned subsidiary, Baudax Bio, Inc. (“Baudax Bio”) when the Company completed a special dividend distribution of all the outstanding shares of common stock of Baudax Bio to its shareholders. See note 3 to the consolidated financial statements for additional information about the spin-off of Baudax Bio.

The Company has incurred net losses since inception and has an accumulated deficit of ~~$220,587~~$222,714 as of ~~June~~September 30, 2020, which is mostly related to activities that are presented as discontinued operations as a result of the spin-off of Baudax Bio. The Company’s future operations are highly dependent on the continued profitability of its manufacturing operations. Management believes that it is probable that the Company will be able to meet its obligations as they become due within one year after the date the financial statements are issued.

The accompanying unaudited consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. In accordance with SEC rules for interim financial statements, certain information required by U.S. GAAP may be condensed or omitted. The Company’s consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. In the opinion of management, the accompanying consolidated financial statements include all normal and recurring adjustments (which consist primarily of accruals, estimates and assumptions that impact the financial statements) considered necessary to present fairly the Company’s results for the interim periods. Operating results for ~~the three and six months ended June 30, 2020~~interim periods are not necessarily indicative of the results that may be expected for the full ~~year ending December 31, 2020.~~year.

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

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

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

Property and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, which are as follows: three to ten years for furniture, office and computer equipment; six to ten years for manufacturing equipment; 40 years for buildings; and the shorter of the lease term or useful life for leasehold improvements. Repairs and maintenance costs are expensed as incurred.

Goodwill represents the excess of purchase price over the fair value of net assets acquired by the Company. Goodwill is not amortized but assessed for impairment on an annual basis or more frequently if impairment indicators exist. The impairment model prescribes a one-step method for determining impairment.

The one-step quantitative test calculates the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.

Intangible assets include the Company’s royalties and contract manufacturing relationships assets. The royalties and contract manufacturing relationships intangible asset is considered a definite-lived intangible asset and is amortized on a straight-line basis over a useful life of six ~~years~~.years. The Company is required to review the carrying value of definite-lived intangible assets for recoverability whenever events occur or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.

The Company performs its annual goodwill impairment test as of November 30^th, or whenever an event or change in circumstances occurs that would require reassessment of the recoverability of goodwill. In performing the evaluation, the Company assesses qualitative factors such as overall financial performance, anticipated changes in industry and market conditions, and competitive environments. The Company performed its last annual impairment test as of November 30, 2019.

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.

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 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.

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

the most-likely amount method based on historical customer pricing and deductions and 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.

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 continuing performance obligations would be 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, 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.

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

The Company’s accounts receivable balances are primarily concentrated among 4 customers. If any of these customers’ receivable balances should be deemed uncollectible, it could have a material adverse effect on the Company’s results of operations and financial condition.

The Company is dependent on its relationships with a small number of commercial partners, with its 4 largest customers having generated ~~95%~~90% or more of its revenues for the periods presented. A portion of the Company’s revenues are dependent on U.S. based customers selling to end-users outside the United States.

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

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

The expected life of stock options was estimated using the “simplified method,” as the Company has limited historical information to develop reasonable expectations about future stock option exercise patterns, which is

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

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

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

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. A valuation allowance is recorded to the extent it is more likely than not that some portion or all of the deferred tax assets will not be realized. A full valuation allowance was recorded as of ~~June~~September 30, 2020 and December 31, 2019.

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

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

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

~~There were no differences in~~For the ~~basic and diluted calculations for~~periods presented, only the ~~three and six months ended June 30, 2020 because~~denominators of the ~~Company reported net losses for those periods. There were also no differences in the income or loss used to calculate~~2019 basic ~~and diluted~~ per share results ~~in either of~~were adjusted for the ~~three- or six-month periods ended June 30, 2019.~~

dilutive effects described above. The following table presents ~~the reconciliation of weighted average shares outstanding used for basic and diluted per share results for the three and six months ended June 30, 2019:~~those effects:

	Three months ended June 30, 2019		Six months ended June 30, 2019		Three months ended September 30, 2019		Nine months ended September 30, 2019
Weighted average shares outstanding, basic		22,265,612		22,092,853		22,505,723		22,231,990
Dilutive impact of:
Restricted stock units		218,745		303,326		372,338		326,330
Stock options		360,899		359,077		642,255		453,470
Warrants		81,146		70,654		129,797		90,368
Weighted average shares outstanding, diluted		22,926,402		22,825,910		23,650,113		23,102,158

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

	Three months ended June 30,				Six months ended June 30,				Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019		2020		2019		2020		2019
Options and restricted stock units outstanding		4,371,266		3,267,522		2,433,452		3,488,802
Restricted stock units										895,573		1,875		640,300		3,425
Stock options										3,577,118		1,897,356		2,472,898		2,955,520
Warrants		348,664		350,000		174,332		350,000		348,664		350,000		348,664		350,000

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

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

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

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 1one 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~~table presents the expenses of the Acute Care business ~~expenses for the three and six months ended June 30, 2019:~~that are included within loss on discontinued operations:

	Three months ended June 30, 2019			Six months ended June 30, 2019			Three months ended September 30, 2019			Nine months ended September 30, 2019
Operating expenses:
Research and development	$	7,180		$	16,734		$	1,845		$	18,579
Selling, general and administrative		4,464			12,138			2,889			15,027
Change in contingent consideration valuation		(4,059	)		(19,150	)		3,909			(15,242	)
Total operating expenses		7,585			9,722			8,643			18,364
Other income (expense), net		(11	)		(49	)
Other expense, net								(37	)		(86	)
Loss on discontinued operations	$	(7,596	)	$	(9,771	)	$	(8,680	)	$	(18,450	)

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:

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

Cash equivalents of $15,248 and $11,609 at September 30, 2020 and December 31, 2019, respectively, consisted entirely of money market mutual funds whose fair value were determined using Level 1 measurements.

The Company follows the disclosure provisions of FASB ASC Topic 825, “Financial Instruments” (ASC 825), for disclosure purposes for financial assets and financial liabilities that are not measured at fair value. As of ~~June~~September 30, 2020, the financial assets and liabilities recorded on the Consolidated Balance Sheets that are not measured at fair value on a recurring basis include accounts receivable, accounts payable and accrued expenses and approximate fair value due to the short-term nature of these instruments.

The fair value of long-term debt, where a quoted market price is not available, is evaluated based on, among other factors, interest rates currently available to the Company for debt with similar terms, remaining payments and considerations of the Company’s creditworthiness. The Company determined that the recorded book value of its debt, a level 2 measurement, approximated fair value at ~~June~~September 30, 2020 ~~because~~as (i) the terms of borrowings under the Credit Agreement are equivalent to the terms of other borrowings currently available to the Company; and (ii) the fair value of the PPP Note, which carries a fixed interest rate below market, is not materially different from its carrying value.

