Form 10-Q Societal CDMO, Inc. For: Jun 30
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
For the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
(Zip Code) |
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Name of exchange on which registered |
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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.
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).
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 ☐ |
Smaller reporting company |
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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 August 3, 2022, there were
TABLE OF CONTENTS
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) |
June 30, 2022 |
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December 31, 2021 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
$ |
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$ |
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Accounts receivable, net |
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Contract asset |
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Inventory |
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Prepaid expenses and other current assets |
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Total current assets |
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Property, plant and equipment, net |
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Operating lease asset |
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Intangible assets, net |
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Goodwill |
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Other assets |
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Total assets |
$ |
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$ |
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Liabilities and shareholders’ equity |
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Current liabilities: |
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Accounts payable |
$ |
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$ |
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Current portion of related party debt |
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Current portion of operating lease liability |
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Accrued expenses and other current liabilities |
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Total current liabilities |
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Debt, net of current portion |
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Related party debt, net of current portion |
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Operating lease liability, net of current portion |
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Other liabilities |
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Total liabilities |
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Shareholders’ equity: |
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Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated deficit |
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( |
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Total shareholders’ equity |
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Total liabilities and shareholders’ equity |
$ |
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$ |
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See accompanying notes to consolidated financial statements.
1
SOCIETAL CDMO, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
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Three months ended June 30, |
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Six months ended June 30, |
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(amounts in thousands, except share and per share data) |
2022 |
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2021 |
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2022 |
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2021 |
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Revenue |
$ |
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$ |
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$ |
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$ |
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Operating expenses: |
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Cost of sales (excluding amortization of intangible assets) |
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Selling, general and administrative |
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Amortization of intangible assets |
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Total operating expenses |
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Operating income (loss) |
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( |
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( |
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Interest expense |
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( |
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( |
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( |
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Gain on extinguishment of debt |
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— |
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— |
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Net (loss) income |
$ |
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$ |
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$ |
( |
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$ |
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(Loss) income per share, basic and diluted |
$ |
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$ |
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$ |
( |
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$ |
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Weighted average shares outstanding |
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Basic |
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Diluted |
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See accompanying notes to consolidated financial statements.
2
SOCIETAL CDMO, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity or Deficit
(Unaudited)
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Common stock |
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Additional paid-in |
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Accumulated |
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(amounts in thousands, except share data) |
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Shares |
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Amount |
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capital |
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deficit |
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Total |
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Balance, December 31, 2021 |
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$ |
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$ |
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$ |
( |
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$ |
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Issuance of common stock, net of costs |
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( |
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— |
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( |
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Stock-based compensation expense |
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— |
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— |
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— |
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Vesting of restricted stock units, net |
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( |
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— |
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( |
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Exercise of stock options |
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— |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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( |
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( |
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Balance, March 31, 2022 |
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$ |
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$ |
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$ |
( |
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$ |
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Issuance of common stock, net of costs |
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— |
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— |
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( |
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— |
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( |
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Stock-based compensation expense |
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— |
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— |
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— |
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Vesting of restricted stock units, net |
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( |
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— |
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( |
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Net loss |
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— |
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— |
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— |
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( |
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( |
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Balance, June 30, 2022 |
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$ |
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$ |
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$ |
( |
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$ |
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Balance, December 31, 2020 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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Issuance of common stock, net of costs |
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— |
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Stock-based compensation expense |
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— |
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— |
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— |
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Vesting of restricted stock units, net |
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( |
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— |
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( |
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Net loss |
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— |
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— |
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— |
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( |
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( |
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Balance, March 31, 2021 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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Issuance of common stock, net of costs |
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— |
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Stock-based compensation expense |
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— |
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— |
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— |
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Vesting of restricted stock units, net |
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( |
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— |
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( |
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Net income |
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— |
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— |
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— |
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Balance, June 30, 2021 |
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$ |
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$ |
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$ |
( |
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$ |
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See accompanying notes to consolidated financial statements.
3
SOCIETAL CDMO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
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Six months ended June 30, |
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(amounts in thousands) |
2022 |
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2021 |
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Cash flows from operating activities: |
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Net loss |
$ |
( |
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$ |
( |
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Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
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Stock-based compensation expense |
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Non-cash interest expense |
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Depreciation expense |
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Amortization of intangible assets |
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Gain on extinguishment of debt |
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( |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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( |
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( |
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Contract asset |
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( |
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Inventory |
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Prepaid expenses and other assets |
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Accrued interest |
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( |
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Accrued payroll |
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Accounts payable, accrued expenses and other liabilities |
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( |
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Net cash (used in) provided by operating activities |
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( |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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( |
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( |
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Net cash used in investing activities |
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( |
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( |
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Cash flows from financing activities: |
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Proceeds from issuance of common stock, net of costs |
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( |
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Cash portion of $ |
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( |
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Payment of financing costs |
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( |
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( |
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Net payments related to vesting of restricted stock units |
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( |
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( |
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Net cash (used in) provided by financing activities |
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( |
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Net (decrease) increase in cash and cash equivalents |
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( |
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Cash and cash equivalents, beginning of period |
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Cash and cash equivalents, end of period |
$ |
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$ |
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Supplemental disclosures of cash flow information: |
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Cash paid for interest |
$ |
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$ |
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Purchases of property, plant and equipment included in accrued expenses and accounts payable |
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Issuance of common stock to reduce debt principal and accrued exit fees |
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Issuance of common stock to settle interest obligations |
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See accompanying notes to consolidated financial statements.
4
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
The Company has incurred net losses since inception and has an accumulated deficit of $
(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 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, 2021.
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.
Business combinations
The Company measures the purchase price paid for acquired companies based on fair value and allocates that purchase price to the assets acquired and liabilities assumed based on their estimated fair values. Valuations are performed to assist in determining the fair values of assets acquired and liabilities assumed, which requires management to make estimates and assumptions, in particular with respect to intangible assets. Management makes estimates of fair value based upon assumptions believed to be reasonable. These estimates are based in part on historical experience and information obtained from the acquired companies and expectations of future cash flows. Costs associated with business combinations are expensed as incurred and classified as selling, general and administrative expenses.
5
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: to
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 lives. 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:
6
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, packaging, research and development and related services for multiple pharmaceutical companies.
Manufacturing
Manufacturing and other related services revenue is recognized upon transfer of control of a product to a customer, generally upon shipment, based on a transaction price that reflects the consideration the Company expects to be entitled to as specified in the agreement with the commercial partner, which could include variable consideration such as pricing and volume-based adjustments.
Profit-sharing
In addition to manufacturing and packaging revenue, certain customer agreements may have 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. For arrangements that include sales-based profit-sharing where the license for intellectual property is deemed to be the predominant item to which the profit-sharing relates, the Company recognizes revenue when the related sales occur by the commercial partner. For arrangements that include sales-based profit-sharing where the license for intellectual property is not deemed to be the predominant item to which the profit-sharing relates, 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.
