Societal CDMO 10Q 2023 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2023

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

For the transition period from to

Commission File Number: 001-36329

Societal CDMO, Inc.

(Exact name of registrant as specified in its charter)


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

1 E. Uwchlan Ave, Suite 112, Exton, Pennsylvania	19341
(Address of principal executive offices)	(Zip Code)

(770) 534-8239

(Registrant’s telephone number, including area code)

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


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

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

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

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


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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to 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 1, 2023, there were 104,788,222 shares of common stock, par value $0.01 per share, outstanding.

TABLE OF CONTENTS


		Page
PART I. FINANCIAL INFORMATION		1
Item 1. Financial statements		1
Item 2. Management's discussion and analysis of financial condition and results of operations		19
Item 3. Quantitative and qualitative disclosures about market risk		27
Item 4. Controls and procedures		27
PART II. OTHER INFORMATION		29
Item 1. Legal proceedings		29
Item 1A. Risk factors		29
Item 2. Unregistered sales of equity securities and use of proceeds		29
Item 3. Defaults upon senior securities		29
Item 4. Mine safety disclosures		30
Item 5. Other information		30
Item 6. Exhibits		31
SIGNATURES		32

PART I. FINANCIAL INFORMATION

Item 1. Financial statements

SOCIETAL CDMO, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)


(amounts in thousands, except share and per share data)	September 30, 2023			December 31, 2022
Assets
Current assets:
Cash and cash equivalents	$	8,156		$	14,995
Accounts receivable, net		14,771			15,950
Contract assets		10,076			8,724
Inventory		12,279			10,301
Prepaid expenses and other current assets		1,688			2,848
Assets held for sale		2,815			2,768
Total current assets		49,785			55,586
Property, plant and equipment, net		51,132			50,365
Operating lease asset		5,132			5,491
Intangible assets, net		2,408			2,928
Goodwill		41,077			41,077
Other assets		1,996			1,996
Total assets	$	151,530		$	157,443
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	2,124		$	1,466
Current portion of debt		9,891			7,577
Current portion of operating lease liability		1,099			1,079
Accrued expenses and other current liabilities		8,509			12,686
Total current liabilities		21,623			22,808
Debt, net of current portion		27,444			30,967
Operating lease liability, net of current portion		4,270			4,584
Other liabilities		39,936			39,225
Total liabilities		93,273			97,584
Commitments and contingencies (note 7)
Shareholders’ equity:
Convertible preferred stock, $0.01 par value. 10,000,000 shares authorized, 0 and 450,000 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively		—			4,350
Common stock, $0.01 par value. 185,000,000 shares authorized, 104,777,745 and 84,588,868 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively		1,048			846
Additional paid-in capital		335,332			320,298
Accumulated deficit		(278,123	)		(265,635	)
Total shareholders’ equity		58,257			59,859
Total liabilities and shareholders’ equity	$	151,530		$	157,443

See accompanying notes to consolidated financial statements.

SOCIETAL CDMO, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)


	Three months ended September 30,						Nine months ended September 30,
(amounts in thousands, except share and per share data)	2023			2022			2023			2022
Revenue	$	23,590		$	21,589		$	66,916		$	65,935
Operating expenses:
Cost of sales		19,870			16,055			56,476			49,639
Selling, general and administrative		5,309			5,075			15,243			15,945
Amortization of intangible assets		168			244			520			685
Total operating expenses		25,347			21,374			72,239			66,269
Operating (loss) income		(1,757	)		215			(5,323	)		(334	)
Interest expense		(2,911	)		(3,586	)		(7,370	)		(10,434	)
Interest income		79			42			319			56
Loss before income taxes		(4,589	)		(3,329	)		(12,374	)		(10,712	)
Income tax expense		3			—			114			—
Net loss	$	(4,592	)	$	(3,329	)	$	(12,488	)	$	(10,712	)

Loss per share, basic and diluted	$	(0.05	)	$	(0.06	)	$	(0.14	)	$	(0.19	)

Weighted average shares outstanding, basic and diluted		100,637,342			56,666,473			92,021,938			56,539,941

See accompanying notes to consolidated financial statements.

SOCIETAL CDMO, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

(Unaudited)


	Convertible preferred stock						Common stock				Additional paid-in			Accumulated
(amounts in thousands, except share data)	Shares			Amount			Shares		Amount		capital			deficit			Total
Balance, December 31, 2022		450,000		$	4,350			84,588,868	$	846	$	320,298		$	(265,635	)	$	59,859
Issuance of stock, net of costs		—			(18	)		—		—		(18	)		—			(36	)
Stock-based compensation expense		—			—			—		—		1,044			—			1,044
Vesting of restricted stock units, net		—			—			313,450		3		(210	)		—			(207	)
Net loss		—			—			—		—		—			(4,684	)		(4,684	)
Balance, March 31, 2023		450,000			4,332			84,902,318		849		321,114			(270,319	)		55,976
Conversion of preferred stock		(450,000	)		(4,332	)		4,500,000		45		4,287			—			—
Stock-based compensation expense		—			—			—		—		1,593			—			1,593
Vesting of restricted stock units, net		—			—			644,607		6		(45	)		—			(39	)
Net loss		—			—			—		—		—			(3,212	)		(3,212	)
Balance, June 30, 2023		—			—			90,046,925		900		326,949			(273,531	)		54,318
Issuance of common stock and warrants, net of costs		—			—			14,640,000		147		7,205			—			7,352
Issuance of warrants		—			—			—		—		37			—			37
Stock-based compensation expense		—			—			—		—		1,179			—			1,179
Vesting of restricted stock units, net		—			—			90,820		1		(38	)		—			(37	)
Net loss		—			—			—		—		—			(4,592	)		(4,592	)
Balance, September 30, 2023		—		$	—			104,777,745	$	1,048	$	335,332		$	(278,123	)	$	58,257


Balance, December 31, 2021	—	$	—	46,681,453	$	467	$	287,351		$	(245,754	)	$	42,064
Issuance of stock, net of costs	—		—	9,302,718		93		(109	)		—			(16	)
Stock-based compensation expense	—		—	—		—		1,479			—			1,479
Exercise of stock options, net	—		—	220		—		—						—
Vesting of restricted stock units, net	—		—	487,695		5		(106	)		—			(101	)
Net loss	—		—	—		—		—			(4,264	)		(4,264	)
Balance, March 31, 2022	—		—	56,472,086		565		288,615			(250,018	)		39,162
Issuance of common stock, net of costs	—		—	—		—		(113	)		—			(113	)
Stock-based compensation expense	—		—	—		—		1,408			—			1,408
Vesting of restricted stock units, net	—		—	172,477		1		(10	)		—			(9	)
Net loss	—		—	—		—		—			(3,119	)		(3,119	)
Balance, June 30, 2022	—		—	56,644,563		566		289,900			(253,137	)		37,329
Issuance of common stock, net of costs	—		—	—		—		(14	)		—			(14	)
Stock-based compensation expense	—		—	—		—		1,260			—			1,260
Vesting of restricted stock units, net	—		—	34,826		1		(13	)		—			(12	)
Net loss	—		—	—		—		—			(3,329	)		(3,329	)
Balance, September 30, 2022	—	$	—	56,679,389	$	567	$	291,133		$	(256,466	)	$	35,234

See accompanying notes to consolidated financial statements.

