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

☐ Transition report pursuant to Section 13 or ~~15(d)~~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)~~Section 13(a) of the Exchange Act. ☐

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

As of ~~November~~August 2, ~~2020,~~2021, there were ~~23,644,631~~46,515,916 shares of common stock, par value $0.01 per share, outstanding.

Recro Pharma, Inc. (the “Company”) was incorporated in the Commonwealth of Pennsylvania on November 15, ~~2007.~~2007. The Company is a ~~leading~~dedicated contract development and manufacturing organization (“CDMO”) ~~with integrated solutions~~solving complex formulation and manufacturing challenges for ~~formulation, analytical services, regulatory support, manufacturing, and packaging of both commercial and development stage~~companies developing 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 ~~$222,714~~$239,911 as of ~~September~~June 30, ~~2020,~~2021, which is ~~mostly~~primarily related to the activities ~~that are presented as discontinued operations as a result~~ of ~~the spin-off of Baudax Bio.~~its former research and development business, which was spun-out in 2019. 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 at least one year after the date the financial statements are issued.

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, plant 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. The Company reviews the carrying value of property, plant and equipment for recoverability whenever events occur or changes in circumstances indicate that the carrying amount of individual assets or asset groups may not be recoverable.

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~~analysis for goodwill consists of an optional qualitative assessment potentially followed by a ~~one-step method for determining impairment.~~

~~The one-step~~ quantitative ~~test calculates~~analysis. If 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. The Company ~~is required to review~~determines that the carrying value of ~~definite-lived intangible assets~~its reporting unit exceeds its fair value, an impairment charge is recorded for ~~recoverability whenever events occur or changes in circumstances indicate that~~ the ~~carrying amount of an asset or asset group may not be recoverable.~~excess.

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

Definite-lived intangible assets are amortized on a straight-line basis over their estimated useful life. The Company ~~performed its last annual impairment test as~~is required to review the carrying value of ~~November 30, 2019.~~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.

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 43 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 43 largest customers having generated ~~90%~~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~~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~~distribution: 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 ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

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 (the denominator).

To calculate diluted income or loss per ~~common~~ share, the numerator and denominator 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.

For the three months ended June 30, 2021, there was no difference in the net income used to calculate basic and diluted per share results. The following table reconciles the difference in weighted average shares outstanding used for basic and diluted per share results:

For the six months ended June 30, 2021 and for both of the 2020 periods presented, ~~only~~ the ~~denominators~~Company incurred a net loss. In periods of net loss, the ~~2019 basic~~inclusion of dilutive securities would be antidilutive because it would reduce the amount of loss incurred per share. As a result, no additional dilutive shares were included in diluted loss per share, ~~results~~and there were ~~adjusted for the dilutive effects described above.~~ no differences between basic and diluted loss per share.

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

~~In August 2018,~~On January 1, 2020, the ~~FASB issued~~Company adopted 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~~There was no impact upon adoption because the Company is not currently required to provide any of the disclosures ~~related to transfers and~~impacted by 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. new standard.

On January 1, ~~2020,~~2021, 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~~new standard for measuring expected credit ~~losses and requires consideration~~losses. That guidance impacts the measurement of ~~a range of reasonable information~~doubtful accounts receivable, among other things. There was no impact upon adoption because the Company does not currently have any significant exposure to ~~estimate~~ credit ~~losses on certain types~~losses.

In the first six months of 2021, $65 of interest expense was capitalized to construction in process.

These assets were amortized over a six-year estimated useful life that ended in April 2021.

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

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

The Company is currently party to a $125,000 credit agreement (the “Credit Agreement”) with Athyrium Opportunities III Acquisition LP (“Athyrium”), which has been fully drawn. The Credit Agreement requires the Company to repay the outstanding principal amount in quarterly installments of $3,030 (including the exit fee discussed below) beginning on March 31, 2021 with the outstanding principal balance plus the exit fee due on March 31, 2023. See note 16 for subsequent event disclosure.

The term loans under the Credit Agreement bear interest at a rate equal to the three-month LIBOR rate, with a 1% floor plus 9.75% per annum. 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 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 September 30, 2020, the Company was in compliance with the 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 $6.84 per share at September 30, 2020. See note 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 deferred issuance costs totaling $19,275, which along with the fair value of warrants, are being amortized using the effective interest method over the term of the Credit Agreement. Debt issuance cost amortization is included in interest expense within the Consolidated Statements of Operations. As of September 30, 2020, the effective interest rate was 14.83%, which takes into consideration the non-cash accretion of the exit fee and the amortization of the deferred issuance costs.

The Company recorded debt issuance cost amortization related to the Credit Agreement of $1,235 and $1,384 for the three months ended September 30, 2020 and 2019, respectively, and $4,002 and $3,746 for the nine months ended 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. 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 would commence on the earlier of September 15, 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 principal 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 of an application for forgiveness, which the Company submitted on October 6, 2020. SBA and PNC Bank must provide the 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 (collectively, the "Defendants") in the U.S. District Court for the Eastern District of Pennsylvania (the "Court") (Case No. 2:18-cv-02279-MMB) that purported to state a claim for alleged violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10(b)(5) promulgated thereunder, based on statements made by the Company concerning the New Drug Application (“NDA”) for IV meloxicam. The complaint seeks unspecified damages, interest, attorneys’ fees and other costs. On December 10, 2018, the lead plaintiff filed an amended complaint that asserted the same claims and sought the same relief but included new allegations and named additional officers as defendants. On February 8, 2019, the Company filed a motion to dismiss the amended complaint in its entirety, which the lead plaintiff opposed on April 9, 2019. On May 9, 2019, the Company filed its response and briefing was completed on the motion to dismiss. In response to questions from the ~~Judge,~~Court, the parties submitted supplemental briefs ~~with regard to~~regarding the motion to dismiss the amended complaint during the fall of 2019. On February 18, 2020, the motion to dismiss was granted by the Court without prejudice. On April 25, 2020, the plaintiff filed a second amended complaint. The Company filed a motion to dismiss the second amended complaint on June 18, 2020. The plaintiff filed an opposition to the Company’s motion to dismiss on August 17, 2020. On September 16, 2020, the Company filed a reply in support of its motion to dismiss. On March 1, 2021, the Court denied the Company’s second motion to dismiss. On June 21, 2021, the Defendants filed an answer and affirmative defenses to the second amended complaint. The parties are in the beginning stages of discovery. A Preliminary Pretrial Conference before the Court occurred on August 3, 2021.