Research and development
Research and development revenue includes services associated with formulation, process development, clinical trials materials services, as well as custom development of manufacturing processes and analytical methods for a customer’s non-clinical, clinical and commercial products. Such revenues are recognized at a point in time or over time depending on the nature and particular facts and circumstances associated with the contract terms.
In contracts that specify milestones, the Company evaluates whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. Milestone payments related to arrangements under which 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.
7
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 relative to diversification and maturities to maintain safety and liquidity.
The Company’s accounts receivable balances are primarily concentrated among
The Company is dependent on its relationships with a small number of commercial partners. The Company's
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. A valuation allowance is recorded to the extent it is more likely than not that some portion or all of the deferred tax assets will not be realized. A full valuation allowance was recorded as of June 30, 2022 and December 31, 2021.
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 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.
8
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 debt.
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).
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 the three months ended June 30, 2021, the Company reported net income. The calculation of net income used to determine basic and diluted per share results in the period ended June 30, 2021, is consistent with how net income is calculated in the period ended June 30, 2022, however, the calculation of we
Weighted average shares outstanding, basic |
|
|
|
Dilutive impact of: |
|
|
|
Restricted stock units |
|
|
|
Stock options |
|
|
|
Warrants |
|
|
|
Weighted average shares outstanding, diluted |
|
|
|
For all other 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 June 30, |
|
|
Six months ended June 30, |
|
||||||||||
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Restricted stock units |
|
|
|
|
|
|
|
|
|
|
|
||||
Stock options |
|
|
|
|
|
|
|
|
|
|
|
||||
Warrants |
|
|
|
|
|
|
|
|
|
|
|
||||
Amounts in the table above reflect the common stock equivalents of the noted instruments.
Recent accounting pronouncements
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). This ASU provides temporary optional expedients and exceptions to the guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate and other interbank offered rates to alternative reference rates. In January 2021, the FASB issued ASU 2021-01, which refines the scope of Topic 848 and clarifies some of its guidance as part of the FASB’s monitoring of global reference rate activities. The new guidance was effective upon issuance, and the Company is allowed to elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
(3) Inventory
The following table presents the components of inventory:
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||
Raw materials |
$ |
|
|
$ |
|
||
Work in process |
|
|
|
|
|
||
Finished goods |
|
|
|
|
|
||
Inventory |
$ |
|
|
$ |
|
||
9
(4) Property, plant and equipment, net
The following table presents the components of
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||
Land |
$ |
|
|
$ |
|
||
Building and improvements |
|
|
|
|
|
||
Furniture, office and computer equipment |
|
|
|
|
|
||
Manufacturing equipment |
|
|
|
|
|
||
Construction in progress |
|
|
|
|
|
||
Property, plant and equipment, gross |
|
|
|
|
|
||
Less: accumulated depreciation |
|
( |
) |
|
|
( |
) |
Property, plant and equipment, net |
$ |
|
|
$ |
|
||
Interest expense capitalized to construction in progress was $
(5) Intangible assets, net
The following table presents the components of other intangible assets:
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||||||||||||||||||
|
Gross value |
|
|
Accumulated amortization |
|
|
Carrying value |
|
|
Gross value |
|
|
Accumulated amortization |
|
|
Carrying value |
|
||||||
Customer relationships |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Backlog |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Trademarks and tradenames |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
The following table presents estimated future amortization of other intangible assets:
Twelve months ending June 30, |
|
|
|
2023 |
$ |
|
|
2024 |
|
|
|
2025 |
|
|
|
2026 |
|
|
|
2027 |
|
|
|
Thereafter |
|
|
|
Total |
$ |
|
|
(6) Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consist of the following:
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||
Payroll and related costs |
$ |
|
|
$ |
|
||
Current portion of contract liabilities (see note 10) |
|
|
|
|
|
||
Property, plant and equipment |
|
|
|
|
|
||
Professional and consulting fees |
|
|
|
|
|
||
Accrued interest |
|
|
|
|
|
||
Other |
|
|
|
|
|
||
Total |
$ |
|
|
$ |
|
||
10
(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. Except as disclosed below, the Company is not currently a party to any such claims or proceedings that, if decided adversely to it, would either individually or in the aggregate have a material adverse effect on its business, financial condition or results of operations.
On May 31, 2018, a securities class action lawsuit (the “Securities Litigation”) was filed against the Company and certain of its officers and directors (collectively, the “Defendants”) in the U.S. District Court for the Eastern District of Pennsylvania (the “Court”) (Case No. 2:18-cv-02279-MMB) that purported to state a claim for alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, based on statements made by the Company concerning the New Drug Application (“NDA”) for IV meloxicam. The complaint seeks unspecified damages, interest, attorneys’ fees and other costs. On December 10, 2018, the lead plaintiff filed an amended complaint that asserted the same claims and sought the same relief but included new allegations and named additional officers as defendants. On February 8, 2019, the Company filed a motion to dismiss the amended complaint in its entirety, which the lead plaintiff opposed on April 9, 2019. On May 9, 2019, the Company filed its response and briefing was completed on the motion to dismiss. In response to questions from the Court, the parties submitted supplemental briefs regarding the motion to dismiss the amended complaint during the fall of 2019. On February 18, 2020, the motion to dismiss was granted by the Court without prejudice. On April 25, 2020, the plaintiff filed a second amended complaint. The Company filed a motion to dismiss the second amended complaint on June 18, 2020. The plaintiff filed an opposition to the Company’s motion to dismiss on August 17, 2020. On September 16, 2020, the Company filed a reply in support of its motion to dismiss. On March 1, 2021, the Court denied the Company’s second motion to dismiss. On June 21, 2021, the Defendants filed an answer and affirmative defenses to the second amended complaint. Since then, the parties have been engaged in discovery, which must conclude by April 29, 2022. On September 30, 2021, the plaintiff filed a motion for class certification and appointment of class representative. The Company filed an opposition to the plaintiff’s motion on November 30, 2021. On January 6, 2022, the plaintiff filed a reply in support of the motion for class certification. On March 24, 2022, the plaintiff informed the Court that the parties had reached an agreement-in-principle to settle the Securities Litigation and requested that the Court stay all deadlines. On May 10, 2022, the plaintiff filed an unopposed motion for preliminary approval of the class action settlement. The Court entered an order preliminarily approving the settlement and providing for notice on May 12, 2022. A hearing for the final approval of the settlement is set for October 26, 2022.
In connection with the separation of the Company's former acute care research and development business into a new standalone entity named Baudax Bio, Inc. (“Baudax Bio”), Baudax Bio accepted assignment by the Company of all of its obligations in connection with the Securities Litigation and agreed to indemnify it for all liabilities related to the Securities Litigation.
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, inter alia, Focalin XR. The complaint seeks compensatory and punitive damages. On July 7, 2022, and prior to the Company’s being served with the complaint, a co-defendant removed the matter to the United States District Court for the Northern District of Georgia, Atlanta Division. The Company filed its responsive pleading on August 2, 2022.