SOCIETAL CDMO, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)


	Nine months ended September 30,
(amounts in thousands)	2023			2022
Cash flows from operating activities:
Net loss	$	(12,488	)	$	(10,712	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense		3,816			4,147
Non-cash interest expense		1,215			3,778
Depreciation expense		6,043			5,516
Amortization of intangible assets		520			685
Deferred income tax expense		98			—
Changes in operating assets and liabilities:
Accounts receivable		1,179			(5,191	)
Contract assets		(1,352	)		(847	)
Inventory		(1,978	)		(497	)
Prepaid expenses and other assets		1,453			1,221
Accrued interest		556			(2,473	)
Accounts payable, accrued expenses and other liabilities		(1,594	)		(1,265	)
Net cash used in operating activities		(2,532	)		(5,638	)
Cash flows from investing activities:
Purchases of property and equipment		(7,503	)		(5,615	)
Net cash used in investing activities		(7,503	)		(5,615	)
Cash flows from financing activities:
Proceeds from issuance of stock, net of costs		7,040			(143	)
Payment of debt principal		(1,384	)		(2,039	)
Payment of financing costs		(2,177	)		(83	)
Net payments related to vesting of restricted stock units		(283	)		(122	)
Net cash provided by (used in) financing activities		3,196			(2,387	)
Net decrease in cash and cash equivalents		(6,839	)		(13,640	)
Cash and cash equivalents, beginning of period		14,995			25,217
Cash and cash equivalents, end of period	$	8,156		$	11,577
Supplemental disclosures of cash flow information:
Cash paid for interest	$	5,651		$	10,081
Purchases of property, plant and equipment included in accrued expenses and accounts payable		691			919
Offering costs included in accounts payable and accrued expenses		251			—
Deferred financing costs included in accounts payable and accrued expenses		144			35
Fair value of warrants issued in connection with financing facility		37			—
Assets reclassified as held for sale		—			2,659

See accompanying notes to consolidated financial statements.

SOCIETAL CDMO, INC. AND SUBSIDIARIES

Notes to consolidated financial statements

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

(Unaudited)

(1) Background

Societal CDMO, Inc. (the “Company”) was incorporated in the Commonwealth of Pennsylvania on November 15, 2007. The Company is a bi-coastal contract development and manufacturing organization with capabilities spanning pre-investigational new drug development to commercial manufacturing and packaging for a wide range of therapeutic dosage forms with a primary focus on small molecules. With an expertise in solving complex manufacturing problems, the Company provides therapeutic development, end-to-end regulatory support, clinical and commercial manufacturing, aseptic fill/finish, lyophilization, packaging and logistics services to the global pharmaceutical market.

Liquidity and capital resources

The Company has incurred net losses since inception, including net losses for the three and nine months ended September 30, 2023, and has an accumulated deficit of $278,123 as of September 30, 2023. As of September 30, 2023, the Company’s cash and cash equivalents were $8,156.

In August 2023, the Company completed an underwritten public offering in which it raised net proceeds of $7,352 by issuing 14,640,000 shares of the Company’s common stock at a public offering price of $0.400 per share and pre-funded warrants to purchase up to 6,110,000 shares of the Company’s common stock.

The Company’s future operations are highly dependent on the profitability of its development and manufacturing operations. Management concluded that substantial doubt about its ability to continue as a going concern was raised as of the date of the issuance of these financial statements. However, management concluded that actions taken to date as well as its plans alleviate the substantial doubt that was raised.

The Company’s credit agreement with Royal Bank of Canada contains certain financial and other covenants, including quarterly and monthly minimum liquidity requirements, maximum net leverage ratios and minimum fixed charge coverage ratios (see note 8 for details), 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, equity or debt issuances and other specified events, based on the terms of the credit agreement. Any failure to comply with the terms, covenants and conditions of the credit agreement or the debt agreements may result in an event of default under such agreements, which could have a material adverse effect on the business, financial condition and results of operations.

The pharmaceutical industry is experiencing a slowdown in clinical development activities resulting from reduced cash funding, and the Company is experiencing higher rates of customer attrition and development program delays that caused management to revise its 2023 earnings and cash projections when it released its second quarter 2023 results in August 2023. As a result of these factors, management took actions to amend its debt agreements in August 2023 to align financial covenants and other terms of the indebtedness with its revised projections.

The Company believes that its results of operations will allow it to comply with the amended financial and other covenants and contractual requirements of the agreements for at least the next twelve months. The Company’s ability to comply is subject to the Company’s success in implementing certain cost control measures, including the Company’s strategic reorganization which included a reduction in force, reducing capital expenditures and managing working capital in order to improve its ongoing financial performance and its liquidity position.

The Company may extend and or supplement the actions it is taking if it continues to experience adverse conditions described above, among others, that might impact the forecasted performance. If the Company is unable to achieve the results required to comply with the terms of its credit agreement in one or more quarters over the next twelve months, the Company may be required to take specific actions in addition to those described above, including but not limited to, additional cost control measures, or alternatively, seeking an amendment or waiver from its lenders. Obtaining a waiver or an amendment is not within the Company’s control, and if unsuccessful, the lenders may exercise the rights available to them under the credit agreement.

(2) Summary of significant accounting principles

Basis of presentation and principles of consolidation

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

The accompanying unaudited interim consolidated financial statements should be read in conjunction with the annual audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Use of estimates

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

Cash and cash equivalents

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

Accounts receivable, net

Accounts receivable generally represent amounts billed for services provided under our customer contracts and are recorded at the invoiced amount net of an allowance for credit losses, if necessary. We apply judgment in assessing the ultimate realization of our receivables, and we estimate an allowance for credit losses based on various factors, such as the aging of our receivables, historical experience, and the financial condition of our customers. The allowance for credit losses was not material as of the balance sheet dates presented.

Inventory

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

Adjustments to inventory are determined at the raw materials, work-in-process, and finished good levels to reflect obsolescence or impaired balances. Factors influencing inventory obsolescence include changes in demand, product life cycle, product pricing, physical deterioration and quality concerns.

Property, plant and equipment, net

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.

The Company considers assets to be held for sale when (i) management commits to a plan to sell the asset; (ii) the asset is available for immediate sale in its present condition; (iii) the asset is actively being marketed for sale at a price that is reasonable given the estimate of current market value; and (iv) the sale is probable and will be completed within one year. Upon designation of an asset as held for sale, the Company records the asset’s value at the lower of its carrying value plus selling costs or its estimated net realizable value.

Goodwill and intangible assets

Goodwill represents the excess of purchase price over the fair value of net assets acquired by the Company in a business combination. Goodwill is not amortized but assessed for impairment on an annual basis or more frequently if impairment indicators exist.

The impairment analysis for goodwill consists of an optional qualitative assessment potentially followed by a quantitative analysis. If the Company determines that the carrying value of its reporting unit exceeds its fair value, an impairment charge is recorded for the excess.

The Company performs its annual goodwill impairment test as of November 30th, or whenever an event or change in circumstance occurs that would require reassessment of the impairment of goodwill. In performing the evaluation, the Company assesses qualitative factors such as overall financial performance, actual and anticipated changes in industry and market conditions, and competitive environments. As a result of the most recent annual goodwill impairment test, the Company determined that there was no impairment of goodwill.

Definite-lived intangible assets are amortized on a straight-line basis over their estimated useful life. The Company is required to review the carrying value of definite-lived intangible assets for recoverability whenever events occur or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.

Contingencies

The Company’s business exposes it to various contingencies including compliance with regulations, legal exposures and other matters. Loss contingencies are reflected in the financial statements based on management’s assessments of their expected outcome or resolution:

•

They are recognized as liabilities on the balance sheet if the potential loss is probable and the amount can be reasonably estimated.

•

They are disclosed if the potential loss is material and considered at least reasonably possible.

Significant judgment is required to determine probability and whether the amount can be reasonably estimated. Due to uncertainties related to these matters, accruals are based only on the information available at the time. As additional information becomes available, the Company reassesses potential liabilities and may revise previous estimates.

Revenue recognition

The Company generates revenues from manufacturing, profit-sharing and development services for multiple pharmaceutical companies.

Manufacturing

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

Profit-sharing

In addition to manufacturing and packaging revenue, certain customers who use our technologies are subject to agreements that provide us intellectual property sales-based profit-sharing and/or royalties consideration, collectively referred to as profit-sharing, computed on the net product sales of the commercial partner. Profit-sharing revenues are generally recognized under the terms of the applicable license, development and/or supply agreement. The Company has determined that, in its arrangements, the license for intellectual property is not the predominant item to which the profit-sharing relates, so the Company recognizes revenue upon transfer of control of the manufactured product. In these cases, significant judgment is required to calculate the estimated variable consideration from such profit-sharing using the expected value method based on historical commercial partner pricing and deductions. Estimated variable consideration is partially constrained due to the uncertainty of price adjustments made by the Company’s commercial partners, which are outside of the Company’s control. Factors causing price adjustments by the Company’s commercial partners include increased competition in the products’ markets, mix of volume between the commercial partners’ customers, and changes in government pricing.

