You should read this section in conjunction with our unaudited condensed interim consolidated financial statements and related notes included in Part I.I Item 1 of this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes thereto and management’s discussion and analysis of financial condition and results of operations for the years ended December 31, 20172018 and 20162017 included in our prospectus dated July 24, 2018 filed with the SEC, pursuant to Rule 424(b) under the Securities Act. As discussed in the section titled “Cautionary Note Regarding Annual Report on Form 10-K.
Our most advanced proprietary investigational product candidates include:
Libervant™, a buccal soluble film formulation of diazepam used as a rescue therapy for breakthrough epileptic seizures and (iii) AQST-117,an adjunctive therapy for use in recurrent convulsive seizures, for which a pre-NDA meeting was held in December 2018 with the FDA. The meeting resulted in a plan to complete a small single-dose crossover study comparing Libervant to the reference listed drug, Diastat®. This study was initiated in the first quarter of 2019, and enrollment into the study was completed in May 2019. The Company also began a rolling NDA submission process during the second quarter of 2019. Subsequent to the close of the period, the Company completed the crossover study and is evaluating the data generated.
Exservan™, an oral soluble film formulation of riluzole for the treatment of Amyotrophic Lateral Sclerosis, or ALS, for which we expect to submitsubmitted an NDA in the first quarter of 2019; the PDUFA goal date for FDA approval is November 30, 2019.
We have also developed a proprietary pipeline of complex molecule-based products addressing large market opportunities beyond CNS indications, which include (i) include:
AQST-108, a sublingual soluble film formulation of epinephrine for the treatment of anaphylaxis and severe allergic reactions, which is intended to provide an adjunct and or alternative to injection treatments such as EpiPen. After the Company’s first human proof of concept trials, a re-formulated and more advanced prototype has been developed, for which we expect to beginbegan additional humanphase 1 proof of concept trials early in late 2018 or early 2019the second quarter of 2019; and (ii)
AQST-305, a sublingual soluble film formulation of octreotide for the treatment of acromegaly and neuroendocrine tumors, for which we have begun humantumors. As a result of early stage clinical proof of concept trials in the third quarter of 2018.studies, re-formulation work is currently underway.
We received tentative approval for Sympazan® (clobazam) Oral Film for the treatment of Lennox-Gastaut Syndrome (LGS) from the U.S. Food and Drug Administration (FDA) in line with its assigned Prescription Drug User Free Act (PDUFA) date of August 31, 2018. Final FDA approval for Sympazan is pending the expiration of the orphan drug exclusivity period for ONFI®, which is expected in October 2018.
In addition to these product candidates, we have a portfolio of commercialized and development-stage partneredlicensed products. These products includeOur largest commercialized licensed product to date is Suboxone, a sublingual film formulation of buprenorphine and naloxone, which is the market leader for the treatment of opioid dependence. We have a sole and exclusive worldwide manufacturing agreement with Indivior to deliver both the branded Suboxone, globally through Indivior, and the authorized generic sublingual film formulation of buprenorphine and naloxone, through Sandoz for the United States market. As of July 2019, these products account for greater than 75% of the oral film products prescribed in the U.S. for recovery from opioid addiction – a market that continues to grow.
We manufacture all of our partneredlicensed and proprietary products at our FDA- and DEA-inspected facilities and anticipatefacilities. There is no guarantee that our current manufacturing capacity is sufficient for commercial quantities of ourproprietary or licensed products and product candidates currently in development.will necessarily be manufactured by the Company. We have produced over 1.12 billion doses of Suboxone in the last four years and over three billionother commercial doses or dose equivalentsnon-pharmaceutical products for all customers since 2008.2006. Our products are developed using our proprietary PharmFilmPharmFilm® technology and know-how. Our patent portfolio currently comprises at least 200 issued patents worldwide, of which at least 40 are U.S. patents, and more than 75 pending patent applications worldwide.
On July 27, 2018, we closed in the initial public offering (“IPO”) and on August 15, 2018, the underwriter’s overallotment option was exercised. A total of 4,500,0004,925,727 shares of common stock at an offering price of $15.00 per share and our common stockwere issued. On July 25, 2018, the Company began trading on the Nasdaq Global Market under ticker symbol “AQST”. The offering and overallotment resulted in aggregate gross proceeds to Aquestive of $67.5 million before underwriting discounts and other costs and expenses of the offering. In August 2018, the underwriters partially exercised the over-allotment option granted to them in connection with the Offering, and on August 15, 2018 the Company completed the sale of 425,727 additional shares of common stock resulting in gross proceeds to Aquestive of $6.4 million$73,886 before underwriting discounts and other costs and expenses of the offering. Total gross proceeds from this offering were $73.9 million, and net proceeds to Aquestive after underwritersunderwriters’ discounts and other costs and expenses of the offeringIPO totaled $63.5 million.$63,482.
On July 15, 2019, we completed a private placement of $70,000 of 12.5% Senior Secured Notes due June 2025 (“Notes”) and unregistered warrants and paid off our existing credit facility. The new financing provided net proceeds of $66,951 after expenses. The net proceeds of the financing were used to repay all outstanding obligations under the Company’s prior credit facility of $52,092. We intend to use the remaining balance of $14,859 for the continued commercialization and advancement of our proprietary products and pipeline candidates, and other general corporate purposes. Our Notes are discussed in Note 18, Subsequent Event, to our Consolidated Financial Statements and in Liquidity and Capital Resources.
We generated revenue of $13.9 million$11,129 and $11.1 million$13,928 for the three months ended June 30, 20182019 and 2017,2018, respectively, and $37.3 million$23,772 and $27.6 million$37,339 for the six months ended June 30, 2019 and 2018, and June 30, 2017, respectively, largelymost significantly from commercial products marketed bylicensed to our partners that generatedmarketing licensees. Total revenues included manufacturing and supply revenues. Total revenues also included licensing, royalty andrevenue, license fees, royalties, co-development and research fees.fees and our proprietary product sales. Our revenue is subject to the normally uneven nature of the timing of co-development and licensing milestone payments, and to the volumes of product our licensees sell on the market from which we receive royalties and manufacturing revenues. Suboxone, which was launched in 2010, was our first partneredlicensed pharmaceutical product to be commercialized, and we have multiple other partnerlicensing relationships that contribute to our revenue and future revenue opportunities from partnered products.opportunities. Sympazan, which was launched in December 2018, is the first proprietary pharmaceutical product commercialized directly by the Company.
As of June 30, 2018,2019, we had $10.6 million$22,165 in cash and cash equivalents. As a result of our investmentsnet losses incurred in product development and recent investments in pre-launch commercialization initiatives, asthe operations of June 30, 2018,the Company during the first six months of 2019, we had a net shareholders’ deficit of $38.9 million.$24,657. We incurred net losses of $36.5 million$20,472 and $5.9 million$36,493 for the three months ended June 30, 20182019 and 2017,2018, respectively. For the six months ended June 30, 20182019 and 2017,2018, we incurred net losses of $32.4 million$35,198 and $7.4 million,$32,394, respectively. Our working capital, inclusive of cash and cash equivalents, at June 30, 2019 was $14,435.
We expect to continue to incur net losses and negative operating cash flow for the next few yearsforeseeable future as we pursue the development, commercialization and commercializationmarketing of our proprietary product candidates. Our net losses may fluctuate significantly from period to period, depending on the timing of our planned clinical trials and expenditures on our other research and development and commercial developmentactivities, as well as our commercialization activities. We expect ourOur expenses will increasemay fluctuate substantially over time as we:
fund commercialization investments for Sympazan (launched in December 2018) and, subject to FDA approval, Libervant, our epilepsy products, Libervant and Sympazan, and our ALS product, AQST-117;products;
continue clinical development of our complex molecules, AQST-108 and AQST-305;
identify and evaluate new pipeline candidates in CNS diseases and other indications; and
fund working capital requirements and expected capital expenditures as a result of the launch of proprietary products and related growth.