Purchase commitments
As of June 30, 2022, the Company had outstanding cancelable and non-cancelable purchase commitments in the aggregate amount of $
Employment agreements and certain other contingencies
The Company has entered into employment agreements with each of its named executive officers that provide for, among other things, severance commitments of up to $
11
(8) Debt
The following table presents the components and classification of debt:
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||
Debt principal: |
|
|
|
|
|
||
Terms loans under Credit Agreement |
$ |
|
|
$ |
|
||
Note with former equity holder of IriSys |
|
|
|
|
|
||
Other |
|
|
|
|
|
||
Debt principal |
|
|
|
|
|
||
Debt adjustments: |
|
|
|
|
|
||
Unamortized deferred issuance costs |
|
( |
) |
|
|
( |
) |
Exit fee accretion |
|
|
|
|
|
||
Unamortized original discount |
|
( |
) |
|
|
( |
) |
Carrying value of debt |
$ |
|
|
$ |
|
||
|
|
|
|
|
|
||
Current portion of related party debt |
$ |
|
|
$ |
|
||
Debt, net of current portion |
|
|
|
|
|
||
Related party debt, net of current portion |
|
|
|
|
|
||
Carrying value of debt |
$ |
|
|
$ |
|
||
The following table presents the future maturity of debt principal:
Twelve months ending June 30, |
|
|
|
2023 |
$ |
|
|
2024 |
|
|
|
2025 |
|
|
|
2026 |
|
|
|
2027 |
|
|
|
Thereafter |
|
|
|
Total debt principal |
$ |
|
|
Term loans under Credit Agreement
The Company is currently party to a credit agreement (the “Credit Agreement”) with Athyrium Opportunities III Acquisition LP (“Athyrium”). The Credit Agreement has been fully drawn in the form of $
The term loans under the Credit Agreement bear a rate of
In connection with the Credit Agreement, the Company issued warrants to each of Athyrium and its affiliate, Athyrium Opportunities II Acquisition LP (“Athyrium II”), to purchase an aggregate of
12
In connection with the Credit Agreement and amendments made to it over the years, the Company has paid financing costs, has incurred costs to record and subsequently to adjust the value of the warrants described above and has been accreting the exit fee described above. These costs are being recognized in interest expense using the effective interest method over the term of the Credit Agreement, resulting in non-cash interest expense of $
At June 30, 2022, the overall effective interest rate, including cash paid for interest and non-cash interest expense, was
Note with former equity holder of IriSys
In connection with the acquisition of IriSys, the Company issued a subordinated promissory note to a former equity holder of IriSys in the aggregate principal amount of $
The Note was initially recognized at fair value as part of the consideration paid for the acquisition of IriSys, resulting in an original discount recognized of $
Since the acquisition of IriSys, we believe that the note holder has held a combination of direct beneficial interests and significant influence over at least 10% of the Company's outstanding common stock. As a result, the Company has presented the note holder as a related party. The Company has accrued interest of $
Other
In connection with the acquisition of IriSys, the Company assumed a loan with a principal amount of $
(9) Shareholders’ equity or deficit
Capital raises
The following table presents the Company’s capital raises since its initial public offering in March 2014:
|
Date or period |
|
Shares of common stock issued |
|
|
Gross proceeds |
|
|
Offering expenses |
|
|
Net proceeds |
|
||||
Initial public offering |
March 12, 2014 |
|
|
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Private placement |
July 7, 2015 |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Underwritten public offering |
August 19, 2016 |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Underwritten public offering |
December 16, 2016 |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
2018 common stock purchase agreement with Aspire Capital |
Year ended December 31, 2018 |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|||
2019 common stock purchase agreement with Aspire Capital |
Fourth quarter 2020 |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Share issuance agreement for amendment 5 to Credit Agreement |
February 2021 |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Underwritten public offering |
May 12, 2021 |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Issuance of shares for IriSys acquisition |
February 2022 |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Shares issued
As part of the consideration paid for the acquisition of IriSys, the Company issued
13
Aspire common stock purchase agreement
The Company is currently party to an amended common stock purchase agreement with Aspire Capital Fund LLC (“Aspire Capital”) originally entered into during 2019, and most recently amended in February 2021 (as amended, the “2019 Common Stock Purchase Agreement”). The 2019 Common Stock Purchase Agreement provides that, upon the terms and subject to the conditions and limitations set forth in the agreement, Aspire Capital is committed to purchase, at the Company’s sole election, up to an aggregate value of $
Warrants
At June 30, 2022, warrants to purchase
(10) Revenue recognition
The following table presents changes in contract assets and liabilities:
|
Contract assets |
|
|
Contract liabilities |
|
||
Balance at December 31, 2021 |
$ |
|
|
$ |
|
||
Changes to the beginning balance of contract assets arising from: |
|
|
|
|
|
||
Reclassification to receivables as a result of rights to consideration becoming unconditional |
|
( |
) |
|
|
— |
|
Reduction to offset within net contract asset due to recognition of revenue |
|
|
|
|
— |
|
|
Changes in estimate |
|
|
|
|
— |
|
|
Contract assets recognized since beginning of period, net of reclassification to receivables and changes in estimates |
|
|
|
|
— |
|
|
Changes to contract liabilities: |
|
|
|
|
|
||
Amounts billed in advance of contract performance |
|
— |
|
|
|
|
|
Revenue recognized |
|
— |
|
|
|
( |
) |
Balance at June 30, 2022 |
$ |
|
|
$ |
|
||
The following table disaggregates revenue by timing of revenue recognition:
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
||||||||||
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Point in time |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Over time |
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
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.