Development

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

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

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

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

Concentration of credit risk

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

The Company’s accounts receivable balances are primarily concentrated among three customers, with balances in the aggregate accounting for 71% of the balance as of September 30, 2023. 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. The Company’s three largest customers generated 75% and 64% of revenues for the three months ended September 30, 2023 and 2022, respectively, and 75% and 69% of its revenues for the nine months ended September 30, 2023 and 2022, respectively.

Stock-based compensation expense

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 use 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,” 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: a reduction to additional paid-in-capital and a financing cash outflow in the consolidated financial statements.

Income taxes

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.

In assessing the realizability of net deferred tax assets, the Company considers all relevant positive and negative evidence in determining whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The realization of the gross deferred tax assets is dependent on several factors, including the generation of sufficient taxable income prior to the expiration of the net operating loss carryforwards. A full valuation allowance was recorded as of September 30, 2023 and December 31, 2022.

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.

Leases

The Company determines under U.S. GAAP 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.

In a sale-leaseback transaction, the Company determines if it relinquished control of the assets to the buyer-lessor. If control is not relinquished, it does not derecognize the asset and does not apply the lease accounting model.

Operating lease balances are presented as separate captions on the balance sheets. Finance lease assets are included in property, plant and equipment. Finance lease liabilities are included in other liabilities.

Income or loss per share

Basic income or loss per share is determined by dividing net income or loss (the numerator) by the weighted average common shares outstanding during the period (the denominator). The denominator includes the weighted average common stock equivalents for warrants priced at $0.0001, as the underlying common shares will be issued for little cash consideration and the conditions for the issuance of the underlying common shares are met when such warrants are issued.

To calculate diluted income or loss per 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 all periods presented, the Company incurred a net loss. In periods of net loss, the 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, and there were no differences between basic and diluted loss per share.

The following table presents the potentially dilutive securities that were excluded from the computations of diluted loss per share:


	Three months ended September 30,				Nine months ended September 30,
	2023		2022		2023		2022
Restricted stock units		2,702,088		1,717,982		2,834,632		1,461,529
Stock options		8,320,590		8,020,457		7,402,889		7,331,963
Warrants		567,588		348,664		457,280		348,664

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

(3) Inventory

The following table presents the components of inventory:


	September 30, 2023		December 31, 2022
Raw materials	$	6,095	$	4,318
Work in process		3,618		3,689
Finished goods		2,566		2,294
Inventory	$	12,279	$	10,301

(4) Intangible assets, net

The following table presents the components of other intangible assets:


	September 30, 2023						December 31, 2022
	Gross value		Accumulated amortization		Carrying value		Gross value		Accumulated amortization		Carrying value
Customer relationships	$	18,900	$	16,553	$	2,347	$	18,900	$	16,188	$	2,712
Backlog		460		399		61		460		261		199
Trademarks and tradenames		310		310		—		310		293		17
Total	$	19,670	$	17,262	$	2,408	$	19,670	$	16,742	$	2,928

The following table presents estimated future amortization of other intangible assets:


Twelve months ending September 30,
2024	$	547
2025		486
2026		486
2027		486
2028		403
Thereafter		—
Total	$	2,408

(5) Property, plant and equipment, net

The following table presents the components of property, plant and equipment:


	September 30, 2023			December 31, 2022
Land	$	604		$	604
Building and improvements		22,867			22,751
Furniture, office and computer equipment		6,792			6,388
Manufacturing equipment		66,048			58,039
Construction in process		5,305			7,024
Property, plant and equipment, gross		101,616			94,806
Less: accumulated depreciation		(50,484	)		(44,441	)
Property, plant and equipment, net	$	51,132		$	50,365

Interest expense capitalized to construction in process was $137 and $419 for the three months ended September 30, 2023 and 2022, respectively, and $403 and $982 for the nine months ended September 30, 2023 and 2022, respectively.

The Company is party to a sale and purchase agreement to sell approximately 121 acres of land adjacent to its Gainesville, Georgia manufacturing campus for expected proceeds of $9,075. The cost of the land has been removed from property, plant and equipment, and together with cumulative closing costs of $156 through September 30, 2023, is currently presented as a held-for-sale asset of $2,815 within prepaid expenses and other current assets. The completion of the land sale is subject to customary closing conditions for transactions of this type, including completion of title and environmental due diligence and receipt of certain zoning approvals and permits, which remained to be satisfied at September 30, 2023.

(6) Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consist of the following:


	September 30, 2023		December 31, 2022
Payroll and related costs	$	3,595	$	4,276
Contract liabilities (see note 11)		1,314		2,211
Professional and consulting fees		851		356
Accrued interest		783		227
Property, plant and equipment		513		934
Accrued transaction costs		50		3,653
Other		1,403		1,029
Total	$	8,509	$	12,686

Accrued transaction costs include costs incurred related to the refinancing completed in December 2022 which included the sale and subsequent leaseback of the Company’s commercial manufacturing campus located in Gainesville, Georgia (see note 9), the issuance of common and preferred stock, a borrowing of $36,900 under a new term loan with Royal Bank of Canada (see note 8) and a one-time cash transaction bonus to certain executive officers and employees.

In September 2023, the Company initiated a strategic reorganization, including a reduction in force of 26 then-current employees and nine open positions, and resulted in a charge of $1,059, of which $693 was recorded in cost of sales and $366 was recorded in selling, general and administrative, primarily related to severance and other related costs. As of September 30, 2023, $545 remains accrued and unpaid and is included in as part of payroll and related costs in the table above.

(7) Commitments and contingencies

Litigation

The Company is involved, from time to time, in various claims and legal proceedings arising in the ordinary course of its business. 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 July 2, 2022, a product liability lawsuit was filed against the Company and various other defendants in the State Court of Cobb County, Georgia that claimed injuries and damages caused by Plaintiff Jakob Cuble’s alleged ingestion of, among other things, Focalin XR. The complaint sought compensatory and punitive damages. On April 14, 2023, Plaintiff’s counsel withdrew the case.

Purchase commitments

As of September 30, 2023, the Company had outstanding cancelable and non-cancelable purchase commitments in the aggregate amount of $9,021 related to inventory, capital expenditures and other goods and services.

Employment agreements and certain other contingencies

The Company has entered into employment agreements with each of its executive officers that provide for, among other things, severance commitments of up to $1,393 should the Company terminate the 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 $4,597 in the aggregate if certain events occur following a change in control.

(8) Debt

The following table presents the components and classification of debt:


	September 30, 2023			December 31, 2022
Debt principal:
Term loan under Credit Agreement	$	35,516		$	36,900
Note with former equity holder of IriSys		4,078			4,078
Other		339			339
Debt principal		39,933			41,317
Debt adjustments:
Unamortized deferred issuance costs		(2,356	)		(2,476	)
Unamortized original discount		(242	)		(297	)
Carrying value of debt	$	37,335		$	38,544

Current portion of debt	$	9,891		$	7,577
Debt, net of current portion		27,444			30,967
Carrying value of debt	$	37,335		$	38,544

The following table presents the future maturity of debt principal:


Twelve months ending September 30,
2024	$	9,891
2025		3,498
2026		26,281
2027		44
2028		53
Thereafter		166
Total debt principal	$	39,933

Term loan under Credit Agreement

The Company is currently party to a credit agreement (as amended from time to time, the “Credit Agreement”) with Royal Bank of Canada. The Credit Agreement has been fully drawn in the form of a term loan of $36,900. The outstanding principal amount will be repaid in quarterly amounts totaling $2,998 and $3,459 during the twelve months ending September 30, 2024 and 2025, respectively. The Company is obligated to make a $7,500 mandatory principal prepayment upon completion of the sale of certain real property, which is not included in the debt maturity disclosures above. Quarterly principal payments made after the completion of the land sale will be reduced proportionately to the reduction in principal. The final payment of all remaining outstanding principal is due on December 16, 2025.

