BAUDAX BIO, INC. The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the interim unaudited financial statements contained in Part I, Item 1 of this Quarterly Report, and the audited financial statements and notes thereto for the year endedDecember 31, 2019 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , filed with theSEC onFebruary 13, 2020 . As used in this Quarterly Report, unless the context suggests otherwise, "we," "us," "our," the "Company" or "Baudax Bio" refer toBaudax Bio, Inc. and its consolidated subsidiaries.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q, or Quarterly Report, contains 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.
These forward-looking statements in this Quarterly Report include, among other things, statements about:
• our estimates regarding expenses, revenue, capital requirements and timing
and availability of and the need for additional financing;
• our ability to maintain regulatory approval for ANJESO® (meloxicam)
injection, or ANJESO, any product candidates that we may develop, and any
related restrictions, limitations, or warnings in the label of any
approved product candidates;
• our ability to successfully manage the timing, costs and other aspects of
the commercial launch of ANJESO, including setting an acceptable price for
and obtaining adequate coverage and reimbursement of such products;
• our ability to successfully market, commercialize and achieve broad market
acceptance for ANJESO and any of our other product candidates once
approved;
• the acceptance of ANJESO by the medical community, including physicians,
patients, healthcare providers and hospital formularies;
• our ability and that of our third-party manufacturers to successfully
scale-up our commercial manufacturing process for ANJESO;
• the results, timing and outcome of our clinical trials of our product
candidates, and any future clinical and preclinical studies;
• our relationships with Recro Pharma, Inc., or Recro, Alkermes plc, or
Alkermes, other third parties, licensors, collaborators and our employees;
• our ability to operate as a standalone company and execute our strategic
priorities;
• potential indemnification liabilities we may owe to Recro after the
separation of Recro's acute care business and transfer of such assets to
us, or the Separation;
• the effects of changes in our effective tax rate due to changes in the mix
of earnings in countries with differing statutory tax rates, changes in
the valuation of deferred tax assets and liabilities, tax impacts and net
operating loss utilization related to the separation from Recro and
changes in the tax laws;
• our ability to comply with the regulatory schemes applicable to our
business and other regulatory developments in the United States and
foreign countries;
• the performance of third-parties upon which we depend, includingthird-party contract research organizations, or CROs, and third-party
suppliers, manufacturers including Alkermes and Patheon UK Limited , group
purchasing organizations, distributors and logistics providers;
• our ability to obtain and maintain patent protection and defend our
intellectual property rights against third-parties;
• our ability to maintain our relationships, profitability and contracts
with our key commercial partners;
• our ability to defend any material litigation filed against us and avoid
liabilities resulting from any material litigation, including any
liabilities associated the ongoing securities class action filed against
Recro for which we have agreed to indemnify Recro;
• our ability to recruit or retain key scientific, technical, commercial,
and management personnel or to retain our executive officers;
24
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• our ability to raise future financing and attain profitability for
continued development of our business and our product candidates and to
meet any required debt payments, and any milestone payments owing to
Alkermes, or our other licensing and collaboration partners;
• our ability to operate under increased leverage and associated lending
covenants; to pay existing required interest and principal amortization
payments when due; and/or to obtain acceptable refinancing alternatives;
and
• our expectations regarding the impact of the ongoing coronavirus 2019, or
COVID-19, pandemic including, but not limited to, the expected duration of
disruption and immediate and long-term delays, disruption in the
commercial launch of ANJESO, manufacturing and supply chain interruptions,
adverse effects on healthcare systems and disruption of the global
economy, and the overall impact of the COVID-19 pandemic on our business,
financial condition and results of operations.
Any forward-looking statements that we make in this Quarterly Report speak only as of the date of such statement, and we undertake no obligation to update such statements to reflect events or circumstances after the date of this Quarterly Report or to reflect the occurrence of unanticipated events. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data. You should also read carefully the factors described in the "Risk Factors" included in Part II, Item 1A of this Quarterly Report, Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 filed with theSEC onFebruary 13, 2020 , or the 2019 Annual Report, and Part II, Item 1A of our Quarterly Report on Form 10-Q for the three months endedMarch 31, 2020 filed with theSEC onMay 8, 2020 , or the Q1 Quarterly Report, to better understand significant risks and uncertainties inherent in our business and underlying any forward-looking statements. As a result of these factors, actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements in this Quarterly Report and you should not place undue reliance on any forward-looking statements.
Overview
We are a pharmaceutical company primarily focused on developing and commercializing innovative products for hospital and related acute care settings. We believe that we can bring valuable therapeutic options for patients, prescribers and payers to the hospital and related acute care markets.