(11) Stock-based compensation
In October 2013, the Company established an equity incentive plan that has been subsequently amended and restated to become the 2018 Amended and Restated Equity Incentive Plan (the “A&R Plan”) At June 30, 2022, a total of
Stock options
Stock options are exercisable generally for a period of
14
The following table presents information about the fair value of stock options granted:
|
Six months ended June 30, |
|
|||||
|
2022 |
|
|
2021 |
|
||
Weighted average grant date fair value |
$ |
|
|
$ |
|
||
Assumptions used to determine fair value: |
|
|
|
|
|
||
Range of expected option life |
|
|
|
||||
Expected volatility |
|
|
|
||||
Risk-free interest rate |
|
|
|
||||
Expected dividend yield |
|
|
|
|
|
||
The intrinsic value of options exercised was negligible in the six months ended June 30, 2022, and
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, 2021 |
|
|
|
$ |
|
|
|
|
|
||||
Granted |
|
|
|
|
|
|
|
|
|
|
|||
Exercised |
|
( |
) |
|
|
|
|
|
|
|
|
||
Forfeited or expired |
|
( |
) |
|
|
|
|
|
|
|
|
||
Balance, June 30, 2022 |
|
|
|
|
|
|
$ |
|
|
||||
Exercisable |
|
|
|
|
|
|
|
|
|
||||
Included in the table above are
Restricted stock units
Restricted stock units (“RSUs”) vest over
The following table presents information about recent RSU activity:
|
Number of shares |
|
|
Weighted average grant date fair value |
|
||
Balance, December 31, 2021 |
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
||
Vested |
|
( |
) |
|
|
|
|
Forfeited |
|
( |
) |
|
|
|
|
Balance, June 30, 2022 |
|
|
|
|
|
||
Included in the table above are
15
Other information
The following table presents the classification of stock-based compensation expense:
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
||||||||||
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Cost of sales |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Selling, general and administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
As of June 30, 2022, there was $
On June 1, 2022, the Company issued an offer to certain employee optionholders (“Eligible Employees”), subject to specified conditions, to exchange and cancel certain options which met the defined eligibility requirements (“Eligible Options”) for a new RSU grant (“New RSUs”) (collectively known as the “Exchange Offer”). Pursuant to the Exchange Offer, 130 Eligible Employees elected to exchange Eligible Options, and the Company accepted for cancellation Eligible Options to purchase an aggregate of
(12) Acquisition of IriSys
On
The following table presents unaudited supplemental pro forma financial information for the three and six months ended June 30, 2021 as if the IriSys acquisition had occurred on January 1, 2021:
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
||
|
2021 |
|
|
2021 |
|
||
Revenue |
$ |
|
|
$ |
|
||
Net income (loss) |
|
|
|
|
( |
) |
|
The pro forma financial information presented above has been prepared by combining the Company's historical results and the historical results of IriSys and adjusting those results to eliminate historical transaction costs and to reflect the effects of the acquisition as if they occurred on January 1, 2021. The effects of the acquisition on the historical pro forma financial information include additional depreciation and amortization expense from the increase of asset carrying values to fair value, the adoption of new accounting standards, additional interest expense from the issuance of the subordinated promissory note and the elimination of interest expense related to indebtedness of IriSys prior to the acquisition. These results do not purport to be indicative of the results of operations which actually would have resulted had the acquisitions occurred on the date indicated above, or that may result in the future, and do not reflect potential synergies or additional costs following the acquisition.
(13) 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:
16
Items measured at fair value on a recurring basis
Cash equivalents of $
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 June 30, 2022, 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 June 30, 2022 due to the recent issuances and amendment of those instruments and taking into consideration management's current evaluation of market conditions.
(14) Leases
The Company is party to
Undiscounted future lease payments for the
Twelve months ended June 30, |
|
|
|
2023 |
$ |
|
|
2024 |
|
|
|
2025 |
|
|
|
2026 |
|
|
|
2027 |
|
|
|
Thereafter |
|
|
|
Total lease payments |
|
|
|
Less imputed interest |
|
( |
) |
Total operating lease liabilities |
$ |
|
|
At June 30, 2022, the weighted average remaining lease term was
17
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, 2021 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, 2021, filed with the SEC on March 1, 2022, 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:
18
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 in the area of small molecules. With an expertise in solving complex formulation and manufacturing problems, we are 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 advanced dosage forms, we have the expertise to deliver on our clients’ pharmaceutical development and manufacturing projects, regardless of complexity level. We do all of this in our best-in-class 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, Donnatal liquids and tablets and Scot-Tussin cough and cold liquids, as well as supporting numerous development stage products.
Effective March 21, 2022, we changed our name to Societal CDMO, Inc. to reflect the corporate transformation that has taken place primarily as a result of our acquisition and successful integration of IriSys into the organization.
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 despite having endured other challenges related to the COVID-19 pandemic during 2021.
19
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. While the impact of COVID-19 has lessened in many ways, we are experiencing a higher level of residual supply chain disruptions that we are actively managing to meet our second half 2022 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 also continue to closely monitor economic developments related to COVID-19 and other diseases and geopolitical conflicts, such as the conflict between Russia and Ukraine, which continue to have adverse effects on the U.S. and global markets.
Due to these and other factors, we anticipate a general slowdown in clinical development activity as a result of clinical failures and/or a lack of adequate funding to go forward, which may cause a reduction in the number of business development opportunities that we will be able to pursue during 2022. We also expect to face continuing inflationary pressures on raw materials, labor and logistics during 2022. Finally, we expect to be impacted by higher interest rates on our LIBOR-based term loan borrowings during the second half of 2022.
Financial overview
Revenues
We recognize three types of revenue: manufacturing, profit-sharing and research and development.
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
We recognize profit-sharing or royalty revenue, collectively referred to as profit-sharing revenue, related to the sale of products by our commercial partners that incorporate our technologies. Profit-sharing revenues are generally recognized under the terms of the applicable license, development and/or supply agreement. For arrangements that include sales-based profit-sharing and the license is deemed to be the predominant item to which the profit-sharing relates, we recognize revenue when the related sales occur by the commercial partner. For arrangements that include sales-based profit-sharing and the license is not deemed to be the predominant item to which the profit-sharing relates, we recognize revenue when the performance obligation to which the profit-sharing has been allocated has been satisfied, which is upon transfer of control of a product to a customer. 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.
Research and development
Research and development revenue includes services associated with formulation, process development, clinical trial material and clinical trial support services, as well as custom development of manufacturing processes and analytical methods for a customer’s non-clinical, clinical and commercial products. Such revenues are recognized at a point in time or over time depending on the nature and particular facts and circumstances associated with the contract terms.
In contracts that specify milestones, we evaluate whether the milestones are considered probable of being achieved and estimate the amount to be included in the transaction price using the most likely amount method. Milestone payments related to arrangements under which we have continuing performance obligations 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.
20
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 consists of salaries and related costs for administrative, public company costs, business development personnel as well as legal, patent-related expenses and consulting fees. Public company costs include compliance, auditing services, tax services, insurance and investor relations.
In October 2021, we integrated and reorganized our collective employee base to support a multi-site organization. As a result, certain employees in administrative roles are supporting the entire company instead of plant operations. Costs associated with these employees, including employee compensation and other expenses, are classified in selling, general and administrative expenses prospectively from October 1, 2021.
Primarily in the last nine months of 2021, we qualified for approximately $4.4 million of federal employee retention credits that were recognized as offsets to expense. We will not recognize any such expense offsets in 2022.
Amortization of intangible assets
Historically, we recognized amortization expense related to an intangible asset for our profit-sharing and contract manufacturing relationships on a straight-line basis over an estimated useful life of six years. Amortization stopped when the intangible asset reached the end of its useful life in April 2021. With the acquisition of IriSys, 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, 2.4, and 1.5 years, respectively.
Interest expense
Interest expense for the periods presented primarily relates to our Athyrium senior secured term loans and the amortization of related financing costs. In addition, following the acquisition of IriSys, there is additional interest expense related to interest on the sellers note which was a component of the IriSys acquisition purchase price.
Net operating losses and tax carryforwards
As of December 31, 2021, we had federal net operating loss, or NOL, carry forwards of approximately $135.9 million, $127.7 million of which have an indefinite carry forward period. The remaining $8.2 million of federal NOL carry forwards, $137.7 million of state NOL carry forwards and federal and state research and development tax credit carryforwards of $4.6 million are also available to offset future taxable income, but they will begin to expire at various dates beginning in 2028 if not utilized. We believe that it is more likely than not that the deferred income tax assets associated with our U.S. operations will not be realized, and as such, there is a full valuation allowance against our U.S. deferred tax assets.
