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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Trading symbol |
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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 November 1, 2023, 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) |
September 30, 2023 |
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December 31, 2022 |
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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 assets |
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Inventory |
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Prepaid expenses and other current assets |
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Assets held for sale |
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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 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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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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Convertible 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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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 September 30, |
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Nine months ended September 30, |
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(amounts in thousands, except share and per share data) |
2023 |
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2022 |
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2023 |
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2022 |
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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 |
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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 (loss) income |
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( |
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Interest expense |
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( |
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Interest income |
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Loss before income taxes |
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Income tax expense |
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Net loss |
$ |
( |
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$ |
( |
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$ |
( |
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$ |
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Loss 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, basic and diluted |
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See accompanying notes to consolidated financial statements.
2
SOCIETAL CDMO, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
(Unaudited)
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Convertible preferred stock |
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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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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, 2022 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Issuance of 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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— |
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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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— |
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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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— |
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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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( |
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( |
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Balance, March 31, 2023 |
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( |
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Conversion of preferred stock |
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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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— |
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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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— |
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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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( |
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( |
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Balance, June 30, 2023 |
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— |
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— |
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( |
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Issuance of common stock and warrants, net of costs |
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— |
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— |
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— |
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Issuance of warrants |
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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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— |
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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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— |
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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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( |
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( |
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Balance, September 30, 2023 |
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— |
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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, December 31, 2021 |
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— |
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$ |
— |
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$ |
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$ |
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$ |
( |
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$ |
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Issuance of 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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— |
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— |
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Exercise of stock options, net |
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— |
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— |
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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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— |
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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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( |
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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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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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— |
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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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— |
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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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— |
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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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( |
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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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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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— |
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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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— |
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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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— |
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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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( |
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( |
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Balance, September 30, 2022 |
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— |
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$ |
— |
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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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Nine months ended September 30, |
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(amounts in thousands) |
2023 |
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2022 |
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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 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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Deferred income tax expense |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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( |
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Contract assets |
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( |
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( |
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Inventory |
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( |
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( |
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Prepaid expenses and other assets |
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Accrued interest |
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( |
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Accounts payable, accrued expenses and other liabilities |
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( |
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( |
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Net cash used in operating activities |
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( |
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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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Cash flows from financing activities: |
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Proceeds from issuance of stock, net of costs |
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Payment of debt principal |
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( |
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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 provided by (used in) financing activities |
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( |
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Net decrease in cash and cash equivalents |
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( |
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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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Offering costs included in accounts payable and accrued expenses |
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Deferred financing costs included in accounts payable and accrued expenses |
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Fair value of warrants issued in connection with financing facility |
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Assets reclassified as held for sale |
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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
Liquidity and capital resources
The Company has incurred net losses since inception, including net losses for the three and nine months ended September 30, 2023, and has an accumulated deficit of $
In August 2023, the Company completed an underwritten public offering in which it raised net proceeds of $7,352 by issuing
The Company’s future operations are highly dependent on the profitability of its development and manufacturing operations. Management concluded that substantial doubt about its ability to continue as a going concern was raised as of the date of the issuance of these financial statements. However, management concluded that actions taken to date as well as its plans alleviate the substantial doubt that was raised.
The Company’s credit agreement with Royal Bank of Canada contains certain financial and other covenants, including quarterly and monthly minimum liquidity requirements, maximum net leverage ratios and minimum fixed charge coverage ratios (see note 8 for details), and includes limitations on, among other things, additional indebtedness, paying dividends in certain circumstances, acquisitions and certain investments. The credit agreement provides for certain mandatory prepayment events, including with respect to the proceeds of asset sales, extraordinary receipts, equity or debt issuances and other specified events, based on the terms of the credit agreement. Any failure to comply with the terms, covenants and conditions of the credit agreement or the debt agreements may result in an event of default under such agreements, which could have a material adverse effect on the business, financial condition and results of operations.
The pharmaceutical industry is experiencing a slowdown in clinical development activities resulting from reduced cash funding, and the Company is experiencing higher rates of customer attrition and development program delays that caused management to revise its 2023 earnings and cash projections when it released its second quarter 2023 results in August 2023. As a result of these factors, management took actions to amend its debt agreements in August 2023 to align financial covenants and other terms of the indebtedness with its revised projections.
The Company believes that its results of operations will allow it to comply with the amended financial and other covenants and contractual requirements of the agreements for at least the next twelve months. The Company’s ability to comply is subject to the Company’s success in implementing certain cost control measures, including the Company’s strategic reorganization which included a reduction in force, reducing capital expenditures and managing working capital in order to improve its ongoing financial performance and its liquidity position.
The Company may extend and or supplement the actions it is taking if it continues to experience adverse conditions described above, among others, that might impact the forecasted performance. If the Company is unable to achieve the results required to comply with the terms of its credit agreement in one or more quarters over the next twelve months, the Company may be required to take specific actions in addition to those described above, including but not limited to, additional cost control measures, or alternatively, seeking an amendment or waiver from its lenders. Obtaining a waiver or an amendment is not within the Company’s control, and if unsuccessful, the lenders may exercise the rights available to them under the credit agreement.
5
(2) Summary of significant accounting principles
Basis of presentation and principles of consolidation
The accompanying unaudited consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. In accordance with Securities and Exchange Commission’s (“SEC”) rules for interim financial statements, certain information required by U.S. GAAP may be condensed or omitted. The Company’s consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. In the opinion of management, the accompanying consolidated financial statements include all normal and recurring adjustments (which consist primarily of accruals, estimates and assumptions that impact the financial statements) considered necessary to present fairly the Company’s results for the interim periods. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. The Company has determined that it operates in a single segment.
The accompanying unaudited interim consolidated financial statements should be read in conjunction with the annual audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Use of estimates
The preparation of financial statements and the notes to the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from such estimates.
Cash and cash equivalents
Cash and cash equivalents represent cash in banks and highly liquid short-term investments that have maturities of three months or less when acquired. These highly liquid short-term investments are both readily convertible to known amounts of cash and so near to their maturity that they present insignificant risk of changes in value due to changes in interest rates.
Accounts receivable, net
Accounts receivable generally represent amounts billed for services provided under our customer contracts and are recorded at the invoiced amount net of an allowance for credit losses, if necessary. We apply judgment in assessing the ultimate realization of our receivables, and we estimate an allowance for credit losses based on various factors, such as the aging of our receivables, historical experience, and the financial condition of our customers. The allowance for credit losses was not material as of the balance sheet dates presented.
Inventory
Inventory is stated at the lower of cost or net realizable value. Included in inventory are raw materials and work-in-process used in the production of commercial products. Items are issued out of inventory using the first-in, first-out method.
Adjustments to inventory are determined at the raw materials, work-in-process, and finished good levels to reflect obsolescence or impaired balances. Factors influencing inventory obsolescence include changes in demand, product life cycle, product pricing, physical deterioration and quality concerns.