Our first commercial product, ANJESO, had its New Drug Application, or NDA, approved by theUnited States Food and Drug Administration , or FDA, onFebruary 20, 2020 for the management of moderate to severe pain, alone or in combination with other non-NSAID analgesics. ANJESO is a once daily intravenous, or IV, NSAID with preferential Cox-2 activity, which has successfully completed three Phase III studies, including two pivotal efficacy trials, a large double-blind Phase III safety trial and other safety studies for the management of moderate to severe pain. Overall, the total NDA program included over 1,400 patients. We have established sales management, marketing and reimbursement functions in connection with the commercialization of ANJESO inthe United States . We have initially launched with a sales team of approximately 50 sales representatives and collaborate with third parties who would market ANJESO to health care professionals at our called-on institutions. We commenced our commercial launch of ANJESO in June of 2020 and continue to evaluate strategic partnerships to commercialize ANJESO outside ofthe United States . InAugust 2020 , CMS established a new permanent J-code for ANJESO facilitating reimbursement in the hospital outpatient, ambulatory surgery center and physician office settings of care. We have also entered into agreements withVizient Inc. , the largest member-driven healthcare performance improvement company in theU.S. , and with one of the top 3 integrated delivery networks for terms for availability of ANJESO to their member institutions. Our costs consist primarily of expenses incurred in conducting our manufacturing scale-up, commercialization of ANJESO, clinical trials and preclinical studies, regulatory activities, and public company and personnel costs. We expect to incur significant and increasing operating losses for at least the next few years. We expect substantially all of our operating losses to result from costs incurred in connection with our commercialization activities, including manufacturing costs, and development programs, including our clinical, non-clinical and formulation development activities. Our expenses over the next several years are expected to relate to successfully commercializing ANJESO and continuing to develop our other current and future product candidates. In addition, we may incur costs associated with the acquisition or in-license of products and successful commercialization of the acquired or in-licensed products. 25
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COVID-19 Impact
Our efforts to commercialize ANJESO have been and may continue to be impacted by the COVID-19 pandemic. Hospitals have reduced and diverted staffing, diverted resources to patients suffering from COVID-19 and limited hospital access for nonpatients, including our sales professionals, which we believe may impact our marketing and commercialization efforts. We believe a reduction in elective surgeries during the COVID-19 pandemic has and may continue to result in decreased demand for ANJESO. We anticipate that many hospitals and health care providers will continue to suffer negative financial consequences due to an increase in unexpected costs, including for additional staff, personal protective equipment and ventilators, along with a reduction in revenue due to fewer elective procedures being performed, which may result in a decreased demand for ANJESO. While access restrictions have eased in some locations, spikes of COVID-19 cases in certain states or regions may further impact our sales force as access to hospitals may be restricted and elective surgeries may be limited in those areas. Due to the rapidly evolving environment, continued uncertainties from the impact of the COVID-19 global pandemic, and the recent regional outbreaks that are impacting the recovery, we cannot estimate the full extent to which our commercialization of ANJESO and financial results may be adversely impacted.
Separation from Recro Pharma, Inc.
InAugust 2019 , Recro announced its plans to separate its acute care business from its contract manufacturing and development business through a pro rata distribution of our common stock to shareholders of Recro. As a part of the Separation, Recro transferred the assets, liabilities and operations of its acute care segment to us, pursuant to the terms of a Separation Agreement. OnNovember 21, 2019 , the distribution date, each Recro shareholder received one share of our common stock for every two and one-half shares of Recro common stock held of record at the close of business onNovember 15, 2019 , the record date for the Distribution. As a result of the Distribution, we are now an independent public company whose shares of common stock are trading under the symbol "BXRX" on The Nasdaq Capital Market, or Nasdaq. Our historical combined financial statements for periods prior to the Separation have been prepared on a stand-alone basis and are derived from Recro's consolidated financial statements and accounting records and are presented in conformity withU.S. GAAP. Our financial position, results of operations and cash flows historically operated as part of Recro's financial position, results of operations and cash flows prior to and until the Distribution to Recro's shareholders. These historical combined financial statements for periods prior to the Separation may not be indicative of our future performance and do not necessarily reflect what our combined results of operations, financial condition and cash flows would have been had we operated as a separate company during the periods presented. 26
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Financial Overview Revenue Subsequent to regulatory approval for ANJESO from the FDA, we began selling ANJESO in theU.S. through a single third-party logistics provider, or 3PL, which takes title to and control of the goods. We recognize revenue from ANJESO product sales at the point the title to the product is transferred to the customer and the customer obtains control of the product. The transaction price that is recognized as revenue for products includes an estimate of variable consideration for reserves, which result from discounts, returns, chargebacks, rebates and other allowances that are offered within contracts between us and our end-customers, wholesalers, group purchasing organizations and other indirect customers. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of its anticipated performance and all information (historical, current and forecasted) that is reasonably available. These reserves reflect our best estimate of the amount of consideration to which we are entitled based on the terms of the contracts. The amount of variable consideration that is included in the transaction price may be constrained and is included in the net sales price only to the extent that is considered probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.