Subject to certain exceptions, the Company is required to make mandatory prepayments with the cash proceeds received in respect of asset sales, certain equity sales, extraordinary receipts, debt issuances, upon a change of control and specified other events. Additionally, the Company is obligated by December 14, 2023 to complete the sale of certain real property adjacent to its Gainesville, Georgia manufacturing campus (see note 5). If that property is not sold by December 14, 2023, the Company will be required to pay a fee of $369 and increase each of its quarterly principal payments by $231 until that property is sold and any mandatory prepayment is made. Because the Company concluded that the sale of the property is probable to occur in the first half of 2024, an additional $2,815 of debt principal has been presented as current, representing the carrying value of the current asset held for sale, and two quarterly principal payment increases of $231 have been included in the debt maturity disclosures above.

The Credit Agreement also includes certain financial covenants that the Company will need to satisfy on a quarterly basis, including: (i) maintaining a net leverage ratio less than 3.75:1.00 through the quarter ending March 31, 2024, stepping down to 2.75:1.00 for each quarter thereafter; (ii) maintaining a fixed charge coverage ratio of 1.00:1.00 at September 30, 2023, increasing to 1.05:1.00 for the last day of each quarter thereafter; (iii) maintaining cash and cash equivalents on hand of no less than: (a) $4,000 on each of September 30, 2023, December 31, 2023 and March 31, 2024 (b) $3,500 on June 30, 2024 (c) $4,500 on September 30, 2024 (d) $5,000 on each of December 31, 2024, March 31, 2025, June 30, 2025 and September 30, 2025 and (e) $1,500 on every other month-end date through maturity. Beginning with the quarter ending December 31, 2023, funded capital expenditures, as defined, cannot exceed $9,000 in the aggregate for the preceding twelve-month period. As of September 30, 2023, the Company was in compliance with its covenants under the Credit Agreement.

In connection with the Credit Agreement, the Company has paid financing costs. These costs are being recognized in interest expense using the effective interest method over the term of the Credit Agreement, resulting in non-cash interest expense of $433 and $902 for the three and nine months ended September 30, 2023, respectively.

The Credit Agreement bears interest at a floating rate equal to the three-month term Secured Overnight Financing Rate, or SOFR, with an initial floor of 1.00%, plus an applicable margin that is equal to 4.50% per annum for the first year, 5.00% for the second year and 5.50% for the third year, with quarterly interest payments due until maturity. At September 30, 2023, the overall effective interest rate, including cash paid for interest and non-cash interest expense, was 13.6%.

Historical term loans with Athyrium

The Company was previously party to a credit agreement with Athyrium Opportunities III Acquisition LP (“Athyrium Credit Agreement”). The Athyrium Credit Agreement included $100,000 of term loans at an interest rate equal to the three-month LIBOR rate plus 8.25% per annum.

During the term of Athyrium Credit Agreement, the Company paid financing costs and accreted an exit fee. These costs were recognized in interest expense using the effective interest method, resulting in non-cash interest expense of $1,163 and $3,451 for the three and nine months ended September 30, 2022, respectively. The Company repaid the term loans in full using the proceeds from the new Credit Agreement, the sale-leaseback transaction (see note 9) and the issuance of preferred and common stock (see note 10) in December 2022.

Note with former equity holder of IriSys

In connection with the acquisition of IriSys, LLC (“IriSys”), the Company issued a subordinated promissory note to a former equity holder of IriSys in the aggregate principal amount of $6,117 (as amended from time to time, the “Note”). The Note is unsecured, has a three-year term, and bears interest at a rate of 6% per annum. The Note must be repaid in three equal installments through its maturity date, August 13, 2024. The Note may be prepaid in whole or in part at any time prior to the maturity date. The Note is expressly subordinated in right of payment and priority to the term loan under the Credit Agreement.

In August 2023, the Note was amended to defer the due date of the $2,039 payment due on August 12, 2023 of principal, plus accrued interest, to the earlier of (i) June 24, 2024; and (ii) the date on which the Company completes its previously announced sale of certain land at its Gainesville, Georgia location (see note 5). In consideration for the payment deferral, the Company issued a warrant to purchase 100,000 shares of the Company’s common stock, par value $0.01 per share at an exercise price of $1.00 with a term of three years.

In connection with the Note, the Company has paid financing costs. These costs are being recognized as interest expense using the effective interest method over the term of the Note. At September 30, 2023, the overall effective interest rate, including the amortization of the original discount, was 15.3%.

(9) Other liabilities

At September 30, 2023, other liabilities include a sale-leaseback liability of $38,803 and other liabilities of $1,133.

Sale-leaseback liability

In December 2022, the Company concurrently entered into sale and lease agreements related to its commercial manufacturing campus in Gainesville, Georgia. The selling price was $39,000, of which $1,750 was placed as a lease deposit and classified within other assets, resulting in cash proceeds to the Company of $37,250 in 2022. The lease is for an initial term of 20 years with four renewal options of ten years each. Rent under the lease will be payable monthly at a rate of $3,510 per year, increasing annually by 3%, except for the first year where annual base rent will increase by the change in the consumer price index, not to exceed 5%, if greater. The Company is responsible for the payment of all operating expenses, property taxes and insurance for the property. Pursuant to the terms of the lease, the Company will have a purchase option every ten years and a right of first offer and a right of first refusal to purchase the property should the buyer-lessor intend to sell the property to a third party.

The Company determined that it did not relinquish control of the assets to the buyer-lessor. Therefore, the assets were not derecognized, and the selling price was recorded as a financial liability. As of September 30, 2023, the carrying value of the liability was $38,803, which is net of $828 of unamortized deferred financing costs. The Company will recognize interest expense at an approximately 11% imputed rate of interest over a term of 20 years that includes the amortization of the deferred financing costs over the term of the lease. The gross liability balance is scheduled to increase through 2034, at which point it will decrease through the end of lease term on December 31, 2042.

(10) Shareholders’ equity or deficit

Common stock

In May 2023, the Company’s shareholders approved an amendment to the articles of incorporation to increase the number of authorized shares of common stock from 95,000,000 to 185,000,000.

In August 2023, the Company closed an underwritten public offering of 14,640,000 shares of its common stock and pre-funded warrants to purchase 6,110,000 shares of common stock at an exercise price of $0.0001 per share for net proceeds to the Company of $7,352, after deducting underwriting discounts and commissions and offering expenses.

Convertible preferred stock

In December 2022, the Company issued 450,000 shares of Series A Convertible Preferred Stock for proceeds of $11.00 per share. Each share was converted into ten shares of common stock automatically in May 2023 upon approval by the Company’s shareholders to increase the number of authorized shares of common stock. As of September 30, 2023, no preferred stock was issued or outstanding.

Warrants

The following table presents the warrants outstanding to purchase shares of common stock as of September 30, 2023. All outstanding warrants are equity-classified.


	Number of shares		Exercise price per share		Expiration date
Athyrium warrants		467,588	$	1.29	November 17, 2024
IriSys warrants		100,000		1.00	August 13, 2026
Pre-Funded warrants		6,110,000		0.0001	None

(11) Revenue recognition

The following table presents changes in contract assets and liabilities:


	Contract assets			Contract liabilities
Balance at December 31, 2022	$	8,724		$	(2,211	)
Changes to the beginning balance arising from:
Reclassification to receivables as the result of rights to consideration becoming unconditional		(10,239	)		—
Reclassification to revenue as the result of performance obligations satisfied		963			1,586
Changes in estimate		1,651			—
Net change to contract balance recognized since beginning of period due to recognition of revenue, amounts billed and changes in estimate		8,977			(689	)
Balance at September 30, 2023	$	10,076		$	(1,314	)

Contract assets and contract liabilities are reported at the contract level. Contracts with multiple performance obligation are reported as a net contract asset or contract liability on the consolidated balance sheet. The reclassification to revenue appearing in the contract assets column results from the recognition of revenue on contract liabilities that are presented as a net contract asset at the beginning of the year.