Inventory is stated at the lower of cost and 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.

	June 30, 2020			December 31, 2019			September 30, 2020			December 31, 2019
Raw materials	$	3,298		$	3,240		$	3,372		$	3,240
Work in process		4,537			6,430			5,790			6,430
Finished goods		4,402			5,892			2,906			5,892
Inventory, prior to provision		12,237			15,562			12,068			15,562
Provision for inventory obsolescence		(465	)		(490	)		(488	)		(490	)
Inventory	$	11,772		$	15,072		$	11,580		$	15,072

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

	June 30, 2020			December 31, 2019			September 30, 2020			December 31, 2019
Land	$	3,263		$	3,263		$	3,263		$	3,263
Building and improvements		20,900			20,900			20,900			20,900
Furniture, office and computer equipment		5,869			5,847			5,869			5,847
Manufacturing equipment		36,573			35,699			38,635			35,699
Construction in progress		3,077			729			3,620			729
Property, plant and equipment, gross		69,682			66,438			72,287			66,438
Less: accumulated depreciation		(27,234	)		(24,226	)		(28,807	)		(24,226	)
Property, plant and equipment, net	$	42,448		$	42,212		$	43,480		$	42,212

Depreciation expense for the three months ended ~~June~~September 30, 2020 and 2019 was ~~$1,508~~$1,573 and ~~$1,467,~~$1,506, respectively. Depreciation expense for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019 was ~~$3,008~~$4,581 and ~~$2,784,~~$4,290, respectively.

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

	June 30, 2020			December 31, 2019			September 30, 2020			December 31, 2019
Cost	$	15,500		$	15,500		$	15,500		$	15,500
Accumulated amortization		(13,509	)		(12,217	)		(14,155	)		(12,217	)
Net intangible assets	$	1,991		$	3,283		$	1,345		$	3,283

Amortization expense was $646 for the three months ended ~~June~~September 30, 2020 and 2019 and ~~$1,292~~$1,938 for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019.

~~As of June~~At September 30, 2020, future amortization expense iswas as follows:

	Amortization		Amortization
Remainder of 2020	$	1,291	$	645
2021		700		700
Total	$	1,991	$	1,345

	June 30, 2020		December 31, 2019		September 30, 2020		December 31, 2019
Contract liabilities (see note 14)	$	1,727	$	337
Payroll and related costs		1,383		2,958	$	1,409	$	2,958
Contract liabilities (see note 13)						1,342		337
Property, plant and equipment		1,002		88		618		88
Professional and consulting fees		221		370		594		370
Other		537		571		839		571
Total	$	4,870	$	4,324	$	4,802	$	4,324

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

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

	Term loans under Credit Agreement		PPP Note		Total		Term loans under Credit Agreement		PPP Note		Total
Remainder of 2020	$	—	$	184	$	184
2021		12,000		2,210		14,210	$	12,120	$	1,474	$	13,594
2022		114,250		922		115,172		12,120		1,842		13,962
2023								102,010		—		102,010
Total debt	$	126,250	$	3,316	$	129,566	$	126,250	$	3,316	$	129,566

~~On November 17, 2017, the~~The Company ~~entered into~~is currently party to a ~~$100,000 Credit Agreement~~$125,000 credit agreement (the “Credit Agreement”) with Athyrium Opportunities III Acquisition LP (“Athyrium”)., which has been fully drawn. The Credit Agreement ~~provided for a term loan in the original principal amount of $60,000 funded at closing. In December 2018,~~requires 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~~$3,030 (including the exit fee discussed below) beginning on March 31, 2021 with the outstanding principal balance plus the exit fee due on ~~the Maturity Date.~~March 31, 2023. See note 16 for subsequent event disclosure.

~~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”)term loans 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~~The Company will have to pay a 1% exit fee on all repayments, which is, in the aggregate, $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 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 leverage ratio (which is the Company’s indebtedness under the Credit Agreement divided by EBITDA, each as defined in the Credit Agreement) of 5.00:1.00. As of ~~June~~September 30, 2020, the Company was in compliance with the ~~covenants.~~leverage ratio covenant under the Credit Agreement, as amended (see note 16).

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.~~ share at September 30, 2020. See note ~~12(d)~~11(d) for additional information. The warrants are exercisable through November 17, 2024. The initial fair value of the warrant and revaluation adjustment in 2018 from the repricing of the warrants of $2,232 was recorded as a debt issuance cost.

In addition, the Company has recorded ~~debt~~deferred 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~~totaling $19,275, 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~~September 30, 2020, the effective interest rate was ~~15.98%~~14.83%, which takes into consideration the non-cash accretion of the exit fee and the amortization of the ~~debt~~deferred issuance ~~cost and the original issue discount.~~costs.

The Company recorded debt issuance cost amortization related to the ~~Amended~~ Credit Agreement of $1,235 and $1,384 for the three months ended ~~June~~September 30, 2020 and 2019, respectively, and ~~$2,768~~$4,002 and ~~$2,362~~$3,746 for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively.

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 PPP Note was subsequently amended by PNC Bank on August 20, 2020 because of changes to the laws governing the Paycheck Protection Program.

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~~However, principal and interest due under the note may be forgiven in part or in whole if the Company meets certain requirements described below. To the extent not forgiven, monthly principal and interest payments ~~less the amount of any potential forgiveness (discussed below), will~~would commence on ~~December~~the earlier of September 15, ~~2020.~~2021 or the date on which a forgiveness decision is received from PNC Bank. 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 both the SBA and PNC Bank ~~and will require~~of an application for forgiveness, which the Company ~~to apply for such treatment in~~submitted on October 6, 2020. SBA and PNC Bank must provide the ~~future.~~Company the forgiveness decision no later than March 5, 2021. 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.

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

On May 31, 2018, a securities class action lawsuit (the “Securities Litigation”) was filed against the Company and certain of its officers and directors 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~~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, 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~~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. 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.

As of ~~June~~September 30, 2020, the Company had outstanding non-cancelable purchase commitments in the aggregate amount of ~~$10,721~~$5,801 related to inventory, capital expenditures, the transition services agreement (see note 14) and other goods and services.

The Company is authorized to issue up to 50,000,000 shares of common stock, with a par value of $0.01 per share.