Key indicators of performance
To evaluate our performance, we monitor a number of industry-standard key indicators such as:
21
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 that provide a more complete understanding of our business.
Results of operations
Comparison of second quarters 2022 and 2021
|
Three months ended June 30, |
|
|||||
(in millions) |
2022 |
|
|
2021 |
|
||
Revenue |
$ |
23.2 |
|
|
$ |
18.0 |
|
Operating expenses: |
|
|
|
|
|
||
Cost of sales (excluding amortization of intangible assets) |
|
17.5 |
|
|
|
12.3 |
|
Selling, general and administrative |
|
5.2 |
|
|
|
3.8 |
|
Amortization of intangible assets |
|
0.2 |
|
|
|
0.1 |
|
Total operating expenses |
|
22.9 |
|
|
|
16.2 |
|
Operating income |
|
0.3 |
|
|
|
1.8 |
|
Interest expense |
|
(3.4 |
) |
|
|
(4.0 |
) |
Gain on extinguishment of debt |
|
— |
|
|
|
3.4 |
|
Net (loss) income |
$ |
(3.1 |
) |
|
$ |
1.2 |
|
Revenue. The increase of $5.2 million was primarily driven by an increase in European Ritalin LA demand from our new customer InfectoPharm, revenue resulting from the acquisition of IriSys, as well as higher revenues from our clinical trial materials business. These increases were partially offset by declining revenues from Lannett’s commercial sales of Verapamil PM products compared to the prior year. In an effort to address this decline, we recently executed an amendment to our license and supply agreement with Lannett for the marketing of Verapamil PM and Verelan products subsequent to the end of the period, which provides overall improved economics for Societal and is expected to strengthen revenues from Lannett in the second half of the year despite the declines experienced in the first half of the year.
Cost of sales. The increase of $5.2 million was primarily due to costs associated with operating the San Diego facility acquired from IriSys and increased costs tied to the increased manufacturing revenue during the quarter. In addition, in 2021, we received certain employment incentive tax credits that were not repeated in 2022 resulting in increased expense in 2022. These increases were partially offset by the reallocation of expenses reflecting the post-acquisition organizational structure. Prior to October 1, 2021, these employees supported our plant operations and were classified in cost of sales.
Selling, general and administrative. The increase of $1.4 million was primarily related to increased personnel costs tied to the reallocation of expenses reflecting the post-acquisition organizational structure (see cost of sales above) and integration costs associated with the IriSys integration.
Amortization of intangible assets. The increase of $0.1 million was the result of the amortization related to the acquisition of IriSys for acquired customer relationships, backlog and trademarks and trade names partially offset by the amortization of CDMO royalties and contract manufacturing relationships acquired in 2015 ending on April 10, 2021.
Interest expense. The decrease of $0.6 million was primarily due to reduced non-cash financing expense and increased capitalized interest. This decrease was partially offset by an increase in interest from the debt portion of the IriSys acquisition purchase price.
Gain on extinguishment of debt. In June 2021, the promissory note with PNC Bank under the Paycheck Protection Program of the Coronavirus Aid, Relief and Economic Security Act of 2020, or the PPP Note, and all accrued interest thereon was forgiven.
22
Comparison of six months ended 2022 and 2021
|
Six months ended June 30, |
|
|||||
(in millions) |
2022 |
|
|
2021 |
|
||
Revenue |
$ |
44.3 |
|
|
$ |
34.8 |
|
Operating expenses: |
|
|
|
|
|
||
Cost of sales (excluding amortization of intangible assets) |
|
33.6 |
|
|
|
26.7 |
|
Selling, general and administrative |
|
10.9 |
|
|
|
8.5 |
|
Amortization of intangible assets |
|
0.4 |
|
|
|
0.7 |
|
Total operating expenses |
|
44.9 |
|
|
|
35.9 |
|
Operating loss |
|
(0.6 |
) |
|
|
(1.1 |
) |
Interest expense |
|
(6.8 |
) |
|
|
(7.8 |
) |
Gain on extinguishment of debt |
|
— |
|
|
|
3.4 |
|
Net loss |
$ |
(7.4 |
) |
|
$ |
(5.5 |
) |
Revenue. The increase of $9.5 million was primarily driven by revenue resulting from the acquisition of IriSys as well as higher revenues from our clinical trial materials business. In addition, there was an increase in European Ritalin LA demand from our new customer InfectoPharm as well as an increase in revenue from our largest commercial customer Teva, correlated with pull through in demand resulting from market share gains against the sole competitor for the Verapamil SR products. The increase in revenue was partially offset by a decline in revenue from Lannett’s commercial sales of the Verapamil PM products.
Cost of sales. The increase of $6.9 million was primarily due to the acquisition of the San Diego facility and certain 2021 employment incentive tax credits that were not repeated in 2022 resulting in increased expense in 2022. These increases were partially offset by the reallocation of expenses reflecting the post-acquisition organizational structure. Prior to October 1, 2021, these employees supported our plant operations and were classified in cost of sales.
Selling, general and administrative. The increase of $2.4 million was primarily related to increased personnel costs tied to the reallocation of expenses and integration costs associated with the IriSys integration. These increases were offset by lower stock-based compensation expense.
Amortization of intangible assets. The decrease of $0.3 million was the result of the amortization of CDMO royalties and contract manufacturing relationships acquired in 2015 ending on April 10, 2021 partially offset by the amortization related to the acquisition of IriSys for acquired customer relationships, backlog and trademarks and trade names.
Interest expense. The decrease of $1.0 million was primarily due to reduced non-cash financing expense and increased capitalized interest. Also contributing to the reduction in interest was the successful refinancing and reduced term loan borrowings under the Credit Agreement with Athyrium as well as a decrease in the LIBOR base rate of interest on our term loans under the Credit Agreement. These decreases were partially offset by an increase in interest from the debt portion of the IriSys acquisition purchase price.
Gain on extinguishment of debt. In June 2021, the PPP Note and all accrued interest thereon was forgiven.
Liquidity and capital resources
At June 30, 2022, we had $15.5 million in cash and cash equivalents.
Since our inception, we have financed our operations and capital expenditures primarily from results of operations and the issuance of equity and debt. During the first half of 2022, our capital expenditures were $3.3 million to scale and support our expansion of capabilities.
We are party to a credit agreement with Athyrium, or the Credit Agreement, which has been fully drawn. The Credit Agreement requires us to repay the outstanding principal amount of $100.0 million on December 31, 2023. The Credit Agreement also includes certain financial covenants that the Company will need to satisfy on a monthly and quarterly basis, including: (i) maintaining a permitted net leverage ratio, calculated as our indebtedness, net of cash and cash equivalents, divided by EBITDA, each as defined in the Credit Agreement; and (ii) a minimum amount of cash and cash equivalents on hand.