The following table disaggregates revenue by timing of revenue recognition:


	Three months ended September 30,				Nine months ended September 30,
	2023		2022		2023		2022
Point in time	$	18,805	$	15,565	$	51,986	$	51,851
Over time		4,785		6,024		14,930		14,084
Total	$	23,590	$	21,589	$	66,916	$	65,935

The Company’s payment terms for manufacturing revenue and development services are typically 30 to 45 days. 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 September 30, 2023, a total of 862,334 shares were available for future grants under the A&R Plan. On December 1st of each year, pursuant to an “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 ten 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,
	2023		2022
Weighted average grant date fair value	$	0.94	$	1.02
Assumptions used to determine fair value:
Range of expected option life	5.5 - 6.0 years		5.5 - 6.0 years
Expected volatility	79 - 84%		79 - 81%
Risk-free interest rate	3.5 - 4.6%		1.5 - 4.0%
Expected dividend yield		—		—

No options were exercised in the nine months ended September 30, 2023. The intrinsic value of options exercised was negligible in the nine months ended September 30, 2022.

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, 2022		8,050,337		$	3.89
Granted		1,877,109			1.33
Forfeited or expired		(1,944,253	)		5.83
Balance, September 30, 2023		7,983,193			2.81	$	28	7.3 years
Exercisable		4,614,058			3.67		—	6.3 years

Included in the table above are 972,872 options outstanding as of September 30, 2023 that were granted outside the A&R Plan. The grants were made pursuant to the 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 and sometimes include performance conditions in addition to service conditions. 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 $1.30 in the nine months ended September 30, 2023 and $1.32 in the nine months ended September 30, 2022. The fair value of RSUs vested was $1,299 and $774 in the nine months ended September 30, 2023 and 2022, respectively.

The following table presents information about recent RSU activity:


	Number of shares			Weighted average grant date fair value
Balance, December 31, 2022		2,061,866		$	1.71
Granted		2,640,762			1.30
Vested		(1,284,143	)		3.19
Forfeited		(232,540	)		1.82
Balance, September 30, 2023		3,185,945			2.12

Included in the table above are 73,506 time-based RSUs outstanding at September 30, 2023 that were granted outside of the A&R Plan. The grants were made pursuant to the 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:


	Three months ended September 30,				Nine months ended September 30,
	2023		2022		2023		2022
Cost of sales	$	486	$	428	$	1,481	$	1,427
Selling, general and administrative expenses		693		832		2,335		2,720
Total	$	1,179	$	1,260	$	3,816	$	4,147

As of September 30, 2023, there was $7,287 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) Income taxes

The tax provision for interim periods is determined using the estimated annual effective consolidated tax rate, based on the current estimate of full-year earnings before taxes, adjusted for the impact of discrete quarterly items.

The provision for income taxes was $3 and $114 for the three and nine months ended September 30, 2023, respectively. There was no provision for income taxes for the three or nine months ended September 30, 2022. The change in effective tax rate from 0% in the prior periods was due to the utilization of all net operating loss carryforwards without limitations during 2022 in connection with the sale-leaseback transaction (see note 9).

(14) Fair value of financial instruments

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

•

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

•

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

•

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

Items measured at fair value on a recurring basis

Cash equivalents of $4 at September 30, 2023 and $6,034 at December 31, 2022 consisted entirely of money market mutual funds whose fair value were determined using Level 1 measurements.

Fair value disclosures

The Company follows the disclosure provisions of FASB ASC Topic 825, “Financial Instruments” (ASC 825), for disclosure purposes for financial assets and financial liabilities that are not measured at fair value. As of September 30, 2023, the financial assets and liabilities recorded on the consolidated balance sheets that are not measured at fair value on a recurring basis include accounts receivable, accounts payable and accrued expenses. The carrying values of these financial assets and liabilities approximate fair value due to their short-term nature.

The fair value of long-term debt, where a quoted market price is not available, is evaluated based on, among other factors, interest rates currently available to the Company for debt with similar terms, remaining payments and considerations of the Company’s creditworthiness. The Company determined that the recorded book value of its debt, a level 2 measurement, approximated fair value at September 30, 2023 due to the recent issuances of those instruments and taking into consideration management’s current evaluation of market conditions.

(15) Leases

The Company is party to two operating leases for development facilities in California and Georgia that end in 2031 and 2025, respectively, as well as other immaterial operating leases for office space, storage and office equipment. The development facility leases each include options to extend, none of which are included in the lease terms. Short-term and variable lease costs were not material for the periods presented. The development facility leases do not provide an implicit rate, so the Company uses its incremental borrowing rate to discount the lease liabilities.

Undiscounted future lease payments for the two development leases, which were the only material noncancelable leases at September 30, 2023, were as follows:


Twelve months ending September 30,
2024	$	1,182
2025		1,210
2026		1,084
2027		1,114
2028		1,146
Thereafter		3,011
Total lease payments		8,747
Less imputed interest		(3,378	)
Total operating lease liabilities	$	5,369

At September 30, 2023, the weighted average remaining lease term was 7.1 years, and the weighted average discount rate was 14.1%. Total lease cost was $549 and $525 for the three months ended September 30, 2023 and 2022, respectively, and $1,350 and $1,498 for the nine months ended September 30, 2023 and 2022, respectively.

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

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited consolidated financial statements 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, 2022 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, 2022, filed with the SEC on March 1, 2023, 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 the 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 contribute to such differences.

Cautionary note regarding forward-looking statements

This Quarterly Report and the documents incorporated by reference herein contain forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this Quarterly Report or the documents incorporated by reference herein regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” “would” “could,” “should,” “potential,” “seek,” “evaluate,” “pursue,” “continue,” “design,” “impact,” “affect,” “forecast,” “target,” “outlook,” “initiative,” “objective,” “designed,” “priorities,” “goal,” or the 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 factors, many of which cannot be predicted with accuracy and some of which might not even be anticipated.

The forward-looking statements in this Quarterly Report and the documents incorporated herein by reference 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 expectations regarding the use of proceeds from recent and any future financings, if any;

•

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, and the potential loss of development customers if they do not receive adequate funding or if their products do not obtain U.S. Food and Drug Administration, or FDA, approval;

•

our ability to operate under the lending covenants under our credit agreement and to pay required interest and principal amortization payments when due;

•

the extent to which health epidemics and other outbreaks of communicable diseases, macroeconomic events, including those due to inflation, rising interest rates and banking instability, geopolitical turmoil, social unrest, global instability, including regional conflicts around the world, political instability and any resulting sanctions, terrorism, or other acts of war, supply chain disruptions, trade restrictions, export controls or other restrictive actions that may be imposed by the U.S. and/or other countries against governmental or other entities may disrupt our business operations or our financial condition or the financial condition of our customers and suppliers, including our ability to initiate and continue relationships with manufacturers and third-party logistics providers;

•

the performance of third-party suppliers upon which we depend for Active Pharmaceutical Ingredients, or APIs, various other direct and indirect materials, and other third parties involved with maintenance of our facilities and equipment;

•

our ability to maintain 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 for those customers;

•

our ability to recruit or retain key scientific, technical, business development, and management personnel and our executive officers, including as a result of applicable state and federal vaccine mandates;

•

our ability to maintain the listing of our common stock on the Nasdaq Capital Market;

•

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

•

our ability to realize the expected benefits of the IriSys, LLC, or IriSys, acquisition.

We may not achieve the plans, intentions or expectations disclosed in our forward-looking statements, 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 cautionary statements included in this Quarterly Report, particularly under “Item 1A. 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.

Solely for convenience, tradenames referred to in this Quarterly Report appear without the ® symbol, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or that the applicable owner will not assert its rights, to these tradenames. All trademarks, service marks and tradenames included or incorporated by reference in this Quarterly Report are the property of their respective owners.

Overview

Societal CDMO, Inc. is a bi-coastal contract development and manufacturing organization, or CDMO, with capabilities spanning pre-investigational new drug development to commercial manufacturing and packaging for a wide range of therapeutic dosage forms with a primary focus on small molecules. With an expertise in solving complex manufacturing problems, Societal is a leading CDMO providing development, end-to-end regulatory support, clinical and commercial manufacturing, aseptic fill/finish, lyophilization, packaging and logistics services to the global pharmaceutical market. In addition to our experience in handling DEA-controlled substances and developing and manufacturing modified-release dosage forms, Societal has the expertise to deliver on our clients’ pharmaceutical development and manufacturing projects, regardless of complexity level. We do all of this in our state-of-the-art facilities that, in the aggregate, total 145,000 square feet, in Gainesville, Georgia and San Diego, California.