Cost of Sales
Cost of sales includes manufacturing costs, transportation and freight, royalty expense, qualification costs for a secondary manufacturing suite for increased available capacity to meet anticipated demand and indirect overhead costs associated with the manufacturing and distribution of ANJESO including supply chain and quality personnel costs. Cost of sales may also include period costs related to certain manufacturing services and inventory adjustment charges. We expensed a significant portion of the cost of producing ANJESO that we are using in the commercial launch as research and development expense prior to the regulatory approval of ANJESO. We expect cost of sales to increase as we deplete these inventories.
Research and Development Expenses
Research and development expenses currently consist primarily of costs incurred in connection with the development of ANJESO and other pipeline activities. These expenses consist primarily of:
• expenses incurred under agreements with contract research organizations,
investigative sites and consultants that conduct our clinical trials and a
substantial portion of our preclinical studies;
• the cost of acquiring and manufacturing clinical trial drug supply and
related manufacturing services and pre-commercial product validation and
inventory manufacturing expenses;
• costs related to facilities, depreciation and other allocated expenses;
• acquired in-process research and development;
• costs associated with non-clinical and pre-commercial regulatory
activities; and
• salaries and related costs for personnel in research and development and
pre-commercial regulatory functions.
The majority of our external research and development costs have related to
clinical trials, manufacturing of drug supply for pre-commercial products,
analysis and testing of product candidates and patent costs. We expense costs
related to clinical inventory and pre-commercial inventory until we receive
approval from the FDA to market a product, at which time we commence
capitalization of costs relating to that product to inventory. Costs related to
facilities, depreciation and support are not charged to specific programs.
Subsequent to regulatory approval of ANJESO, we allocated or recategorized
certain personnel and overhead expenses related to medical affairs, supply
chain, quality and regulatory support functions that had previously been
recorded within research and development to cost of sales or selling, general
and administrative expenses in support of the commercial launch of ANJESO.
Pre-commercial activities directly utilizing personnel and overhead expenses
from the medical affairs, supply chain, quality and regulatory support function
continue to be recorded within research and development.
27
--------------------------------------------------------------------------------The development of our other product candidates is highly uncertain and subject to a number of risks, including, but not limited to:
• the costs, timing and outcome of regulatory review of a product candidate;
• the duration of clinical trials, which varies substantially according to
the type, complexity and novelty of the product candidate;
• substantial requirements on the introduction of pharmaceutical products
imposed by the FDA and comparable agencies in foreign countries, which
require lengthy and detailed laboratory and clinical testing procedures,
sampling activities and other costly and time-consuming procedures;
• the possibility that data obtained from pre-clinical and clinicalactivities at any step in the testing process may be adverse and lead to
discontinuation or redirection of development activity or may be
susceptible to varying interpretations, which could delay, limit or
prevent regulatory approval;
• risk involved with development of manufacturing processes, FDA
pre-approval inspection practices and successful completion of
manufacturing batches for clinical development and other regulatory
purposes;
• the emergence of competing technologies and products, including obtaining
and maintaining patent protections, and other adverse market developments,
which could impede our commercial efforts; and
• the other risks disclosed in the sections titled "Risk Factors" of our
2019 Annual Report, Q1 Quarterly Report and this Quarterly Report.
Development timelines, probability of success and development costs vary widely. As a result of the uncertainties discussed above, we will assess our product candidate's commercial potential and our available capital resources. As a result of these uncertainties surrounding the timing and outcome of any approval, we are currently unable to estimate precisely when, if ever, any of our product candidates will generate revenues and cash flows. We expect our research and development costs to relate to ANJESO, including required pediatric post-marketing studies, as well as development and commercialization scale-up of our other product candidates. We may elect to seek collaborative relationships in order to provide us with a diversified revenue stream and to help facilitate the development and commercialization of our product candidate pipeline.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of sales and marketing expenses and general and administrative expenses.
Sales and marketing expenses primarily consist of compensation and benefits for our sales force and personnel that support our sales and marketing efforts as well as third party consulting costs for the promotion and sale of ANJESO. In addition, sales and marketing expenses include expenses related to communicating the clinical and economic benefits of ANJESO and educational programs for our indirect customers. General and administrative expenses consist principally of salaries and related costs for personnel in executive, medical affairs, regulatory, finance and information technology functions. General and administrative expenses also include public company costs, directors and officers insurance, professional fees for legal, including patent-related expenses, consulting, auditing and tax services.
We expect our selling, general and administrative expenses to increase in the future as a result of our commercial launch of ANJESO.