23
We are also party to an amended common stock purchase agreement with Aspire Capital Fund LLC, or Aspire Capital. The amended agreement provides that, upon the terms and subject to the conditions and limitations set forth in the agreement, Aspire Capital is committed to purchase, at our sole election, up to an aggregate value of $41.2 million in shares of common stock. As of June 30, 2022, there is availability to issue up to $30.0 million or 6,199,299 shares of common stock under the 2019 Common Stock Purchase Agreement.
We may require additional financing or choose to refinance certain of these instruments, which could include debt refinancing, sale of real estate and/or other assets, strategic development, licensing activities and/or marketing arrangements or through public or private sales of equity or debt securities from time to time. Financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could materially adversely impact our growth plans and our financial condition or results of operations. Further, our ability to access capital market or otherwise raise capital may be adversely impacted by potential worsening global economic conditions, geopolitical conflicts, and the recent disruptions to, and volatility in, financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic and the conflict between Russia and Ukraine. 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.
Sources and uses of cash
|
Six months ended June 30, |
|
|||||
(amounts in millions) |
2022 |
|
|
2021 |
|
||
Net cash (used in) provided by: |
|
|
|
|
|
||
Operating activities |
$ |
(6.1 |
) |
|
$ |
2.7 |
|
Investing activities |
|
(3.3 |
) |
|
|
(2.1 |
) |
Financing activities |
|
(0.3 |
) |
|
|
21.3 |
|
Total |
$ |
(9.7 |
) |
|
$ |
21.9 |
|
Cash flows from operating activities represents our net loss as adjusted for stock-based compensation, depreciation, non-cash interest expense and amortization of intangibles as well as changes in operating assets and liabilities. The increase in cash used in operations in 2022 compared to 2021 was primarily due to a decrease in stock-based compensation expense in addition to changes in operating assets and liabilities. These included (i) a $3.3 million change in inventory balances due to timing of production and customer orders; (ii) a $1.1 million change in accounts receivable due to increased sales activity; (iii) a $2.3 million change in accrued payroll due to the fact that there were limited cash bonuses paid in 2021 and the effects of payroll period cutoff; and (iv) an additional $2.2 million interest payment that fell in the first quarter of 2022 compared to 2021, partially offset by (v) a $0.5 million reduction of prepaid expenses and other current assets.
Net cash used in investing activities for each period includes capital expenditures to scale and support our expansion of capabilities. With the inclusion of IriSys, we continue to anticipate that 2022 capital expenditures will increase as we continue to maintain our existing capabilities and support the growth of our clinical trials business and other new business acquired from IriSys. We expect to complete a significant capital project during the early second half of 2022 that will enhance our sterile fill and finishing capabilities. If we are unable to complete the capital project according to plan, this could have an adverse impact on our forecasted results.
Net cash provided by financing activities in 2021 changed to net cash used in financing activities in 2022, a change of $21.5 million primarily due to the absence of significant activities that occurred in 2021; in the first half of 2021, net proceeds from an issuance of common stock of $32.1 million were partially offset by debt repayments of $10.1 million and related financing cost payments of $0.2 million.
Forward-looking factors
Our future use of operating cash and capital requirements will depend on many forward-looking factors, including the following:
24
We anticipate raising funds from real estate asset sales to reduce our outstanding debt principal. There are a number of risks and uncertainties that could impact real estate values and or our ability, if any, to successfully monetize the sale of any non-core real-estate assets including, but not limited to, market forces, economic conditions, revenue concentration, debt levels, geographic location, interest rates, results of engineering plans, geotechnical surveys, coverage density, physical characteristics of the land (e.g. rock, wetlands delineation, streams, powerlines, topography, zoning), ability to reach acceptable contractual terms and obtaining the required approvals and release(s) from our senior secured lender.
We may also use existing cash and cash equivalents on hand, additional debt, equity financing, sale of 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. 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 June 30, 2022:
|
Payments due by period |
|
|||||||||||||||||
(in millions) |
Total |
|
|
Less than |
|
|
1-3 years |
|
|
3-5 years |
|
|
More than |
|
|||||
Debt obligations (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Principal |
$ |
106.5 |
|
|
$ |
2.0 |
|
|
$ |
104.1 |
|
|
$ |
0.1 |
|
|
$ |
0.3 |
|
Interest |
|
15.0 |
|
|
|
9.7 |
|
|
|
5.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
Purchase obligations (2) |
|
10.6 |
|
|
|
0.7 |
|
|
|
9.9 |
|
|
|
— |
|
|
|
— |
|
Operating leases (3) |
|
9.9 |
|
|
|
1.2 |
|
|
|
2.4 |
|
|
|
2.1 |
|
|
|
4.2 |
|
Other long-term liabilities (4) |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total |
$ |
142.0 |
|
|
$ |
13.6 |
|
|
$ |
121.5 |
|
|
$ |
2.3 |
|
|
$ |
4.6 |
|
25
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 June 30, 2022. We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.
A control system, no matter how well conceived and operated, can provide only reasonable, and not absolute, assurance that the objectives of the control system will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. However, our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. Based on the evaluation of our disclosure controls and procedures as of June 30, 2022, 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.
26
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 2021 Annual Report and Quarterly Report for the quarter ended March 31, 2022.
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.
The listing standards of the Nasdaq provide that a company, in order to qualify for continued listing, must maintain a minimum closing bid price of $1.00 and satisfy standards relative to minimum shareholders’ equity, minimum market value of publicly held shares and various additional requirements. On June 27, 2022, we received a deficiency letter from the Listing Qualifications Department of Nasdaq, or the Staff, notifying us that, for the last 30 consecutive business days, the bid price for our common stock had closed below the minimum $1.00 per share requirement for continued inclusion on Nasdaq.
In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we have been provided a period of 180 calendar days, or until December 26, 2022, in which to regain compliance. In order to regain compliance with the minimum bid price requirement, the closing bid price of our common stock must be at least $1.00 per share for a minimum of ten consecutive business days during this 180-day period. In the event that we do not regain compliance within this 180-day period, we may be eligible to seek an additional compliance period of 180 calendar days if we meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for Nasdaq, with the exception of the bid price requirement. However, if it appears to the Staff that we will not be able to cure the deficiency, Nasdaq will provide notice to us that we will not be eligible for the additional compliance period and our common stock will be subject to delisting. We would then be entitled to appeal the determination to a Nasdaq Listing Qualifications Panel and request a hearing.
There can be no assurance that we will be able to regain compliance with the minimum bid price requirement or maintain compliance with the other Nasdaq listing requirements. If we do not regain compliance with the Nasdaq continuing listing requirements, our common stock will be delisted from Nasdaq and it could be more difficult to buy or sell our securities and to obtain accurate quotations, and the price of our common stock could suffer a material decline. In addition, a delisting would impair our ability to raise capital through the public markets, could deter broker-dealers from making a market in or otherwise seeking or generating interest in our securities and might deter certain institutions and persons from investing in our securities at all.
27
Item 2. Unregistered sales of equity securities and use of proceeds.
None.
Item 3. Defaults upon senior securities.
None.
Item 4. Mine safety disclosures.
