| Note 3. | Summary of Significant Accounting Policies
(A) | Principles of Consolidation |
On January 1, 2018 MonoSol Rx, LLC (which previously consolidated MonoSol Rx, Inc. in 2017) was converted from a Delaware LLC into a Delaware corporation pursuant to a statutory conversion under the laws(A) Principles of the State of Delaware. The resulting entity is Aquestive Therapeutics, Inc. into which is consolidated its wholly-owned subsidiary MonoSol Rx, Inc.Consolidation
TheseThe interim condensed consolidated financial statements presented for periods earlier than January 1, 2018herein include the accounts of the MonoSol Rx, LLC.Aquestive Therapeutics, Inc. and its wholly owned subsidiary, MonoSol Rx, Inc. Other than corporate formation activities, MonoSol Rx, Inc. has conducted no commercial, developmental or operational activities and has no customers or vendors.
(B) Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to makethe use of estimates and assumptions that affect the reported amounts of assets and liabilities, andincluding disclosure of contingent assets and contingent liabilities, at the date of these consolidatedthe financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to estimates and assumptions include allowances for rebates from proprietary product sales, the allowance for sales returns, the useful lives of fixed assets, valuation of warrants, stockshare-based compensation, and contingencies.
(C) | Deferred Offering Costs |
Deferred Offering costs, consisting primarily of direct incremental legal, accounting and other fees relating to the IPO, were capitalized as incurred. As of December 31, 2017, deferred offering costs of $1,050 were included as a component of Other Assets due to the uncertainty of an IPO. Upon the Company’s closure of the IPO on July 27, 2018, the deferred offering costs of $5,230 were reclassified from Other Assets to Additional Paid in Capital in the accompanying balance sheet.
(D) | (C) Recent Accounting Pronouncements |
As a publican emerging growth company, the Company has elected to take advantage of the extended transition period afforded by the Jumpstart Our Business Startups Act for the implementation of new or revised accounting standards and, as a result, the Company will comply with new or revised accounting standards onno later than the relevant dates on which adoption of such standards is required for public emerging growth companies.
From time to time, new accounting pronouncements are issued by the FASB and adopted by the Company as of the specified effective date. Unless otherwise discussed, theThe Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.
In May 2014, the FASB, issued Accounting Standards Update NoASU 2014-09, “Revenue from Contracts with Customers”Customers (ASU 2014-09), and has subsequently issued a number of amendments to ASU 2014-09.this update. The new standard, as amended, or ASC 606, provides a single comprehensive model to be used in the accounting for revenue arising from contracts with customers and supersedes currentprevious revenue recognition guidance, including industry specific guidance. The standard’s stated core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, ASU 2014-09, includes provisions within a five-step model that includes identifying the contract with a customer, identifying the performance obligation in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing when, or as, an entity satisfies a performance obligation. In addition, the standard requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
The Company adopted this standard on January 1, 2019, using the modified retrospective method and recorded a cumulative effect adjustment of $2,832 to increase the opening balance of accumulated deficit. The impact was primarily related to deferral of a portion of the original upfront and milestone payments of its collaborative licensing arrangements resulting in a deferral of $3,100 of previously recognized revenue as of the adoption date. The cumulative adjustment also reflects $151 net acceleration of revenue related to feasibility and development arrangements with its customers and acceleration of $117 of revenue recognition of the Company’s manufacturing and supply product sales. Under the modified retrospective method of adoption, the comparative information in the consolidated financial statements has not been revised and continues to be reported under the previously applicable revenue accounting guidance, ASC 605.
For additional information regarding the Company’s revenue, see Note 5, Revenues and Trade Receivables, Net.
In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Non-Employee Share-Based Payment Accounting, which more closely aligns accounting for share-based payments to nonemployees to that of employees under existing guidance of Topic 718. This guidance supersedes previous guidance provided by Subtopic 505-50, Equity – Equity-Based Payments to Non-Employees. The Company adopted the new standard will be effective for us beginning January 1, 2019 and permits two methods of adoption: the full retrospective method, which requires the standard to be applied to each prior period presented, or the modified retrospective method, which requires therecorded a cumulative effect adoptionadjustment of $20 to be recognized as an adjustment to opening retained earnings in the period ofits Accumulated deficit upon adoption. We will adopt the standard using the modified retrospective method.