Our business has been financed through a combination of revenue from partneredlicensed product activities, proceeds from our IPO, equity investments from our stockholders and debt proceeds from our credit facilities. In additionfacilities and issuance of our Senior Secured Notes. Our new 12.5% Senior Secured Notes due 2025 and unregistered Warrants issued on July 15, 2019, are discussed in Note 18, Subsequent Event, to proceeds from our initial public offering,Consolidated Financial Statements and in Liquidity and Capital Resources. The Warrants include an obligation of the Company to use reasonable best efforts to register the Warrant Shares for resale with the Securities and Exchange Commission within 90 days of the closing and grant customary piggy-back rights to Warrant holders. As a result of the requirement to register the shares, we may require additional financingwill register the warrants and affiliate shares as part of our Universal Shelf Registration that we expect to file later in the third quarter of 2019. The Shelf Registration Statement provides increased capital flexibility as we continue to execute our business strategy.plan. We do not at this time have any current plans to access the equity capital markets.
Aquestive is subject to the same risks common to companies in similar industries and stages of development, including, but not limited to, competition from larger companies, reliance on a very limited number of products and services and dependence on a single customer for the substantial majority of our current revenues, expected incurrence of operating losses and negative operating cash flows for the foreseeable future, reliance on future uncommitted funding sources, which cannot be assured, to satisfy short-term and longer term liquidity and cash requirements, reliance on a single manufacturing site, new technological innovations, dependence on key personnel, reliance on third-party service providers and sole source suppliers, protection of proprietary technology, compliance with government regulations, dependency on the clinical and commercial success of our drug candidates, ability to obtain regulatory approval of our drug candidates, including Libervant, uncertainty of broad adoption of the recently-launched Sympazan or other approved products, if any, by payers, physicians, and consumers, significant competition, untested manufacturing capabilities and risks related to cybersecurity.
Critical Accounting Policies and Use of Estimates
See Note 3, Summary of Significant Accounting Policies, to our condensed consolidated financial statements,Consolidated Financial Statements, included herein for a discussion of recently issued accounting pronouncements and their impact or future potential impact on our financial results, if determinable. For a discussion of critical accounting policies that affect our significant judgments and estimates used in the preparation of our consolidated financial statements, refer to “Critical Accounting Policies and Use of Estimates” in our 2018 Annual Report on Form S-1 which became effective July 24, 2018.10-K.
JOBS Act
As an “emerging growth company” underOn April 5, 2012, the Jumpstart Our Business Startups Act, or the JOBS Act, of 2012, wewas enacted. The JOBS Act provides that, among other things, an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allowsAs an emerging growth company, to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are electingwe have elected to take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards and, as a result, we expect to comply with new or revised accounting standards no later than on the relevant datedates on which adoption of such standards is required for public emerging growth companies.
In addition, we intend to rely on the other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company”, we are not required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 and (ii) provide all of the compensation disclosure that is required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act. These exemptions will apply for a period of five years following the consummation of our IPO or until we no longer meet the requirements of being an emerging growth company, whichever is earlier.
We are also a “smaller reporting company,” meaning that we are not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent company that is not a “smaller reporting company,” and have either: (i) a public float of less than $250 million or (ii) annual revenues of less than $100 million during the most recently completed fiscal year and (A) no public float or (B) a public float of less than $700 million. As a “smaller reporting company,” we are subject to reduced disclosure obligations in our SEC filings, including with respect to executive compensation in our periodic reports and proxy statements and certain reduced financial disclosures in our periodic reports.
Financial Operations Overview
Revenues
Our revenues to date have been earned from our commercialized partnered pipelineproducts, licensing and marketed product activities.royalty initiatives, development initiatives for third parties and sales of self-developed medicines. These activities generate revenues in threefour primary categories: manufacturing and supply revenue, co-development and research fees, license and royalty revenue, and manufacturingproprietary product sales, net.
Manufacture and supply revenue.Supply Revenue
Currently, we produce two licensed pharmaceutical products: Suboxone and Zuplenz. We are the exclusive manufacturer for these products. We manufacture based on receipt of purchase orders from our licensees, and our licensees have an obligation to accept these filled orders once quality assurance validates the quality of the manufactured product. Under ASC 606, we record revenues once the manufactured product passes quality control. Our licensees are responsible for all other aspects of commercialization of these products and the Company has no role in or ability to participate in commercialization including marketing, pricing, sales and regulatory strategy.
We expect future revenue from licensed activities to be based on volume demand for licensed products, new collaborations for product development, and additional licensing of our intellectual property.
Co-development and Research Fees
We work with our partnerslicensees to co-develop pharmaceutical products. In this regard, we earn fees through performance of specific tasks, activities, or completion of stages of development defined within a contractual arrangement with the relevant partner.licensee. The nature and extent of these performance obligations, broadly referred to as milestones or deliverables, are usually dependent on the scope and structure of the project as contracted, as well as the complexity of the product and the specific regulatory approval path necessary for that product.
License and Royalty Revenue
Once a viable product opportunity is identified from our co-development and research activities with our partners,licensees, we may out-license to our partnerslicensees the rights to utilize our intellectual property related to their marketing of such products globally.products. As a result, we earn revenue from up-front license fees received under such license, development and supply agreements. We also may earn royalties based on our partners’licensees’ sales of products that use our intellectual property that are marketed and sold in the countries where we hold patented technology rights that may produce royalties pursuant to such arrangements.rights.
22Proprietary Product Sales
Manufacture and Supply Revenue
Currently, we produce two partnered pharmaceutical products: Suboxone and Zuplenz. We are the exclusive manufacturer for these products. We manufacture based on receipt of purchase orders from our partners, and our partners accept delivery of these orders at shipping point. As a result, we record revenues when product is shipped and title passes to the customers. Our partners are responsible for all other aspects of commercialization of these products.
We expect future revenue from partnered activities to increase based on growing production volumes of partnered products, new product development with partners, and additional licensing of our intellectual property.
As we commercialize our proprietary CNS product candidates, beginning with Sympazan, as well as Libervant, and Sympazan, subject to regulatory approval, we expect to directly sellmarket our products to consumers in the United States, resulting in an additional source of revenue which will be referredwe refer to as Proprietary Product Sales, net.Sales. We commercialized our first proprietary CNS product, Sympazan, in December 2018. We currently sell Sympazan through wholesalers for distribution primarily through retail pharmacies. Additionally, we may choose to select a collaborator to commercialize our product candidates in certain markets inside and outside of the United States. To date, the only revenue generated from our self-developed and self-commercialized pharmaceutical products is from the sale of Sympazan in the United States.
Revenues from sales of products are recorded net of prompt payment discounts, wholesaler service fees, returns allowances, rebates and co-pay card redemptions, each of which are described in more detail below. These reserves are based on estimates of the amounts earned or to be claimed on the related sales. These amounts are treated as variable consideration, estimated and recognized as a reduction of the transaction price at the time of the sale. The Company includes these estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized for such transaction will not occur, or when the uncertainty associated with the variable consideration is resolved. The calculation of some of these items requires management to make estimates based on sales data, historical return data, contracts and other related information that may become known in the future. The adequacy of these provisions is reviewed on a quarterly basis.
Prompt Pay Discounts
The prompt pay reserve is based upon discounts offered to wholesalers as an incentive to meet certain payment terms. We accrue discounts to wholesalers based on contractual terms of agreements. We account for these discounts at the time of sale as a reduction to gross product sales and a reduction to accounts receivable.