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

As of ~~September~~June 30, ~~2020,~~2021, the Company had outstanding cancelable and non-cancelable purchase commitments in the aggregate amount of ~~$5,801~~ $5,512related to inventory, capital expenditures ~~the transition services agreement (see note 14)~~ and other goods and services.

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

(10)Shareholders’ equity or deficit

Capital raises

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

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


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

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

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

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

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

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

~~On December 29, 2017, the Company entered into a sales~~purchase agreement (the “Sales Agreement”) with Cowen and Company, LLC (“Cowen”) pursuant to which the Company 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. The Company sold no shares of common stock under the Sales Agreement, which terminated on August 11, 2020.

~~(b)~~

~~Aspire Common Stock Purchase Agreements~~

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

OnAthyrium stock issuance agreement

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

Warrants

At June 30, 2021, warrants to purchase ~~at the Company’s sole election, up to an aggregate of $20,000 of its~~348,664 shares of common stock over the approximately 30-month term of the 2019 Purchase Agreement. On the execution of the 2019 Purchase Agreement, the Company agreed to issue 34,762 shares of common stock to Aspire Capital as consideration for entering into the 2019 Purchase Agreement. On August 7, 2020, the Company entered into a First Amendment to the 2019 Purchase Agreement with Aspire Capital (the “Amended Purchase Agreement”) which amended the 2019 Purchase Agreement to, among other things, increase the aggregate amount of shares of common stock Aspire is committed to purchase to $30,000 and extend the term of the 2019 Purchase Agreement to March 20, 2022. As of September 30, 2020, the Company did 0t have any sales of common stock under the Amended Purchase Agreement.

~~(c)~~

~~Preferred Stock~~

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

~~(d)~~

~~Warrants~~

~~At September 30, 2020, 348,664 warrants were outstanding to purchase shares of the Company’s common stock.~~ The warrants are held by Athyrium, equity-classified, exercisable at ~~$6.84~~$1.73 per share and expire in November ~~2024. In connection with an amendment to the Credit Agreement in November 2020 (see~~2024. See note ~~16), the exercise price of the warrants was reduced to $1.73.~~

~~During March 2019, the warrant to purchase 140,000 shares originally issued to Aegis Capital Corporation, which was equity-classified, was forfeited upon expiration.~~

In November 2019, the warrant to purchase 350,000 shares issued to Alkermes 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.

~~(12)~~9 for additional details.

~~Stock-Based Compensation~~

In October 2013, the Company established the 2013 Equity Incentive Plan (the “2013 Plan”), which allows for the grant of stock options, stock appreciation rights and stock awards for a total of 600,000 shares of common stock. In June 2015, the Company’s shareholders approved the Amended and Restated Equity Incentive Plan (the “2015 A&R Plan”), which amended and restated the 2013 Plan and increased the aggregate amount of shares available for issuance to 2,000,000. In May 2018, the Company’s shareholders approved the 2018 Amended and Restated Equity Incentive Plan (the “A&R Plan”), which amended and restated the 2015 A&R Plan to increase the aggregate amount of shares available for issuance to 8,119,709. At September 30, 2020, the total number of shares authorized under the A&R Plan was 9,281,402, of which 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~~13

(11)Revenue recognition

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

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

Nine months ended September 30,

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

Expected volatility
75 - 81%

79 - 82%

Risk-free interest rate
0.3 - 1.4%

1.6 - 2.7%

Expected dividend yield

—

—

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

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

Number of shares

Weighted average exercise price

Aggregate intrinsic value

Weighted average remaining contractual life
Balance, December 31, 2019

3,695,649

$
7.97

Granted

347,750

12.34

Exercised

(178,747
)

4.52

Forfeited or expired

(166,530
)

8.52

Balance, September 30, 2020

3,698,122

8.52

$
—

6.6 years
Exercisable

2,545,003

8.14

—

5.8 years

Included in the table above are 438,000 options outstanding as of 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~~

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 nine months ended September 30, 2020 and 2019 was $15.11 and $8.12, respectively. The fair value of RSUs vested during the nine months ended September 30, 2020 and 2019 was $3,246 and $4,142, respectively.

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

Number of shares

Weighted average grant date fair value

Balance, December 31, 2019

1,197,502

$
10.92

Granted

274,775

15.11

Vested

(249,057
)

9.18

Forfeited

(318,466
)

8.96

Balance, September 30, 2020

904,754

13.36

Included in the table above are 9,625 time-based RSUs outstanding as of 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).

~~Other information~~

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

For the nine months ended September 30, 2020, stock-based compensation expense 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 nine months ended September 30, 2019, additional stock-based compensation expense of $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 the Company’s financial statements.

As of September 30, 2020, there was $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 September 30, 2020, there was $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.