2019 Reduction in Force
Following the receipt of a second complete response letter from the FDA with regard to IV meloxicam in March of 2019, we implemented a strategic restructuring initiative, and corresponding reduction in workforce, aimed at reducing operating expenses, while maintaining key personnel needed to select a partner and obtain FDA approval of IV meloxicam. The restructuring initiative included a reduction of approximately 50 positions. During the six months endedJune 30, 2019 , we incurred approximately$7.2 million of costs, all of which were incurred in the first half of 2019, in connection with the strategic restructuring plan. These costs included severance and related termination benefits and canceled marketing and production costs. 28 --------------------------------------------------------------------------------
Change in Fair Value of Contingent Consideration
In connection with the Separation, we entered into an Assignment and a Partial Assignment, Assumption and Bifurcation Agreement, or the Alkermes Agreements, relating to the Purchase and Sale Agreement for the acquisition of certain assets, including the worldwide rights to injectable meloxicam and Recro's development, formulation and manufacturing business from Alkermes, or the Alkermes Transaction, as amended inDecember 2018 . Pursuant to the Alkermes Agreements, we are required to pay up to$140.0 million in milestone payments, including$10.0 million that was paid during 2019, another$5.0 million due within 180 days of approval of ANJESO and$45.0 million over seven years beginning one year after approval, as well as net sales milestones and a royalty percentage of future product net sales related to injectable meloxicam between 10% and 12% (subject to a 30% reduction when no longer covered by patent). The estimated fair value of the initial$54.6 million payment obligation was recorded as part of the purchase price for the Alkermes Transaction. We have continued to reevaluate the fair value each subsequent period and as ofJune 30, 2020 recorded a$98.0 million payment obligation, representing the estimated probability adjusted fair value of the liability. Each reporting period, we revalue this estimated obligation with changes in fair value recognized as a non-cash operating expense or gain. As ofJune 30, 2020 , we have paid$10.0 million in milestone payments to Alkermes.
Interest Expense
Interest expense for the periods presented primarily includes interest expense incurred on our Credit Agreement with MAM Eagle Lender, the amortization of related financing costs, and interest expense on a promissory note withPNC Bank under the Paycheck Protection Program ("PPP") of the Coronavirus Aid, Relief and Economic Security Act of 2020 (the "CARES Act") administered by theSmall Business Administration (the "SBA").
Income Taxation
We maintained a valuation allowance against our deferred tax assets as of
Results of Operations
Comparison of the Three Months Ended
Three Months Ended June 30,
2020 2019
(amounts in thousands)
Revenue, net $ 349 $ -
Operating expenses:
Cost of sales 650 -
Research and development 1,350 7,180
Selling, general and administrative 11,217 7,449
Amortization of intangible assets 644
-
Change in warrant valuation 12,667
-
Change in contingent consideration valuation 4,053 (4,059 ) Total operating expenses 30,581 10,570 Operating loss (30,232 ) (10,570 ) Other expense: Other expense, net (213 ) (12 ) Net loss$ (30,445 ) $ (10,582 ) Revenue, net. For the three months endedJune 30, 2020 , net product revenue was$0.3 million , related to sales of ANJESO in theU.S. For the three months endedJune 30, 2019 , we did not recognize any product revenue. Cost of sales. Our cost of sales was$0.7 million for the three months endedJune 30, 2020 and consists of product costs, royalty expense and certain fixed costs associated with the manufacturing of ANJESO including supply chain and quality costs. Based on our policy, we expense costs associated with the manufacturing of our products as research and development prior to regulatory approval. Certain product costs of ANJESO units recognized as revenue during the three months endedJune 30, 2020 were incurred prior to FDA approval of ANJESO inFebruary 2020 , and therefore are not included in cost of sales during the period. We expect cost of sales to increase as we build new inventory not expensed during the pre-approval period, validate a larger manufacturing suite and deplete our initial inventory levels. No product cost of sales was recorded for the three months endedJune 30, 2019 . 29 -------------------------------------------------------------------------------- Research and Development. Our research and development expenses were$1.4 million and$7.2 million for the three months endedJune 30, 2020 and 2019, respectively, a decrease of$5.8 million . Excluding$2.6 million of costs associated with the strategic restructuring initiative recorded in the three months endedJune 30, 2019 , our research and development expenses decreased$3.2 million primarily resulting from a decrease in pre-commercialization manufacturing and clinical costs for ANJESO of$2.3 million and a decrease in personnel and overhead expenses of$0.9 million as we allocated or recategorized certain expenses related to supply chain, regulatory, quality and medical affairs associated with support of the commercial launch of ANJESO. Selling, General and Administrative. Our selling, general and administrative expenses were$11.2 million and$7.4 million for the three months endedJune 30, 2020 and 2019, respectively, an increase of$3.8 million . Excluding$3.4 million of costs associated with the strategic restructuring initiative recorded in the three months endedJune 30, 2019 , our