Reflected below are the Company’s capital raises since its initial public offering (“IPO”):

On March 12, 2014, the Company completed an IPO in which the Company sold 4,312,500 shares of common stock at $8.00 per share, resulting in gross proceeds of $34,500. In connection with the IPO, 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 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 agreement ~~or the Sales Agreement,~~(the “Sales Agreement”) with Cowen and Company, LLC ~~or Cowen,~~(“Cowen”) pursuant to which the Company ~~may~~could 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~~The Company ~~did not have any sales~~sold no shares of common stock under the Sales ~~Agreement. The Sales~~ Agreement, ~~will terminate~~which terminated on August 11, 2020.

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 provides that, upon the terms and subject to the conditions and limitations set forth in the 2018 Purchase Agreement, Aspire Capital is committed to purchase, at the Company’s sole election, up to an aggregate 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 shares of common stock to Aspire Capital as consideration for entering into the 2018 Purchase Agreement. ~~As of June 30, 2020, the~~The Company sold 1,950,000 shares of common stock under the 2018 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~~2019 Purchase Agreement, as defined below, replaces the 2018 Purchase Agreement.

On February 19, 2019, the Company entered into a common stock purchase agreement (the “2019 Purchase Agreement”) with Aspire Capital, which provides that, upon the terms and subject to the conditions and limitations set forth in the 2019 Purchase Agreement, Aspire Capital is committed to purchase, at the Company’s sole election, up to an aggregate of $20,000 of its 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~~$30,000 and extend the term of the 2019 Purchase Agreement to March 20, 2022. As of September 30, 2020, the Company did 0t have any sales of common stock under the Amended Purchase Agreement.

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~~September 30, 2020, 0 preferred stock was issued or outstanding.

~~As of June~~At September 30, 2020, ~~the Company had the following~~348,664 warrants were outstanding to purchase shares of the Company’s common ~~stock:~~

stock. The warrants are held by Athyrium, equity-classified, exercisable at $6.84 per share and expire in November 2024. In connection with an amendment to the Credit Agreement in November 2020 (see note 16), the exercise price of the warrants was reduced to $1.73.

~~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,~~equity-classified, was forfeited upon expiration.

In November 2019, the warrant to purchase 350,000 shares issued to Alkermes plc, which was liability classified as it contained a contingent net cash settlement feature, was exercised on a cashless basis, with Alkermes plc 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.

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~~September 30, 2020, the total number of shares authorized under the A&R Plan was 9,281,402, of which ~~3,369,127~~3,446,933 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 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~~following table presents information about the fair value of ~~the~~stock 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:granted:

	June 30,				Nine months ended September 30,
	2020		2019		2020		2019
Weighted average grant date fair value					$	8.24	$	8.14
Assumptions used to determine fair value:
Range of expected option life	5.5 - 6 years		5.5 - 6 years		5.5 - 6 years		5.5 - 6 years
Expected volatility	75.34% - 81.09%		79.11% - 81.54%		75 - 81%		79 - 82%
Risk-free interest rate	0.34 - 1.40%		1.82 - 2.66%		0.3 - 1.4%		1.6 - 2.7%
Expected dividend yield		—		—		—		—

The intrinsic value of options exercised during the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019 was $1,058 and ~~$1,033,~~$1,710, respectively.

The following table ~~summarizes~~presents information about stock option ~~activity during the six months ended June 30, 2020:~~balances and activity:

	Number of shares			Weighted average exercise price		Aggregate intrinsic value		Weighted average remaining contractual life	Number of shares			Weighted average exercise price		Aggregate intrinsic value		Weighted average remaining contractual life
Balance, December 31, 2019		3,695,649		$	7.97					3,695,649		$	7.97
Granted		347,750			12.34					347,750			12.34
Exercised		(178,747	)		4.52					(178,747	)		4.52
Forfeited or expired		(111,579	)		8.25					(166,530	)		8.52
Balance, June 30, 2020		3,753,073			8.53	$	304	6.8 years
Balance, September 30, 2020										3,698,122			8.52	$	—	6.6 years
Exercisable		2,407,433			8.11		304	6.0 years		2,545,003			8.14		—	5.8 years

Included in the table above are 438,000 options outstanding as of ~~June~~September 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 (“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~~nine months ended ~~June~~September 30, 2020 and 2019 was $15.11 and $8.12, respectively. The fair value of RSUs vested during the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019 was ~~$3,227~~$3,246 and ~~$3,952,~~$4,142, respectively.

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

	Number of shares			Weighted average grant date fair value		Number of shares			Weighted average grant date fair value
Balance, December 31, 2019		1,197,502		$	10.92		1,197,502		$	10.92
Granted		274,775			15.11		274,775			15.11
Vested		(243,682	)		9.23		(249,057	)		9.18
Forfeited		(295,611	)		8.73		(318,466	)		8.96
Balance, June 30, 2020		932,984			13.29
Balance, September 30, 2020							904,754			13.36

Included in the table above are ~~15,000~~9,625 time-based RSUs outstanding as of ~~June~~September 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).

Stock-based compensation expense from continuing operations for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019 was ~~$5,677~~$8,086 and ~~$3,541,~~$4,635, respectively. Of these amounts, ~~$1,991~~$2,293 and ~~$845,~~$933, respectively, were classified as cost of sales and ~~$3,686~~$5,793 and ~~$2,696,~~$3,702, respectively, were classified as selling, general and administrative expenses.

For the ~~six~~nine months ended ~~June~~September 30, 2020, ~~this represents~~ stock-based compensation expense ~~for~~includes awards issued to 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~~nine months ended ~~June~~September 30, 2019, additional stock-based compensation expense of ~~$1,644~~$2,291 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 in accordance with their respective vesting schedules. Any stock-based compensation expense with respect to former employees who continue to vest based on their employment service at Baudax but no longer provide services to the Company is not reflected in ~~Baudax Bio’s~~the Company’s financial statements.

As of ~~June~~September 30, 2020, there was ~~$11,106~~$8,312 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~~September 30, 2020, there was ~~$2,707~~$2,632 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.

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			Contract assets			Contract liabilities
Balance at beginning of period	$	8,851		$	(337	)	$	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	)		—			(13,193	)		—
Changes in estimate related to the transaction price		2,700			—
Changes in estimate								4,540			—
Contract assets recognized since beginning of period, net of reclassification to receivables and changes in estimates		6,919						9,530			—
Changes to contract liabilities:
Cash received in advance of contract performance		—			(2,434	)		—			3,606
Revenue recognized		—			1,044			—			(2,601	)
Balance at end of period	$	8,911		$	(1,727	)	$	9,728		$	1,342

	Three months ended June 30,				Six months ended June 30,				Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019		2020		2019		2020		2019
Point in time	$	14,365	$	30,432	$	35,420	$	55,382	$	17,827	$	24,200	$	53,247	$	79,581
Over time		1,157		824		1,879		940		1,460		1,055		3,339		1,995
Total	$	15,522	$	31,256	$	37,299	$	56,322	$	19,287	$	25,255	$	56,586	$	81,576

The Company’s payment terms for manufacturing revenue and development services are typically 30 to 45 days. Royalty 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.