~~(13)~~

~~Revenue Recognition~~

Contract assets represent revenue recognized for performance obligations completed before an unconditional right to payment exists, and therefore invoicing or associated reporting from the customer regarding the computation of the net product sales has not yet occurred. 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 contract assets and liabilities:


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

Contract assets

Contract liabilities

Balance at beginning of period
$
8,851

$
337

Changes to the beginning balance of contract assets arising from:

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

(13,193
)

—

Changes in estimate

4,540

—

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

9,530

—

Changes to contract liabilities:

Cash received in advance of contract performance

—

3,606

Revenue recognized

—

(2,601
)
Balance at end of period
$
9,728

$
1,342

The following table disaggregates revenue by timing of revenue recognition:

Three months ended September 30,

Nine months ended September 30,

2020

2019

2020

2019

Point in time
$
17,827

$
24,200

$
53,247

$
79,581

Over time

1,460

1,055

3,339

1,995

Total
$
19,287

$
25,255

$
56,586

$
81,576


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

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

(12)Stock-based compensation

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

Stock options

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

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


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

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

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


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

Included in the table above are 761,848 options outstanding as of June 30, 2021 that were granted outside the A&R Plan. The grants were made pursuant to the NASDAQ inducement grant exception in accordance with NASDAQ Listing Rule 5635(c)(4).

Restricted stock units

Restricted stock units (“RSUs”) vest over six months to four years depending on the purpose of the award. The fair value of RSUs on the date of grant is measured as the closing price of the Company's common stock on that date. The weighted average grant-date fair value of RSUs awarded to employees was $3.49 in the first half of 2021 and $15.11 in the first half of 2020. The fair value of RSUs vested was $1,537 in the first half of 2021 and $3,227 in the first half of 2020.

The following table presents information about recent RSU activity:


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

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

Other information

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


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

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

(13)Leases

~~(14)~~

~~Leases~~

The Company determines if an arrangement is a lease at inception. The arrangement is a lease if it conveys the right to the Company to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. Options to extend the lease are included in the lease term if the options are reasonably certain to be exercised. Operating lease expense is recognized on a straight-line basis over the lease term. ~~Operating~~

The following table presents the operating lease ~~assets, current liabilities and noncurrent liabilities are classified as other assets, other current liabilities and other liabilities, respectively,~~amounts recognized on the consolidated balance ~~sheet.~~sheets:


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

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

Undiscounted future lease payments for the development lease, which was the only material noncancelable lease at ~~September 30, 2020,~~March 31, 2021, were as follows:

September 30, 2020

Remainder of 2020
$
39

2021

156

2022

156

2023

156

2024

156

2025 and thereafter

91

Total lease payments

754

Less imputed interest

(224
)
Total operating lease liabilities
$
530


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

At ~~September~~June 30, ~~2020,~~2021, the weighted average remaining lease term was ~~4.7~~4.0 years, and the weighted average discount rate was ~~16%~~16%.

~~Operating~~ For the second quarter, total lease cost ~~for~~was $85 in 2021 and $80 in 2020. For the ~~three~~first six months ended ~~September~~June 30, ~~2020 and 2019 was $76 and $80, respectively. Operating~~total lease cost ~~for the nine months ended September 30, 2020~~was $186 in 2021 and ~~2019 was $234 and $240, respectively.~~

$158~~(15)~~

~~Related Party Transactions~~

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 nine months ended September 30, 2020, the Company recorded expense of $516 and $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 $39 and a net payable of $273 for such activities and other activity with Baudax Bio as of September 30, 2020 and December 31, 2019, respectively.2020.

~~(16)~~

~~Subsequent Events~~

In November 2020, the Company amended the Credit Agreement (see note 9). Pursuant to 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 leverage ratio was amended to exclude qualifying cash balances from indebtedness 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 $10,000 through March 31, 2021, after which the minimum liquidity amount returns to $12,000 until maturity; and (v) the exercise price of the Athyrium warrants was reduced from $6.84 to $1.73. In connection with the amendment, the Company paid an amendment fee of $260 and prepaid $9,090 of principal and exit fee without penalty.

Item 2.Management’s ~~Discussion~~discussion and ~~Analysis~~analysis of ~~Financial Condition~~financial condition and ~~Results~~results of ~~Operations~~operations

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

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

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

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

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

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

•

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



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

•

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



•

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



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

•



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



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



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



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



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



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



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

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

•

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

•

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

•

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

•

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

•

~~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, 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 our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the Annual Report, particularly under “Risk Factors,” that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, collaborations or investments we may make. You should read this Quarterly Report and the documents that we incorporate by reference herein completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements.

~~Overview~~17

Overview

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

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

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

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

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

In the second quarter of 2020, we launched a new clinical trials materials , or CTM, and logistics business. Our capabilities include on-demand services for innovative trial design and direct-to-patient supply 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 and packaging services. We also made additional capital improvements to support a new tech transfer project for a commercial product and 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.

~~COVID-19~~

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

Operations. We ~~have instituted~~are continuing to follow appropriate safety protocols ~~to have appropriate personnel work remotely and have implemented~~including strict social distancing and other protective measures for ~~those~~ employees ~~continuing to support~~supporting essential operations at our 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 commercial manufacturing volumes, and the related impact on fixed costs expensed through cost of sales, despite making reductions in the work force and implementing cost saving measures. Thereplant. We are also ~~some incremental expenses associated with safe practices~~supporting continued remote work arrangements for ~~our organization due~~other personnel not required to ~~COVID-19.~~work on site.

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

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

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

Financial ~~Overview~~

~~Recent Developments~~

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

•overview

Third party data has shown a decrease in prescriptions filled during COVID-19 for the first nine months of 2020 for a number of the commercial products we manufacture for our customers. We continue to see the COVID-19 pandemic resulting in lower end-user demand for our manufacturing services and inventory rebalancing by our commercial partners with respect to these products, especially since the duration of the COVID-19 pandemic and its impacts are not predictable at this time.