Property, plant and equipment, net
Property, plant and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, which are as follows: to
6
The Company considers assets to be held for sale when (i) management commits to a plan to sell the asset; (ii) the asset is available for immediate sale in its present condition; (iii) the asset is actively being marketed for sale at a price that is reasonable given the estimate of current market value; and (iv) the sale is probable and will be completed within one year. Upon designation of an asset as held for sale, the Company records the asset’s value at the lower of its carrying value plus selling costs or its estimated net realizable value.
Goodwill and intangible assets
Goodwill represents the excess of purchase price over the fair value of net assets acquired by the Company in a business combination. Goodwill is not amortized but assessed for impairment on an annual basis or more frequently if impairment indicators exist.
The impairment analysis for goodwill consists of an optional qualitative assessment potentially followed by a quantitative analysis. If the Company determines that the carrying value of its reporting unit exceeds its fair value, an impairment charge is recorded for the excess.
The Company performs its annual goodwill impairment test as of November 30th, or whenever an event or change in circumstance occurs that would require reassessment of the impairment of goodwill. In performing the evaluation, the Company assesses qualitative factors such as overall financial performance, actual and anticipated changes in industry and market conditions, and competitive environments. As a result of the most recent annual goodwill impairment test, the Company determined that there was no impairment of goodwill.
Definite-lived intangible assets are amortized on a straight-line basis over their estimated useful life. The Company is required to review the carrying value of definite-lived intangible assets for recoverability whenever events occur or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.
Contingencies
The Company’s business exposes it to various contingencies including compliance with regulations, legal exposures and other matters. Loss contingencies are reflected in the financial statements based on management’s assessments of their expected outcome or resolution:
Significant judgment is required to determine probability and whether the amount can be reasonably estimated. Due to uncertainties related to these matters, accruals are based only on the information available at the time. As additional information becomes available, the Company reassesses potential liabilities and may revise previous estimates.
Revenue recognition
The Company generates revenues from manufacturing, profit-sharing and development services for multiple pharmaceutical companies.
Manufacturing
Manufacturing, packaging and other related services revenue is recognized upon transfer of control of a product to a customer, generally upon shipment, based on a transaction price that reflects the consideration the Company expects to be entitled to as specified in the agreement with the commercial partner, which could include variable consideration such as pricing and volume-based adjustments.
7
Profit-sharing
In addition to manufacturing and packaging revenue, certain customers who use our technologies are subject to agreements that provide us intellectual property sales-based profit-sharing and/or royalties consideration, collectively referred to as profit-sharing, computed on the net product sales of the commercial partner. Profit-sharing revenues are generally recognized under the terms of the applicable license, development and/or supply agreement. The Company has determined that, in its arrangements, the license for intellectual property is not the predominant item to which the profit-sharing relates, so the Company recognizes revenue upon transfer of control of the manufactured product. In these cases, significant judgment is required to calculate the estimated variable consideration from such profit-sharing using the expected value method based on historical commercial partner pricing and deductions. Estimated variable consideration is partially constrained due to the uncertainty of price adjustments made by the Company’s commercial partners, which are outside of the Company’s control. Factors causing price adjustments by the Company’s commercial partners include increased competition in the products’ markets, mix of volume between the commercial partners’ customers, and changes in government pricing.
Development
Development revenue includes services associated with formulation, process development, clinical trial materials services, as well as custom development of manufacturing processes and analytical methods for a customer’s non-clinical, clinical and commercial products. Such revenues are recognized at a point in time or over time depending on the nature and particular facts and circumstances associated with the contract terms.
In contracts that specify milestones, the Company evaluates whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. Milestone payments related to arrangements under which the Company has continuing performance obligations are deferred and recognized over the period of performance. Milestone payments that are not within the Company’s control, such as submission for approval to regulators by a commercial partner or approvals from regulators, are not considered probable of being achieved until those submissions are submitted by the customer or approvals are received.
In contracts that require revenue recognition over time, the Company utilizes input or output methods, depending on the specifics of the contract, that compare the cumulative work-in-process to date to the most current estimates for the entire performance obligation. Under these contracts, the customer typically owns the product details and process, which have no alternative use. These projects are customized to each customer to meet its specifications, and typically only one performance obligation is included. Each project represents a distinct service that is sold separately and has stand-alone value to the customer. The customer also retains control of its product as the product is being created or enhanced by the Company’s services and can make changes to its process or specifications upon request.
Contract assets represent revenue recognized for performance obligations completed or in process before an unconditional right to payment exists, and therefore invoicing or associated reporting from the customer regarding the computation of the net product sales has not yet occurred. Contract liabilities represent payments received from customers prior to the completion of associated performance obligations.
Concentration of credit risk
Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash, cash equivalents and accounts receivable. The Company manages its cash and cash equivalents based on established guidelines that balance safety and liquidity.
The Company’s accounts receivable balances are primarily concentrated among
The Company is dependent on its relationships with a small number of commercial partners. The Company’s three largest customers generated
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.
8
Determining the appropriate fair value of stock options requires the use of subjective assumptions, including the expected life of the option and expected stock price volatility. The Company uses the Black-Scholes option pricing model to value its stock option awards. The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and/or management uses different assumptions, stock-based compensation expense could be materially different for future awards.
The expected life of stock options was estimated using the “simplified method,” which is based on the average of the vesting tranches and the contractual life of each grant. For stock price volatility, the Company uses the historical volatility of its publicly traded stock in order to estimate future stock price trends. The risk-free interest rate is based on U.S. Treasury notes with a term approximating the expected life of the option.
Upon exercise of stock options or vesting of restricted stock units, the holder may elect to cover tax withholdings by forfeiting shares of an equivalent value. In such cases, the Company issues net new shares to the holder, pays the tax withholding on behalf of the participant and presents the payment similar to a capital distribution: a reduction to additional paid-in-capital and a financing cash outflow in the consolidated financial statements.
Income taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.
In assessing the realizability of net deferred tax assets, the Company considers all relevant positive and negative evidence in determining whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The realization of the gross deferred tax assets is dependent on several factors, including the generation of sufficient taxable income prior to the expiration of the net operating loss carryforwards. A full valuation allowance was recorded as of September 30, 2023 and December 31, 2022.
Unrecognized income tax benefits represent income tax positions taken on income tax returns that have not been recognized in the consolidated financial statements. The Company recognizes the benefit of an income tax position only if it is more likely than not (greater than 50%) that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position. Otherwise, no benefit is recognized. The tax benefits recognized are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company does not anticipate significant changes in the amount of unrecognized income tax benefits over the next year.
Leases
The Company determines under U.S. GAAP if an arrangement is a lease at inception. The arrangement is a lease if it conveys the right to the Company to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. Options to extend the lease are included in the lease term if the options are reasonably certain to be exercised. Operating lease expense is recognized on a straight-line basis over the lease term.
In a sale-leaseback transaction, the Company determines if it relinquished control of the assets to the buyer-lessor. If control is not relinquished, it does not derecognize the asset and does not apply the lease accounting model.
Operating lease balances are presented as separate captions on the balance sheets. Finance lease assets are included in property, plant and equipment. Finance lease liabilities are included in other liabilities.