The Company is a party to various operating leases in Georgia for office, manufacturing, chemistry, and manufacturing and controls development space. The Company is also a party 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, on the Consolidated Balance Sheets.

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. Operating lease assets, current liabilities and noncurrent liabilities are classified as other assets, other current liabilities and other liabilities, respectively, on the balance sheet.

AsThe Company is a party to a seven-year operating lease for a development facility in 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 ~~June 30, 2020, undiscounted~~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 September 30, 2020, were as follows:

	Lease payments			September 30, 2020
Remainder of 2020	$	80		$	39
2021		160			156
2022		156			156
2023		156			156
2024		156			156
2025 and thereafter		91			91
Total lease payments		799			754
Less imputed interest		(373	)		(224	)
Total operating lease liabilities	$	426		$	530

At ~~June~~September 30, 2020, the weighted average remaining lease term was 54.7 years, and the weighted average discount rate was 16%.

for the three months ended September 30, 2020 and 2019 was $76 and $80, respectively. Operating lease cost for the nine months ended September 30, 2020 and 2019 was $234 and $240, respectively.

Baudax Bio is a related party to 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 and ~~six~~nine months ended ~~June~~September 30, 2020, the Company recorded expense of $516 and ~~$1,032,~~$1,548, respectively, related to its transition services agreement with Baudax Bio. These expenses are included in selling, general and administrative expenses on the Company’s Consolidated Statements of Operations. The Company recorded a net receivable of ~~$33~~$39 and a net payable of $273 for such activities and other activity with Baudax Bio as of ~~June~~September 30, 2020 and December 31, 2019, respectively.

~~The~~In November 2020, the Company ~~has a voluntary 401(k) Savings Plan (the 401(k) Plan) in which all employees are eligible~~amended the Credit Agreement (see note 9). Pursuant to ~~participate. The Company’s policy is to match 100%~~the amendment: (i) required quarterly repayments of $3,030 were deferred by one year, with such repayments beginning on March 31, 2022; (ii) effective September 30, 2020, the calculation of the ~~employee contributions up~~leverage ratio was amended to ~~a maximum of 5% of employee compensation. Total Company contributions~~exclude qualifying cash balances from indebtedness and to ~~the 401(k) plan for the three months ended June~~include certain additional adjustments to earnings; (iii) effective September 30, 2020, the permitted leverage ratio was increased to 5.60:1.00 through and ~~2019 were $223~~including the fourth quarter of 2021, after which time the leverage ratio returns to 5.00:1.00; (iv) the permitted minimum liquidity amount was decreased to $10,000 through March 31, 2021, after which the minimum liquidity amount returns to $12,000 until maturity; and ~~$237, respectively. Total~~(v) the exercise price of the Athyrium warrants was reduced from $6.84 to $1.73. In connection with the amendment, the Company ~~contributions to the 401(k) plan for the six months ended June 30, 2020~~paid an amendment fee of $260 and ~~2019 were $539~~prepaid $9,090 of principal and ~~$528, respectively.~~exit fee without penalty.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the interim unaudited financial statements contained in Part I, Item 1 of this Quarterly Report, and the audited financial statements and notes thereto for the year ended December 31, 2019 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 filed with the SEC on March 4, 2020. As used in this report, unless the context suggests otherwise, “we,” “us,” “our,” “the Company” or “Recro” refer to Recro Pharma, Inc. and its consolidated subsidiaries.

This Quarterly Report on Form 10-Q, or Quarterly Report, contains forward-looking statements. We may, in some cases, use terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” the negatives thereof and other words that convey uncertainty of future events or outcomes to identify these forward-looking statements.

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

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, and Part II, Item 1A of our Quarterly Report on Form 10-Q for the three months ended June 30, 2020 filed with the SEC on August 10, 2020, or the Q2 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 any forward-looking statements.

We are a leading contract development and manufacturing organization, or CDMO, with integrated solutions for ~~the development,~~ formulation, analytical services, regulatory support, manufacturing and packaging of both commercial and development stage 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 our proprietary delivery technologies and ~~know-how~~other manufacturing services for commercial and development-stage partners who ~~develop,~~ commercialize or plan to commercialize these products. These collaborations can result in revenue streams including manufacturing, royalties, profit sharing, and development. We operate a 97,000 square foot, DEA-licensed manufacturing facility in Gainesville, Georgia, as well as a 24,000 square foot development and high potency product facility in Gainesville, Georgia. 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 Verapamil SR and Zohydro ER®, as well as provide CDMO services for supporting development stage products.

We have used cash flow generated by our business primarily to fund operations at our Gainesville, Georgia manufacturing facilities, to fund our historical Acute Care business and to make payments under our credit facility. We believe our business will continue to contribute cash for future operations at our Gainesville facilities 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,~~trials materials , or ~~CTM.~~CTM, and logistics business. Our capabilities include on-demand services for innovative trial design and direct-to-patient supply ~~logistics.~~logistics such as (i) clinical trial drug manufacturing, double-blind packaging and distribution services and (ii) specialized services related to the development and GMP manufacturing of high potency products. We also can provide non-clinical formulations, Active Pharmaceutical Ingredient (API) characterization, over-encapsulation and other commercial 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 other 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.

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 protocols to have appropriate personnel work remotely and have implemented strict social distancing and other protective measures for those employees continuing to support essential operations at our work locations in order to ensure the health of our employees while continuing 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~~commercial manufacturing volumes, ~~resulting~~and the related impact on fixed costs expensed through cost of sales, despite making reductions in ~~manufacturing variances,~~the work force and ~~there~~implementing cost saving measures. There are also some incremental expenses associated with safe practices for our organization due to COVID-19.

Business ~~Development:~~Development. We successfully launched our new CTM offering in the second ~~quarter~~quarter. We have seen greater interest in this service from multiple current and ~~secured new customers.~~prospective clients, and early work has resulted in expanded proposal scope. In other sectors, we have experienced lower than expected new development business growth, which we believe is primarily attributable to COVID-19. Concerns surrounding COVID-19 have resulted in our adoption of new methods for meeting and contacting customers, have slowed customer access, and have caused delays in plans for development services by some customers and prospects for a variety of reasons, such as concerns about the timing of clinical trials.