•

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

•

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

•

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

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

Revenues

~~During the periods presented, we recognized revenues from~~We recognize three ~~revenue streams:~~types of revenue: manufacturing, ~~revenue, royalty revenue~~profit-sharing and ~~development revenue.~~research and development.

Manufacturing ~~Revenue~~

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

~~Royalty Revenue~~Profit-sharing

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

Research and ~~Development Revenue~~development

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

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

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

~~Selling, General and Administrative Expenses~~

Cost of sales and selling, general and administrative expenses

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

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

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

Amortization of ~~Intangible Assets~~intangible assets

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

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

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

~~Interest Expense~~

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

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

~~Net Operating Losses and Tax Carryforwards~~

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

Results of ~~Operations~~operations

Comparison of ~~the three months ended September 30,~~second quarters 2021 and 2020 ~~and 2019~~

Three months ended September 30,

(in millions)
2020

2019

Revenue
$
19.3

$
25.3

Operating expenses:

Cost of sales (excluding amortization of intangible assets)

11.7

11.0

Selling, general and administrative

4.5

4.1

Amortization of intangible assets

0.6

0.6

Change in warrant valuation

—

0.2

Total operating expenses

16.8

15.9

Operating income from continuing operations

2.5

9.4

Interest expense

(4.6
)

(5.0
)
(Loss) income from continuing operations

(2.1
)

4.4

Loss on discontinued operations

—

(8.7
)
Net loss
$
(2.1
)

$
(4.3
)


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

Revenue. The ~~decrease~~increase of ~~$6.0~~$2.5 million was primarily the result of ~~customer ordering patterns in the prior year and the loss~~increased product sales from one of Verapamil SR market share by a commercial partner in the first quarter of 2020 due to the re-entry of a competitor (Mylan). Our commercial partner has sustained its market position for Verapamil SR capsules since the end of the first quarter of 2020. The COVID-19 pandemic has resulted in decreased end-user demand, inventory rebalancing by our commercial partners ~~and slower than expected new business starts. Higher~~as well as higher revenues from our ~~new~~clinical trial materials business ~~growth activities has partially offset the decrease,~~ including revenue from a ~~significant~~ new commercial product tech transfer project. These increases were partially offset by decreases in product sales due to the discontinuation of two commercial product lines by our commercial partners.

Cost of sales. The increase of $0.7 million was ~~not proportionate to the decrease in revenue~~ primarily due to ~~lower~~higher commercial manufacturing volumes and ~~the related impact on fixed~~is partially offset by lower costs ~~expensed through cost of sales, despite making reductions~~due to certain employment incentive tax credits in ~~the work force and implementing cost saving measures.~~2021.

Selling, general and administrative. The ~~increase~~decrease of ~~$0.4~~$0.5 million was primarily related to ~~our new business efforts~~lower public company costs and ~~the launch of the CTM business~~.stock based compensation expense.

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

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

Interest expense. The decrease of ~~$0.4~~$1.0 million was primarily due to reduced term loan borrowings under the Credit Agreement with Athyrium as well as a decrease in the LIBOR base rate of interest on our term loans under the Credit ~~Agreement with Athyrium.~~Agreement.

~~Discontinued operations.~~20

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

Comparison of ~~the nine~~first six months ~~ended September 30,~~2021 and 2020 ~~and 2019~~

Nine months ended September 30,

(in millions)
2020

2019

Revenue
$
56.6

$
81.6

Operating expenses:

Cost of sales (excluding amortization of intangible assets)

41.6

39.5

Selling, general and administrative

14.2

16.1

Amortization of intangible assets

1.9

1.9

Change in warrant valuation

—

0.9

Total operating expenses

57.7

58.4

Operating (loss) income from continuing operations

(1.1
)

23.2

Interest expense

(14.7
)

(13.9
)
(Loss) income from continuing operations

(15.8
)

9.3

Loss on discontinued operations

—

(18.4
)
Net loss
$
(15.8
)

$
(9.1
)


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

Revenue. The decrease of ~~$25.0~~$2.5 million was primarily the result of ~~customer ordering patterns in~~ the ~~prior year and the loss~~discontinuation of ~~Verapamil SR market share~~two commercial product lines by aour commercial ~~partner~~partners announced in the first quarter of ~~2020 due to~~2020. During the ~~re-entry~~2021 period, increased product sales from two of a competitor. Our commercial partner has sustained its market position for Verapamil SR capsules since the end of the first quarter of 2020. The COVID-19 pandemic has resulted in decreased end-user demand, inventory rebalancing by our commercial partners, ~~and slower than expected new business starts. Higher~~as well as higher revenues from our clinical trial materials new business growth activities, ~~has~~have partially offset the ~~decrease, including a significant new commercial product tech transfer project.~~ decrease.

Cost of sales. The ~~increase~~decrease of ~~$2.1~~$3.2 million was ~~not proportionate to the decrease in revenue~~ primarily due to lower commercial manufacturing volumes and reflects lower costs due to the ~~related impact on fixed costs expensed through cost of sales, despite making reductions~~prior year reduction in ~~the work~~ force ~~and implementing cost saving measures,~~ as well as ~~increased cost of development sales on higher revenues. Cost savings generated from these activities are expected to continue into~~certain employment incentive tax credits in 2021.

Selling, general and administrative. The decrease of ~~$1.9~~$1.2 million was primarily related to lower public company costs ~~which were partially offset by our new business efforts~~ and ~~the launch of the CTM business.~~stock based compensation expense.