Income or loss per share
Basic income or loss per share is determined by dividing net income or loss (the numerator) by the weighted average common shares outstanding during the period (the denominator). The denominator includes the weighted average common stock equivalents for warrants priced at $0.0001, as the underlying common shares will be issued for little cash consideration and the conditions for the issuance of the underlying common shares are met when such warrants are issued.
9
To calculate diluted income or loss per share, the numerator and denominator are adjusted to eliminate the income or loss and the dilutive effects on shares, respectively, caused by outstanding common stock options, warrants and unvested restricted stock units, using the treasury stock method, if the inclusion of such instruments would be dilutive.
For all periods presented, the Company incurred a net loss. In periods of net loss, the inclusion of dilutive securities would be antidilutive because it would reduce the amount of loss incurred per share. As a result, no additional dilutive shares were included in diluted loss per share, and there were no differences between basic and diluted loss per share.
The following table presents the potentially dilutive securities that were excluded from the computations of diluted loss per share:
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
||||||||||
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Restricted stock units |
|
|
|
|
|
|
|
|
|
|
|
||||
Stock options |
|
|
|
|
|
|
|
|
|
|
|
||||
Warrants |
|
|
|
|
|
|
|
|
|
|
|
||||
Amounts in the table above reflect the common stock equivalents of the noted instruments.
(3) Inventory
The following table presents the components of inventory:
|
September 30, 2023 |
|
|
December 31, 2022 |
|
||
Raw materials |
$ |
|
|
$ |
|
||
Work in process |
|
|
|
|
|
||
Finished goods |
|
|
|
|
|
||
Inventory |
$ |
|
|
$ |
|
||
(4) Intangible assets, net
The following table presents the components of other intangible assets:
|
September 30, 2023 |
|
|
December 31, 2022 |
|
||||||||||||||||||
|
Gross value |
|
|
Accumulated amortization |
|
|
Carrying value |
|
|
Gross value |
|
|
Accumulated amortization |
|
|
Carrying value |
|
||||||
Customer relationships |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Backlog |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Trademarks and tradenames |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|||||
Total |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
The following table presents estimated future amortization of other intangible assets:
Twelve months ending September 30, |
|
|
|
2024 |
$ |
|
|
2025 |
|
|
|
2026 |
|
|
|
2027 |
|
|
|
2028 |
|
|
|
Thereafter |
|
|
|
Total |
$ |
|
|
10
(5) Property, plant and equipment, net
The following table presents the components of property, plant and equipment:
|
September 30, 2023 |
|
|
December 31, 2022 |
|
||
Land |
$ |
|
|
$ |
|
||
Building and improvements |
|
|
|
|
|
||
Furniture, office and computer equipment |
|
|
|
|
|
||
Manufacturing equipment |
|
|
|
|
|
||
Construction in process |
|
|
|
|
|
||
Property, plant and equipment, gross |
|
|
|
|
|
||
Less: accumulated depreciation |
|
( |
) |
|
|
( |
) |
Property, plant and equipment, net |
$ |
|
|
$ |
|
||
Interest expense capitalized to construction in process was $
The Company is party to a sale and purchase agreement to sell approximately
(6) Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consist of the following:
|
September 30, 2023 |
|
|
December 31, 2022 |
|
||
Payroll and related costs |
$ |
|
|
$ |
|
||
Contract liabilities (see note 11) |
|
|
|
|
|
||
Professional and consulting fees |
|
|
|
|
|
||
Accrued interest |
|
|
|
|
|
||
Property, plant and equipment |
|
|
|
|
|
||
Accrued transaction costs |
|
|
|
|
|
||
Other |
|
|
|
|
|
||
Total |
$ |
|
|
$ |
|
||
Accrued transaction costs include costs incurred related to the refinancing completed in December 2022 which included the sale and subsequent leaseback of the Company’s commercial manufacturing campus located in Gainesville, Georgia (see note 9), the issuance of common and preferred stock, a borrowing of $
In September 2023, the Company initiated a strategic reorganization, including a reduction in force of 26 then-current employees and nine open positions, and resulted in a charge of $
(7) Commitments and contingencies
Litigation
The Company is involved, from time to time, in various claims and legal proceedings arising in the ordinary course of its business. The Company is not currently a party to any such claims or proceedings that, if decided adversely to it, would either individually or in the aggregate have a material adverse effect on its business, financial condition or results of operations.
On July 2, 2022, a product liability lawsuit was filed against the Company and various other defendants in the State Court of Cobb County, Georgia that claimed injuries and damages caused by Plaintiff Jakob Cuble’s alleged ingestion of, among other things, Focalin XR. The complaint sought compensatory and punitive damages. On April 14, 2023, Plaintiff’s counsel withdrew the case.
11
Purchase commitments
As of September 30, 2023, 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 executive officers that provide for, among other things, severance commitments of up to $
(8) Debt
The following table presents the components and classification of debt:
|
September 30, 2023 |
|
|
December 31, 2022 |
|
||
Debt principal: |
|
|
|
|
|
||
Term loan under Credit Agreement |
$ |
|
|
$ |
|
||
Note with former equity holder of IriSys |
|
|
|
|
|
||
Other |
|
|
|
|
|
||
Debt principal |
|
|
|
|
|
||
Debt adjustments: |
|
|
|
|
|
||
Unamortized deferred issuance costs |
|
( |
) |
|
|
( |
) |
Unamortized original discount |
|
( |
) |
|
|
( |
) |
Carrying value of debt |
$ |
|
|
$ |
|
||
|
|
|
|
|
|
||
Current portion of debt |
$ |
|
|
$ |
|
||
Debt, net of current portion |
|
|
|
|
|
||
Carrying value of debt |
$ |
|
|
$ |
|
||
The following table presents the future maturity of debt principal:
Twelve months ending September 30, |
|
|
|
2024 |
$ |
|
|
2025 |
|
|
|
2026 |
|
|
|
2027 |
|
|
|
2028 |
|
|
|
Thereafter |
|
|
|
Total debt principal |
$ |
|
|
Term loan under Credit Agreement
The Company is currently party to a credit agreement (as amended from time to time, the “Credit Agreement”) with Royal Bank of Canada. The Credit Agreement has been fully drawn in the form of a term loan of $
12
The Credit Agreement also includes certain financial covenants that the Company will need to satisfy on a quarterly basis, including: (i) maintaining a net leverage ratio less than
In connection with the Credit Agreement, the Company has paid financing costs. These costs are being recognized in interest expense using the effective interest method over the term of the Credit Agreement, resulting in non-cash interest expense of $
The Credit Agreement bears
Historical term loans with Athyrium
The Company was previously party to a credit agreement with Athyrium Opportunities III Acquisition LP (“Athyrium Credit Agreement”). The Athyrium Credit Agreement included $
During the term of Athyrium Credit Agreement, the Company paid financing costs and accreted an exit fee. These costs were recognized in interest expense using the effective interest method, resulting in non-cash interest expense of $
Note with former equity holder of IriSys
In connection with the acquisition of IriSys, LLC (“IriSys”), the Company issued a subordinated promissory note to a former equity holder of IriSys in the aggregate principal amount of $
In August 2023, the Note was amended to defer the due date of the $2,039 payment due on August 12, 2023 of principal, plus accrued interest, to the earlier of (i) June 24, 2024; and (ii) the date on which the Company completes its previously announced sale of certain land at its Gainesville, Georgia location (see note 5). In consideration for the payment deferral, the Company issued a warrant to purchase
In connection with the Note, the Company has paid financing costs. These costs are being recognized as interest expense using the effective interest method over the term of the Note. At September 30, 2023, the overall effective interest rate, including the amortization of the original discount, was
13
(9) Other liabilities
At September 30, 2023, other liabilities include a sale-leaseback liability of $
Sale-leaseback liability
The Company determined that it did not relinquish control of the assets to the buyer-lessor. Therefore, the assets were not derecognized, and the selling price was recorded as a financial liability. As of September 30, 2023, the carrying value of the liability was $
(10) Shareholders’ equity or deficit
Common stock
In May 2023, the Company’s shareholders approved an amendment to the articles of incorporation to increase the number of authorized shares of common stock from
In August 2023, the Company closed an underwritten public offering of
Convertible preferred stock
In December 2022, the Company issued
Warrants
The following table presents the warrants outstanding to purchase shares of common stock as of September 30, 2023. All outstanding warrants are equity-classified.