We currently manufacture the following key products with our key commercial partners: Ritalin LA®, Focalin XR®, Verelan PM®, Verelan SR®, Verapamil PM, Verapamil SR and Donnatal liquids and tablets. We also support numerous development stage products. During the first quarter of 2023, the FDA approved the Company as a manufacturer of a commercial tablet product. This FDA approval represents the first commercial tablet that Societal CDMO has been approved to manufacture, and the Company began commercial manufacturing of the product at its Gainesville, Georgia facilities in the middle of 2023.

Our manufacturing and development capabilities include product development from formulation through clinical trial and commercial manufacturing, and specialized capabilities for solid oral dosage forms, with specialization in modified release technologies and facilities to handle high potent compounds and controlled substances, liposomes and nano/microparticles, topicals and oral liquids. In addition to providing manufacturing capabilities, we offer our customers clinical trial support including over-encapsulation, comparator sourcing, packaging, labeling, storage and distribution. We have a bi-coastal footprint from which to better serve clients within the U.S., as well as globally. In a typical collaboration between us and our commercial partners, we continue to work with our partners to develop product candidates or new formulations of existing product candidates. We also typically exclusively manufacture and supply clinical and commercial supplies of these proprietary products and product candidates.

We use cash flow generated by our business primarily to fund the growth of our CDMO business and to make payments under our credit facility. We believe our business will continue to contribute cash to fund our growth, to make payments under our credit facility and for other general corporate purposes.

Global economic and supply conditions

Global economic conditions, logistics and supply chain issues continue to present obstacles to our business.

We rely on third-party manufacturers to supply our manufacturing components, supplies and related materials, which in some instances are supplied from a single source. Prolonged disruptions in the supply of any of our third-party materials, difficulty implementing new sources of supply or significant price increases could have an adverse effect on our results. We are experiencing a higher level of residual supply chain disruptions that we are actively managing to meet our production timelines and that may constrain our ability to capture additional growth opportunities, beyond our established projections, from customers who would otherwise want to increase their safety stock of the products that we produce.

We closely monitor economic developments, stock market conditions and geopolitical conflicts, such as the conflict between Russia and Ukraine and the evolving events in Israel and Gaza, which continue to have adverse effects on the U.S. and global markets and supply chain.

We have been experiencing the effects of a general slowdown in clinical development activity as a result of clinical failures and/or a lack of adequate funding to go forward. The slowdown has caused us to experience delays in and reductions to our backlog during the first nine months of 2023, and we may continue to experience adverse effects such as delays in and reductions to our backlog and/or a reduction in the number of business development opportunities that we will be able to pursue or close. We are making efforts to adapt to these market changes, including a recently-announced reduction in force and a strategic refocus of operations resulting in the discontinuation of certain programs and services. While we believe these actions will drive improved cash flows, they will also reduce our overall revenue-generating capacity in the near term.

We have recently experienced a decline in our stock price. If the stock price decline is sustained, our goodwill may be determined to be impaired. We may face continuing inflationary pressures on raw materials, labor and logistics. Finally, while we have been able to capture overall interest savings as a result of the December 2022 refinancing, those improvements have been partially offset by a sustained increase in variable base interest rates, which could increase further in future periods.

Corporate restructuring

In September 2023, we initiated a strategic reorganization, including a reduction in force of 26 then-current employees and nine open positions, which was intended to reduce costs and streamline and optimize our operations and resulted in a charge of approximately $1.1 million, primarily related to severance and other related costs.

Financial overview

Revenues

We recognize three types of revenue: manufacturing, profit-sharing and development.

As previously disclosed, in May 2023, Lannett, which represented 16% of our revenue in 2022, commenced prepackaged Chapter 11 cases in the United States Bankruptcy Court for the District of Delaware and entered into a restructuring support agreement with certain of its lenders. On June 8, 2023, Lannett emerged from the Chapter 11 bankruptcy as a privately-held company under the ownership of its prepetition lenders. While our agreement with Lannett remains in place, at this time we do not know whether Lannett’s performance with sales of Verapamil PM will be impacted by these events or might otherwise impact our economics going forward.

Manufacturing

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.

Profit-sharing

In addition to manufacturing revenue, certain customers who use our technologies are subject to agreements that provide us intellectual property sales-based profit-sharing and/or royalties consideration, collectively referred to as profit-sharing, computed on the net product sales of the commercial partner. Profit-sharing revenues are generally recognized under the terms of the applicable license, development and/or supply agreement. We have determined, that in our arrangements, the license for intellectual property is not the predominant item to which the profit-sharing relates, so we recognize revenue upon transfer of control of the manufactured product. In these cases, significant judgment is required to calculate the estimated variable consideration from such profit-sharing using the expected value method based on historical commercial partner pricing and deductions. Estimated variable consideration is partially constrained due to the uncertainty of price adjustments made by our commercial 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.

Development

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 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.

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 of salaries and related costs for administrative, public company and business development functions as well as legal fees, patent-related expenses and consulting fees. Public company costs include compliance, audit, tax, insurance and investor relations.

Amortization of intangible assets

We are recognizing amortization expense related to acquired customer relationships, backlog and trademarks and trade names on a straight-line basis over estimated useful lives of 7.0, 2.4, and 1.5 years, respectively.

Interest expense

Interest expense for the current period presented primarily relates to our new term loan borrowing with Royal Bank of Canada originally funded at $36.9 million and the financial liability related to the sale and leaseback of our commercial manufacturing campus in Gainesville, Georgia for gross proceeds of $39.0 million. Interest expense for the prior period presented primarily relates to the $100.0 million senior secured term loans with Athyrium Opportunities III Acquisition LP and the amortization of related financing costs.

As a result of these changes, interest expense was lower in the first nine months of 2023 and will continue to be lower in future periods due to the lower amount of aggregate principal and lower variable interest margins as compared to the Athyrium borrowings.

Net operating losses and tax carryforwards

As of December 31, 2022, we had federal net operating loss, or NOL, carry forwards of approximately $125.6 million, substantially all of which are subject to annual limitations following a December 2022 change in control and have an indefinite carry forward period. We also had $135.4 million of state NOL carry forwards available to offset future taxable income that will begin to expire at various dates beginning in 2028 if not utilized. We believe that it is more likely than not that our deferred income tax assets will not be realized, and as such, there is a full valuation allowance.

Key indicators of performance

To evaluate our performance, we monitor a number of industry-standard key indicators such as:

•

Safety and human capital management, as measured by recordable injuries, good saves and employee retention;

•

Operational excellence, as measured by the percentage of our orders that are delivered on-time and in full;

•

New business growth, as measured by value of new contracts signed; and

•

Financial operating results, as measured by revenue and EBITDA, as adjusted.

EBITDA, as adjusted, is a non-GAAP measure that we discuss and reconcile to its nearest GAAP measure elsewhere in our public financial reporting. We believe that supplementing our financial results presented in accordance with GAAP with non-GAAP measures is useful to investors, creditors and others in assessing our performance. These measurements should not be considered in isolation or as a substitute for reported GAAP results because they may include or exclude certain items as compared to similar GAAP-based measurements, and such measurements may not be comparable to similarly-titled measurements reported by other companies. Rather, these measurements should be considered as an additional way of viewing aspects of our operations and gaining an understanding of our business.

Results of operations

Comparison of third quarters 2023 and 2022


	Three months ended September 30,
(in millions)	2023			2022
Revenue	$	23.6		$	21.6
Operating expenses:
Cost of sales		19.9			16.1
Selling, general and administrative		5.3			5.1
Amortization of intangible assets		0.1			0.2
Total operating expenses		25.3			21.4
Operating (loss) income		(1.7	)		0.2
Interest expense		(3.0	)		(3.6	)
Interest income		0.1			0.1
Loss before income taxes		(4.6	)		(3.3	)
Income tax expense		—			—
Net loss	$	(4.6	)	$	(3.3	)

Revenue. The increase of $2.0 million was primarily driven by an increase in revenue from our largest commercial customer, Teva, due to the continued pull through in demand during the quarter resulting from market share gains against the sole competitor for the Verapamil SR products as well as a catch-up in shipments to Teva from the second quarter of 2023, during which we saw a decrease in shipments due to a scheduled shutdown of our packaging line to implement upgrades required to comply with new serialization aggregation compliance standards. In addition, there was an increase in shipments to Lannett for Verapamil PM due to timing of customer orders during the year. Further, we had our first shipment of Otsuka commercial batches during the quarter. Offsetting these increases were a decrease in Novartis and InfectoPharm shipments due to timing of customer orders as well as prior year inventory-build for InfectoPharm as a then new customer.