Amortization of intangible assets. ~~Amortization expense~~The decrease of $0.5 million was ~~$1.9 million for both periods, which was related to~~because the amortization of ~~the~~ CDMO royalties and contract manufacturing relationships ~~intangible asset over its estimated useful life.~~acquired in 2015 ended on April 10, 2021.

Interest expense. The ~~increase~~decrease of ~~$0.8~~$2.3 million was primarily due to ~~additional~~reduced term loan borrowings under the Credit Agreement with Athyrium as well as a decrease in the ~~first quarter~~LIBOR base rate of ~~2019.~~interest on our term loans under the Credit Agreement.

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

Liquidity and ~~Capital Resources~~capital resources

At ~~September~~June 30, ~~2020,~~2021, we had ~~$21.5~~$45.7 million in cash and cash equivalents.

Since our inception, ~~through September 30, 2020,~~ we have financed our ~~product development,~~ operations and capital expenditures primarily from ~~sales~~the issuance of equity and ~~debt securities, and term loans made under our previous and existing credit facilities.~~debt. During the ~~nine months ended September 30, 2020,~~first half of 2021, our capital expenditures were ~~$5.2~~$2.1 million to scale and ~~primarily related to equipment and facility modifications to~~ support ~~a new customer.~~our expansion of capabilities.

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~~$100.0 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 also includes certain financial covenants that the Company will need to satisfy on a monthly and quarterly basis, including: 1) maintaining a permitted net leverage ratio, calculated as our indebtedness, net of cash and cash equivalents, divided by EBITDA, each as defined in the Credit ~~Agreement are provided in note 9 to the consolidated financial statements included in Part I, Item 1 in this Form 10-Q.~~Agreement; and 2) a minimum amount of cash and cash equivalents on hand.

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~~an amended common stock purchase agreement ~~or the 2019 Purchase Agreement,~~ with Aspire Capital ~~which~~Fund LLC, or Aspire Capital. The amended agreement provides that, upon the terms and subject to the conditions and limitations set forth in the ~~2019 Purchase Agreement,~~agreement, Aspire Capital is committed to purchase, at our sole election, up to an aggregate value of ~~$20~~$41.2 million ~~of our~~in 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.stock. As of ~~September~~June 30, ~~2020, we did not have any sales~~2021, there is availability to issue up to $30.0 million or 6,199,299 shares of common stock under the ~~Amended~~2019 Common Stock 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 to access to capital.

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


	Nine months ended September 30,						Six months ended June 30,
(amounts in millions)	2020			2019			2021			2020
Net cash provided by (used in) continuing operations:
Operating activities	$	6.4		$	14.2		$	2.7		$	4.4
Investing activities		(5.5	)		(7.9	)		(2.1	)		(2.2	)
Financing activities		2.6			42.2			21.3			2.6
Net cash provided by continuing operations	$	3.5		$	48.5		$	21.9		$	4.8

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

~~Continuing operations~~

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

Net cash used in investing activities ~~for the current period related~~relates to capital expenditures to scale and support our expansion of ~~capabilities and for the prior period reflected cash used for net purchases of short-term investments and for the purchases of property and equipment.~~capabilities.

Net cash provided by financing activities ~~for~~in the ~~current period~~first half of 2021 primarily included ~~$4.4 of~~net proceeds from a PPP Note offset by a $1.1 million repayment, which was within the safe harbor time period for repayment established by the Small Business Administration. Certifications made with respect to loan amounts repaid during this safe harbor period are deemed to have been made in good faith. Additionally, in the current period we used net cashan issuance of ~~$0.7 million to settle stock-based awards. Net cash provided by financing activities for the prior period~~ ~~included proceeds from debt~~common stock of ~~$43.6~~$32.1 million, partially offset by ~~deferred financing costs~~debt repayments of ~~$2.9~~$10.1 million made in connection with an amendment to our credit facility..

~~Discontinued operations~~

Net cash used in discontinued operations ~~for the current period~~during 2020 was ~~used~~ to settle outstanding liabilities related to our ~~Acute Care business~~former acute care research and ~~for the prior period was used primarily to fund the research activities of our Acute Care~~development business.

Forward-looking factors

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



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



the timing and extent of our manufacturing and capital expenditures;



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



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



our ability to regain profitability;



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



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



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



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

•

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

•

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

•

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

•

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

•

~~our ability to regain profitability;~~

•

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

•

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

•

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

•

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

Contractual ~~Commitments~~commitments

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


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

Payments due by period

(in millions)
Total

Less than
1 year

1-3 years

3-5 years

More than
5 years

Debt obligations (1):

Principal
$
129.6

$
9.5

$
120.1

$
—

$
—

Interest

30.8

13.3

17.5

—

—

Purchase obligations (2):

5.8

5.8

—

—

—

Operating leases (3)

0.8

0.2

0.3

0.3

—

Total
$
167.0

$
28.8

$
137.9

$
0.3

$
—

(1)

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

(2)

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

(3)

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

(4)

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

Off-balance sheet arrangements

~~(1)~~

Debt obligations consist of principal, an exit fee of 1% of that principal, and interest on $125.0 million of outstanding term loans under our credit facility with Athyrium in addition to principal and interest on $3.3 of outstanding borrowings under the PPP Note. Because the Athyrium term loans bear interest at a variable rate based on LIBOR, we estimated future interest commitments utilizing the LIBOR rate as of September 30, 2020. In accordance with U.S. GAAP, the future interest obligations are not recorded on our Consolidated Balance Sheet. See note 9 to the consolidated financial statements included in Part I, Item 1 in this Form 10-Q.