Not applicable.
Item 5. Other information.
None.
Item 6. Exhibits.
28
EXHIBIT INDEX
Exhibit No. |
|
Description |
|
Method of filing |
10.1 |
|
|
Filed herewith |
|
31.1 |
|
Rule 13a-14(a)/15d-14(a) certification of Principal Executive Officer |
|
Filed herewith |
31.2 |
|
Rule 13a-14(a)/15d-14(a) certification of Principal Financial and Accounting Officer |
|
Filed herewith |
32.1 |
|
Section 1350 certification, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
Filed herewith |
101 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 |
29
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: August 10, 2022 |
|
By: |
/s/ J. David Enloe, Jr. |
|
|
|
J. David Enloe, Jr. |
|
|
|
President and Chief Executive Officer |
|
|
|
(Principal Executive Officer) |
|
|
|
|
Date: August 10, 2022 |
|
By: |
/s/ Ryan D. Lake |
|
|
|
Ryan D. Lake |
|
|
|
Chief Financial Officer |
|
|
|
(Principal Financial and Accounting Officer) |
30
Exhibit 10.1
CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY [***], HAS BEEN OMITTED BECAUSE IT IS NOT MATERIAL AND THE REGISTRANT CUSTOMARILY AND ACTUALLY TREATS SUCH INFORMATION AS PRIVATE AND CONFIDENTIAL.
AMENDMENT NO. 3 TO LICENSE AND SUPPLY AGREEMENT
THIS AMENDMENT NO. 3 TO LICENSE AND SUPPLY AGREEMENT (this “Amendment No. 3”) is made as of July 1, 2022 by and between Societal CDMO Gainesville, LLC (f/k/a Recro Gainesville LLC) (as successor to Alkermes Pharma Ireland Limited) (“Societal”) and Lannett Company, Inc. (as successor to Kremers Urban Pharmaceuticals, Inc.) (“Lannett”).
Background
WHEREAS, Societal and Lannett are parties to that certain License and Supply Agreement, effective as of January 1, 2014, as amended in September 2018, as amended by Amendment No.1 to License and Supply Agreement, effective as of September 6, 2018 and as further amendment by Amendment No. 2 to License and Supply Agreement, effective as of November 5, 2020 (as amended, the “Agreement”); and
WHEREAS, the parties now desire to enter into this Amendment No. 3 to set forth certain changes to and modifications of the terms and conditions contained in the Agreement.
Agreement
NOW, THEREFORE, in consideration of the mutual agreement of the parties contained herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged and agreed, and intending to be legally bound hereby, the parties agree as follows:
“Notwithstanding the foregoing, Lannett shall not discontinue any Product without Societal’s prior written consent. Without imitation of this Section 2.4(b), the parties acknowledge and agree that Lannett shall resume marketing the Branded V Product in accordance with its obligations under this Section 2.4 and otherwise under the Agreement notwithstanding any prior decision on the part of Lannett to discontinue the marketing thereof unless otherwise expressly agreed by Societal.”
“(d) Without limitation of the foregoing, Lannett shall use commercially reasonable efforts to carry out the activities set forth on Schedule 2.4(d) to this Agreement.”
“Without limitation of the foregoing, representatives of the Joint Marketing Committee (including the individuals who hold the positions of Vice President of Business Development and Head of Sales & Marketing or equivalent position(s) with Lannett and Senior Vice President, Operations and Vice President of Supply Chain or equivalent position(s) with Societal) shall meet by teleconference or other means as agreed by the parties (i) on a monthly basis to discuss market dynamics and any actions to be taken by the parties or changes to the marketing and promotional plan with respect to the Products and (ii) on a quarterly basis to discuss the financial performance of the Products and review the monthly, quarterly and annual revenue forecasts for commercializing the Products.”
2.7 Development Option.
(a) Lannett hereby grants to Societal the option to select [***] of the products set forth on Schedule 2.7(a) (each, an “Option Product”) for Development and Commercialization (as such terms shall be defined in the Development Agreement (as defined below) to be entered into by the parties) by Societal and Lannett. In each instance where Societal exercises its right to designate an Option Product for Development, Societal and Lannett shall negotiate in good faith the terms of one or more appropriate agreement(s) with respect to the parties’ Development and Commercialization of such Option Product, including commercial terms with respect to rights and responsibilities for maintaining applicable regulatory approvals, Development, manufacturing and commercializing such Option Product and all related Development and post-Development matters (each such agreement, a “Development Agreement”) in accordance with the terms set forth in Section 2.7(b).
The parties recognize that execution of a Development Agreement is contingent upon costs and fees for Development and manufacturing services by Societal being consistent with prevailing rates offered by similarly situated vendors; provided, that if Lannett asserts that amounts quoted by Societal in connection with any such Development Agreement are higher than any such prevailing rates, Lannett shall provide evidence reasonably satisfactory to Societal of such prevailing rates offered by similarly situated vendors and shall negotiate in good faith with Lannett with respect to the same.
(b) The Development Agreement for any Option Product that is selected by Societal to be Developed and Commercialized pursuant to Section 2.7(a) shall provide for the following terms:
(i) Lannett shall order and purchase such Option Product exclusively from Societal and Societal shall agree to supply such Option Product exclusively to Lannett for an initial term of [***] at a supply price equal to [***] (the “Option Product Supply Price”);
(ii) in addition to the Option Product Supply Price, Societal shall be entitled to a share of the profits generated by Lannett with respect to such Option Product equal to [***] for such Option Product; and
2
(iii) (A) [***]; and
(B) [***].
For clarification, the [***] are not guaranteed payments, and will only be paid if successfully achieved on or before the agreed upon dates.
“At any time after [***], if the aggregate amount payable to Societal in respect of its applicable share of the Generic VPM Operating Profits, the Branded V Operating Profits and the Branded VPM Operating Profits pursuant to Schedule 3.1 is less than (i) [***] in any [***].
[***].”
“Upon delivery of any Product shipment or otherwise when any payment is due Societal pursuant to the terms of Schedule 3.1 of this Agreement, Societal shall be entitled to submit invoices therefor to Lannett, and Lannett agrees to remit payment within [***] from receipt of invoice.”
“Without limitation of Lannett’s reimbursement obligations pursuant to this Section 8.2(d), Lannett and Societal shall cooperate with each other for purposes of seeking an exemption from the payment of PDUFA program fees with respect to the applicable Product, to the extent such exemption is available for such Product under applicable law.”
“10.1 Termination. The term of this Agreement shall begin upon the Effective Date and, unless sooner terminated as hereinafter provided, shall end on December 31, 2024. This Agreement may be renewed for successive two (2)-year terms by mutual agreement of the parties in writing. Notwithstanding the foregoing, this Agreement may be terminated as follows:
(a) Termination for Insolvency. If either Lannett or Societal (i) makes a general assignment for the benefit of creditors or becomes insolvent; (ii) files an insolvency petition in bankruptcy; (iii) petitions for or acquiesces in the appointment of any receiver, trustee or similar officer to liquidate or conserve its business or any substantial part of its assets; (iv) commences under the laws of any jurisdiction any proceeding involving its insolvency, bankruptcy, reorganization, adjustment of debt, dissolution, liquidation or any other similar proceeding for the release of financially distressed debtors; or (v) becomes a party to any proceeding or action of the type described above in (iii) or (iv) and such proceeding or action remains undismissed or unstayed for a period of more than 60 days, then the other party may by written notice terminate this Agreement in its entirety with immediate effect.