selling, general and administrative expenses increased$7.2 million primarily due to increased selling and marketing expenses in connection with the commercial launch of ANJESO. Selling and marketing expenses of$5.6 million for the three months endedJune 30, 2020 increased$5.0 million due to increased personnel costs of$3.1 million and increased commercial costs of$1.9 million . General and administrative expenses of$5.6 million for the three months endedJune 30, 2020 increased$2.2 million primarily due to increased personnel costs, including over half of which was attributed to medical affairs and regulatory support functions which had previously been recorded within research and development expense in the prior year period. Amortization of Intangible Assets. Amortization expense was$0.6 million for the three months endedJune 30, 2020 , which was related to the amortization of our intangible asset resulting from research and development activities over its estimated useful life. There was no amortization expense for the three months endedJune 30, 2019 . Change in Warrant Valuation. The change in warrant valuation was an increase in value of$12.7 million for the three months endedJune 30, 2020 due to an increase in the Black-Scholes values as a result of an increase in our stock price. Change in Contingent Consideration Valuation. The change in contingent consideration valuation was an increase in value of$4.1 million for the three months endedJune 30, 2020 and a decrease in value of$4.1 million for the three months endedJune 30, 2019 . The non-cash charge for contingent consideration in each period related to the revaluation of the probability-adjusted fair value of the Alkermes Transaction payment obligation. The increase in contingent consideration value for the three months endedJune 30, 2020 was primarily due to the time value of money associated with the balance as we progress closer to payment of the contingent consideration liability. The decrease in contingent consideration valuation for the three months endedJune 30, 2019 was due to the adjusted timing of estimated milestone and royalty payments.
Comparison of the Six Months Ended
Six Months Ended June 30,
2020 2019
(amounts in thousands)
Revenue, net $ 349 $ -
Operating expenses:
Cost of sales 650 -
Research and development 4,420 16,734
Selling, general and administrative 19,263 17,284
Amortization of intangible assets 859 - Change in warrant valuation 14,045 - Change in contingent consideration valuation 31,679 (19,150 ) Total operating expenses 70,916 14,868 Operating loss (70,567 ) (14,868 ) Other expense: Other expense, net (176 ) (49 ) Net loss$ (70,743 ) $ (14,917 ) Revenue, net. For the six months endedJune 30, 2020 , net product revenue was$0.3 million , related to sales of ANJESO in theU.S. For the six months endedJune 30, 2019 , we did not recognize any product revenue. Cost of sales. Our cost of sales was$0.7 million for the six months endedJune 30, 2020 and consists of product costs, royalty expense and certain fixed costs associated with the manufacturing of ANJESO including supply chain and quality costs. Based on our policy, we expense costs associated with the manufacturing of our products as research and development prior to regulatory approval. Certain product costs of ANJESO units recognized as revenue during the six months endedJune 30, 2020 were incurred prior to FDA 30 -------------------------------------------------------------------------------- approval of ANJESO inFebruary 2020 , and therefore are not included in cost of sales during the period. We expect cost of sales to increase as we build new inventory not expensed during the pre-approval period, validate a larger manufacturing suite and deplete our initial inventory levels. No product cost of sales was recorded for the six months endedJune 30, 2019 . Research and Development. Our research and development expenses were$4.4 million and$16.7 million for the six months endedJune 30, 2020 and 2019, respectively, a decrease of$12.3 million . Excluding$2.8 of costs associated with the strategic restructuring initiative recorded in the six months endedJune 30, 2019 , the decrease of$9.5 million resulted from a decrease in pre-commercialization manufacturing and clinical costs for IV meloxicam of$6.2 million , a decrease in development costs for other pipeline products of$2.1 million and a decrease in personnel and overhead expenses of$1.2 million as we re-allocated costs related to supply chain, regulatory, quality and medical affairs associated with support of the commercial launch of ANJESO. Selling, General and Administrative. Our selling, general and administrative expenses were$19.3 million and$17.3 million for the six months endedJune 30, 2020 and 2019, respectively. Excluding$4.4 million of costs associated with the strategic restructuring initiative recorded in the six months endedJune 30, 2019 , the increase of$6.4 million primarily due to increased selling and marketing expenses in connection with the commercial launch of ANJESO. Selling and marketing expenses of$8.9 million for the six months endedJune 30, 2020 increased$3.5 million due to increased personnel costs of$1.9 million and increased commercial costs of$1.6 million . General and administrative expenses of$10.4 million for the six months endedJune 30, 2020 increased$2.9 million primarily due to increased personnel costs of$2.4 million , including over half of which was attributed to medical affairs and regulatory support functions, which had previously been recorded within research and development expense in the prior year period, and increased public company costs of approximately$0.5 million as the prior year costs represent an allocated portion of the costs in the