|
Number of shares |
|
|
Exercise price per share |
|
|
Expiration date |
||
Athyrium warrants |
|
|
|
$ |
|
|
November 17, 2024 |
||
IriSys warrants |
|
|
|
|
|
|
August 13, 2026 |
||
Pre-Funded warrants |
|
|
|
|
|
|
None |
||
14
(11) Revenue recognition
The following table presents changes in contract assets and liabilities:
|
Contract assets |
|
|
Contract liabilities |
|
||
Balance at December 31, 2022 |
$ |
|
|
$ |
( |
) |
|
Changes to the beginning balance arising from: |
|
|
|
|
|
||
Reclassification to receivables as the result of rights to consideration becoming unconditional |
|
( |
) |
|
|
— |
|
Reclassification to revenue as the result of performance obligations satisfied |
|
|
|
|
|
||
Changes in estimate |
|
|
|
|
— |
|
|
Net change to contract balance recognized since beginning of period due to recognition of revenue, amounts billed and changes in estimate |
|
|
|
|
( |
) |
|
Balance at September 30, 2023 |
$ |
|
|
$ |
( |
) |
|
Contract assets and contract liabilities are reported at the contract level. Contracts with multiple performance obligation are reported as a net contract asset or contract liability on the consolidated balance sheet. The reclassification to revenue appearing in the contract assets column results from the recognition of revenue on contract liabilities that are presented as a net contract asset at the beginning of the year.
The following table disaggregates revenue by timing of revenue recognition:
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
||||||||||||
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
|
||||
Point in time |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
||||
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.
(12) Stock-based compensation
In October 2013, the Company established an equity incentive plan that has been subsequently amended and restated to become the 2018 Amended and Restated Equity Incentive Plan (the “A&R Plan”). At September 30, 2023, a total of
Stock options
Stock options are exercisable generally for a period of
The following table presents information about the fair value of stock options granted:
|
Nine months ended September 30, |
|
|||||
|
2023 |
|
|
2022 |
|
||
Weighted average grant date fair value |
$ |
|
|
$ |
|
||
Assumptions used to determine fair value: |
|
|
|
|
|
||
Range of expected option life |
|
|
|
||||
Expected volatility |
|
|
|
||||
Risk-free interest rate |
|
|
|
||||
Expected dividend yield |
|
|
|
|
|
||
15
The following table presents information about stock option balances and activity:
|
Number of shares |
|
|
Weighted average exercise price |
|
|
Aggregate intrinsic value |
|
|
Weighted average remaining contractual life |
|||
Balance, December 31, 2022 |
|
|
|
$ |
|
|
|
|
|
|
|||
Granted |
|
|
|
|
|
|
|
|
|
|
|||
Forfeited or expired |
|
( |
) |
|
|
|
|
|
|
|
|
||
Balance, September 30, 2023 |
|
|
|
|
|
|
$ |
|
|
||||
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, 2022 |
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
||
Vested |
|
( |
) |
|
|
|
|
Forfeited |
|
( |
) |
|
|
|
|
Balance, September 30, 2023 |
|
|
|
|
|
||
Included in the table above are
Other information
The following table presents the classification of stock-based compensation expense:
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
||||||||||
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Cost of sales |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Selling, general and administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
As of September 30, 2023, there was $
(13) Income taxes
The tax provision for interim periods is determined using the estimated annual effective consolidated tax rate, based on the current estimate of full-year earnings before taxes, adjusted for the impact of discrete quarterly items.
16
The provision for income taxes was $
(14) Fair value of financial instruments
The Company follows the provisions of FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” for fair value measurement recognition and disclosure purposes for its financial assets and financial liabilities that are remeasured and reported at fair value each reporting period. The Company measures certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents, short-term investments and certain warrants. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of financial assets and financial liabilities and their placement within the fair value hierarchy. Categorization is based on a three-tier valuation hierarchy, which prioritizes the inputs used in measuring fair value, as follows:
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 September 30, 2023, the financial assets and liabilities recorded on the consolidated balance sheets that are not measured at fair value on a recurring basis include accounts receivable, accounts payable and accrued expenses. The carrying values of these financial assets and liabilities approximate fair value due to their short-term nature.
The fair value of long-term debt, where a quoted market price is not available, is evaluated based on, among other factors, interest rates currently available to the Company for debt with similar terms, remaining payments and considerations of the Company’s creditworthiness. The Company determined that the recorded book value of its debt, a level 2 measurement, approximated fair value at September 30, 2023 due to the recent issuances of those instruments and taking into consideration management’s current evaluation of market conditions.
(15) Leases
The Company is party to
17
Undiscounted future lease payments for the
Twelve months ending September 30, |
|
|
|
2024 |
$ |
|
|
2025 |
|
|
|
2026 |
|
|
|
2027 |
|
|
|
2028 |
|
|
|
Thereafter |
|
|
|
Total lease payments |
|
|
|
Less imputed interest |
|
( |
) |
Total operating lease liabilities |
$ |
|
|
At September 30, 2023, the weighted average remaining lease term was
18
Item 2. Management’s discussion and analysis of financial condition and results of operations
You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited consolidated financial statements and notes thereto in Part I, Item 1 of this Quarterly Report on Form 10-Q, or Quarterly Report, and the audited consolidated financial statements and notes thereto for the year ended December 31, 2022 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 1, 2023, or Annual Report.
In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions and other factors that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. Our actual results may differ materially from those discussed below. Please see “Forward-Looking Statements” and “Risk Factors” included in Part I, Item 1A of our Annual Report for factors that could cause or contribute to such differences.
Cautionary note regarding forward-looking statements
This Quarterly Report and the documents incorporated by reference herein contain forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this Quarterly Report or the documents incorporated by reference herein regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” “would” “could,” “should,” “potential,” “seek,” “evaluate,” “pursue,” “continue,” “design,” “impact,” “affect,” “forecast,” “target,” “outlook,” “initiative,” “objective,” “designed,” “priorities,” “goal,” or the negative of such terms and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Such statements are based on assumptions and expectations that may not be realized and are inherently subject to risks, uncertainties and other factors, many of which cannot be predicted with accuracy and some of which might not even be anticipated.