The Company is continuing to evaluate the impact of these updates on its consolidated financial statements. Adoption of this standard will require changes to our business processes, systems and controls to support the additional required disclosures. We are in the process of identifying and designing such changes to ensure our readiness to appropriately recognize our revenues pursuant to the new standard in 2019.
In January 2016, the FASB issued revised guidance governing accounting and reporting of financial instruments (ASU 2016-01) and in 2018 issued technical corrections (ASU 2018-03). This guidance requires that equity investments with readily determinable fair values that are classified as available-for-sale be measured at fair value with changes in value reflected in current earnings. This guidance also simplifies the impairment testing of equity investments without readily determinable fair values and alters certain disclosure requirements. ASU No. 2016-01,Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, also provides guidance as to classification of the change in fair value of financial liabilities. These revised standards areAdoption of this standard was effective on January 1, 2019 and had no material impact on the financial statements given the lack of any such equity investments during the period presented.
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This guidance simplifies aspects of accounting for employee share-based payments, including income tax consequences, classification of awards as either equity or liabilities, and classifications within the statement of cash flows. This guidance was effective for the Company for annual periods in fiscal years beginning after December 15, 2017, with early adoption permitted. Under the Company’s now-terminated Performance Unit Plans (PUPs), vested grants were unable to be exercised prior to either a change in control of the Company or completion of an IPO, and, as a result, expense recognition related to the settlement of these awards was deferred until the PUPs were formally terminated in April 2018. TheBecause the Company is currently evaluating thehas incurred net operating losses since its incorporation, a full valuation allowance has been provided and, accordingly, there was no financial statement impact of these revised standards.adopting the ASU 2016-09 provisions regarding recognition of tax effects associated with share-based compensation.
Recent Accounting Pronouncements Not Adopted as of June 30, 2019:
In February 2016, the FASB issued ASU No. 2016-02,Leases (Topic 842),which establishes a comprehensive new lease accounting model. The new standard: (i) clarifies the definition of a lease;lease, (ii) requires a dual approach to lease classification similar to current lease classifications;classifications, and (iii) causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease-term of more than twelve months. The new standard is effective for the Company for fiscal years and interim periods beginning after December 15, 2019 and requires modified retrospective application. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its condensed consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This guidance simplifies aspects of accounting for employee share-based payments, including income tax consequences, classification of awards as either equity or liabilities, and classifications within the statement of cash flows. This guidance was effective for annual periods beginning after December 15, 2017, with early adoption permitted. Under the Company’s Performance unit plans (Note 15), vested grants may not be exercised prior to either a change in control of the Company or completion of an IPO, rendering the grants contingent and requiring deferred expense recognition until either of the conditions is satisfied. Accordingly, the adoption of ASU 2016-09 had no impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13,Financial Instruments – Credit Losses (Topic 326), amending existing guidance on the accounting for credit losses on financial instruments within its scope. The guidance introduces an expected loss model for estimating credit losses, replacing the incurred loss model. The new guidance also changes the impairment model for available-for-sale debt securities, requiring the use of an allowance to record estimated credit losses (and subsequent recoveries). The new guidance is effective for the Company beginning after December 15, 2020. The Company is currently evaluating the impact of the adoption of this guidance on its condensed consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15,Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, providing guidance on the classification of certain cash receipts and payments in the statement of cash flows intended to reduce diversity in practice.practice, including cash flows related to debt prepayment or extinguishment costs and contingent consideration that may be paid following a business combination. The guidance is effective for the Company for fiscal years beginning after December 31, 2019. Early adoption is permitted. The Company is currently evaluating the effect of the standard on its Condensed Consolidated Statement of Cash Flows.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework. The purpose of the update is to improve the effectiveness of the fair value measurement disclosures that allows for clear communication of information that is most important to the users of financial statements. There were certain required disclosures that have been removed or modified. In addition, the update added the following disclosures: (i) changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period and (ii) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The standard will become effective for the Company for its periods beginning after December 15, 2019; early adoption is permitted. The Company is currently evaluating the impact of ASU 2018-13 on its condensed consolidated financial statements.