historical combined financial statements prior to the Separation. Amortization of Intangible Assets. Amortization expense was$0.9 million for the six months endedJune 30, 2020 , which was related to the amortization of our intangible asset resulting from research and development activities over its estimated useful life. There was no amortization expense for the six months endedJune 30, 2019 . Change in Warrant Valuation. The change in warrant valuation was an increase of$14.0 million for the six months endedJune 30, 2020 , related to the warrants sold as part of theMarch 26, 2020 underwritten public offering and represents an increase in the Black-Scholes values as a result of an increase in our stock price. Change in Contingent Consideration Valuation. The change in contingent consideration valuation was an increase in value of$31.7 million for the six months endedJune 30, 2020 as compared to a decrease in value of$19.2 million for the six months endedJune 30, 2019 . The non-cash charge for contingent consideration in each period related to the revaluation of the probability-adjusted fair value of the Alkermes Transaction payment obligation. The increase in contingent consideration value for the six months endedJune 30, 2020 was primarily due to the increase in probability of success of milestones tied to the FDA approval of ANJESO. The decrease in contingent consideration valuation for the six months endedJune 30, 2019 was due to the adjusted timing of estimated milestone and royalty payments after receipt of the second CRL from the FDA inMarch 2019 .
Liquidity and Capital Resources
As ofJune 30, 2020 , we had$39.4 million in cash and cash equivalents. Historically, the primary source of liquidity for our business was cash flow provided to us from Recro. Prior to the Separation, transfers of cash to and from Recro were reflected inNet Parent Investment in the historical combined balance sheets, statements of cash flows and statements of changes inNet Parent Investment . We have not reported cash or cash equivalents for the periods presented in the combined balance sheets prior to the Separation. OnMay 29, 2020 , we entered in a$50.0 million Credit Agreement with MAM Eagle Lender, pursuant to which we have drawn$10.0 million as of the date of this Quarterly Report and may draw upon four additional tranches of term loans. The Tranche Two Loans in an amount not to exceed$5.0 million may be drawn upon on or beforeAugust 29, 2021 provided that we generate at least$5.0 million in net revenue in the three consecutive calendar months immediately preceding the date such Tranche Two Loans are funded. The Tranche Two Loans may also be drawn on a subsequent date with the satisfaction of the conditions for the Tranche Three Loans, Tranche Four Loans, or Tranche Five Loans, as applicable, provided that the Tranche Two Loans may not be drawn more than once. The Tranche Three Loans in an amount not to exceed$5.0 million may be drawn upon on or beforeNovember 29, 2021 provided that we generate at least$10.0 in net revenue in the three consecutive calendar months immediately preceding such date such Tranche Three Loans are funded. The Tranche Three Loans may also be drawn on a subsequent date with the satisfaction of the conditions for the Tranche Four Loans or Tranche Five Loans, as applicable, provided that the Tranche Three Loans may not be drawn more than once. The Tranche Four Loans in an amount not to exceed$10.0 million may be drawn upon, subject to the consent of the Lenders, on or beforeAugust 29, 2022 provided that we generate at least$20.0 million in net revenue in the three consecutive calendar months immediately preceding the date such Tranche Four Loans are funded. The Tranche Four Loans may also be drawn on a subsequent date with the satisfaction of the conditions for the Tranche Five Loans provided that the Tranche Four Loans may not be drawn more than once. The Tranche Five Loans in an amount not to exceed$20.0 million may be drawn upon, subject to the consent of the Lenders, on or beforeMarch 1, 2023 provided 31 --------------------------------------------------------------------------------
that we generate at least
OnMay 8, 2020 , we entered into a promissory note for$1.5 million under the PPP of the CARES Act administered by the SBA. We plan to use the loan proceeds for covered payroll costs, rent and utilities in accordance with the relevant terms and conditions of the CARES Act. This Loan may be partially or fully forgiven if we comply with the provisions of the CARES Act including the use of Loan proceeds for payroll costs, rent, utilities and other expenses, and at least 60% of the loan proceeds must be used for payroll costs as defined by the CARES Act. Any forgiveness of the Loan will be subject to approval by the SBA and the Lender will require us to apply for such treatment in the future. Should we meet the requirements for forgiveness, we would extinguish the note upon receiving legal release fromPNC Bank and record a gain on extinguishment in the period. We expect that the full$1.5 million balance of the PPP Note will be forgiven, however, no assurance can be given that we will obtain forgiveness of the PPP Note in whole or in part. OnMarch 26, 2020 , we closed an underwritten public offering of 7,692,308 shares of our common stock, Series A warrants to purchase 7,692,308 shares of our common stock at an exercise price of$4.59 per share and Series B warrants to purchase 7,692,308 shares of our common stock at an exercise price of$3.25 per share, resulting in$23.1 million of net proceeds, after deducting underwriting discounts and commissions and estimated offering expenses. Subsequent to the closing of the underwritten public offering, the exercise of warrants