Manufacturing ~~Demand:~~Demand. We believe that there has been lower end-user demand for some of the commercial products we manufacture for our customers due to the effects of COVID-19. Third party national data demonstrates that there has been 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~~have been disrupted as a result of the pandemic because of production slowdowns, stoppages, or decreased demand for the products we ~~manufacture.~~manufacture, and we expect such disruptions to continue through the remainder of the year. Given the uncertain scope and duration of the pandemic, the extent to which the pandemic will continue to impact our financial results remains uncertain in terms of manufacturing volumes 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 costs and drive more new business, and we are actively evaluating various ways to further conserve operational resources.

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

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.

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

We recognize royalty or profit-sharing revenue, collectively referred to as royalty revenue, related to the sale of products by our commercial partners that incorporate our technologies. Royalty revenues are generally recognized under the terms of the applicable license, development and/or supply agreement. For arrangements that include sales-based royalties and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue when the related sales occur by the commercial partner. For arrangements that include sales-based royalties and the license is not deemed to be the predominant item to which the royalties relate, we recognize revenue when the performance obligation to which the royalty has been allocated has been satisfied, which is upon transfer of control of a product to a customer. In this case, significant judgment is used in the estimation of these royalties based on historical customer pricing and deductions and 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.

Research and development revenue includes services associated with formulation, process development, CTM 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 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 consist of salaries and related costs for corporate administrative, public company costs, and business development personnel as well as legal, patent-related 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, as we continue to expand our ~~sales~~business development team in various geographies in support of our new offerings, in anticipation of business growth from new formulation, development and CTM capabilities.

We recognize amortization expense related to the intangible asset for our contract manufacturing relationships on a straight-line basis over an estimated useful life of six years.

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 for the periods presented primarily includes interest expense incurred on our Athyrium senior secured term loans, the amortization of related financing costs 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.

As of December 31, 2019, we had approximately $121.6 million of federal net operating loss carryforwards. We also had federal and state research and development tax credit carryforwards of $4.4 million 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 carryforwards 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 deferred tax assets.

Comparison of the ~~Three Months Ended June~~three months ended September 30, 2020 and 2019

	Three months ended June 30,						Three months ended September 30,
(amounts in thousands)	2020			2019
(in millions)							2020			2019
Revenue	$	15,522		$	31,256		$	19.3		$	25.3
Operating expenses:
Cost of sales (excluding amortization of intangible assets)		11,634			14,100			11.7			11.0
Selling, general and administrative		4,259			5,533			4.5			4.1
Amortization of intangible assets		646			646			0.6			0.6
Change in warrant valuation		—			1,041			—			0.2
Total operating expenses		16,539			21,320			16.8			15.9
Operating income from continuing operations		(1,017	)		9,936			2.5			9.4
Interest expense		(4,995	)		(5,176	)		(4.6	)		(5.0	)
(Loss) income from continuing operations		(6,012	)		4,760			(2.1	)		4.4
Loss on discontinued operations		—			(7,596	)		—			(8.7	)
Net loss	$	(6,012	)	$	(2,836	)	$	(2.1	)	$	(4.3	)

Revenue. The decrease of ~~$15.7~~$6.0 million was primarily ~~due to decreased product sales~~the result of customer ordering patterns in the prior year and ~~royalties recognized from three~~the loss of ~~our commercial partners. The first key customer experienced lower~~Verapamil SR market share ~~compared to 2019~~by a commercial partner in the first quarter of 2020 due to the re-entry of a competitor ~~to the market but~~(Mylan). Our commercial partner has ~~maintained~~sustained its market ~~share~~position for Verapamil SR capsules since the end of the first quarter of 2020. The ~~second key customer saw~~COVID-19 pandemic has resulted in decreased ~~sales that reduced~~end-user demand, inventory rebalancing by our ~~royalties~~commercial partners 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 line in the first quarter of 2020. We also experienced slower than expected new business ~~project starts and overall~~starts. Higher revenues from our new business growth ~~due to~~activities has partially offset the ~~impacts of COVID-19.~~

~~We expect that the return of~~decrease, including a ~~competitor to the market experienced by one of our~~significant new 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.tech transfer project.

Cost of sales. ~~Cost~~The increase of ~~sales decreased $2.5~~$0.7 million ~~and~~ was not proportionate to the decrease in ~~revenues,~~revenue primarily due to lower commercial manufacturing volumes and ~~slower than anticipated new project starts (including $0.2 million~~the related toimpact on fixed costs expensed through cost of sales, despite making reductions in the ~~second reduction in force associated with continued revised commercial volume and development revenue). Annual savings from this reduction in~~work force and ~~an earlier reduction in force are estimated to be $3.4 million in fiscal year 2021.~~implementing cost saving measures.

Selling, general and administrative. The ~~decrease~~increase of ~~$1.3~~$0.4 million was primarily related to ~~lower public company costs~~our new business efforts 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~~launch of ~~readiness for~~ the CTM ~~business.~~business.

Amortization of intangible assets. Amortization expense was $0.6 million for both ~~three-month~~ periods ~~ended June 30, 2020 and 2019~~ which was related to the amortization of the CDMO royalties and contract manufacturing relationships intangible asset over its estimated useful life.

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~~$0.4 million was primarily due to a ~~slight~~ decrease in the LIBOR base rate of interest on our term loans under the Credit Agreement with Athyrium.

Discontinued operations. In November 2019, our former Acute Care business 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.

Comparison of the ~~Six Months Ended June~~nine months ended September 30, 2020 and 2019

	Six months ended June 30,						Nine months ended September 30,
(amounts in thousands)	2020			2019
(in millions)							2020			2019
Revenue	$	37,299		$	56,322		$	56.6		$	81.6
Operating expenses:
Cost of sales (excluding amortization of intangible assets)		29,888			28,491			41.6			39.5
Selling, general and administrative		9,705			12,037			14.2			16.1
Amortization of intangible assets		1,292			1,292			1.9			1.9
Change in warrant valuation		—			779			—			0.9
Total operating expenses		40,885			42,599			57.7			58.4
Operating (loss) income from continuing operations		(3,586	)		13,723			(1.1	)		23.2
Interest expense		(10,118	)		(8,766	)		(14.7	)		(13.9	)
(Loss) income from continuing operations		(13,704	)		4,957			(15.8	)		9.3
Loss on discontinued operations		—			(9,771	)		—			(18.4	)
Net loss	$	(13,704	)	$	(4,814	)	$	(15.8	)	$	(9.1	)