The Company reviewed allOther pronouncements issued by the FASB or other recently issuedauthoritative accounting pronouncements and concluded that they werestandards groups with future effective dates are either not applicable or not expectedsignificant to have a material impact on the condensed consolidated financial statements.statements of the Company.
| Note 4. | Risks and Uncertainties |
The Company’s budgetedunaudited interim condensed financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities in the ordinary course of business. The Company’s cash requirements for 20182019 and beyond include expenses related to continuing development and clinical evaluation of its products, preparing forcosts of regulatory filings, patent prosecution expenses and litigation expenses, expenses related to commercialization of ourits products, as well as for thedebt service requirements, and costs to comply with the requirements of being a public company. As Septemberof June 30, 2018 and December 31, 2017, we had2019, working capital, (current assets less current liabilities) of $56,030including cash and $12,813, respectively.cash equivalents, totaled $14,435.
On July 27 and August 15, 2018,As of the date of issuance of these unaudited interim condensed financial statements, the Company closed the IPO of 4,500,000 and overallotment exercise of 425,727 shares of common stock, respectively, at a price of $15.00 per share raising total net proceeds of $63,484, net of underwriting discounts and other offering expenses.
The Company believesexpects that its revenues from partneredlicensed and proprietary products, including expected milestone payments, other co-development payments and royalties, manufacturing and sale revenues at anticipated levels, anticipated sales of its proprietary products, cash on hand, and the funds receivednet proceeds from the IPO areissuance on July 15, 2019 of its 12.5% Senior Secured Notes due 2025, including possible future issuances under the Indenture (see Note 18, Subsequent Event), will be adequate to meetfund its operating, investing, and financing needsexpected cash requirements for at least the next twelve months.
To the extent additional funds are necessary to meet long-term liquidity or other cash needs as the Company continues to execute its business strategy, the Company anticipates that thesewill seek to satisfy such additional funding requirements will be obtained through monetization of certain royalty streams or through additional debt or equity financings, monetization of royalty streams, the completion of a licensing transaction for one or more of the Company’s pipeline assets, continuing expense reduction initiatives, or a combination of these potential sources of funds, althoughfunds. Although the Company can providehas been successful in raising capital in the past, there is no assurance that these sources of funding will be sufficient or available or on reasonable terms, if at all.all, which could adversely affect its business prospects.
| Note 5. | Revenues and Trade Receivables, Net |
The Company’s revenues to date have been earned from partnered commercialized products, research and development services provided to customers, licensing of patent-protected intellectual property and commercialization of a proprietary product. These activities generate revenues in four primary categories: manufacturing and supply revenue, co-development and research fees, license and royalty revenue, and proprietary product sales, net.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in the current revenue standard. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. At contract inception, we assess the goods promised in our contracts with customers and identify a performance obligation for each promise to transfer to the customer a good that is distinct. When identifying our performance obligations, we consider all goods or services promised in the contract regardless of whether explicitly stated in the customer contract or implied by customary business practices. The Company’s performance obligations consist mainly of transferring control of goods and services identified in the contracts, purchase orders or invoices.
The Company’s performance obligation with respect to its proprietary product sales is satisfied at a point in time which transfers control upon delivery of the product to its customers. The Company considers control to have transferred upon delivery because the customer has legal title to the asset, physical possession of the asset has been transferred, the customer has significant risks and rewards of ownership of the asset and the Company has a present right to payment at that time. With respect to manufacturing and supply revenue stream, a quantity is ordered and manufactured according to customer’s specifications and represents a single performance obligation. The products manufactured are exclusively for specific customers and have no alternative use. Under the customer arrangements, the Company is entitled to receive payments for progress made to date once the acceptance requirements surrounding quality control are satisfied. Thus, revenues related to this product stream is recognized at a point in time, when the manufactured product passes quality control testing.