Wholesaler Service Fees
Our customers include major national and regional wholesalers with whom we have not generated any revenues fromcontracted a fee for service based on a percentage of gross product sales. This fee for service is recorded as a reduction to gross product sales and an increase to accrued expenses at the time of self-developed medicines.sale and is recorded based on the contracted percentage.
Returns Allowances
We allow customers to return product that is damaged or received in error. In addition, we allow Sympazan to be returned beginning six months prior to, and twelve months following, product expiration. We estimate our sales returns reserve based on industry averages until such time that we have accumulated enough data to apply a historical trend analysis. The returns reserve is recorded at the time of sale as a reduction to gross product sales and accounts receivable.
Rebates
Rebates include third party Managed Care and Medicaid rebates, and Medicare Part D rebates and other government rebates. Rebates are accrued based upon an estimate of claims to be paid for product sold into trade by the Company. The provisions for government rebates was based in part by contractual terms and government regulations. We monitor legislative changes to determine what impact such legislation might have on our Company. We account for these deductions as a reduction of gross products sales and an increase in accrued expenses.
Co-Pay Cards
Co-pay card redemptions costs represent the costs to help offset a customer’s co-pay or cover a predetermined amount of prescription based on business rules. We account for these deductions as a reduction of gross product sales and an increase in accrued expenses.
Costs and Expenses
Our costs and expenses are primarily the result of the following activities: generation of partneredmanufacture and supply revenues; development of our pipeline of proprietary product candidates; and selling, general and administrative expenses, including pre-launch and post-launch commercialization efforts related to our CNS product candidates, intellectual property defense, developmentprocurement, protection, prosecution and maintenance,litigation expenses, corporate management functions, public company costs, share-based compensation expenses and interest on our corporate borrowings. We primarily record our costs and expenses in the following categories:
Manufacture and Supply Costs and Expenses
Manufacture and supply costs and expenses are comprised primarily of costs and expenses related to manufacturing our proprietary dissolving film products for our marketed partneredlicensed pharmaceutical products and for clinical trial batches of our newly approved proprietary and partnered product candidates,products including raw materials, direct labor and fixed overhead principally in our Portage, Indiana facilities. In 2019, we expect the costs of our proprietary products manufactured to be a greater factor in these expenses, but such costs were minimal in 2018. Our material costs include the costs of raw materials, other than the API component of Suboxone, used in the production of our proprietary dissolving film and primary packaging materials. Direct labor costs consist of payroll costs (including taxes and benefits) of employees engaged in production activities. Fixed and semi-fixed overhead principally consists of indirect payroll, facilities rent, utilities and depreciation for leasehold improvements and production machinery and equipment.
Our manufacture and supply costs and expenses are impacted by our customers’ supply requirements;requirements. Costs of production reflect the costs of production, which includes raw materials which we purchasethat are purchased at market prices and production efficiency (measured by the cost of a salable unit). SuchThese costs can increase or decrease based on the amount of direct labor and materials required to produce a product and the allocation of fixed overhead, which is dependent on the levels of production.
We expect our manufacture and supply costs and expenses to increase over the next several years due to the commercialization of Sympazan launched in December 2018 and as we commercialize and begin to market, following regulatory approval, our product candidates, including Libervant and Sympazan, our ALS product candidate, AQST-117, and our other product candidates.Libervant. Additionally, we expect tomay incur increased costs associated with hiring additional personnel to support the increased manufacturing and supply costs arising from our commercialization of these products and product candidates. As such, we expect our manufacturing and supply costs and expenses to increase as our product candidates receive regulatory approval and can be commercialized both in and outside the United States.production begins.
Research and Development Expenses
Since our inception, we have focused significant resources on our research and development activities, including preclinical studiesactivities. Research and clinical trials, activities related to regulatory filings, and manufacturing development efforts. Significant expenses also included inprimarily consist of:
employee-related expenses;
external research and development are personnel expenses incurred under arrangements with third parties;
the cost of acquiring, developing and manufacturing clinical study materials; and
costs which includes compensation, benefitsassociated with preclinical and stock-based compensation. clinical activities and regulatory operations.
We expenseexpect our research and development costsexpenses to increase over the next several years as they are incurred.we expand our efforts to identify and develop or acquire additional product candidates and technologies. We may hire additional skilled colleagues to perform these activities, conduct clinical trials and ultimately seek regulatory approvals for any product candidate that successfully completes those clinical trials.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of salaries, benefits, share-based compensation, commercialization and marketing costs, and other related costs for executive, finance, selling and operational personnel. Other significant costs include facility and related costs not otherwise included in research and development expenses such as: professional fees for legal, consulting, tax and accounting services; insurance; selling; market research; advisory board and key opinion leaders; depreciation; unabsorbed factory overhead costs and general corporate expenses, inclusive of IT systems related costs.
Historically, our selling, general and administrative expenses have been focused primarily on partnered selling activities and corporate management functions.functions along with unabsorbed factory overhead costs. However, costs related to commercialization of our CNS product candidates began in the second half of 2017 and significantly increased in 2018 as we prepare toprogressed toward the launch our late stage epilepsy productsof Sympazan and Libervant in lateDecember 2018, and began initial preparations for the launch of Libervant, an additional late-stage epilepsy product currently subject to FDA approval. These costs are expected to increase in 2019, respectively.with a full year effect of Sympazan’s commercialization. Incremental marketing spending in preparation for the commercial launch of Libervant is expected to be incurred prior to the PDUFA date for this product and will be accordingly planned once the PDUFA date is known. As part of the commercial launch of Sympazan, we prepare to launch Sympazan during the fourth quarter 2018, we have begun enteringentered into contractual arrangements with a third party logisticthird-party logistics provider (3PL) and wholesalers for distribution of our products and expect to enterproducts. We also entered into a contract for our contracted sales force over the next few weeks.and medical affairs team and have established a market access account team. With this increased activity related to the upcoming commercial launch we expect sellingof Sympazan, our sales and marketing expenses have increased and are expected to continue to increase in subsequent periods as we continue to support our epilepsy franchise. We expect to be able to significantly leverage these now existing relationships for the second halffuture launch, subject to FDA approval, of 2018. In addition, ourLibervant. Our general and administrative costs will increaseincreased as a result of becoming a public company, including costs related to additional personnel and accounting, audit, legal, regulatory, and tax-related services, associatedand other public company costs. In addition, in order to better align our selling, general and administrative expenses with maintaining compliance with exchange listingexpected revenue, during the second quarter we reviewed and SEC requirements, directorbegan initiatives to reduce certain expenses in non-core functions, and officer insurance costs,we will continue to review and investorassess our selling, general and public relations costs.administrative expenses relative to planned revenues going forward.
Interest Expense
Interest expense consists of interest expensecosts related to the Loan Agreement,our debt facility, as well as amortization of loan costs and debt discounts.discount. Our interest, iswhich under our Perceptive credit facility was subject to changes in one-month LIBOR, and represents a monthly cash payment obligation. This debt facility isOur new 12.5% Senior Secured Notes due 2025 issued on July 15, 2019 are discussed in more depthNote 18, Subsequent Event, to our Consolidated Financial Statements and in Liquidity and Capital Resources. Interest expense is expected to increase based on additional borrowings under such new Notes.
Other ExpenseInterest Income
Other expenseInterest income consists of changesearnings derived from an interest-bearing account. We expect to continue generating interest income in 2019 from our interest-bearing cash accounts, albeit on a declining cash balance that is expected to be applied to operating costs as needed.