The forward-looking statements in this Quarterly Report and the documents incorporated herein by reference include, among other things, statements about:
19
We may not achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report, particularly under “Item 1A. Risk Factors,” that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, collaborations or investments we may make. You should read this Quarterly Report and the documents that we incorporate by reference herein completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements.
Solely for convenience, tradenames referred to in this Quarterly Report appear without the ® symbol, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or that the applicable owner will not assert its rights, to these tradenames. All trademarks, service marks and tradenames included or incorporated by reference in this Quarterly Report are the property of their respective owners.
Overview
Societal CDMO, Inc. is a bi-coastal contract development and manufacturing organization, or CDMO, with capabilities spanning pre-investigational new drug development to commercial manufacturing and packaging for a wide range of therapeutic dosage forms with a primary focus on small molecules. With an expertise in solving complex manufacturing problems, Societal is a leading CDMO providing development, end-to-end regulatory support, clinical and commercial manufacturing, aseptic fill/finish, lyophilization, packaging and logistics services to the global pharmaceutical market. In addition to our experience in handling DEA-controlled substances and developing and manufacturing modified-release dosage forms, Societal has the expertise to deliver on our clients’ pharmaceutical development and manufacturing projects, regardless of complexity level. We do all of this in our state-of-the-art facilities that, in the aggregate, total 145,000 square feet, in Gainesville, Georgia and San Diego, California.
We currently manufacture the following key products with our key commercial partners: Ritalin LA®, Focalin XR®, Verelan PM®, Verelan SR®, Verapamil PM, Verapamil SR and Donnatal liquids and tablets. We also support numerous development stage products. During the first quarter of 2023, the FDA approved the Company as a manufacturer of a commercial tablet product. This FDA approval represents the first commercial tablet that Societal CDMO has been approved to manufacture, and the Company began commercial manufacturing of the product at its Gainesville, Georgia facilities in the middle of 2023.
Our manufacturing and development capabilities include product development from formulation through clinical trial and commercial manufacturing, and specialized capabilities for solid oral dosage forms, with specialization in modified release technologies and facilities to handle high potent compounds and controlled substances, liposomes and nano/microparticles, topicals and oral liquids. In addition to providing manufacturing capabilities, we offer our customers clinical trial support including over-encapsulation, comparator sourcing, packaging, labeling, storage and distribution. We have a bi-coastal footprint from which to better serve clients within the U.S., as well as globally. In a typical collaboration between us and our commercial partners, we continue to work with our partners to develop product candidates or new formulations of existing product candidates. We also typically exclusively manufacture and supply clinical and commercial supplies of these proprietary products and product candidates.
We use cash flow generated by our business primarily to fund the growth of our CDMO business and to make payments under our credit facility. We believe our business will continue to contribute cash to fund our growth, to make payments under our credit facility and for other general corporate purposes.
Global economic and supply conditions
Global economic conditions, logistics and supply chain issues continue to present obstacles to our business.
20
We rely on third-party manufacturers to supply our manufacturing components, supplies and related materials, which in some instances are supplied from a single source. Prolonged disruptions in the supply of any of our third-party materials, difficulty implementing new sources of supply or significant price increases could have an adverse effect on our results. We are experiencing a higher level of residual supply chain disruptions that we are actively managing to meet our production timelines and that may constrain our ability to capture additional growth opportunities, beyond our established projections, from customers who would otherwise want to increase their safety stock of the products that we produce.
We closely monitor economic developments, stock market conditions and geopolitical conflicts, such as the conflict between Russia and Ukraine and the evolving events in Israel and Gaza, which continue to have adverse effects on the U.S. and global markets and supply chain.
We have been experiencing the effects of a general slowdown in clinical development activity as a result of clinical failures and/or a lack of adequate funding to go forward. The slowdown has caused us to experience delays in and reductions to our backlog during the first nine months of 2023, and we may continue to experience adverse effects such as delays in and reductions to our backlog and/or a reduction in the number of business development opportunities that we will be able to pursue or close. We are making efforts to adapt to these market changes, including a recently-announced reduction in force and a strategic refocus of operations resulting in the discontinuation of certain programs and services. While we believe these actions will drive improved cash flows, they will also reduce our overall revenue-generating capacity in the near term.
We have recently experienced a decline in our stock price. If the stock price decline is sustained, our goodwill may be determined to be impaired. We may face continuing inflationary pressures on raw materials, labor and logistics. Finally, while we have been able to capture overall interest savings as a result of the December 2022 refinancing, those improvements have been partially offset by a sustained increase in variable base interest rates, which could increase further in future periods.
Corporate restructuring
In September 2023, we initiated a strategic reorganization, including a reduction in force of 26 then-current employees and nine open positions, which was intended to reduce costs and streamline and optimize our operations and resulted in a charge of approximately $1.1 million, primarily related to severance and other related costs.
Financial overview
Revenues
We recognize three types of revenue: manufacturing, profit-sharing and development.
As previously disclosed, in May 2023, Lannett, which represented 16% of our revenue in 2022, commenced prepackaged Chapter 11 cases in the United States Bankruptcy Court for the District of Delaware and entered into a restructuring support agreement with certain of its lenders. On June 8, 2023, Lannett emerged from the Chapter 11 bankruptcy as a privately-held company under the ownership of its prepetition lenders. While our agreement with Lannett remains in place, at this time we do not know whether Lannett’s performance with sales of Verapamil PM will be impacted by these events or might otherwise impact our economics going forward.
Manufacturing
We recognize manufacturing revenue from the sale of products we manufacture for our commercial partners. Manufacturing revenues are recognized upon transfer of control of a product to a customer, generally upon shipment, based on a transaction price that reflects the consideration we expect to be entitled to as specified in the agreement with the commercial partner, which could include pricing and volume-based adjustments.
21
Profit-sharing
In addition to manufacturing revenue, certain customers who use our technologies are subject to agreements that provide us intellectual property sales-based profit-sharing and/or royalties consideration, collectively referred to as profit-sharing, computed on the net product sales of the commercial partner. Profit-sharing revenues are generally recognized under the terms of the applicable license, development and/or supply agreement. We have determined, that in our arrangements, the license for intellectual property is not the predominant item to which the profit-sharing relates, so we recognize revenue upon transfer of control of the manufactured product. In these cases, significant judgment is required to calculate the estimated variable consideration from such profit-sharing using the expected value method based on historical commercial partner pricing and deductions. Estimated variable consideration is partially constrained due to the uncertainty of price adjustments made by our commercial partners, which are outside of our control. Factors causing price adjustments by our commercial partners include increased competition in the products’ markets, mix of volume between the commercial partners’ customers, and changes in government pricing.
Development
Development revenue includes services associated with formulation, process development, clinical trial materials services, as well as custom development of manufacturing processes and analytical methods for a customer’s non-clinical, clinical and commercial products. Such revenues are recognized at a point in time or over time depending on the nature and particular facts and circumstances associated with the contract terms.