Cost of sales. The increase of $3.8 million was primarily due to higher commercial manufacturing revenue and higher fixed costs to support the newly installed aseptic fill/finish line that has expanded our capabilities. In addition, there were $0.7 million of restructuring costs recorded during the current year period.

Selling, general and administrative. Selling, general and administrative expenses were relatively consistent for the periods presented. Included within the current year period was $0.4 million of restructuring costs.

Amortization of intangible assets. The amortization related to the acquisition of IriSys for acquired customer relationships, backlog and trademarks and trade names.

Interest expense. The decrease of $0.6 million was primarily due to a significantly reduced amount of aggregate principal and lower interest rates under the company’s refinanced debt as compared to the borrowings outstanding during the period ended September 30, 2022.

Comparison of nine months ended 2023 and 2022


	Nine months ended September 30,
(in millions)	2023			2022
Revenue	$	66.9		$	65.9
Operating expenses:
Cost of sales		56.5			49.6
Selling, general and administrative		15.2			15.9
Amortization of intangible assets		0.5			0.7
Total operating expenses		72.2			66.2
Operating loss		(5.3	)		(0.3	)
Interest expense		(7.4	)		(10.5	)
Interest income		0.3			0.1
Loss before income taxes		(12.4	)		(10.7	)
Income tax expense		0.1			—
Net loss	$	(12.5	)	$	(10.7	)

Revenue. The increase of $1.0 million was primarily driven by increases in revenues from Teva and Lannett as well as an increase in pre-commercial development revenues, which were partially offset by a decrease in Novartis and InfectoPharm revenues, as described above.

Cost of sales. The increase of $6.9 million was primarily due to mix of revenue and related fixed cost absorption, including increased costs associated with the new aseptic fill/finish line that has expanded the company’s capabilities and increased material costs. In addition, there were $0.7 million of restructuring costs recorded during the current year period.

Selling, general and administrative. The decrease of $0.7 million was primarily related to lower public company costs and administrative costs than the prior year offset by $0.3 million of restructuring costs recorded in the current year period.

Amortization of intangible assets. The amortization related to the acquisition of IriSys for acquired customer relationships, backlog and trademarks and trade names.

Interest expense. The decrease of $3.1 million was primarily due to a significantly reduced amount of aggregate principal and lower interest rates under the company’s refinanced debt as compared to the borrowings outstanding during the period ended September 30, 2022.

Liquidity and capital resources

At September 30, 2023, we had $8.2 million in cash and cash equivalents. Our credit agreement with Royal Bank of Canada, as amended, contains minimum liquidity requirements ranging from $3.5 million to $4.5 million at quarter-ends through September 30, 2024 and minimum liquidity requirements of $1.5 million at month-ends that are not quarter-ends. Our ability to continue to comply with the minimum liquidity requirements is subject to our success in implementing certain cost control measures, reducing capital expenditures and managing working capital in order to improve our ongoing financial performance and our liquidity position.

In August 2023, we raised net proceeds of $7.4 million following completion of an underwritten public offering in which we issued and sold 14,640,000 shares of our common stock at a public offering price of $0.400 per share and pre-funded warrants to purchase up to 6,110,000 shares of our common stock.

Since our inception, we have financed our operations and capital expenditures primarily from results of operations, from the issuance of equity and debt, and recently, to a lesser extent, from real estate transactions. During the first nine months of 2023, our capital expenditures were $7.5 million to maintain, scale and support expansion of our capabilities.

We are currently party to a credit agreement with Royal Bank of Canada, or the Credit Agreement, for a term loan originally funded at $36.9 million. The principal is being repaid in quarterly amounts, including $3.0 million and $3.5 million to be paid during the twelve months ending September 30, 2024 and 2025, respectively. An additional $7.5 million will be paid upon completing a sale of certain real property (see below). The final payment of all remaining outstanding principal is due on December 16, 2025.

Subject to certain exceptions, we are required to make mandatory prepayments with the cash proceeds received in respect of asset sales, certain equity sales, extraordinary receipts, debt issuances, upon a change of control and specified other events. Additionally, we are obligated by December 14, 2023 to complete the sale of certain real property adjacent to our Gainesville, Georgia manufacturing campus. If that property is not sold by December 14, 2023, we will be required to pay a fee of $0.4 million and increase each of our quarterly principal payments by $0.2 million until that property is sold and any mandatory principal prepayment is made.

In September 2022, we signed a sales and purchase agreement to sell approximately 121 acres of land adjacent to our Gainesville, Georgia manufacturing campus for expected proceeds of $9.1 million, $7.5 million of which we are obligated to use to repay outstanding balances on the Credit Agreement. The land sale is currently expected to close in the first half of 2024. Until closing, the sale of the land is subject to customary closing conditions for transactions of this type, including completion of title and environmental due diligence and receipt of certain zoning approvals and permits.

The pharmaceutical industry is experiencing a slowdown in clinical development activities resulting from reduced cash funding and other liquidity resources and we are experiencing higher rates of customer attrition and development program delays that caused us to revise our 2023 earnings and cash projections during the second quarter of 2023. As a result of these factors, we took actions to amend our debt agreements to align financial covenants and other terms of the indebtedness with our revised projections. Absent these amendments, we would not have been able to conclude that it was probable that we would comply with the provisions of our debt agreements through November 9, 2024.

We believe that our results of operations will allow us to comply with the financial and other covenants and contractual requirements of the agreements for at least the next twelve months. Our ability to comply is subject to our success in implementing certain cost control measures, including our strategic reorganization which included a reduction in force, reducing capital expenditures and managing working capital in order to improve our ongoing financial performance and our liquidity position.

We may extend and or supplement the actions we are taking if we continue to experience adverse conditions described above, among others, that might impact the forecasted performance. If we are unable to achieve the results required to comply with the terms of our credit agreement in one or more quarters over the next twelve months, we may be required to take specific actions in addition to those described above, including but not limited to, additional cost control measures, or alternatively, seeking an amendment or waiver from our lenders. Obtaining a waiver or an amendment is not within our control, and if unsuccessful, the lenders may exercise the rights available to them under the credit agreement.

We may require additional financing or choose to refinance certain of these instruments, which could include strategic development, licensing activities and/or marketing arrangements, public or private sales of equity or debt securities or debt refinancing. 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, including as a result of diseases, geopolitical conflicts, recent liquidity constraints or failures and instability in U.S. and international financial banking systems on the global financial markets. 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 capital, and may further restrict dividend payments.

Sources and uses of cash


	Nine months ended September 30,
(amounts in millions)	2023			2022
Net cash used in:
Operating activities	$	(2.5	)	$	(5.6	)
Investing activities		(7.5	)		(5.6	)
Financing activities		3.2			(2.4	)
Total	$	(6.8	)	$	(13.6	)

Cash flows from operating activities represents our net loss as adjusted for stock-based compensation expense, non-cash interest expense, depreciation expense, amortization of intangible assets and deferred income tax expense as well as changes in operating assets and liabilities. The $3.1 million decrease in cash flows used for operating activities in 2023 compared to 2022 was due to favorable working capital changes, partially offset by a reduction to our cash-based earnings.

Net cash used in investing activities for each period includes capital expenditures to scale and support our expansion of capabilities.

Net cash provided by financing activities increased $5.6 million primarily due to higher net proceeds from issuances of common stock of $7.0 million and a decrease in debt repayments of $0.7 million, partially offset by financing cost payments of $2.1 million.