Revenue. The decrease of ~~$19.0~~$25.0 million ~~in revenue~~ was primarily ~~due to decreased product sales~~the result of customer ordering patterns in the prior year and ~~royalties recognized from three~~the loss of ~~our commercial partners. The first key customer experienced lower~~Verapamil SR market share ~~compared to 2019~~by a commercial partner in the first quarter of 2020 due to the re-entry of a ~~competitor to the market but~~competitor. Our commercial partner has ~~maintained~~sustained its market ~~share~~position for Verapamil SR capsules since the end of the first quarter of 2020. The ~~second key customer saw~~COVID-19 pandemic has resulted in decreased ~~sales that reduced~~end-user demand, inventory rebalancing by our ~~royalties~~commercial partners 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 line in the first quarter of 2020. We also experienced slower than expected new business ~~project starts and overall~~starts. Higher revenues from our new business growth ~~due to~~activities has partially offset the ~~impacts of COVID-19.~~

Cost of sales. ~~Cost~~The increase of ~~sales increased $1.4~~$2.1 million ~~and~~ was not proportionate to the decrease in ~~revenues,~~revenue primarily due to lower commercial manufacturing volumes and ~~slower than anticipated new project starts (including spending reductions that included $1.0 million~~the related toimpact on fixed costs expensed through cost of sales, despite making reductions in the work force ~~associated with revised commercial volume~~ and implementing cost saving measures, as well as increased cost of development ~~revenue). Annual~~sales on higher revenues. Cost savings generated from these ~~reduction in force actions~~activities are ~~estimated~~expected to ~~be $3.4 million in fiscal year~~continue into 2021.

Selling, general and administrative. The decrease of ~~$2.3~~$1.9 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~~our new business efforts and ~~associated personnel costs focused on business development, as well as completion~~the launch of ~~readiness for~~ the CTM business.

Amortization of intangible assets. Amortization expense was ~~$1.3~~$1.9 million for both ~~six-month~~ periods, ~~ended June 30, 2020 and 2019,~~ which was related to the amortization of the CDMO royalties and contract manufacturing relationships intangible asset over its estimated useful life.

Interest expense. The increase of ~~$1.4~~$0.8 million was primarily due to additional term loan borrowings under ~~its~~the Credit Agreement with Athyrium in the first quarter of ~~2019, partially offset by a decrease in the LIBOR base rate of interest on those term loans.~~2019.

~~As of June~~At September 30, 2020, we had ~~$22.8~~$21.5 million in cash and cash equivalents.

Since our inception through ~~June~~September 30, 2020, we have financed our product development, operations and capital expenditures primarily from sales of equity and debt securities, and term loans made under our previous and existing credit facilities. During the ~~six~~nine months ended ~~June~~September 30, 2020, our capital expenditures were ~~$2.2~~$5.2 million and primarily related to equipment and facility modifications to support a new customer.

We are currently party to a $125,000 credit agreement with Athyrium Opportunities III Acquisition LP, or the Credit Agreement, which has been fully drawn. The Credit Agreement requires us to repay the outstanding principal amount in quarterly installments of $3.0 million (including exit fee) beginning on March 31, 2021 with the remaining outstanding principal balance due on March 31, 2023. Additional details about the Credit Agreement are provided in note 9 to the consolidated financial statements included in Part I, Item 1 in this Form 10-Q.

In November 2020, we entered into an amendment to the Credit Agreement, or the Fourth Amendment. Pursuant to the Fourth Amendment: (i) required quarterly repayments of $3.0 million were deferred by one year, with such repayments beginning on March 31, 2022; (ii) effective September 30, 2020, the calculation of the leverage ratio was amended to exclude qualifying cash balances and to include certain additional adjustments to earnings; (iii) effective September 30, 2020, the permitted leverage ratio was increased to 5.60:1.00 through and including the fourth quarter of 2021, after which time the leverage ratio returns to 5.00:1.00; (iv) the permitted minimum liquidity amount was decreased to $10.0 through March 31, 2021, after which the minimum liquidity amount returns to $12.0 until maturity; and (v) the exercise price of the Athyrium warrants was reduced from $6.84 to $1.73. In connection with the Fourth Amendment, we paid an amendment fee of $0.3 million and prepaid $9.1 million of principal and exit fee without penalty.

We are also party to a $3.3 million PPP Note which has a two-year term and matures on May 12, 2022. On October 6, 2020, we applied for forgiveness of the PPP Note. We expect that the full $3.3 million balance of the PPP Note will be forgiven, which would result in a $3.3 million gain on extinguishment of debt being recognized in earnings as early as the fourth quarter of 2020. However, no assurance can be given that the balance of the PPP Note will be forgiven, in part or in whole. Additional details about the PPP Note are provided in note 9 to the consolidated financial statements included in Part I, Item 1 in this Form 10-Q.

On February 19, 2019, we entered into a common stock purchase agreement, or the 2019 Purchase Agreement, with Aspire Capital, which provides that, upon the terms and subject to the conditions and limitations set forth in the 2019 Purchase Agreement, Aspire Capital is committed to purchase, at our sole election, up to an aggregate of $20 million of our shares of common stock over the approximately 30-month term of the 2019 Purchase Agreement. In August 2020, we entered into a First Amendment to the 2019 Purchase Agreement with Aspire Capital, or 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 million and extend the term of the 2019 Purchase Agreement to March 20, 2022. As of September 30, 2020, we did not have any sales of common stock under the Amended Purchase Agreement. Additional details about the Amended Purchase Agreement are provided in note 11 to the consolidated financial statements included in Part I, Item 1 in this Form 10-Q.

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 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.

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 our income or 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 changes in operating assets and liabilities.

~~Cash~~Net cash used in investing activities ~~continuing operations, was $2.2 million~~ for the ~~six months ended June 30, 2020, which~~current period related to capital expenditures to scale and support our expansion of ~~capabilities. Cash used in investing activities from continuing operations was $9.4 million~~capabilities and for the ~~six months ended June 30, 2019. The 2019 amount~~prior period reflected cash used for net purchases of short-term investments and for the purchases of property and equipment.

~~Cash~~Net cash provided by financing activities ~~continuing operations, was $2.6 million~~ for the ~~six months ended June 30, 2020, which primarily~~current period included $4.4 of 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~~Additionally, in the current period we used net cash of $0.7 million to settle stock-based awards. Net cash provided by financing activities ~~from continuing operations was~~for the prior period ~~$40.8 million, which primarily~~ included proceeds from debt of $43.6 million partially offset by deferred financing costs of $2.9 million.

Net cash used in discontinued operations for the current period was used to settle outstanding liabilities related to our Acute Care business and for the prior period was used primarily to fund the research activities of our Acute Care business.

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

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.

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

	Payments Due by Period (in 000s)										Payments due by period
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
(in millions)											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	$	—	$	—	$	129.6	$	9.5	$	120.1	$	—	$	—
Interest		30,463		13,573		16,890		—		—		30.8		13.3		17.5		—		—
Purchase obligations (2):		10,721		10,721		—		—		—		5.8		5.8		—		—		—
Operating leases (3)		799		160		314		312		13		0.8		0.2		0.3		0.3		—
Total	$	171,549	$	31,743	$	139,481	$	312	$	13	$	167.0	$	28.8	$	137.9	$	0.3	$	—

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

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~~There have been no significant changes to ~~the application of~~those critical accounting policies ~~previously disclosed in our 2019 Annual Report.~~and estimates.