In contracts that specify milestones, we evaluate whether the milestones are considered probable of being achieved and estimate the amount to be included in the transaction price using the most likely amount method. Milestone payments related to arrangements under which we have continuing performance obligations are deferred and recognized over the period of performance. Milestone payments that are not within our control, such as submission for approval to regulators by a commercial partner or approvals from regulators, are not considered probable of being achieved until those submissions are submitted by the customer or approvals are received.
In contracts that require revenue recognition over time, we utilize input or output methods, depending on the specifics of the contract, that compare the cumulative work-in-process to date to the most current estimates for the entire performance obligation. Under these contracts, the customer typically owns the product details and process, which have no alternative use. These projects are customized to each customer to meet its specifications, and typically only one performance obligation is included. Each project represents a distinct service that is sold separately and has stand-alone value to the customer. The customer also retains control of its product as the product is being created or enhanced by our services and can make changes to its process or specifications upon request.
Cost of sales and selling, general and administrative expenses
Cost of sales consists of inventory costs, including production wages, material costs and overhead, and other costs related to the recognition of revenue. Selling, general and administrative expenses consist of salaries and related costs for administrative, public company and business development functions as well as legal fees, patent-related expenses and consulting fees. Public company costs include compliance, audit, tax, insurance and investor relations.
Amortization of intangible assets
We are recognizing amortization expense related to acquired customer relationships, backlog and trademarks and trade names on a straight-line basis over estimated useful lives of 7.0, 2.4, and 1.5 years, respectively.
Interest expense
Interest expense for the current period presented primarily relates to our new term loan borrowing with Royal Bank of Canada originally funded at $36.9 million and the financial liability related to the sale and leaseback of our commercial manufacturing campus in Gainesville, Georgia for gross proceeds of $39.0 million. Interest expense for the prior period presented primarily relates to the $100.0 million senior secured term loans with Athyrium Opportunities III Acquisition LP and the amortization of related financing costs.
As a result of these changes, interest expense was lower in the first nine months of 2023 and will continue to be lower in future periods due to the lower amount of aggregate principal and lower variable interest margins as compared to the Athyrium borrowings.
22
Net operating losses and tax carryforwards
As of December 31, 2022, we had federal net operating loss, or NOL, carry forwards of approximately $125.6 million, substantially all of which are subject to annual limitations following a December 2022 change in control and have an indefinite carry forward period. We also had $135.4 million of state NOL carry forwards available to offset future taxable income that will begin to expire at various dates beginning in 2028 if not utilized. We believe that it is more likely than not that our deferred income tax assets will not be realized, and as such, there is a full valuation allowance.
Key indicators of performance
To evaluate our performance, we monitor a number of industry-standard key indicators such as:
EBITDA, as adjusted, is a non-GAAP measure that we discuss and reconcile to its nearest GAAP measure elsewhere in our public financial reporting. We believe that supplementing our financial results presented in accordance with GAAP with non-GAAP measures is useful to investors, creditors and others in assessing our performance. These measurements should not be considered in isolation or as a substitute for reported GAAP results because they may include or exclude certain items as compared to similar GAAP-based measurements, and such measurements may not be comparable to similarly-titled measurements reported by other companies. Rather, these measurements should be considered as an additional way of viewing aspects of our operations and gaining an understanding of our business.
Results of operations
Comparison of third quarters 2023 and 2022
|
Three months ended September 30, |
|
|||||
(in millions) |
2023 |
|
|
2022 |
|
||
Revenue |
$ |
23.6 |
|
|
$ |
21.6 |
|
Operating expenses: |
|
|
|
|
|
||
Cost of sales |
|
19.9 |
|
|
|
16.1 |
|
Selling, general and administrative |
|
5.3 |
|
|
|
5.1 |
|
Amortization of intangible assets |
|
0.1 |
|
|
|
0.2 |
|
Total operating expenses |
|
25.3 |
|
|
|
21.4 |
|
Operating (loss) income |
|
(1.7 |
) |
|
|
0.2 |
|
Interest expense |
|
(3.0 |
) |
|
|
(3.6 |
) |
Interest income |
|
0.1 |
|
|
|
0.1 |
|
Loss before income taxes |
|
(4.6 |
) |
|
|
(3.3 |
) |
Income tax expense |
|
— |
|
|
|
— |
|
Net loss |
$ |
(4.6 |
) |
|
$ |
(3.3 |
) |
Revenue. The increase of $2.0 million was primarily driven by an increase in revenue from our largest commercial customer, Teva, due to the continued pull through in demand during the quarter resulting from market share gains against the sole competitor for the Verapamil SR products as well as a catch-up in shipments to Teva from the second quarter of 2023, during which we saw a decrease in shipments due to a scheduled shutdown of our packaging line to implement upgrades required to comply with new serialization aggregation compliance standards. In addition, there was an increase in shipments to Lannett for Verapamil PM due to timing of customer orders during the year. Further, we had our first shipment of Otsuka commercial batches during the quarter. Offsetting these increases were a decrease in Novartis and InfectoPharm shipments due to timing of customer orders as well as prior year inventory-build for InfectoPharm as a then new customer.
Cost of sales. The increase of $3.8 million was primarily due to higher commercial manufacturing revenue and higher fixed costs to support the newly installed aseptic fill/finish line that has expanded our capabilities. In addition, there were $0.7 million of restructuring costs recorded during the current year period.
23
Selling, general and administrative. Selling, general and administrative expenses were relatively consistent for the periods presented. Included within the current year period was $0.4 million of restructuring costs.
Amortization of intangible assets. The amortization related to the acquisition of IriSys for acquired customer relationships, backlog and trademarks and trade names.
Interest expense. The decrease of $0.6 million was primarily due to a significantly reduced amount of aggregate principal and lower interest rates under the company’s refinanced debt as compared to the borrowings outstanding during the period ended September 30, 2022.
Comparison of nine months ended 2023 and 2022
|
Nine months ended September 30, |
|
|||||
(in millions) |
2023 |
|
|
2022 |
|
||
Revenue |
$ |
66.9 |
|
|
$ |
65.9 |
|
Operating expenses: |
|
|
|
|
|
||
Cost of sales |
|
56.5 |
|
|
|
49.6 |
|
Selling, general and administrative |
|
15.2 |
|
|
|
15.9 |
|
Amortization of intangible assets |
|
0.5 |
|
|
|
0.7 |
|
Total operating expenses |
|
72.2 |
|
|
|
66.2 |
|
Operating loss |
|
(5.3 |
) |
|
|
(0.3 |
) |
Interest expense |
|
(7.4 |
) |
|
|
(10.5 |
) |
Interest income |
|
0.3 |
|
|
|
0.1 |
|
Loss before income taxes |
|
(12.4 |
) |
|
|
(10.7 |
) |
Income tax expense |
|
0.1 |
|
|
|
— |
|
Net loss |
$ |
(12.5 |
) |
|
$ |
(10.7 |
) |
Revenue. The increase of $1.0 million was primarily driven by increases in revenues from Teva and Lannett as well as an increase in pre-commercial development revenues, which were partially offset by a decrease in Novartis and InfectoPharm revenues, as described above.