Change in Fair Value of Warrant
Changes in the fair value of warrants resulted from non-cash periodic revaluations of the Perceptive Warrantswarrants issued to Perceptive Credit Opportunities Fund in connection with the Loan Agreement.debt facility. Effective with the automatic exercise of the warrants by Perceptive prior to our IPO in July 2018, these warrants are no longer outstanding and no future related charges to earnings will be incurred. Warrants issued in conjunction with the Notes issued on July 15, 2019 will be valued at market, and revaluations will impact future periods related to the new Warrants.
For information concerning the Warrants issued in connection with our 12.5% Senior Secured Notes due 2025, see Note 18, Subsequent Event, to our Consolidated Financial Statements.
Results of Operations
Comparison of the Three Months Ended June 30, 20182019 and 20172018
We recorded revenue of $13.9 million$11,129 and $11.1 million$13,928 in the three months ended June 30, 20182019 and June 30, 2017,2018, respectively, generating a net lossesloss of $36.5 million$20,472 and $5.9 million$36,493 for each of those quarters, respectively.
The following discussion of our results of operations explains the material drivers of these results of operations.
Revenues
The following table sets forth our revenue data for the periods indicated:
| | | Three Months Ended June 30, | | | Change | |
| (In thousands, except %) | | 2018 | | | 2017 | | | $ | | | | % | |
| Manufacture and supply revenue | | $ | 8,684 | | | $ | 10,336 | | | $ | (1,652 | ) | | | (16 | %) |
| License and royalty revenue | | | 4,532 | | | | 246 | | | | 4,286 | | | | NM | % |
| Co-development and research fees | | | 712 | | | | 560 | | | | 152 | | | | 27 | % |
| Revenues | | $ | 13,928 | | | $ | 11,142 | | | $ | 2,786 | | | | 25 | % |
Revenues increased 25% or $2.8 million in the three months ended June 30, 2019 and 2018, to $13.9 million as compared to $11.1 million inrespectively.
Revenues:
| | | Three Months Ended June 30, | | | Change | |
| (In thousands, except %) | | 2019 | | | 2018 | | | $ | | |
| % | |
| Manufacture and supply revenue | | $ | 8,915 | | | $ | 8,684 | | | $ | 231 | | | | 3 | % |
| License and royalty revenue | | | 424 | | | | 4,532 | | | | (4,108 | ) | | | (91 | %) |
| Co-development and research fees | | | 1,019 | | | | 712 | | | | 307 | | | | 43 | % |
| Proprietary product sales, net | | | 771 | | | | - | | | | 771 | | | | 100 | % |
| Total revenues | | $ | 11,129 | | | $ | 13,928 | | | $ | (2,799 | ) | | | (20 | %) |
For the three months ended June 30, 2017.2019, total revenues decreased 20% or $2,799 to $11,129 compared to revenues of $13,928 for the same period in 2018. The change is primarily attributable to differences in license and royalty revenue that by nature are variable as to timing and magnitude. Additionally, under the Indivior Supplemental Agreement license fees are currently suspended following the “at risk” launches of several generic buprenorphine/naloxone products into the Suboxone market. These fees are recoverable in the future under certain conditions. These are offset in part by increases in manufacture and supply revenue, co-development and research fees and proprietary product sales revenue from Sympazan, launched in December 2018.
Manufacture and supply revenue decreasedincreased approximately 16%3% or $1.6 million$231 to $8.7 million in$8,915 for the three months ended June 30, 2018 as2019 compared to $10.3$8,684 from the prior year period. This increase is attributable to slightly higher Suboxone product mix of higher margin dose configurations offset in part by 1.8 million fewer strips sold period over period. As of the early part of third quarter 2019, Suboxone and its authorized generic maintained a greater than 75% share in the market. While it is uncertain to predict the generic erosion effect on our Suboxone product volumes in future periods, the market for Suboxone product, including generic competitor products, continues to grow and we will continue to closely monitor these dynamics in the marketplace.
License and royalty revenue decreased 91% or $4,108 to $424 for the three months ended June 30, 2017 due2019 compared to revenues of $4,532 from the prior year period. This change was primarily related to timing of purchase volume demand attributable to Suboxonethe license and Zuplenznew patent fees on our licensed product sales.
Suboxone. License and royalty revenue increased $4.3 million to $4.5 million infees totaled $0 for the three months ended June 30, 2019 compared to $4,250 of license fees recognized during the prior year period. Suboxone related license fees were $4,250 lower compared to 2018, as compareda result of the fact that certain license fees due from Indivior have been suspended pending the outcome of litigation related to $0.2 million ininfringement claims against the generic products launched “at risk.” Royalty revenues earned on Suboxone and Zuplenz were flat year-over-year on similar product sales volumes flowing through our licensees’ sales and distribution channels. License fees are generally driven by transfer of rights, patent performance contingencies, specific FDA or other regulatory achievements, sales levels achievements or other contingencies and milestones, and will likely fluctuate significantly from quarter-to-quarter.
Co-development and research fees increased 43% or $307 to $1,019 for the three months ended June 30, 2017. This2019 compared to $712 from the prior year period. The increase was primarily related to license fees on our partnered product Suboxone and royalties on Suboxone and Zuplenz. License fees were higher in the 2018 period as a result ofdriven by the timing of the achievement of research and development performance obligations on licensed products and related milestones in these agreements. License feesand are milestone driven and maynormally expected to fluctuate significantly from quarter-to-quarter.one reporting period to the next.
Co-development and research fees rose 27%Product sales, net increased $771 or $0.1 million in100% for the three months ended June 30, 2018 to $0.7 million as2019 compared to $0.6 millionthe prior year period, due to the launch of our first proprietary self-developed medicine, Sympazan, in December 2018.
Expenses and Other:
| | | Three Months Ended June 30, | | | Change | |
| (In thousands, except %) | | 2019 | | | 2018 | | | $ | | |
| % | |
| Manufacture and supply | | $ | 5,420 | | | $ | 4,973 | | | $ | 447 | | | | 9 | % |
| Research and development | | | 8,151 | | | | 7,994 | | | | 157 | | | | 2 | % |
| Selling, general and administrative | | | 16,246 | | | | 33,668 | | | | (17,422 | ) | | | (52 | )% |
| Interest expense | | | 1,937 | | | | 1,927 | | | | 10 | | | | 1 | % |
| Interest income | | | (153 | ) | | | - | | | | 153 | | | NM | |
| Other | | | - | | | | 1,859 | | | | (1,859 | ) | | NM | |
Manufacture and supply costs and expenses increased 9% or $447 to $5,420 for the three months ended June 30, 2017. These fees are highly dependent on the timing of partnered product research and development activities and related milestones, which may fluctuate significantly quarter-to-quarter.
Expenses:
The following table sets forth our expense data2019 compared to $4,973 for the periods indicated:
| | | Three Months Ended June 30, | | | Change | |
| (In thousands, except %) | | 2018 | | | 2017 | | | $ | | | | % | |
| Manufacturing and supply | | $ | 4,973 | | | $ | 5,141 | | | $ | (168 | ) | | | (2 | )% |
| Research and development | | | 7,994 | | | | 4,837 | | | | 3,157 | | | | 67 | % |
| Selling, general and administrative | | | 33,647 | | | | 5,223 | | | | 28,424 | | | | 544 | % |
| Interest | | | 1,927 | | | | 1,949 | | | | (22 | ) | | | (1 | )% |
| Other | | | 1,870 | | | | (111 | ) | | | 1,981 | | | | NM | % |
Manufacturingsame period in 2018. This increase was primarily driven by lower volumes of Suboxone production and supplyhigher production costs and expenses decreased 2% or $0.1 million to $5.0 millionassociated with other products. Additionally, there was a $110 increase in share-based compensation costs during the three months ended June 30, 20182019 as compared to $5.1 millionthe same period in the three months ended June 30, 2017, driven primarily by timing of purchase volume demand related to partnered product volumes2018. These increases were offset in part by $0.3 million of$345 in compensation cost associated with the issuance of the non-voting common shares and related withholding taxes whichallocated to manufacture and supply costs and expense during the Company elected to pay on behalf ofthree month period ended June 30, 2018 that did not occur during the former performance unit holders.three month period ended June 30, 2019.