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

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~~September 30, 2020. 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~~September 30, 2020, 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.

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.

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

On May 31, 2018, a securities class action lawsuit, or the Securities Litigation, was filed against ~~the Company~~us and certain of ~~its~~our 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~~us concerning the 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~~we 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~~we filed ~~its~~our 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~~We 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~~our 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~~we filed a reply in support of ~~the~~its motion to dismiss. In connection with the separation of Baudax Bio, Baudax Bio accepted assignment by ~~the Company~~us of all of ~~its~~our obligations in connection with the Securities Litigation and agreed to indemnify itus for all liabilities related to the Securities Litigation. ~~The Company~~Baudax Bio and ~~Baudax Bio~~we believe that the lawsuit is without merit and intend to vigorously defend against it.

You should carefully consider the risk factors described in our 2019 Annual Report, our Q1 Quarterly Report and our Q1Q2 Quarterly Report under the caption “Item 1A. Risk Factors.” Except as set forth below, there have been no material changes in our risk factors disclosed in our 2019 Annual Report, our Q1 Quarterly Report and our Q1Q2 Quarterly Report.

We ~~may not be entitled to forgiveness~~have incurred significant indebtedness, which could adversely affect our business.

As of September 30, 2020, we had an outstanding balance under our ~~recently received Paycheck Protection Program Loan, and our application for the Paycheck Protection Program Loan~~credit agreement with Athyrium, which was amended on November 5, 2020, of $125 million. Our indebtedness could ~~in the future be determined to~~ have ~~been impermissible or could result in damage~~important consequences to our ~~reputation.~~shareholders. For example, it:

Any 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~~above-listed factors could materially adversely affect our business, financial condition, results of operations and ~~make lease~~cash flows. Our credit agreement with Athyrium also contains certain financial and ~~utility payments. The PPP Note is evidenced by~~other covenants, including a ~~promissory note, dated as of May 12, 2020, issued by PNC Bank, which contains customary events of default relating to,~~minimum liquidity requirement and maximum leverage ratios and includes limitations on, among other things, ~~payment defaults~~additional indebtedness, paying dividends in certain circumstances, acquisitions and ~~breaches of representations and warranties.~~certain investments. 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 periodcredit agreement provides for ~~repayment established by the Small Business Administration. Certifications made~~certain mandatory prepayment events, including with respect to ~~loan amounts repaid during~~the proceeds of asset sales, extraordinary receipts, debt issuances and other specified events, based on the terms of the credit agreement with Athyrium.

In November 2020, we entered into the Fourth Amendment (as defined in Part II, Item 5 of this ~~safe harbor period are deemed~~Quarterly Report). Pursuant to the Fourth Amendment: (i) required quarterly repayments of $3.0 million were deferred by one year, with such repayments beginning on March 31, 2022; (ii) effective September 30, 2020, the calculation of the leverage ratio was amended to exclude qualifying cash balances and to include certain additional adjustments to earnings; (iii) effective September 30, 2020, the permitted leverage ratio was increased to 5.60:1.00 through and including the fourth quarter of 2021, after which time the leverage ratio returns to 5.00:1.00; (iv) the permitted minimum liquidity amount was decreased to $10.0 million through March 31, 2021, after which the minimum liquidity amount returns to $12.0 million until maturity; and (v) the exercise price of the Athyrium warrants was reduced from $6.84 to $1.73. In connection with the Fourth Amendment, we paid an amendment fee of $0.3 million and prepaid $9.1 million of principal and exit fee without penalty.

If we and Athyrium had not amended the credit agreement, we would not have been ~~made~~ in ~~good faith.~~

~~Commencing December 15, 2020, we are required~~compliance with the permitted leverage ratio covenant under the credit agreement as measured for September 30, 2020. Any failure to ~~pay regular monthly payments~~comply with the terms, covenants and conditions of the Fourth Amendment may result in an ~~amount equal~~event of default under such agreement, which could have a material adverse effect on our business, financial condition and results of operation. In addition, in the event of a future covenant non-compliance event with respect 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, alongcredit agreement with ~~accrued interest, and~~Athyrium, 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~~able to ~~repay the PPP Note on~~obtain a covenant waiver or credit agreement amendment, which may result in an ~~accelerated basis, rather than over two years provided~~event of default under the ~~PPP Note,~~credit agreement and athave a ~~higher interest rate than 1.000% per annum. If we receive an~~material adverse ~~finding in any audit related to the PPP Note, some or all~~effect on our business, financial condition and results 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.operations.

On ~~August 7,~~November 5, 2020, we entered into a ~~First~~Fourth Amendment to ~~our Common Stock Purchase~~Credit Agreement and Investment Documents by and among us, the subsidiaries named as guarantors therein, the lenders named therein and Athyrium, in its capacity as the administrative agent (the “Fourth Amendment”). The Fourth Amendment modified the Credit Agreement.

Pursuant to the Fourth Amendment: (i) required quarterly repayments of $3.0 million were deferred by one year, with ~~Aspire Capital Fund, LLC, or Aspire Capital, originally dated February 19, 2019, (as~~such repayments beginning on March 31, 2022; (ii) effective September 30, 2020, the calculation of the leverage ratio was amended to exclude qualifying cash balances and to include certain additional adjustments to earnings; (iii) the ~~“Amended Purchase Agreement”) pursuant~~permitted leverage ratio was increased to 5.60:1.00 through and including the fourth quarter of 2021, after which ~~we have~~ the ~~right~~leverage ratio returns to ~~sell~~5.00:1.00; (iv) the permitted minimum liquidity amount was decreased to ~~Aspire Capital Fund, LLC, or Aspire Capital,~~$10.0 million through March 31, 2021, after which the minimum liquidity amount returns to $12.0 million until maturity; and (v) the exercise price of the 348,664 warrants issued to Athyrium on November 17, 2017 was reduced from ~~time~~$6.84 to ~~time~~$1.73.

The Fourth Amendment also modified the Credit Amendment’s definition of “Consolidated CDMO EBITDA” to add-back the following to “Consolidated CDMO Net Income”: (i) to the extent permanently and irrevocably forgiven, an amount not to exceed $3.32 million consisting of the principal amount of the loan the Company obtained under the federal Paycheck Protection Program provided in ~~our sole discretion up~~Section 7(a) of the Small Business Act of 1953, as amended by the Coronavirus Aid, Relief, and Economic Security Act; and (ii) fees, costs and expenses incurred in connection with the Investment Documents in an amount not to ~~$30.0~~exceed $0.5 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:consecutive four fiscal quarter period.