Cost of sales. The increase of $6.9 million was primarily due to mix of revenue and related fixed cost absorption, including increased costs associated with the new aseptic fill/finish line that has expanded the company’s capabilities and increased material costs. In addition, there were $0.7 million of restructuring costs recorded during the current year period.
Selling, general and administrative. The decrease of $0.7 million was primarily related to lower public company costs and administrative costs than the prior year offset by $0.3 million of restructuring costs recorded in the current year period.
Amortization of intangible assets. The amortization related to the acquisition of IriSys for acquired customer relationships, backlog and trademarks and trade names.
Interest expense. The decrease of $3.1 million was primarily due to a significantly reduced amount of aggregate principal and lower interest rates under the company’s refinanced debt as compared to the borrowings outstanding during the period ended September 30, 2022.
Liquidity and capital resources
At September 30, 2023, we had $8.2 million in cash and cash equivalents. Our credit agreement with Royal Bank of Canada, as amended, contains minimum liquidity requirements ranging from $3.5 million to $4.5 million at quarter-ends through September 30, 2024 and minimum liquidity requirements of $1.5 million at month-ends that are not quarter-ends. Our ability to continue to comply with the minimum liquidity requirements is subject to our success in implementing certain cost control measures, reducing capital expenditures and managing working capital in order to improve our ongoing financial performance and our liquidity position.
In August 2023, we raised net proceeds of $7.4 million following completion of an underwritten public offering in which we issued and sold 14,640,000 shares of our common stock at a public offering price of $0.400 per share and pre-funded warrants to purchase up to 6,110,000 shares of our common stock.
24
Since our inception, we have financed our operations and capital expenditures primarily from results of operations, from the issuance of equity and debt, and recently, to a lesser extent, from real estate transactions. During the first nine months of 2023, our capital expenditures were $7.5 million to maintain, scale and support expansion of our capabilities.
We are currently party to a credit agreement with Royal Bank of Canada, or the Credit Agreement, for a term loan originally funded at $36.9 million. The principal is being repaid in quarterly amounts, including $3.0 million and $3.5 million to be paid during the twelve months ending September 30, 2024 and 2025, respectively. An additional $7.5 million will be paid upon completing a sale of certain real property (see below). The final payment of all remaining outstanding principal is due on December 16, 2025.
Subject to certain exceptions, we are required to make mandatory prepayments with the cash proceeds received in respect of asset sales, certain equity sales, extraordinary receipts, debt issuances, upon a change of control and specified other events. Additionally, we are obligated by December 14, 2023 to complete the sale of certain real property adjacent to our Gainesville, Georgia manufacturing campus. If that property is not sold by December 14, 2023, we will be required to pay a fee of $0.4 million and increase each of our quarterly principal payments by $0.2 million until that property is sold and any mandatory principal prepayment is made.
In September 2022, we signed a sales and purchase agreement to sell approximately 121 acres of land adjacent to our Gainesville, Georgia manufacturing campus for expected proceeds of $9.1 million, $7.5 million of which we are obligated to use to repay outstanding balances on the Credit Agreement. The land sale is currently expected to close in the first half of 2024. Until closing, the sale of the land is subject to customary closing conditions for transactions of this type, including completion of title and environmental due diligence and receipt of certain zoning approvals and permits.
The pharmaceutical industry is experiencing a slowdown in clinical development activities resulting from reduced cash funding and other liquidity resources and we are experiencing higher rates of customer attrition and development program delays that caused us to revise our 2023 earnings and cash projections during the second quarter of 2023. As a result of these factors, we took actions to amend our debt agreements to align financial covenants and other terms of the indebtedness with our revised projections. Absent these amendments, we would not have been able to conclude that it was probable that we would comply with the provisions of our debt agreements through November 9, 2024.
We believe that our results of operations will allow us to comply with the financial and other covenants and contractual requirements of the agreements for at least the next twelve months. Our ability to comply is subject to our success in implementing certain cost control measures, including our strategic reorganization which included a reduction in force, reducing capital expenditures and managing working capital in order to improve our ongoing financial performance and our liquidity position.
We may extend and or supplement the actions we are taking if we continue to experience adverse conditions described above, among others, that might impact the forecasted performance. If we are unable to achieve the results required to comply with the terms of our credit agreement in one or more quarters over the next twelve months, we may be required to take specific actions in addition to those described above, including but not limited to, additional cost control measures, or alternatively, seeking an amendment or waiver from our lenders. Obtaining a waiver or an amendment is not within our control, and if unsuccessful, the lenders may exercise the rights available to them under the credit agreement.
We may require additional financing or choose to refinance certain of these instruments, which could include strategic development, licensing activities and/or marketing arrangements, public or private sales of equity or debt securities or debt refinancing. Financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could materially adversely impact our growth plans and our financial condition or results of operations. Further, our ability to access capital market or otherwise raise capital may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, financial markets in the United States and worldwide, including as a result of diseases, geopolitical conflicts, recent liquidity constraints or failures and instability in U.S. and international financial banking systems on the global financial markets. Additional debt or equity financing, if available, may be dilutive to the holders of our common stock and may involve significant cash payment obligations and covenants that restrict our ability to operate our business or to access capital, and may further restrict dividend payments.
25
Sources and uses of cash
|
Nine months ended September 30, |
|
|||||
(amounts in millions) |
2023 |
|
|
2022 |
|
||
Net cash used in: |
|
|
|
|
|
||
Operating activities |
$ |
(2.5 |
) |
|
$ |
(5.6 |
) |
Investing activities |
|
(7.5 |
) |
|
|
(5.6 |
) |
Financing activities |
|
3.2 |
|
|
|
(2.4 |
) |
Total |
$ |
(6.8 |
) |
|
$ |
(13.6 |
) |
Cash flows from operating activities represents our net loss as adjusted for stock-based compensation expense, non-cash interest expense, depreciation expense, amortization of intangible assets and deferred income tax expense as well as changes in operating assets and liabilities. The $3.1 million decrease in cash flows used for operating activities in 2023 compared to 2022 was due to favorable working capital changes, partially offset by a reduction to our cash-based earnings.
Net cash used in investing activities for each period includes capital expenditures to scale and support our expansion of capabilities.
Net cash provided by financing activities increased $5.6 million primarily due to higher net proceeds from issuances of common stock of $7.0 million and a decrease in debt repayments of $0.7 million, partially offset by financing cost payments of $2.1 million.
Forward-looking factors
Our future use of operating cash and capital requirements will depend on many forward-looking factors, including the following:
We may use existing cash and cash equivalents on hand, additional debt, equity financing, sale of real-estate or other assets or out-licensing revenue or a combination thereof to fund our operations or acquisitions. If we increase our debt levels, we might be restricted in our ability to raise additional capital and might be subject to financial and restrictive covenants. If we issue additional equity in future periods, our shareholders may experience dilution. This dilution may be significant depending upon the amount of equity or debt securities that we issue and the prices at which we issue any securities.