~~(2)~~

Purchase obligations consist of cancelable and non-cancelable purchase commitments related to inventory, capital expenditures, the transition services agreement costs and other goods or services. In accordance with U.S. GAAP, these obligations are not recorded on our consolidated balance sheets. See note 10 to the Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q.

~~(3)~~

We are party to certain operating leases, including a seven-year operating lease for a development facility in Georgia that ends in 2025. See note 14 to the consolidated financial statements included in Part I, Item 1 in this Form 10-Q.

~~Off-Balance Sheet Arrangements~~

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

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

Our critical accounting policies and estimates are disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our ~~2019~~ Annual Report. ~~There have been no~~ ~~significant changes to those critical accounting policies and estimates.~~

Item 3. Quantitative and ~~Qualitative Disclosures About Market Risk~~qualitative disclosures about market risk

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

Item 4. Controls and ~~Procedures~~procedures

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

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

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

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

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

PART II.OTHER INFORMATION

Item 1. Legal ~~Proceedings.~~proceedings.

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

We are ~~involved, from time to time,~~also engaged in various ~~claims and~~other legal ~~proceedings~~actions arising in the ordinary course of ~~its business. Except~~our business (such as, ~~disclosed below,~~for example, proceedings relating to employment matters or the initiation or defense of proceedings relating to intellectual property rights) and, while there can be no assurance, we ~~are~~believe that the ultimate outcome of these other legal actions will not ~~currently a party to any such claims or proceedings that, if decided adversely to it, would either individually or in the aggregate~~ have a material adverse effect on ~~its~~our business, results of operations, financial condition or ~~results of operations.~~cash flows.

On May 31, 2018, a securities class action lawsuit, or the Securities Litigation, was filed against us and certain of 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 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, 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, we filed 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. We filed a motion to dismiss the second amended complaint on June 18, 2020. The plaintiff filed an opposition to our motion to dismiss on August 17, 2020. On September 16, 2020, we filed a reply in support of its motion to dismiss. In connection with the separation of Baudax Bio, Baudax Bio accepted assignment by us of all of our obligations in connection with the Securities Litigation and agreed to indemnify us for all liabilities related to the Securities Litigation. Baudax Bio and we believe that the lawsuit is without merit and intend to vigorously defend against it.

Item 1A.Risk ~~Factors.~~factors.

You should carefully consider the risk factors described in our 2019 Annual Report, our Q1 Quarterly Report and our Q2 Quarterly Report under the caption “Item 1A. Risk Factors.” Except as set forth below, thereThere have been no material changes infrom our risk factors ~~disclosed~~as previously reported in our ~~2019~~ Annual ~~Report, our Q1 Quarterly Report and our Q2 Quarterly~~ Report.

~~We have incurred significant indebtedness, which could adversely affect our business.~~

As of September 30, 2020, we had an outstanding balance under our credit agreement with Athyrium, which was amended on November 5, 2020, of $125 million. Our indebtedness could have important consequences to our shareholders. For example, it:

•

~~increases our vulnerability to adverse general economic or industry conditions;~~

•

~~limits our flexibility in planning for, or reacting to, changes in our business or the industries in which we operate;~~

•

~~reduces proceeds we may receive as a result of any sale;~~

•

~~makes us more vulnerable to increases in interest rates, as borrowings under our credit agreement with Athyrium are at variable rates;~~

•

~~limits our ability to obtain additional financing or refinancing in the future for working capital or other purposes; and~~

•

~~places us at a competitive disadvantage compared to our competitors that have less indebtedness.~~

Any of the above-listed factors could materially adversely affect our business, financial condition, results of operations and cash flows. Our credit agreement with Athyrium also contains certain financial and other covenants, including a minimum liquidity requirement and maximum leverage ratios and includes limitations on, among other things, additional indebtedness, paying dividends in certain circumstances, acquisitions and certain investments. The credit agreement provides for certain mandatory prepayment events, including with respect to 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 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 in compliance with the permitted leverage ratio covenant under the credit agreement as measured for September 30, 2020. Any failure to comply with the terms, covenants and conditions of the Fourth Amendment may result in an 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 the credit agreement with Athyrium, we cannot provide assurance that we would be able to obtain a covenant waiver or credit agreement amendment, which may result in an event of default under the credit agreement and have a material adverse effect on our business, financial condition and results of operations.

Item 2. Unregistered ~~Sales~~sales of ~~Equity Securities~~equity securities and ~~Use~~use of ~~Proceeds.~~proceeds.

None.

Item 3. Defaults ~~Upon Senior Securities.~~upon senior securities.

None.

Item 4. Mine ~~Safety Disclosures.~~safety disclosures.

Not applicable.

Item 5. Other ~~Information.~~

~~Athyrium Credit Agreement Amendment~~

On November 5, 2020, we entered into a Fourth Amendment to 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 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 permitted leverage ratio was increased to 5.60:1.00 through and including the fourth quarter of 2021, after which 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 348,664 warrants issued to Athyrium on November 17, 2017 was reduced from $6.84 to $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 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 exceed $0.5 million in any consecutive four fiscal quarter period.

In connection with the execution of the Fourth Amendment, we made the following payments to Athyrium: (i) an amendment fee of $0.3 million, (ii) a prepayment of $9.1 million of the principal and exit fee without penalty and (iii) certain other fees and expenses, including the fees and expenses of Athyrium’s legal counsel.information.

The foregoing description of the Fourth Amendment does not purport to be complete and is qualified in its entirety by the terms and conditions of the Fourth Amendment, which is filed as Exhibit 10.2 to this Quarterly Report and incorporated herein by reference.None.

~~Amendment to Lannett License and Supply Agreement~~

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 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.

~~The Lannett License terminates on December 31, 2024, unless earlier terminated pursuant to the 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 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 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.