related to the transaction has provided net proceeds of an additional$2.5 million . OnFebruary 13, 2020 , we entered into a Sales Agreement withJMP Securities LLC , as sales agent, or the Agent, pursuant to which we may, from time to time, issue and sell shares of our common stock, in an aggregate offering price of up to$25.0 million through the Agent, or the ATM Program. As ofJune 30, 2020 , 441,967 shares have been sold under the ATM Program for net proceeds of$3.6 million . Under the terms of the Separation Agreement, Recro made a cash capital contribution of$19.0 million to us to fund our initial operations. Subsequent to the Separation, we no longer participate in Recro's centralized cash management or benefit from direct funding from Recro. Our ability to fund our operations and capital needs will depend on our ability to raise additional funds through debt financings, bank or other loans, licensing, including out-licensing activities, sale of assets and/or marketing arrangements, the exercise of our short-dated warrants, or through public or private sales of equity or debt securities from time to time. Financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could materially adversely impact our growth plans and our financial condition or results of operations. Further, our ability to access capital market or otherwise raise capital may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, financial markets inthe United States and worldwide resulting from the ongoing COVID-19 pandemic. Additional debt or equity financing, if available, may be dilutive to the holders of our common stock and may involve significant cash payment obligations and covenants that restrict our ability to operate our business or access to capital. We anticipate that our principal uses of cash in the future will be primarily to launch and commercialize ANJESO and to fund our operations, pipeline development activities, working capital needs, capital expenditures and other general corporate purposes.
Sources and Uses of Cash
Cash used in operations was$17.6 million and$39.2 million for the six months endedJune 30, 2020 and 2019, respectively, which represents our operating losses less our non-cash items including: stock-based compensation, non-cash interest expense, depreciation, amortization, changes in warrant valuations, and changes in fair value of contingent consideration, as well as changes in operating assets and liabilities. There was no cash used in investing activities for the six months endedJune 30, 2020 . Cash used in investing activities was$1.7 million for the six months endedJune 30, 2019 , which was primarily due to our capital expenditures of$1.6 million . There was$39.3 million of cash provided by financing activities in the six months endedJune 30, 2020 consisting of net proceeds of$23.1 million from the public offering of common stock and warrants, net proceeds of$1.5 million from the issuance of the PPP Loan, net proceeds of$8.7 million from the incurrence of long-term debt under the Credit Agreement with MAM Eagle Lender, net proceeds of$3.6 million from our ATM Program, and net proceeds of$2.5 million from warrant exercises. There was$40.9 million of cash provided by financing activities for the six months endedJune 30, 2019 from net proceeds of$50.9 million from parent company investment, partially offset by a payment of contingent consideration of$10.0 million .
Our future use of operating cash and capital requirements will depend on many forward-looking factors, including the following:
• our relationships with Recro, third parties, licensors, collaborators and
our employees;
• our ability to continue to operate as a standalone company and execute our
strategic priorities;
• potential indemnification liabilities we may owe to Recro;
• the timing of the Alkermes Transaction milestone payments and other
contingent consideration;
• the costs of manufacturing scale-up and commercialization activities, for
ANJESO;
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• the level of market acceptance of ANJESO;
• the scope, progress, results and costs of development for our other
product candidates;
• the cost, timing and outcome of regulatory review of our other product
candidates;
• the cost of manufacturing scale-up, acquiring drug product and other
capital equipment for our other product candidates;
• the extent to which we in-license, acquire or invest in products,
businesses and technologies;
• our ability to raise additional funds through equity or debt financings or
sale of certain assets;
• our ability to achieve certain milestones to access and draw down
additional tranches of debt under the Credit Agreement;
• the costs of preparing, submitting and prosecuting patent applications and
maintaining, enforcing and defending intellectual property claims; and
• the effect of any changes in our effective tax rate due to changes in the
mix of earnings in countries with differing statutory tax rates, changes
in the valuation of deferred tax assets and liabilities, tax impacts and
net operating loss utilization related to the Separation and changes in
tax laws.
We might use existing cash and cash equivalents on hand, debt, equity financing,
sale of assets or out-licensing revenue or a combination thereof to fund our
operations or product acquisitions. If we increase our debt levels, we might be
restricted in our ability to raise additional capital and might be subject to
financial and restrictive covenants. Our shareholders may experience dilution as
a result of the issuance of additional equity or debt securities. This dilution
may be significant depending upon the amount of equity or debt securities that
we issue and the prices at which we issue any securities.