Royalty revenues are estimated based on the provisions of contracts with customers and recognized in the same period that the royalty-based products are sold to the Company’s strategic partners, as all royalties are directly attributable to the Company’s manufacturing activities, and are therefore recognizable at the same time the manufacturing revenue is recognizable. In addition to usage-based royalties, licensing contracts may contain provisions for one-time payments related to certain license fees and milestone achievements. Revenue recognition of these license fees and milestone payments depend on the nature of the specific contract, typically license and milestone payments are recognized at a point in time in the period they are achieved. However, there are limited instances where upon review of the contract, it is determined that the license is non-distinct and limited in nature and does not provide benefit to the customer without purchasing the product, these upfront licensing fees are recognized over time (typically the length of the contract).
Co-development and research fee revenue is recorded over time based upon the progress of services provided in order to complete the specific performance obligation identified in the related contract.
Revenues from sale of products and services and the subsequent related payments are evidenced by a contract with the customer, which includes all relevant terms of sale. For manufacturing and supply and proprietary product sales, invoices are generally issued upon the transfer of control and co-development and research revenue is typically invoiced based on the contractual payment schedule, or upon completion of the service. Invoices are typically payable 30 to 60 days after the invoice date, however some payment terms may reach 105 days depending on the customer. The Company performs a review of each specific customer’s credit worthiness and ability to pay prior to acceptance as a customer. Further, the Company performs periodic reviews of its customers’ creditworthiness, prospectively.
Contract Assets
In limited situations, certain customer contractual payment terms require billing to occur in arrears; accordingly, some portions, or all, of the Company’s performance obligations are completed before we are contractually entitled to bill the customer. In these situations, billing occurs subsequent to revenue recognition, which results in a contract asset. These contract assets are reflected as a component of Trade and other receivables on the Condensed Consolidated Balance Sheet. As of June 30, 2019 and January 1, 2019, such contract assets were $295, and $284, respectively.
Contract Liabilities
In other limited situations, certain customer contractual payment terms allow advanced billings; accordingly, customer cash payments may be received before satisfaction of some or all contractual performance obligations. In these situations, billing occurs in advance of revenue recognition, which results in contract liabilities. These contract liabilities are reflected as Deferred revenue in the Consolidated Balance Sheet. As remaining performance obligations are satisfied, a portion of the deferred revenue balance is recognized in the Company’s results of operations. As of June 30, 2019 and January 1, 2019, such contract liabilities were $2,866 and $3,762, respectively. Revenue recognized for the six-month period ended June 30, 2019 that was reflected in the deferred revenue balance as of January 1, 2019 was $940.
The Company’s revenues were comprised of the following:
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | Manufacture and supply revenue | | $ | 8,915 | | | $ | 8,684 | | | $ | 15,584 | | | $ | 20,244 | | | License and royalty revenue | | | 424 | | | | 4,532 | | | | 5,046 | | | | 14,032 | | | Co-development and research fees | | | 1,019 | | | | 712 | | | | 1,789 | | | | 3,063 | | | Proprietary product sales, net | | | 771 | | | | - | | | | 1,353 | | | | - | | | Total revenues | | $ | 11,129 | | | $ | 13,928 | | | $ | 23,772 | | | $ | 37,339 | |
Disaggregation of Revenue
The following table provides disaggregated net revenue by geographic area:
| | Three Months Ended June 30, | | Six Months Ended June 30, | | | | 2019 | | 2018 | | 2019 | | 2018 | | | United States | | $ | 10,267 | | | $ | 13,380 | | | $ | 22,661 | | | $ | 36,577 | | | Ex-United States | | | 862 | | | | 548 | | | | 1,111 | | | | 762 | | | Total revenues | | $ | 11,129 | | | $ | 13,928 | | | $ | 23,772 | | | $ | 37,339 | |
Non-United States revenues is derived primarily from products manufactured for the Australian and Malaysian markets.