Item 6. Exhibits.

(a)

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

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

EXHIBIT INDEX


Exhibit No.	Description	Method of ~~Filing~~filing
10.1	Form of Non-Qualified Stock Option Inducement Award Agreement	Filed herewith
~~10.1~~10.2	~~First Amendment to Common~~Form of Inducement Award Agreement for Restricted Stock ~~Purchase Agreement, by and between Aspire Capital Fund, LLC and Recro Pharma, Inc., dated August 7, 2020.~~Units	~~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.~~Filed herewith
31.1
~~10.2~~	~~Fourth Amendment to Credit Agreement and Investment Documents, dated as of November 5, 2020, by and between Recro Pharma, Inc. and Athyrium Opportunities III Acquisition LP.~~	~~Filed 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.~~Officer	Filed ~~herewith.~~herewith
31.2
~~31.2~~	Rule 13a-14(a)/15d-14(a) certification of Principal Financial and Accounting ~~Officer.~~Officer	Filed ~~herewith.~~herewith
32.1
~~32.1~~	Section 1350 certification, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002.~~2002	Filed ~~herewith.~~herewith
101 INS	XBRL Instance Document	Filed herewith
101 SCH	~~Inline~~ XBRL Taxonomy Extension Schema	Filed ~~herewith.~~herewith
101 CAL
~~101 CAL~~	~~Inline~~ XBRL Taxonomy Extension Calculation Linkbase	Filed ~~herewith.~~herewith
101 DEF
~~101 DEF~~	~~Inline~~ XBRL Taxonomy Extension Definition Linkbase	Filed ~~herewith.~~herewith
101 LAB
~~101 LAB~~	~~Inline~~ XBRL Taxonomy Extension Label Linkbase	Filed ~~herewith.~~herewith
101 PRE
~~101 PRE~~	~~Inline~~ XBRL Taxonomy Extension Presentation Linkbase Document	Filed ~~herewith.~~

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

SIGNATURES

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


	RECRO PHARMA, INC.

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

Date: August 9, 2021	By:

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

3827


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

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


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


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

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

	~~Item 3.~~		~~Quantitative and Qualitative Disclosures About Market Risk~~24	32

	~~Item 4.~~		~~Controls and Procedures~~	33

PART II. OTHER INFORMATION		3425
Item 1. Legal proceedings				25
	Item 1.		~~Legal Proceedings~~1A. Risk factors	3425
Item 2. Unregistered sales of equity securities and use of proceeds				25
	Item ~~1A.~~		~~Risk Factors~~3. Defaults upon senior securities	3425
Item 4. Mine safety disclosures				25
	Item 2.		~~Unregistered Sales of Equity Securities and Use of Proceeds~~5. Other information	3525

	~~Item 3.~~		~~Defaults Upon Senior Securities~~	35

	~~Item 4.~~		~~Mine Safety Disclosures~~	35

	~~Item 5.~~		~~Other Information~~	35

	Item 6.		Exhibits	36
				25
SIGNATURES		38
				27

(amounts in thousands, except share and per share data)	September 30, 2020			December 31, 2019
Assets
Current assets:
Cash and cash equivalents	$	21,487		$	19,148
Accounts receivable		13,634			14,389
Contract asset		9,728			8,851
Inventory		11,580			15,072
Prepaid expenses and other current assets		2,492			2,700
Total current assets		58,921			60,160
Property, plant and equipment, net		43,480			42,212
Intangible assets, net		1,345			3,283
Goodwill		4,319			4,319
Other assets		503			485
Total assets	$	108,568		$	110,459
Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable	$	657		$	989
Accrued expenses and other current liabilities		4,802			4,324
Current portion of debt		9,458			—
Liabilities of discontinued operation		—			1,172
Total current liabilities		14,917			6,485
Debt, net		108,399			110,319
Other liabilities		385			367
Total liabilities		123,701			117,171
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, 23,644,631 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		207,345			199,938
Accumulated deficit		(222,714	)		(206,883	)
Total stockholders’ deficit		(15,133	)		(6,712	)
Total liabilities and stockholders’ deficit	$	108,568		$	110,459

	Three months ended September 30,						Nine months ended September 30,
(amounts in thousands, except share and per share data)	2020			2019			2020			2019
Revenue	$	19,287		$	25,255		$	56,586		$	81,576
Operating expenses:
Cost of sales (excluding amortization of intangible assets)		11,741			11,027			41,629			39,518
Selling, general and administrative		4,418			3,990			14,123			16,028
Amortization of intangible assets		646			646			1,938			1,938
Change in warrant valuation		—			160			—			938
Total operating expenses		16,805			15,823			57,690			58,422
Operating income (loss) from continuing operations		2,482			9,432			(1,104	)		23,154
Interest expense		(4,609	)		(5,057	)		(14,727	)		(13,823	)
(Loss) income from continuing operations		(2,127	)		4,375			(15,831	)		9,331
Loss on discontinued operations		—			(8,680	)		—			(18,450	)
Net loss	$	(2,127	)	$	(4,305	)	$	(15,831	)	$	(9,119	)

(Loss) income per share information:
Basic:
Continuing operations	$	(0.09	)	$	0.19		$	(0.67	)	$	0.42
Discontinued operations		—			(0.38	)		—			(0.83	)
Total	$	(0.09	)	$	(0.19	)	$	(0.67	)	$	(0.41	)
Weighted average shares outstanding		23,641,973			22,505,723			23,538,378			22,231,990
Diluted:
Continuing operations	$	(0.09	)	$	0.18		$	(0.67	)	$	0.40
Discontinued operations		—			(0.36	)		—			(0.79	)
Total	$	(0.09	)	$	(0.18	)	$	(0.67	)	$	(0.39	)
Weighted average shares outstanding		23,641,973			23,650,113			23,538,378			23,102,158