Research and development expenses increased 67%2% or $3.2 million$157 to $8.0 million in$8,151 for the three months ended June 30, 2018 as2019 compared to $4.8 million$7,994 in the prior year period. This increase resulted from an increase of clinical trials expenses of $1,625 along with added expenses of organizational growth that was substantially offset by a net reduction of share-based compensation expenses totaling $2,053 that was primarily attributable to the one-time settlement in 2018 of the Company’s obligations arising from its Performance Unit Plan. Clinical trial and other third party product development expenses may be expected to fluctuate based on the schedule of clinical and development activities that are conducted during any reporting period.
Selling, general and administrative expenses decreased 52% or $17,422 to $16,246 for the three months ended June 30, 20172019 as compared to $33,668 for the prior year period. This decrease is primarily due to timing of expenses for direct project costs primarily associated with our CNS product candidates (Libervant and AQST-117) and AQST-119 which increased approximately $2.2 million period over period due to the progression of Phase II Libervant initiatives offset$24,767 in part by lower early clinical trial activity for our complex molecule product candidate AQST-108 as compared to 2017 versus 2018. Additionally, $2.2 million of increase is related to the compensation cost associated with the issuance of the non-voting common shares and withholding taxes.
Selling, general and administrative expenses increased by 544% or $28.4 million to $33.6 million in the three months ended June 30, 2018 as compared to $5.2 million primarily due to $24.8 million of compensation cost associated with the issuance of the non-voting common shares and related withholding taxes which the Company electedallocable to pay on behalf of the performance unit holders. Excluding expenses associated with share-based compensation, selling, general and administrative expenses increased 70% or $3.6 million to $8.8 million induring the three monthsmonth period ended June 30, 2018 as compared to $5.2 million inthat did not occur during the three monthsmonth period ended June 30, 2017 primarily due to initial2019, offset in part by $3,631 of investments in our commercialization, branding and marketing capabilities for Sympazan and in preparation for the expected launch of Libervant, Sympazan and AQST-117.Libervant. These higher costs included those for personnel, external consultants and other resources that enabled us to establish the key commercial functions such as sales and marketing, market access and medical affairs. We also have addedincurred $535 of increased legal fees in connection with the ongoing state anti-trust litigation and other patent related matters, and $1,589 of share-based compensation expense. Further, additional personnel and other external resources have been engaged to prepare our company for going public.further assist us in operations as a public company.
Interest expense remained essentially flat period in each ofincreased 1% or $10 to $1,937 for the three months ended June 30, 2018 and 2017.2019 compared to 1,927 for the same period in 2018. Our interest expense iswas subject to adjustmentfluctuations based on one-month LIBOR. Our new Senior Secured Note due 2025 issued on July 15, 2019 carry a 12.5% fixed interest rate per annum.
Other (income) expensesInterest income increased 100% or $153 for the three months ended June 30, 2019, compared to the prior year period. This increase is a result of investing the net cash proceeds from our IPO in an interest-bearing account.
Change in the fair value of warrants decreased principallyby $1,859 for the three months ended June 30, 2019 compared to the same period in 2018. For periods prior to our IPO, which was effective July 24, 2018, we remeasured the fair value of outstanding warrants each quarter in accordance with the AICPA Practice Aid, Valuation of Privately-Held Company Equity Securities issued as compensation. The Company had no outstanding warrants during the three months ended June 30, 2019. However, for information concerning the warrants issued in connection with our 12.5% Senior Secured Notes due 2025, issued on July 18, 2019, see Note 18, Subsequent Event, to our Consolidated Financial Statements.
Comparison of the Six Months Ended June 30, 2019 and 2018
We recorded revenue of $23,772 and $37,339 in the six months ended June 30, 2019 and 2018, respectively, generating a net loss of $35,198 and $32,394 for the six months ended June 30, 2019 and 2018, respectively.
Revenues:
| | | Six Months Ended June 30, | | | Change | |
| (In thousands, except %) | | 2019 | | | 2018 | | | $ | | |
| % | |
| Manufacture and supply revenue | | $ | 15,584 | | | $ | 20,244 | | | $ | (4,660 | ) | | | (23 | %) |
| License and royalty revenue | | | 5,046 | | | | 14,032 | | | | (8,986 | ) | | | (64 | %) |
| Co-development and research fees | | | 1,789 | | | | 3,063 | | | | (1,274 | ) | | | (42 | %) |
| Proprietary product sales, net | | | 1,353 | | | | - | | | | 1,353 | | | | 100 | % |
| Total revenues | | $ | 23,772 | | | $ | 37,339 | | | $ | (13,567 | ) | | | (36 | %) |
For the six months ended June 30, 2019, total revenues decreased 36% or $13,567 to $23,772 compared to revenues of $37,339 for the same period in 2018. The change is primarily attributable to decreases in manufacture and supply revenue, license and royalty revenue, and in co-development and research fees, offset in part by an increase in proprietary product sales revenue for Sympazan, launched in December 2018.
Manufacture and supply revenue decreased approximately 23% or $4,660 to $15,584 for the six months ended June 30, 2019 compared to $20,244 from the prior year period. This decrease is attributable to lower Suboxone production volume. As of the early part of third quarter 2019, Suboxone and its authorized generic maintained a greater than 75% market share. While it is uncertain to predict the generic erosion effect on our Suboxone product volumes in future periods, the market for Suboxone product, including generic competitor products, continues to grow and we will continue to closely monitor these dynamics in the marketplace.
License and royalty revenue decreased 64% or $8,986 to $5,046 for the six months ended June 30, 2019 compared to revenues of $14,032 from the prior year period. This change was primarily related to the license and new patent fees on our licensed product Suboxone. License fees totaled $4,250 for the six months ended June 30, 2019 compared to $13,500 of license fees recognized during the prior year period. Suboxone related license fees were $9,250 lower compared to 2018, as a result of two factors: the uneven timing and magnitude of the various payments owed to the Company by Indivior and the fact that certain license fees due from Indivior have been suspended pending the outcome of litigation related to infringement claims against the generic products launched “at risk.” Milestones from other licensed products such as Sunovion’s APL-130277 product are likely to be earned after 2019 based on the timing of the expected PDUFA date for that product. Royalty revenues earned on Suboxone and Zuplenz remained flat year-over-year on similar product sales volumes flowing through our licensees’ sales and distribution channels. License fees are generally driven by transfer of rights, patent performance contingencies, specific FDA or other regulatory achievements, sales levels achievements or other contingencies and milestones, and will likely fluctuate significantly from quarter-to-quarter.
Co-development and research fees decreased 42% or $1,274 to $1,789 for the six months ended June 30, 2019 compared to $3,063 from the prior year period. The decrease was driven by the timing of the achievement of research and development performance obligations on licensed products and related milestones, both of which are normally expected to fluctuate significantly one reporting period to the next.
Product sales, net increased $1,353 or 100% for the six months ended June 30, 2019 compared to the prior year period, due to the changelaunch of our first proprietary self-developed medicine, Sympazan, in December 2018.