(b) Termination for Default.
3
(i) Lannett and Societal each shall have the right to terminate this Agreement for default upon the other’s failure to comply in any material respect with the terms and conditions of this Agreement. At least thirty (30) days prior to any such termination for default (or fifteen (15) days in the case of a default upon the other’s failure to comply in any material aspect with the terms and conditions of this Agreement. At least thirty (30) days prior to any such termination for default (or fifteen (15) days in the case of a default arising from a party’s failure to pay any amounts when due to the other party under this Agreement) (such thirty (30) or fifteen (15) day period, as applicable, the “Cure Period”), the party seeking to so terminate shall give the other written notice of its intention to terminate this Agreement in accordance with the provisions of this Section 10.1(b), which notice shall set forth the default(s) which form the basis for such termination. If the defaulting party fails to correct such default(s) within the applicable Cure Period, or if the same cannot reasonably be corrected or remedied within the applicable Cure Period, then if the defaulting party has not commenced curing said default(s) within said Cure Period and be diligently pursuing completion of same, then such party immediately may terminate this Agreement.
(ii) This Section 10.1(b) shall not be exclusive and shall not be in lieu of any other remedies available to a party hereto for any default hereunder on the part of the other party.
(c) Termination for Change of Control. Either Lannett or Societal shall have the right to terminate this Agreement effective immediately upon the consummation of (i) any merger or consolidation of either party with or into another entity or any other corporate reorganization, if fifty percent (50%) or more of immediately after such merger, consolidation or other reorganization is owned by persons who were not stockholders of either party immediately prior to such merger, consolidation or other reorganization, (ii) the sale, transfer or other disposition of all or substantially all of either party’s assets or (iii) any transaction as a result of which any persons or group is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of securities of the Company representing at least fifty percent (50%) of the total voting power of either party’s outstanding voting securities.
(d) Continuing Obligations. Termination of this Agreement for any reason shall not relieve the parties of any obligation accruing prior thereto with respect to the Products and any ongoing obligations hereunder with respect to the remaining Products and shall be without prejudice to the rights and remedies of either party with respect to any antecedent breach of the provisions of this Agreement. Without limiting the generality of the foregoing, no termination of this Agreement, whether by lapse of time or otherwise, shall serve to terminate the obligations of the parties hereto under Sections 8.4, 8.5, 8.6, 8.8, 8.15, Section 9, Section 10.1(b), 10.1(e), 10.1(f) and Section 11 hereof, and such obligations shall survive any such termination.
(e) Net Sales Allowances after the Termination Date. In reference to returns or other Net Sales allowances which arise after the termination of this Agreement in respect of any Product supplied and sold under this Agreement prior to such termination, the parties agree that Lannett shall not be entitled to seek any reimbursement, Net Sales deductions or other form of compensation from Societal.
(f) Transition after Termination. Following a termination of this Agreement pursuant to this Section 10.1, the parties shall promptly meet to negotiate in good faith and establish a wind-down plan (the “Wind-Down Plan”) to transition any and all marketing and promotional activities being conducted by Lannett under this Agreement to Societal or a third party designated by Societal and Lannett and Societal shall use commercially reasonable efforts to carry out the activities set forth in the Wind-Down Plan and any other actions reasonably requested by Societal to facilitate the termination of this Agreement and the transition of the marketing and promotion of the Products to Societal or such third party in a commercially reasonable manner.”
All references to [***] set forth in (A) the definition of “Supply Price for Branded Product” and (B) Section 3(b)(i), Section 4(b)(i) and Section 4(b)(ii) are deleted and replaced with references to [***].
4
“(a) (i) Each invoice submitted to Lannett upon delivery of an order of Generic VPM Product shall reflect a price per unit equal to those set forth on Exhibit C to Amendment No. 3, however the price per unit shall not exceed [***].
(ii) In addition, (A) in every Quarter in which every Branded Product in all dosage strengths is sold by Lannett, Lannett shall pay Societal [***] and (B) in every Quarter where Lannett does not sell each dosage strength of each Branded Product, Lannett shall pay Societal [***].”
Societal CDMO, Inc.
1 E. Uwchlan Ave., Suite 112
Exton, PA
Attention: Scott Rizzo
Email: [email protected]
[signature page follows]
5
IN WITNESS WHEREOF, Societal, Lannett and Lannett have duly executed this Amendment No. 3 as of the date first written above.
SOCIETAL CDMO GAINESVILLE, LLC
By: /s/ Scott Rizzo
Name: Scott Rizzo
Title: Senior Vice President, Operations
LANNETT COMPANY, INC.
By: /s/ Michael Block
Name: Michael Block
Title: Vice President of Business Development
6
EXHIBIT A
Schedule 2.4(d)
Marketing Activities
Lannett shall undertake email marketing communications promoting the Products and such other activities as may be agreed among the parties in connection with the monthly marketing meetings of the Joint Marketing Committee as set forth in Section 2.5 of the Agreement. Additionally, Lannett shall proactively keep current with all relevant data regarding the financial performance of the Products, including sales and margin performance, and use commercially reasonable efforts to sell the Products that other companies in similar market conditions and business circumstances would reasonably deploy.
7
EXHIBIT B
Schedule 2.7(a)
Option Products
8
EXHIBIT C
Verapamil PM (Generic) Pricing
|
Per [***] Capsules |
||||
Verapamil PM Generic |
2020 |
2021 |
Jul-22 |
Jul-23 |
Jul-24 |
[***] |
[***] |
[***] |
[***] |
[***] |
[***] |
[***] |
[***] |
[***] |
[***] |
[***] |
[***] |
[***] |
[***] |
[***] |
[***] |
[***] |
[***] |
9
Exhibit 31.1
CERTIFICATION
I, J. David Enloe, Jr., certify that:
Date: August 10, 2022
/s/ J. David Enloe, Jr. |
J. David Enloe, Jr. |
President and Chief Executive Officer |
(Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION
I, Ryan D. Lake, certify that:
Date: August 10, 2022
/s/ Ryan D. Lake |
Ryan D. Lake |
Chief Financial Officer |
(Principal Financial and Accounting Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Societal CDMO, Inc. (the “Company”) on Form 10-Q for the quarterly period ended June 30, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the Company certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to such officer’s knowledge:
Date: August 10, 2022
/s/ J. David Enloe, Jr. |
J. David Enloe, Jr. |
President and Chief Executive Officer |
(Principal Executive Officer) |
|
/s/ Ryan D. Lake |
Ryan D. Lake |
Chief Financial Officer (Principal Financial and Accounting Officer) |
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