Trade and other receivables, net consist of the following:
| | | June 30, 2019 | | | December 31, 2018 | | | | | | | | | | | Trade receivables | | $ | 10,036 | | | $ | 6,610 | | | Contract and other receivables | | | 290 | | | | 33 | | | Less: allowance for bad debts | | | (88 | ) | | | (58 | ) | | Less: sales-related allowances | | | (88 | ) | | | (104 | ) | | Trade and other receivables, net | | $ | 10,150 | | | $ | 6,481 | |
Contract and other receivables totaled $290 as of June 30, 2019, consisting primarily of contract assets related to the adoption of ASC 606 and certain reimbursable customer costs. Other receivables totaled $33 as of December 31, 2018, consisting primarily of reimbursable costs incurred on behalf of a customer. Sales-related allowances for both periods presented are estimated in relation to revenues recognized for sales of Sympazan® beginning with the launch of this product in December 2018.
The following table presents the changes in the allowance for bad debt:
| | | June 30, 2019 | | | December 31, 2018 | | | | | | | | | | | Allowance for doubtful accounts at beginning of year | | $ | 58 | | | $ | 55 | | | Additions charged to bad debt expense | | | 30 | | | | 53 | | | Write-downs charged against the allowance | | | - | | | | (50 | ) | | Allowance for doubtful accounts at end of the period | | $ | 88 | | | $ | 58 | |
Sales Related Allowances and Accruals
Revenues from sales of products are recorded net of prompt payment discounts, wholesaler service fees, returns allowances, rebates and co-pay card redemptions. 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.
The following table provides a summary of activity with respect to our sales related allowances and accruals for the six months ended June 30, 2019:
| | | Total Sales Related Allowances and Accruals | | | | | | | | Balance at December 31, 2018 | | $ | 585 | | | Provision | | | 847
| | Payments / credits
| | | (535 | ) | | Balance at June 30, 2019 | | $ | 897 | |
Total reductions of gross product sales from sales-related allowances and accruals were $847 for the six months ended June 30, 2019. Accruals for returns allowances and prompt pay discounts are reflected as a direct reduction to trade receivables, and totaled $88 and $104 at June 30, 2019 and December 31, 2018, respectively. Accruals for wholesaler fees, co-pay cards and rebates are reflected as current liabilities, and totaled $809 and $481 at June 30, 2019 and December 31, 2018, respectively. There were no sales related allowances and accruals at June 30, 2018, as Sympazan was launched in December 2018.
Concentration of Major Customers
Customers are considered major customers when sales exceed 10% of total net sales for the period or outstanding receivable balances exceed 10% of total receivables. DuringFor the nine-month periodyear ended September 30,December 31, 2018, Indivior, Inc. (“Indivior”) represented 95%provided 89% of the total revenues for the period, while during the nine-month period ended September 30, 2017, Indivior represented 88%and as of the total revenue for the period. As of September 30, 2018, and December 31, 2017,that date, the Company’s outstanding receivable balance from Indivior represented approximately 92%78% of gross receivables. For the six months ended June 30, 2019, revenues provided by Indivior represented approximately 86% of total revenues, and 93%, respectively,outstanding accounts receivable due from Indivior represented approximately 74% of totalgross receivables.
As of September 30, 2018, cash and cash equivalents were maintained at one federally insured financial institution. The Company has not experienced any losses in such accounts and management believes that the Company is not exposed to any credit risk due to the financial position of the banking institution. The Company has no off-balance sheet risk, such as foreign exchange contracts, option contracts, or other foreign hedging arrangements.
Note 5. | Revenue Recognition and Trade Receivables, net |
Pursuant to FASB ASC Topic 605, Revenue Recognition, revenue is recognized when there is persuasive evidence of an agreement, title has passed or delivery has occurred, the price is fixed and determinable, and collection is reasonably assured.
Manufacture and Supply Revenue – The Company records revenues when products are shipped and title passes to the customers.