Contractual Commitments
The table below reflects our contractual commitments as of
Payments Due by Period (in 000s)
Less than More than
Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years
Debt Obligations (1):
Debt $ 11,537 $ 598 $ 4,828 $ 6,111 $ -
Interest on Debt 7,737 2,301 4,095 1,341 -
Purchase Obligations (2): $ 10,508 $ 4,320 $ 2,971 $ - $ -
Operating Leases (3) 994 440 554 - -
Other Long-Term Liabilities:
Other License Commitments and Milestone
payments (4), (5) 53,285 40 130 170 225
Alkermes Payments (6) 130,000 11,429 12,857 12,857 12,857
Employment Agreements (7) 1,327 1,018 309 - -
Total Contractual Obligations $ 215,388 $ 20,146 $ 25,744 $ 20,479 $ 13,082 (1) Debt obligations consist of principal, an exit fee of 2.5% of that principal
and interest on the
Agreement in addition to principal and interest on a
note under the SBA Paycheck Protection Program of the CARES Act. In
accordance with
on our Consolidated Balance Sheet. See Note 11 to the Consolidated and
Combined Financial Statements included in this Quarterly Report.
(2) These obligations consist of cancelable and non-cancelable purchase
commitments related to inventory and other goods or services. The timing of
certain purchase commitments cannot be estimated as it is dependent on sales
launch trajectory or the outcome of other strategic evaluations. In
accordance with
Consolidated Balance Sheets. See Note 12(d) to the Consolidated and Combined
Financial Statements included in this Quarterly Report.
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(3) We have become party to certain operating leases for the leased space in
for which the minimum lease payments are presented.
(4) We are party to exclusive licenses with Orion for the development and
commercialization of certain pipeline product candidates, under which we may
be required to make certain milestone and royalty payments to Orion. See Note
12(a) to the Consolidated and Combined Financial Statements included in the
Quarterly Report. The amount reflects only payment obligations that are fixed
and determinable. We are unable to reliably estimate the timing of these
payments because they are dependent on the type and complexity of the
clinical studies and intended uses of the products, which have not been
established. In accordance with
on our Consolidated Balance Sheets.
(5) We license the neuromuscular blocking agents, or NMBAs, from Cornell
University pursuant to a license agreement under which we are obligated to
make annual license maintenance fee payments, milestone payments and patent
cost payments and to pay royalties on net sales of the NMBAs. The amount
reflects only payment obligations that are fixed and determinable. We are
unable to reliably estimate the timing of certain of these payments because
they are dependent on the type and complexity of the clinical studies and
intended uses of the products, which have not been established. In accordance
with U.S. GAAP, certain of these obligations are not recorded on our
Consolidated Balance Sheets. See 12(a) to the Consolidated and Combined
Financial Statements included in this Quarterly Report.
(6) Pursuant to the purchase and sale agreement governing the Alkermes
Transaction, we agreed to pay to Alkermes milestone and royalty payments. The
amount reflects only payment obligations that are fixed and determinable. We
are unable to reliably estimate the timing of some of these payments because
they are in some instances, dependent on the commercial success of the
product. In accordance with
recorded as contingent consideration on our Consolidated Balance Sheets. See
Note 12(b) to the Consolidated and Combined Financial Statements included in
this Quarterly Report.
(7) We have entered into employment agreements with certain of our named
executive officers. As of
for, among other things, annual base salaries in an aggregate amount of not
less than this amount, from that date through
with
Balance Sheets. See Note 12(e) to the Consolidated and Combined Financial
Statements included in this Quarterly Report.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
Critical Accounting Policies 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 2019 Annual Report. In the six months endedJune 30, 2020 , there were changes to the application of critical accounting policies previously disclosed in our 2019 Annual Report related to the launch of ANJESO and the related revenue recognition, as described below. Revenue Recognition-- Subsequent to regulatory approval for ANJESO from the FDA, we began selling ANJESO in theU.S. through a single third party logistics provider, or 3PL, which takes title to and control of the goods. We recognize revenue from ANJESO product sales at the point the title to the product is transferred to the customer and the customer obtains control of the product. The transaction price that is recognized as revenue for products includes an estimate of variable consideration for reserves which result from discounts, returns, chargebacks, rebates and other allowances that are offered within contracts between us and our end-customers wholesalers, group purchasing organizations and other indirect customers. Our payment terms are generally between thirty to ninety days. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of its anticipated performance and all information (historical, current and forecasted) that is reasonably available. The amount of variable consideration that is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is considered probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. These reserves reflect our best estimate of the amount of consideration to which we are entitled based on the terms of the contracts. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.
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