26
Contractual commitments
The table below reflects our contractual commitments as of September 30, 2023:
|
Payments due by period |
|
|||||||||||||||||
(in millions) |
Total |
|
|
Less than |
|
|
1-3 years |
|
|
3-5 years |
|
|
More than |
|
|||||
Debt obligations (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Principal |
$ |
39.9 |
|
|
$ |
9.9 |
|
|
$ |
29.7 |
|
|
$ |
0.1 |
|
|
$ |
0.2 |
|
Interest |
|
8.2 |
|
|
|
3.9 |
|
|
|
4.2 |
|
|
|
0.1 |
|
|
|
— |
|
Purchase obligations (2) |
|
9.0 |
|
|
|
8.3 |
|
|
|
0.7 |
|
|
|
— |
|
|
|
— |
|
Operating leases (3) |
|
8.8 |
|
|
|
1.2 |
|
|
|
2.3 |
|
|
|
2.3 |
|
|
|
3.0 |
|
Other long-term liabilities (4)(5) |
|
91.9 |
|
|
|
3.6 |
|
|
|
7.5 |
|
|
|
8.0 |
|
|
|
72.8 |
|
Total |
$ |
157.8 |
|
|
$ |
26.9 |
|
|
$ |
44.4 |
|
|
$ |
10.5 |
|
|
$ |
76.0 |
|
Critical accounting policies and estimates
Our critical accounting policies and estimates are disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report.
Item 3. Quantitative and qualitative disclosures about market risk
There has been no material change in our assessment of our sensitivity to market risk described in the Annual Report.
Item 4. Controls and procedures
Evaluation of disclosure controls and procedures
Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of September 30, 2023. We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.
27
A control system, no matter how well conceived and operated, can provide only reasonable, and not absolute, assurance that the objectives of the control system will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. However, our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. Based on the evaluation of our disclosure controls and procedures as of September 30, 2023, our principal executive officer and principal financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in internal control over financial reporting
There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal proceedings.
Information regarding legal and regulatory proceedings is set forth in note 7 to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report, and is incorporated by reference herein.
We are also engaged in various other legal actions arising in the ordinary course of our business (such as, for example, proceedings relating to employment matters or the initiation or defense of proceedings relating to intellectual property rights) and, while there can be no assurance, we believe that the ultimate outcome of these other legal actions will not have a material adverse effect on our business, results of operations, financial condition or cash flows.
Item 1A. Risk factors.
Investing in our securities involves certain risks. In addition to any risks and uncertainties described elsewhere in this Quarterly Report, investors should carefully consider the risks and uncertainties discussed in Part I, Item 1A. “Risk Factors” in our Annual Report. These risks are not the only risks that could materialize. Other than as set forth below, there have been no material changes in our risk factors from those previously disclosed in our Annual Report, Quarterly Report for the quarter ended March 31, 2023 and Quarterly Report for the quarter ended June 30, 2023.
Our losses and accumulated deficit raise substantial doubt about our ability to continue as a going concern absent obtaining adequate new debt or equity financings.
Our future operations are highly dependent on the profitability of our development and manufacturing operations. Management concluded that substantial doubt about the Company’s ability to continue as a going concern was raised as of the date of the issuance of these financial statements. However, management concluded that actions taken to date as well as its plans alleviate the substantial doubt that was raised.
As of September 30, 2023, we had an accumulated deficit of $278.1 million, cash and cash equivalents of $8.2 million and current liabilities of $21.6 million. Although it is difficult to forecast all of our future liquidity requirements, we believe that our cash and cash equivalents on hand combined with our projected cash receipts from services generated under our customer contracts will be sufficient to fund our operations into the fourth quarter of 2024.
We have also incurred significant indebtedness. As of September 30, 2023, we had $39.9 million of outstanding indebtedness, $35.5 million of which was under our Credit Agreement with Royal Bank of Canada. These factors, individually and collectively, raise substantial doubt about our ability to continue as a going concern, and therefore, could materially limit our ability to raise additional funds through an issuance of debt or equity securities or otherwise.
There can be no assurance that we will be able to raise sufficient additional capital on acceptable terms or at all. Additionally, if we are unable to regain compliance with the listing standards of Nasdaq, our common stock may become delisted, which could have a material adverse effect on the liquidity of our common stock and our ability to raise funding. If such additional financing is not available on satisfactory terms, or is not available in sufficient amounts, we may be required to delay, limit or eliminate the development of business opportunities and our ability to achieve our business objectives, our competitiveness, and our business, financial condition and results of operations will be materially adversely affected. In addition, the impact of macroeconomic factors, including but not limited to, inflationary pressures, rising interest rates, banking instability, geopolitical turmoil, social unrest, global instability, including regional conflicts around the world, political instability and any resulting sanctions, terrorism, or other acts of war, on the global financial markets may reduce our ability to access capital, which could negatively affect our liquidity and ability to continue as a going concern. In addition, the perception that we may not be able to continue as a going concern may cause others to choose not to deal with us due to concerns about our ability to meet our contractual obligations.
Item 2. Unregistered sales of equity securities and use of proceeds.
Expect as previously reported by us on our Current Reports on Form 8-K, we did not sell any securities during the period covered by this Quarterly Report on Form 10-Q that were not registered under the Securities Act of 1933, as amended.
Item 3. Defaults upon senior securities.
None.
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Item 4. Mine safety disclosures.
Not applicable.
Item 5. Other information.
None.
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Item 6. Exhibits.
EXHIBIT INDEX
Exhibit No. |
|
Description |
|
Method of filing |
4.1 |
|
|
Incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on August 28, 2023 |
|
10.1 |
|
|
Filed herewith |
|
10.2 |
|
|
Filed herewith |
|
10.3 |
|
|
Filed herewith |
|
10.4 |
|
|
Filed herewith |
|
31.1 |
|
Rule 13a-14(a)/15d-14(a) certification of Principal Executive Officer |
|
Filed herewith |
31.2 |
|
Rule 13a-14(a)/15d-14(a) certification of Principal Financial and Accounting Officer |
|
Filed herewith |
32.1 |
|
Section 1350 certification, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
Furnished herewith |
101 INS |
|
XBRL Instance Document |
|
Filed herewith |
101 SCH |
|
XBRL Taxonomy Extension Schema |
|
Filed herewith |
101 CAL |
|
XBRL Taxonomy Extension Calculation Linkbase |
|
Filed herewith |
101 DEF |
|
XBRL Taxonomy Extension Definition Linkbase |
|
Filed herewith |
101 LAB |
|
XBRL Taxonomy Extension Label Linkbase |
|
Filed herewith |
101 PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document |
|
Filed herewith |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
SOCIETAL CDMO, INC. |
|
|
|
|
|
Date: November 8, 2023 |
|
By: |
/s/ J. David Enloe, Jr. |
|
|
|
J. David Enloe, Jr. |
|
|
|
President and Chief Executive Officer |
|
|
|
(Principal Executive Officer) |
|
|
|
|
Date: November 8, 2023 |
|
By: |
/s/ Ryan D. Lake |
|
|
|
Ryan D. Lake |
|
|
|
Chief Financial Officer |
|
|
|
(Principal Financial and Accounting Officer) |
32