	Common stock				Additional paid-in capital			Accumulated deficit			Total
(amounts in thousands, except share data)	Shares		Amount		Additional paid-in capital			Accumulated deficit			Total
Balance, December 31, 2019		23,312,928	$	233	$	199,938		$	(206,883	)	$	(6,712	)
Stock-based compensation expense		—		—		3,231			—			3,231
Exercise of stock options, net		37,063		—		(105	)		—			(105	)
Vesting of restricted stock units, net		105,242		1		(917	)		—			(916	)
Net loss		—		—		—			(7,692	)		(7,692	)
Balance, March 31, 2020		23,455,233		234		202,147			(214,575	)		(12,194	)
Stock-based compensation expense		—		—		2,446			—			2,446
Exercise of stock options, net		105,606		1		378			—			379
Vesting of restricted stock units, net		78,067		1		(31	)		—			(30	)
Net loss		—		—		—			(6,012	)		(6,012	)
Balance, June 30, 2020		23,638,906		236		204,940			(220,587	)		(15,411	)
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			Total
(amounts in thousands, except share data)	Shares		Amount		Additional paid-in capital			Accumulated deficit			Total
Balance, December 31, 2018		21,799,961	$	218	$	168,535		$	(188,253	)	$	(19,500	)
Stock-based compensation expense		—		—		2,826			—			2,826
Exercise of stock options, net		29,750		—		185			—			185
Vesting of restricted stock units, net		268,915		3		(865	)		—			(862	)
Issuance of common stock for equity facility		34,762		—		301			—			301
Net loss		—		—		—			(1,978	)		(1,978	)
Balance, March 31, 2019		22,133,388		221		170,982			(190,231	)		(19,028	)
Stock-based compensation expense		—		—		2,359			—			2,359
Exercise of stock options, net		206,625		2		907			—			909
Vesting of restricted stock units, net		74,594		1		(114	)		—			(113	)
Net loss		—		—		—			(2,836	)		(2,836	)
Balance, June 30, 2019		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	)

	Nine months ended September 30,
(amounts in thousands)	2020			2019
Cash flows from operating activities, continuing operations:
Net loss	$	(15,831	)	$	(9,119	)
Loss on discontinued operations		—			18,450
Adjustments to reconcile income or loss from continuing operations to net cash provided by operating activities, continuing operations:
Stock-based compensation expense		8,086			4,635
Non-cash interest expense		4,222			3,872
Depreciation expense		4,581			4,290
Amortization of intangible assets		1,938			1,938
Change in warrant valuation		—			938
Changes in operating assets and liabilities:
Accounts receivable		755			(3,351	)
Contract asset		(877	)		(5,442	)
Inventory		3,492			(2,223	)
Prepaid expenses and other assets		268			(1,033	)
Accounts payable, accrued expenses and other liabilities		(234	)		1,287
Net cash provided by operating activities, continuing operations		6,400			14,242
Cash flows from investing activities, continuing operations:
Purchases of property and equipment		(5,451	)		(7,997	)
Purchases of short-term investments		—			(12,020	)
Proceeds from maturity of investments		—			12,100
Net cash used in investing activities, continuing operations		(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 nine months ended September 30, 2019		4,416			43,600
Repayments of debt		(1,100	)		—
Payment of deferred financing costs		(78	)		(2,936	)
Net payments related to vesting and exercise of stock-based awards		(1,185	)		(1,029	)
Net proceeds related to exercise of stock options		509			2,552
Net cash provided by financing activities, continuing operations		2,562			42,187
Net increase in cash and cash equivalents from continuing operations		3,511			48,512
Discontinued operations:
Cash flows used in operating activities		(1,172	)		(37,271	)
Cash flows used in investing activities		—			(1,811	)
Cash flows used in financing activities		—			(10,000	)
Net decrease in cash and cash equivalents from discontinued operations		(1,172	)		(49,082	)
Cash and cash equivalents, beginning of period		19,148			38,514
Cash and cash equivalents, end of period	$	21,487		$	37,944
Supplemental disclosures of cash flow information:
Cash paid for interest	$	10,662		$	10,601
Purchases of property, plant and equipment included in accrued expenses and accounts payable		686			21
Common stock issued under equity facility		—			301


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

	Three months ended September 30, 2019		Nine months ended September 30, 2019
Weighted average shares outstanding, basic		22,505,723		22,231,990
Dilutive impact of:
Restricted stock units		372,338		326,330
Stock options		642,255		453,470
Warrants		129,797		90,368
Weighted average shares outstanding, diluted		23,650,113		23,102,158

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


	June 30, 2021			December 31, 2020
Land	$	3,263		$	3,263
Building and improvements		20,947			20,924
Furniture, office and computer equipment		5,826			5,879
Manufacturing equipment		45,339			39,349
Construction in progress		614			5,568
Property, plant and equipment, gross		75,989			74,983
Less: accumulated depreciation		(34,122	)		(31,142	)
Property, plant and equipment, net	$	41,867		$	43,841


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


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

	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

	Contract assets			Contract liabilities
Balance at beginning of period	$	8,851		$	337
Changes to the beginning balance of contract assets arising from:
Reclassification to receivables as a result of rights to consideration becoming unconditional		(13,193	)		—
Changes in estimate		4,540			—
Contract assets recognized since beginning of period, net of reclassification to receivables and changes in estimates		9,530			—
Changes to contract liabilities:
Cash received in advance of contract performance		—			3,606
Revenue recognized		—			(2,601	)
Balance at end of period	$	9,728		$	1,342

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