Co-development and Research Fees – Co-development and research fees are earned through performance of specific tasks, activities or completion of stages of development defined within a contractual arrangement with a customer. The nature 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. Accordingly, the duration of the Company’s research and development projects may range from several months to approximately three years. Although each contractual arrangement is unique, common milestones included in these arrangements include those for the performance of efficacy and other tests, reports of findings, formulation of initial prototypes, production of stability clinical and/or scale-up batches, and stability testing of those batches. Additional milestones may be established and linked to clinical results or the product submission and/or approval of the product by the FDA and the commercial launch of the product. Co-development and research fees are recognized when related milestones are completed and delivered and, in some cases, accepted by the customer.
License and Royalty Revenue – License revenue is recognized in accordance with the terms of the license agreement. The Company’s license revenues most commonly are non-refundable once collected and are typically recognized as revenue at the time that the transferred licensed rights can be utilized for the benefit of the licensee, subject to determinable pricing, performance contingencies and collectability assessments. In the event that a licensing agreement requires the Company to meet ongoing or future performance objectives that are other than inconsequential or perfunctory, licensing revenue may be recognized ratably, or in conjunction with completion of its performance obligations, during the initial term of the license agreement. If a performance obligation, milestone, or contingency, such as a specified level of cumulative product sales or the approval of a regulatory agency, exists, revenue is deferred until such time that the contingencies are satisfied, or obligations are met. Payments received in excess of amounts achieved are classified as deferred revenue until earned. Royalty revenue is recognized in accordance with contractual rates when they can be reasonably estimated based on reported sales data and when collection is reasonably assured. In the event that reasonable sales data is unavailable, revenue is recognized when royalty reports are received.
Collaborative Arrangements – A contractual arrangement falls within the scope of FASB ASC Subtopic 808-10, Collaborative Arrangements, if the arrangement requires the parties to be active participants and the arrangement exposes the parties to significant risks that are tied to the commercial success of the endeavor. Costs incurred, and revenues generated on sales to third parties are reported in the consolidated statement of operations based on the guidance in FASB ASC Subtopic 605-45, Revenue Recognition – Principal Agent Considerations. Revenue earned from collaboration partners as of September 30, 2018 and 2017 was not material.
The Company’s revenues for the three and nine months ended September 30, 2018 and 2017 consisted of the following:
| | | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | | | | | 2018 | | | 2017 | | | 2018 | | | 2017 | | | Manufacture and supply revenue | | $ | 9,005 | | | $ | 9,020 | | | $ | 29,249 | | | $ | 29,511 | | | License and royalty revenue | | | 3,355 | | | | 17,351 | | | | 17,387 | | | | 22,820 | | | Co-development and research fees | | | 907 | | | | 775 | | | | 3,970 | | | | 2,392 | | | Revenues | | $ | 13,267 | | | $ | 27,146 | | | $ | 50,606 | | | $ | 54,723 | |
Disaggregation of Revenue
The following table provides additional information pertaining to revenues disaggregated by geographic market for the three and nine months ended September 30, 2018 and 2017:
| | | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | | | | | 2018 | | | 2017 | | | 2018 | | | 2017 | | | United States | | $ | 12,483 | | | $ | 26,427 | | | $ | 49,060 | | | $ | 52,999 | | | Ex-United States | | | 784 | | | | 719 | | | | 1,546 | | | | 1,724 | | | Revenues | | $ | 13,267 | | | $ | 27,146 | | | $ | 50,606 | | | $ | 54,723 | |
Ex-United States revenues is derived from products manufactured for the Australian and Malaysian markets.
The Company’s credit terms generally range from 30 to 60 days, depending on the customer and type of invoice. Trade receivables are carried at original invoice amount less an estimate of doubtful receivables based on a review of all outstanding amounts on a periodic basis. Management determines the allowance for doubtful accounts by identifying troubled accounts and, in the absence of historical experience, applies an estimate that is believed to be a reasonable indicator of future potential losses. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received.