Expenses and Other:
| | | Six Months Ended June 30, | | | Change | |
| (In thousands, except %) | | 2019 | | | 2018 | | | $ | | |
| % | |
| Manufacture and supply | | $ | 8,926 | | | $ | 10,609 | | | $ | (1,683 | ) | | | (16 | )% |
| Research and development | | | 12,454 | | | | 12,895 | | | | (441 | ) | | | (3 | )% |
| Selling, general and administrative | | | 34,154 | | | | 41,213 | | | | (7,059 | ) | | | (17 | )% |
| Interest expense | | | 3,863 | | | | 3,876 | | | | (13 | ) | | | 0 | % |
| Interest income | | | (427 | ) | | | (22 | ) | | | 405 | | | NM | |
| Other | | | - | | | | 1,162 | | | | (1,162 | ) | | NM | |
Manufacture and supply costs and expenses decreased 16% or $1,683 to $8,926 for the six months ended June 30, 2019 compared to $10,609 for the same period in 2018. This decrease was primarily driven by lower production costs due to the lower volume of Suboxone. Further, there was a $110 increase in share-based compensation expenses offset by $345 in compensation cost associated with the issuance of the non-voting common shares and related withholding taxes allocated to manufacturing and supply costs and expenses during the six month period ended June 30, 2018 that did not occur during the six month period ended June 30, 2019.
Research and development expenses decreased 3% or $441 to $12,454 for the six months ended June 30, 2019 compared to $12,895 in the prior year period. This net expense reduction was the result of a net decrease of share-based compensation expenses of $1,845 due primarily to the one-time settlement in 2018 of the Company’s obligations arising from its Performance Unit Plan, partially offset by $1,404 of expenses arising primarily from organizational growth. Third party clinical expenses and other direct project development expenses remained stable during the two periods. Clinical trial and other third party direct product development expenses may be expected to fluctuate based on the schedule of clinical and development activities that are conducted during and reporting period.
Selling, general and administrative expenses decreased 17% or $7,059 to $34,154 for the six months ended June 30, 2019 as compared to $41,213 for the prior year period. This decrease is primarily due to $24,767 in compensation cost associated with the issuance of the non-voting common shares and related withholding taxes allocable to selling, general and administrative expenses offset in part by $7,692 of higher investments in our commercialization, branding and marketing capabilities for Sympazan and in preparation for the expected launch of Libervant. These costs included those for personnel, external consultants and other resources that enabled us to establish key commercial functions such as sales and marketing, market access and medical affairs. We incurred $1,885 of increased legal fees in connection with the ongoing state anti-trust litigation and other patent related matters, $2,377 of higher factory unabsorbed overhead as a result of lower production of Suboxone period over period and $2,857 of share-based compensation expense. Further, additional personnel and other external resources have been engaged to further assist us in operations as a public company and higher factory unabsorbed overhead as a result of lower production of Suboxone period over period.
Interest expense remained flat for the six months ended June 30, 2019 compared to the same period in 2018. Our interest expense was subject to fluctuations based on one-month LIBOR. Our new Senior Secured Note due 2025 issued on July 15, 2019 carry a 12.5% fixed interest rate per annum.
Interest income increased $405 for the six months ended June 30, 2019 compared to the same period in 2018, as a result of investing the net cash proceeds from our IPO in an interest-bearing account.
Change in the fair value of warrants. We re-measurewarrants decreased by $1,162 for the six months ended June 30, 2019 compared to the same period in 2018. For periods prior to our IPO, which was effective July 24, 2018, we remeasured the fair value of outstanding warrants each quarter in accordance with the AICPA Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as compensation.
Comparison of Six Months Ended June 30, 2018 and 2017
We recorded revenue of $37.3 million and $27.6 million inCompensation. The Company had no outstanding warrants during the six months ended June 30, 2018 and 2017, respectively, generating net losses of $32.4 million and $7.4 million2019. However, for each of those periods, respectively.
The following discussion ofinformation concerning the warrants issued in connection with our results of operations explains the material drivers of these results of operations.
Revenues
The following table sets forth12.5% Senior Secured Notes due 2025, issued on July 18, 2019, see Note 18, Subsequent Event, to our revenue data for the periods indicated:Consolidated Financial Statements.
| | | Six Months Ended June 30, | | | Change | |
| | | 2018 | | | 2017 | | | $ | | | | % | |
| (In thousands, except %) | | | | | | | | | | | | | |
| Manufacture and supply revenue | | $ | 20,244 | | | $ | 20,491 | | | $ | (247 | ) | | | (1 | )% |
| License and royalty revenue | | | 14,032 | | | | 5,469 | | | | 8,563 | | | | 157 | % |
| Co-development and research fees | | | 3,063 | | | | 1,617 | | | | 1,446 | | | | 89 | % |
| Revenues | | $ | 37,339 | | | $ | 27,577 | | | $ | 9,762 | | | | 35 | % |
Revenues increased $9.7 million in the six months ended June 30, 2018 to $37.3 million as compared to $27.6 million in the six months ended June 30, 2017. This increase came primarily from increases in license and royalty revenue, followed by an increase in co-development and research fees offset, in part, by lower manufacture and supply revenue.
Manufacture and supply revenue decreased approximately 1.0% or $0.3 million to $20.2 million in the six months ended June 30, 2018 as compared to $20.5 million in the six months ended June 30, 2017 primarily due to a $2.0 million flat fee earned in the 2017 period for certain manufacturing exclusivity rights, without a corresponding revenue item in the 2018 period. Excluding this flat fee, manufacture and supply revenue increased from $18.5 million in the six months ended June 30, 2017 to $20.2 million in the six months ended June 30, 2018, an increase of 9%, due to an increase in the volume of products manufactured and sold during the 2018 period.
License and royalty revenue increased 157% or $8.5 million to $14.0 million in the six months ended June 30, 2018 as compared to $5.5 million in the six months ended June 30, 2017. This increase was primarily related to license fees on our partnered product Suboxone and royalties on Suboxone and Zuplenz. License fees were higher in the 2018 period as a result of the achievement of certain performance obligations specified in these agreements, and royalties rose year-over-year on higher product sales volumes flowing through our partners’ sales and distribution channels. License fees are generally driven by transfers of rights, patent performance contingencies, specific FDA or other regulatory achievements, sales level achievements or other contingencies and milestones, and may fluctuate significantly from quarter-to-quarter.
Co-development and research fees rose 89% or $1.5 million to $3.1 million in the six months ended June 30, 2018 as compared to $1.6 million in the six months ended June 30, 2017. The increase was driven by the timing of the achievement of research and development performance obligations on partnered products and related milestones and may fluctuate significantly quarter-to-quarter.
Expenses:
The following table sets forth our expense data for the periods indicated:
| | | Six Months Ended June 30, | | | Change | |
| | | 2018 | | | 2017 | | | $ | | | | % | |
| (In thousands, except %) | | | | | | | | | | | | | |
| Manufacturing and supply | | $ | 10,609 | | | $ | 9,325 | | | $ | 1,284 | | | | 14 | % |
| Research and development | | | 12,895 | | | | 10,178 | | | | 2,717 | | | | 27 | % |
| Selling, general and administrative | | | 41,216 | | | | 11,352 | | | | 29,864 | | | | 263 | % |
| Interest | | | 3,854 | | | | 3,767 | | | | 87 | | | | 2 | % |
| Other | | | 1,159 | | | | 309 | | | | 850 | | | | 275 | % |
Manufacturing and supply costs and expenses increased 14% or $1.3 million to $10.6 million in the six months ended June 30, 2018 as compared to $9.3 million in the six months ended June 30, 2017, driven primarily by an increase in volume, higher production costs and higher scrap costs period over period and the $0.3 million of compensation cost associated with the issuance of the non-voting common shares and related withholding taxes, which the Company elected to pay on behalf of the former performance unit holders.