Forward-looking factors

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

•

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

•

the timing and extent of our manufacturing and capital expenditures;

•

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

•

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

•

our ability to regain profitability;

•

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

•

our ability to raise additional funds through equity or debt financings or sale of real estate or other assets;

•

the costs of maintaining, enforcing and defending intellectual property claims; and

•

the extent to which health epidemics and other outbreaks of communicable diseases, macroeconomic events, including those due to inflation, rising interest rates and banking instability, global instability, including regional conflicts around the world, political instability and any resulting sanctions, export controls or other restrictive actions that may be imposed by the U.S. and/or other countries against governmental or other entities may disrupt our business operations or financial condition or the financial condition of our customers and suppliers.

We may use existing cash and cash equivalents on hand, additional debt, equity financing, sale of real-estate or other 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. If we issue additional equity in future periods, our shareholders may experience dilution. 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

The table below reflects our contractual commitments as of September 30, 2023:


	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	$	39.9	$	9.9	$	29.7	$	0.1	$	0.2
Interest		8.2		3.9		4.2		0.1		—
Purchase obligations (2)		9.0		8.3		0.7		—		—
Operating leases (3)		8.8		1.2		2.3		2.3		3.0
Other long-term liabilities (4)(5)		91.9		3.6		7.5		8.0		72.8
Total	$	157.8	$	26.9	$	44.4	$	10.5	$	76.0

(1)

Debt obligations consist of scheduled principal repayments and interest on $35.5 million of outstanding term loan principal under our credit facility with Royal Bank of Canada, $4.1 million of notes issued to the former members of IriSys and a small finance lease. Because the Royal Bank of Canada term loan bears interest at a variable rate based on SOFR, we estimated future interest commitments utilizing the SOFR rate as of September 30, 2023. 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 two operating leases for development facilities in California and Georgia that end in 2031 and 2025, respectively. The leases each include options to extend at our discretion.

(4)

We are party to a lease for a DEA-licensed facility in Georgia that ends in 2042. The lease includes the option to extend at our discretion. The principal component of this obligation is classified as a liability under U.S. GAAP, therefore we did not present it as an operating or capital lease in the table.

(5)

We have entered into employment agreements with each of our executive officers that provide for, among other things, severance commitments of up to $1.4 million should we terminate the 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 $4.6 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.

Critical accounting policies and 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 Annual Report.

Item 3. Quantitative and qualitative disclosures about market risk

There has been no material change in our assessment of our sensitivity to market risk described in the Annual Report.

Item 4. Controls and procedures

Evaluation of disclosure controls and 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 30, 2023. 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 30, 2023, 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 over 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.

Information regarding legal and regulatory proceedings is set forth in note 7 to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report, and is incorporated by reference herein.

We are also engaged in various other legal actions arising in the ordinary course of our business (such as, 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 believe that the ultimate outcome of these other legal actions will not have a material adverse effect on our business, results of operations, financial condition or cash flows.

Item 1A. Risk factors.

Investing in our securities involves certain risks. In addition to any risks and uncertainties described elsewhere in this Quarterly Report, investors should carefully consider the risks and uncertainties discussed in Part I, Item 1A. “Risk Factors” in our Annual Report. These risks are not the only risks that could materialize. Other than as set forth below, there have been no material changes in our risk factors from those previously disclosed in our Annual Report, Quarterly Report for the quarter ended March 31, 2023 and Quarterly Report for the quarter ended June 30, 2023.

Our losses and accumulated deficit raise substantial doubt about our ability to continue as a going concern absent obtaining adequate new debt or equity financings.

Our future operations are highly dependent on the profitability of our development and manufacturing operations. Management concluded that substantial doubt about the Company’s ability to continue as a going concern was raised as of the date of the issuance of these financial statements. However, management concluded that actions taken to date as well as its plans alleviate the substantial doubt that was raised.

As of September 30, 2023, we had an accumulated deficit of $278.1 million, cash and cash equivalents of $8.2 million and current liabilities of $21.6 million. Although it is difficult to forecast all of our future liquidity requirements, we believe that our cash and cash equivalents on hand combined with our projected cash receipts from services generated under our customer contracts will be sufficient to fund our operations into the fourth quarter of 2024.

We have also incurred significant indebtedness. As of September 30, 2023, we had $39.9 million of outstanding indebtedness, $35.5 million of which was under our Credit Agreement with Royal Bank of Canada. These factors, individually and collectively, raise substantial doubt about our ability to continue as a going concern, and therefore, could materially limit our ability to raise additional funds through an issuance of debt or equity securities or otherwise.

There can be no assurance that we will be able to raise sufficient additional capital on acceptable terms or at all. Additionally, if we are unable to regain compliance with the listing standards of Nasdaq, our common stock may become delisted, which could have a material adverse effect on the liquidity of our common stock and our ability to raise funding. If such additional financing is not available on satisfactory terms, or is not available in sufficient amounts, we may be required to delay, limit or eliminate the development of business opportunities and our ability to achieve our business objectives, our competitiveness, and our business, financial condition and results of operations will be materially adversely affected. In addition, the impact of macroeconomic factors, including but not limited to, inflationary pressures, rising interest rates, banking instability, geopolitical turmoil, social unrest, global instability, including regional conflicts around the world, political instability and any resulting sanctions, terrorism, or other acts of war, on the global financial markets may reduce our ability to access capital, which could negatively affect our liquidity and ability to continue as a going concern. In addition, the perception that we may not be able to continue as a going concern may cause others to choose not to deal with us due to concerns about our ability to meet our contractual obligations.

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

Expect as previously reported by us on our Current Reports on Form 8-K, we did not sell any securities during the period covered by this Quarterly Report on Form 10-Q that were not registered under the Securities Act of 1933, as amended.

Item 3. Defaults upon senior securities.

None.

Item 4. Mine safety disclosures.

Not applicable.

Item 5. Other information.

None.

Item 6. Exhibits.

(a)

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

EXHIBIT INDEX


Exhibit No.	Description	Method of filing
4.1	Form of Pre-Funded Warrant	Incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on August 28, 2023
10.1	First Amendment to Purchase and Sale Agreement and Joint Escrow Instructions, dated November 22, 2022, by and among Societal CDMO Gainesville, LLC, a Massachusetts limited liability company, and Weekley Homes, LLC, a Delaware limited liability company	Filed herewith
10.2	Second Amendment to Purchase and Sale Agreement and Joint Escrow Instructions, dated January 23, 2023, by and among Societal CDMO Gainesville, LLC, a Massachusetts limited liability company, and Weekley Homes, LLC, a Delaware limited liability company	Filed herewith
10.3	Third Amendment to Purchase and Sale Agreement and Joint Escrow Instructions, dated April 21, 2023, by and among Societal CDMO Gainesville, LLC, a Massachusetts limited liability company, and Weekley Homes, LLC, a Delaware limited liability company	Filed herewith
10.4	Fourth Amendment to Purchase and Sale Agreement and Joint Escrow Instructions, dated October 3, 2023, by and among Societal CDMO Gainesville, LLC, a Massachusetts limited liability company, and Weekley Homes, LLC, a Delaware limited liability company	Filed herewith
31.1	Rule 13a-14(a)/15d-14(a) certification of Principal Executive Officer	Filed herewith
31.2	Rule 13a-14(a)/15d-14(a) certification of Principal Financial and Accounting Officer	Filed herewith
32.1	Section 1350 certification, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Furnished herewith
101 INS	XBRL Instance Document	Filed herewith
101 SCH	XBRL Taxonomy Extension Schema	Filed herewith
101 CAL	XBRL Taxonomy Extension Calculation Linkbase	Filed herewith
101 DEF	XBRL Taxonomy Extension Definition Linkbase	Filed herewith
101 LAB	XBRL Taxonomy Extension Label Linkbase	Filed herewith
101 PRE	XBRL Taxonomy Extension Presentation Linkbase Document	Filed 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.


	SOCIETAL CDMO, INC.

Date: November 8, 2023	By:	/s/ J. David Enloe, Jr.
		J. David Enloe, Jr.
		President and Chief Executive Officer
		(Principal Executive Officer)

Date: November 8, 2023	By:	/s/ Ryan D. Lake
		Ryan D. Lake
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

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Societal CDMO (SCTL) 10-Q2023 Q3 Quarterly report

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