Accounts Receivable, net
Accounts Receivable, net consist of the following:
| | | September 30, 2018 | | | December 31, 2017 | | | | | | | | | | | Trade receivables | | $ | 7,506 | | | $ | 6,156 | | | Other receivables | | | 19 | | | | 78 | | | Less: allowance for bad debts | | | (75 | ) | | | (55 | ) | | Trade receivables, net | | $ | 7,450 | | | $ | 6,179 | |
Other receivables consisted primarily of reimbursable costs incurred on behalf of a major customer.
The following table presents the changes in the allowance for bad debts account:
| | | September 30, 2018 | | | December 31, 2017 | | | | | | | | | | | Allowance for doubtful accounts at beginning of year | | $ | 55 | | | $ | 108 | | | Additions charged to bad debt expense | | | 73 | | | | - | | | Write-downs charged against the allowance | | | (53 | ) | | | - | | | Recoveries of amounts previously reserved | | | - | | | | (53 | ) | | Allowance for doubtful accounts at end of the period | | $ | 75 | | | $ | 55 | |
| Note 6. | Material Agreements | |
Commercial Exploitation Agreement with Indivior
In August 2008, the Company entered into a Commercial Exploitation Agreement with Reckitt Benckiser Pharmaceuticals, Inc. (the(with subsequent amendments, collectively, the “Indivior License Agreement”). Reckitt Benckiser Pharmaceuticals, Inc. was later succeeded to in interest by Indivior, Inc. (“Indivior”). Pursuant to the Indivior License Agreement, the Company agreed to manufacture and supply Indivior’s requirements offor Suboxone, a sublingual film formulation, both inside and outside the United States on an exclusive basis.
Under the terms of the Indivior License Agreement, the Company is required to manufacture Suboxone in accordance with current Good Manufacturing Practice standards and according to the specifications and processes set forth in the related quality agreements the Company entered into with Indivior. Additionally, the Company is required to obtain Active Pharmaceutical Ingredients (“API”) for the manufacture of Suboxone directly from Indivior. The Indivior License Agreement specifies a minimummaximum annual threshold quantity of Suboxone that the Company is obligated to fill and requires Indivior to provide the Company with a forecast of its requirements at various specified times throughout the year. Additionally, in the event Indivior purchases certain large quantities of Suboxone during a specified period, Indivior will be entitled to scaled rebates on rest of the world sales only.
In addition to the purchase price for the Suboxone supplied, Indivior is required to make certain single digit percentage royalty payments tied to net sales value (as provided for in the Indivior License Agreement) in each ofall countries other than the United States and in the rest of the world subject to annual maximum amounts. In the event that Indivior has paid the Company a specified aggregate royalty amount in royalties on Suboxone sold in the United States, then it will be required to prepayamounts and limited to the Company, an additional agreed payment amount, after which all obligations of Indivior to pay royalties on Suboxone sold in the United States will terminate. Except as set forth in the prior sentence, Indivior’s royalty obligations to the Company continue in the United States and the restlife of the world until the expiration of all of the patents (either in therelated United States or other territories) or upon written notice by Indivior subject to Indivior being required to pay the Company a final royalty payout. In 2012, Indivior exercised its right to buyout its future royalty obligations for Suboxone sales in the United States. Indivior remains obligated to pay royalties for all sales outside the United States.international patents.
The Indivior License Agreement contains customary contractual termination provisions, including those for breach, or in the event ofa filing for bankruptcy or corporate dissolution, an invalidation of the intellectual property surrounding Suboxone, is found to be invalid, or either party commitscommission of a material breach of the Indivior License Agreement.Agreement by either party. Additionally, Indivior may terminate if the U.S. Food and Drug Administration (“FDA”) or other applicable regulatory authority declares the Company’s manufacturing site to no longer be suitable for the manufacture of Suboxone or Suboxone is no longer suitable to be manufactured due to health or safety reasons. The initial term of the Indivior License Agreement was seven years from the commencement date. Thereafter, the Indivior License Agreement automatically renews for successive one-year periods, unless Indivioreither party provides the Companyother with written notice of its intent not to renew at least one year prior to the expiration of the initial or renewal term.