Research and development expenses increased 27% or $2.7 million to $12.9 million in the six months ended June 30, 2018 as compared to $10.2 million in the six months ended June 30, 2017 primarily due to increased direct project costs primarily associated with our CNS product candidates (Libervant, Sympazan and AQST-117) and AQST-119 of which $1.2 million increase period over period was due to the progression of Phase II initiatives for Libervant offset in part by lower early clinical trial activity for our complex molecule product candidate AQST-108 as compared to 2017 versus 2018. Further adding to the increase was the $2.2 million of compensation cost associated with the issuance of the non-voting common shares and related withholding taxes.
Selling, general and administrative expenses increased 263% or $29.9 million to $41.2 million in the six months ended June 30, 2018 as compared to $11.3 million primarily due to the $24.8 million of compensation cost associated with the issuance of the non-voting common shares and related withholding taxes. The remaining increase of $5.1 million is a primary result of investments in our commercialization capabilities in preparation for the expected launch of Libervant, Sympazan and AQST-117. These higher costs included personnel, external consultants and other resources that enabled us to establish the key commercial functions such as sales and marketing, market access and medical affairs. We also have added additional personnel and other external resources to prepare our company for our initial public offering. Also contributing to this increase were higher costs incurred in the state anti-trust litigation and other patent related matters.
Interest expense increased 2% or $0.1 million to $3.9 million in the six months ended June 30, 2018 as compared to $3.8 million in the six months ended June 30, 2017 primarily as a result of an increase in our indebtedness of $5.0 million incurred on March 9, 2017. Our interest expense is subject to increases based on one-month LIBOR.
Other expenses increased in the six months ended June 30, 2018 compared to the six months ended June 30, 2017, principally due to the change in fair value of warrants of $0.9 million to $1.2 million.
Liquidity and Capital Resources
Sources of Liquidity
Since our inception in January 2004, we have incurred significant losses and expect to incur significant operating losses and negative operating cash flow for the foreseeable future and as of June 30, 2018,2019, we hadhave a net shareholders’stockholders’ deficit of $38.9 million.$24,657. We have funded our operations primarily with equity and debt financings and manufacture and supply revenue as well as milestone and royalty payments from our collaboration partners. Through June 30, 2018, we received net proceeds from debt and equity issuances of $125.6 million as follows:licensees.
· | $50.0 million from debt facilities further described below; and |
· | $75.6 million from equity financings, with most of these proceeds received in 2008 and prior years |
We generate revenue from partnered products and related activities, but the costs to generate these revenues and the costs and expenses of our proprietary CNS and complex molecule development programs and related commercialization efforts have resulted in the deficit we have accumulated since our inception.
We had $10.6 million$22,165 in cash and cash equivalents as of June 30, 2018. We have no committed sources2019 and working capital, including cash and cash equivalents, of capital and our borrowing capability under the Loan Agreement is fully drawn.$14,435.
On July 27, 2018, we closed the IPO of 4,500,000 shares of common stock at an offering price of $15.00 per share. We received net proceeds of approximately $57.5 million, after deducting underwriting discounts, commissions, and offering related transaction costs of approximately $10.0 million. On August 15, 2018, the underwriters exercised their over-allotment option and the Company issued 425,727 at $15.00 per share. The Company received additional net proceeds of approximately $5.9 million, after deducting underwriter discounts of approximately $0.4 million. The Company received from the IPO total gross proceeds of approximately $73.9 million and net proceeds of approximately $63.5 million, after deducting underwriter discounts and costs and expenses of the offering.
Credit Agreement and Guaranty
On August 16, 2016, we entered into a Credit Agreement and Guarantee with Perceptive Credit Opportunities Fund, LP, which we amended on May 21, 2018, or, as so amended, the Loan Agreement. At closing, we borrowed $45.0 million$45,000 under the Loan Agreement and were permitted to borrow up to an additional $5.0 million$5,000 within one year of the closing date based on achievement of a defined milestone. In March 2017, we met our performance obligations under the terms of the Loan Agreement and received the remaining $5.0 million$5,000 available to us under the Loan Agreement. Proceeds under the Loan Agreement were used to repay an existing debt obligation of $37.5 million, with the balance available for general corporate purposes. The loan from Perceptive was originally scheduled to mature on August 16, 2020. However, upon the consummation of our initial public offering, the maturity date was extended to December 16, 2020. The loan bearsbore interest, payable monthly, at one-month LIBOR, or 2%which at June 30, 2019 was approximately 2.75%, plus 9.75%, subject to a minimum rate of 11.75%. The loan iswas interest-only through April 2019, as amended.
Additionally, pursuant to the Loan Agreement, commencing The final payments under this agreement were due December 15, 2020, and repayment began on May 31, 2019, seven monthly principal payments are due in2019. However, the amount of $550 thousand. Thereafter, monthly principal payments inagreement and related security interests were terminated with the amount of $750 thousand are due through the maturity date (as extended), at which time the full amount of the remaining outstanding loan balance is due. Our tangible and intangible assets are subject to first priority liens to the extent of the outstanding debt. Other significant terms include financial covenants, change of control triggers and limitationspayoff that occurred on additional indebtedness, asset sales, acquisitions and dividend payments. The Loan Agreement contains certain financial covenants, which include (1) a minimum liquidity requirement pursuant to which we must maintain a monthly cash balance of $4.0 million at all times and (2) a minimum revenue requirement pursuant to which on a quarterly basis (calculation date) we must maintain minimum revenues for the twelve consecutive trailing months ended prior to the calculation date. Further, under the Loan Agreement, as amended, we are permitted, subject to Perceptive’s consent, to monetize the royalty and fees derived from sales of certain Apomorphine products and, in connection with such monetization Perceptive has agreed to release liens related to these royalties and fees.July 15, 2019.
As of June 30, 2018,2019, we were compliant with all financial and other covenants under the Perceptive Loan Agreement.
In addition, uponUpon the closing of our initial public offering,IPO, Perceptive received 863,400 shares of common stock issuable pursuant to the automatic exercise of warrants from APL’s ownership interest at anfor a total exercise price of $.01 per share.$116.
12.5% Senior Secured Notes
On July 15, 2019, we issued $70,000 aggregate principal amount of our 12.5% Senior Secured Notes due 2025 and Warrants under an Indenture. In addition, the Indenture provides opportunity to issue up to $30,000 of additional Notes under certain conditions for a total possible issuance amount of $100,000.
The Loannet proceeds from the Notes is $66,951, after deducting the estimated expenses of the transaction. We used a portion of the net proceeds to repay an aggregate amount of approximately $52,092, comprised of the full principal amount, all accrued and unpaid interest and applicable prepayment and end-of-term fees, owed to Perceptive under the Credit Agreement originally containedand Guaranty (described above). We will use the cash balance of approximately $14,859 for the continued commercialization and advancement of its proprietary products and pipeline candidates, and other general corporate purposes.
The additional notes can be issued if the Company satisfies certain conditions and achieves milestones related to the filing and approval of its epilepsy product Libervant and there are available purchasers for the additional notes. Specifically, on or prior to March 31, 2021, the Company has the option to issue an additional $10,000 aggregate principal amount of the Notes if the Company has filed a requirement that we makenew drug application for its candidate Libervant with the FDA, provided it has obtained the written consent of the holders of a mandatory prepaymentmajority in aggregate principal amount of outstanding Notes (first reopener), and, on or prior to March 31, 2021, up to an additional $30,000 (less the amount of 25%any first additional notes issued by us) if the Company obtains approval from the FDA of its product candidate Libervant.
Interest on the Notes accrues at a rate of 12.5% per annum and is payable quarterly in arrears on March 30th, June 30th, September 30th and December 30th of each year commencing on September 30, 2019. On each payment date commencing on September 30, 2021, we will also pay an installment of principal of the netNotes pursuant to a fixed amortization schedule. The stated maturity date of the Notes is June 30, 2025.