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.

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~~connection 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.

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~~Fourth Amendment, we made the following payments to ~~issue any shares~~Athyrium: (i) an amendment fee of ~~common stock under the Amended Purchase Agreement if such issuance would breach our obligations under the rules or regulations~~$0.3 million, (ii) a prepayment of $9.1 million of the ~~Nasdaq Capital Market.~~

~~The Amended Purchase Agreement may be terminated by us at any time, at our discretion,~~principal and exit fee without ~~any cost to us. Aspire Capital has agreed that neither it nor any~~penalty and (iii) certain other fees and expenses, including the fees and expenses 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.Athyrium’s legal counsel.

The foregoing description of the ~~Amended Purchase Agreement~~Fourth Amendment does not purport to be complete and is qualified in its entirety by ~~reference to~~ the ~~full text~~terms and conditions of the ~~Amended Purchase Agreement,~~Fourth Amendment, 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~~10.2 to this ~~Annual~~Quarterly Report and incorporated herein by reference.

On November 5, 2020, Recro Gainesville LLC (“Recro Gainesville”), our wholly-owned subsidiary and successor to Alkermes Pharma Ireland Limited (“Alkermes”) entered into Amendment No. 2 to License and Supply Agreement by and among Recro Gainesville, Lannett Company, Inc. (“Lannett”) and Kremers Urban Pharmaceuticals, Inc. (“Kremers Urban”), a wholly-owned subsidiary of Lannett (the “Lannett Amendment”). The Lannett Amendment amends the License and Supply Agreement by and between Alkermes and Kremers Urban, dated January 1, 2014, as amended (the “Original Lannett License,” and together with the Lannett Amendment, the “Lannett License”). Pursuant to the Lannett Amendment, Lannett assumed all of the rights and obligations of Kremers Urban under the Lannett License.

Pursuant to the Lannett Amendment (i) within 30 days of November 5, 2020, Lannett is required to make a one-time $1.86 million payment to Recro Gainesville; (ii) beginning on ~~Form 10-Q.~~January 1, 2022 and continuing yearly for the duration of the Lannett License, Lannett will pay Recro Gainesville an annual license fee of $0.5 million; and (iii) Lannett will be required to reimburse Recro for 50% of its Drug User Fee Act program fees for eligible products under the Lannett License beginning in 2021.

~~In connection with entering into~~The Lannett License terminates on December 31, 2024, unless earlier terminated pursuant to the ~~Amended Purchase Agreement, we terminated our~~terms thereof, or renewed by the mutual agreement of the parties to thereto.

The Lannett Amendment also modified the Lannett License’s termination provisions to eliminate the right by either party to terminate the Lannett License if net sales ~~agreement, dated December 29, 2017, with Cowen~~failed to meet a certain threshold for a 12-month period.

The foregoing description of the Lannett Amendment does not purport to be complete and ~~Company, LLC, effective August 11, 2020.~~is qualified in its entirety by the terms and conditions of the Lannett Amendment, which is filed as Exhibit 10.3 to this Quarterly Report and incorporated herein by reference.

Exhibit No.	Description	Method of Filing

~~5.1~~	~~Opinion of Troutman Pepper Hamilton Sanders LLP~~	~~Filed herewith.~~

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.~~Incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 10, 2020.

~~23.1~~10.2	~~Consent~~Fourth Amendment to Credit Agreement and Investment Documents, dated as of ~~Troutman Pepper Hamilton Sanders LLP (included in Exhibit 5.1)~~November 5, 2020, by and between Recro Pharma, Inc. and Athyrium Opportunities III Acquisition LP.	Filed ~~herewith.~~herewith

10.3	Amendment No. 2 to License and Supply Agreement, dated as of November 5, 2020 by and among Recro Gainesville LLC, Kremers Urban Pharmaceuticals, Inc. and Lannett Company, Inc.	Filed herewith

31.1	Rule 13a-14(a)/15d-14(a) certification of Principal Executive Officer.	Filed herewith.

31.2	Rule 13a-14(a)/15d-14(a) certification of Principal Financial and Accounting Officer.	Filed herewith.

32.1	Section 1350 certification, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	Filed herewith.

101 SCH	Inline XBRL Taxonomy Extension Schema	Filed herewith.

101 CAL	Inline XBRL Taxonomy Extension Calculation Linkbase	Filed herewith.

101 DEF	Inline XBRL Taxonomy Extension Definition Linkbase	Filed herewith.

101 LAB	Inline XBRL Taxonomy Extension Label Linkbase	Filed herewith.

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.

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.

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

490 Lapp Road, Malvern, Pennsylvania	19355
(Address of principal executive offices)	(Zip Code)

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

			Page

PART I. FINANCIAL INFORMATION			3

	Item 1.	Consolidated Financial Statements (Unaudited)	3

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2423

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3332

	Item 4.	Controls and Procedures	3433

PART II. OTHER INFORMATION			3534

	Item 1.	Legal Proceedings	3534

	Item 1A.	Risk Factors	3534

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3635

	Item 3.	Defaults Upon Senior Securities	3635

	Item 4.	Mine Safety Disclosures	3635

	Item 5.	Other Information	3635

	Item 6.	Exhibits	3736

SIGNATURES			3938

	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	$	—	$	—

	Term loans under Credit Agreement			PPP Note			Total
Principal balance outstanding	$	125,000		$	3,316		$	128,316
Unamortized deferred issuance costs		(11,098	)		—			(11,098	)
Exit fee accretion		639			—			639
Total debt		114,541			3,316			117,857
Current portion of debt		(9,090	)		(368	)		(9,458	)
Debt, net	$	105,451		$	2,948		$	108,399

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

	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

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

	Nine months ended September 30,
(amounts in millions)	2020			2019
Net cash provided by (used in) continuing operations:
Operating activities	$	6.4		$	14.2
Investing activities		(5.5	)		(7.9	)
Financing activities		2.6			42.2
Net cash provided by continuing operations	$	3.5		$	48.5

Net cash used in discontinued operations	$	(1.2	)	$	(49.1	)

	RECRO PHARMA, INC.

Date: ~~August 10,~~November 9, 2020	By:	/s/ Gerri A. Henwood
		Gerri A. Henwood
		President and Chief Executive Officer
		(Principal Executive Officer)



Date: ~~August 10,~~November 9, 2020	By:	/s/ Ryan D. Lake
		Ryan D. Lake
		Chief Financial Officer
		(Principal Financial and Accounting Officer)