Under the agreement, the Company has the right to monetize its royalty and milestone interests in Sunovion’s Apomorphine product APL-130277 once the NDA for such product is approved by the FDA. Upon any such monetization we shall offer to purchase each holder’s Notes on a pro rata basis at a repurchase price in cash proceedsequal to 112.500% of the principal amount of such Notes, plus accrued interest and unpaid interest, if any, thereon to the repurchase date and such offer will be available to be exercised up to the date of the Libervant approval of the NDA by the FDA, unless exercised prior to that date. The maximum amount that can be offered for repurchase is $40,000 or $50,000 if the first reopener has been issued and funded. The amount of Notes repurchased will be at the discretion of the holders of the Notes.
The Indenture permits us, upon consummationthe continuing satisfaction of our initial public offering; however,certain conditions, including that we (on a consolidated basis) have at least $75,000 of net revenues for the most recently completed twelve calendar month period, to enter into an asset-based borrowing (“ABL”) facility not to exceed $10,000. The ABL Facility may be collateralized by assets constituting only inventory, accounts receivable and the proceeds thereof of the Company. The Indenture carries customary covenants and restrictions associated with Notes of this nature.
Affirmative and negative covenants specified in the Indenture are considered typical for loans of this nature, including, but not limited to, specifications relating to preservation of corporate existence, publicly traded status, intellectual property and business interests; limitations or prohibitions of dividend payments or other dispositions, repurchases of shares, additional debt, certain equity issuances, asset transfers or dispositions, creation or occurrence of additional liens, entering into licensing or monetization arrangements other than as amended, following consummationpermitted under the Indenture, and perfection of our initial public offering, such requirement no longer applies.security interests. Events of default include various commonly specified conditions, including but not limited to, bankruptcy, insolvency, material adverse changes, failure to meet Indenture payment or other obligations, compliance with regulatory requirements and preservation of the corporate existence and business operations of the Company.
In connection with the new financing, we agreed to issue to the new noteholders unregistered Warrants to purchase up to an aggregate of 2,000,000 shares of common stock at a price of $4.25 per Warrant. The Warrants also contain customary change of control provisions and are exercisable on a “cashless” basis. The Warrants include an obligation for the Company to use reasonable best efforts to register the Warrant shares for resale with the Securities and Exchange Commission within 90 days of the closing and grant customary piggy-back rights to the holders of the Warrants.
Cash Flows
Six Months Ended June 30, 20182019 and 20172018
| (In thousands) | | 2019 | | | 2018 | |
| Net cash (used for) provided by operating activities | | $ | (34,846 | ) | | $ | 1,296 | |
| Net cash (used for) investing activities | | | (486 | ) | | | (886 | ) |
| Net cash (used for) financing activities | | | (3,102 | ) | | | (7,151 | ) |
| Net decrease in cash and cash equivalents | | $ | (38,434 | ) | | $ | (6,741 | ) |
Net Cash (Used for) Provided by Operating Activities
Net cash used for operating activities for the six months ended June 30, 2019 was $34,846. The following table provides information regardinguse of cash can be understood as represented by three main factors: (1) our net loss of $35,198, (2) decrease in operating assets and liabilities of $5,822, partially offset by (3) non-cash operating expenses. The non-cash operating expenses of $6,174 primarily resulted from $3,330 of share-based compensation expense recorded in the six months ended June 30, 2019. Other significant components included non-cash charges of $2,844 related to depreciation, amortization and amortization of debt issuance costs.
Net cash flowsprovided by operating activities for the six months ended June 30, 2018 and 2017:
| (In thousands) | | 2018 | | | 2017 | |
| Net cash provided by (used for) operating activities | | $ | 1,296 | | | $ | (2,394 | ) |
| Net cash (used for) investing activities | | | (886 | ) | | | (1,547 | ) |
| Net cash (used for) provided by financing activities | | | (7,151 | ) | | | 5,021 | |
| Net (decrease) increase in cash and cash equivalents | | $ | (6,741 | ) | | $ | 1,080 | |
Net Cash Providedwas $1,296. The provision of cash can be understood as represented by (Used for) Operating Activities
Net cash provided bythree main factors: (1) non-cash operating activities was $1.3 million for the six months ended June 30, 2018 compared to net cash used in operating activitesexpenses of $2.4 million for the six months ended June 30, 2017. This increase in net cash provided by operating activities of $3.7 million was associated with net changes in working capital of $0.6 million, increase in net loss of $25.0 million,$31,204, which was primarily a result of an increase in share-based compensation expense of $27.3 millionincluded $27,305 related to the termination of the Company’s performance unit plans and an increase of $0.8 million$3,899 in noncashnon-cash charges such as depreciation, amortization, amortization of debt issuance costs and changes in warrant valuation.valuation, (2) changes in working capital accounts totaling $2,486, primarily through collections of trade receivables and increases in trade payables as management sought to optimize our liquidity, offset in part by (3) our net loss of $32,394.
Net Cash (Used for) Investing Activities
Net cash used infor investing activities of $0.9 millionwas $486 for the six months ended June 30, 20182019 compared to $1.5 million$886 for the six months ended June 30, 20172018. This decrease in net cash used for investing activities was primarily attributable to timing of capital expenditures for propertyplant and equipment purchases.
Net Cash (Used for) Provided by Financing Activities
Net cash used infor financing activities was $7.1 million$3,102 for the six months ended June 30, 20182019 compared to cash provided by financing activities of $5.0 million$7,151 for the six months ended June 30, 2017.2018. The cash used in 20182019 is aprimarily the result of $1.5 millionthe payment of $2,664 in withholding taxes associated with tax reimbursement payments from the share-based compensation recorded during 2018 and a $550 principal payment made during May 2019 related to the Credit Agreement and Guaranty, offset in part by $112 of proceeds derived from common stock purchased by eligible employees through the Company’s employee stock purchase plan. Net cash used for financing activities in the prior year period was the result of $1,528 transaction costs paid as part ofincurred related to our initial public offeringIPO and $5.6 million$5,623 related to the payment of withholding taxes associated with the share-based compensation recorded during the quarter ended June 30, 2018. Neither of which existed in 2017, this compared to $5.0 million of debt proceeds received in 2017 from an additional draw under the Loan Agreement.
Funding Requirements
We believeexpect that our existing cash combined with our anticipated revenue from our licensed product activities, including expected milestone payments, other co-development payments and royalty payments, manufacturing and supply revenues at anticipated levels and anticipated sales of our proprietary product, and the net proceeds from the issuance of our Initial Public Offering, combined with our expected revenue12.5% Senior Secured Notes due 2025 issued on July 15, 2019 and, assuming satisfaction of all conditions and requirements for further senior secured notes issuances of additional senior secured notes, and available purchasers thereof, additional proceeds from our partnered product activities,future issuances of up to $30,000 of additional Senior Secured Notes, and potential future monetization of certain royalty streams or other license rights such as apomorphine (subject to conditions and requirements under the indenture), will be sufficientadequate to fund our operationsexpected cash requirements for at least through the next 12 months, of operations, including our planned investments in the commercialization of our late stage CNS product candidates research and development investments in our complex molecule product pipeline candidates,other expected costs and expenses, capital expenditures and investments in new product candidates in epilepsy and other CNS diseases. We have based this estimateexpectation on assumptions that could change, or prove to be inaccurate, and we could utilize our available financial resources sooner than we currently expect.
The key assumptions underlying this estimateexpectation include:
the costs necessary to successfully complete our development efforts of our proprietary product candidates;
continued revenue from our partneredproprietary and licensed products at levels similar to or above recent years’ results;planned levels;