Supplemental Agreement with Indivior
On September 24, 2017, the Company entered into an agreement with Indivior, (the “Indivioror the Indivior Supplemental Agreement”).Agreement. Pursuant to this agreement, the CompanyIndivior Supplemental Agreement, we conveyed to Indivior all of itsour existing and future rights in the settlement of various ongoing patent enforcement legal actions and disputes related to the Suboxone product. The Company also conveyed to Indivior the right to sublicense manufacturing and marketing capabilities to enable an Indivior licensed generic buprenorphine product to be produced and sold by parties unrelated to Indivior or the Company. Under the Indivior Supplemental Agreement, the Company iswe are entitled to receive certain payments from Indivior commencing on the date of the agreement through January 1, 2023. Once paid, all payments made under thisthe Indivior Supplemental Agreement are non-refundable. In consideration fornon-refundable, and total payments under this agreement are capped at $75,000. Through February 20, 2019, the rights granted toat-risk launch date of the competing generic products of Dr. Reddy’s Labs and Alvogen, we received an aggregate of $40,750 from Indivior under the Indivior Supplemental Agreement, the Company received in September 2017, a non-refundable payment of $17,000, which $4,250 was recognized as revenue in 2017 in License and royalty revenue. The Company received $3,000 and $16,500collected during the three and nine-month periodsmonths ended September 30, 2018, respectively,March 31, 2019. Further payments under the Indivior Supplemental Agreement are suspended until adjudication of related patent infringement litigation is completed. If such litigation is successful, which is includedcannot be assured, in License and royalty revenue. In addition to the amounts already received through September 30, 2018,as described in the Companyforegoing, we may receive up to an additional $41,500,$34,250, consisting of (i) up to $39,000$33,000 in the aggregate from any combination of (a) performance or event-based milestone payments and (b) single digit percentage royalties on net revenue earned by Indivior on sales of Suboxone and (ii) and an additional $2,500$1,250 that may bewas earned through the issuance to the Company of additional process patent rights to us with the aggregate payment amounts under the Indivior Supplemental Agreement capped at $75,000. Accordingly, the Agreement includes certain provisions that may allow Indivior to cease remitting certain payments to the Company upon the occurrence of certain events related to unlicensed generic versions of Suboxone. In the event that Indivior’s defense of its rights is ultimately successful, then, all payment obligations owed to the Company are retroactively reinstated.rights.
All payments made by Indivior to the Company pursuant to the Indivior Supplemental Agreement are in addition to, and not in place of, any amounts owed by Indivior to the Company pursuant to the Indivior License Agreement. Indivior’s payment obligations under the Indivior Supplemental Agreement are subject to certain factors affecting the market for Suboxone and may terminate prior to January 1, 2023 in the event certain contingencies relating to such market occur.
License Agreement with Sunovion Pharmaceuticals, Inc.
In April 2016, the Companywe entered into a license agreement with Cynapsus Therapeutics Inc. (which was later succeeded to anin interest by Sunovion), referred to as the Sunovion Pharmaceuticals, Inc. (“Sunovion”)) (the “Sunovion License Agreement”),Agreement, pursuant to which the Companywe granted Sunovion an exclusive, worldwide license (with the right to sub-license) to certain intellectual property, including existing and future patents and patent applications, covering all oral films containing APL-130277 (apomorphine) for the treatment of off episodes in Parkinson’s disease patients, as well as two other fields. Our licensee, Sunovion, as sponsor of APL-130277, submitted an NDA to the FDA on March 29, 2018. According to statements by Sunovion, following the January 2019 PDUFA date, Sunovion received a Complete Response Letter from the FDA which requires additional data, but does not require additional clinical studies.
In consideration for the rights granted to Sunovion under the Sunovion License Agreement, we received aggregate payments totaling $18,000 to date. In addition to the Companyupfront payment of $5,000, we have also earned an aggregate of $13,000 in connection with specified regulatory and development milestones in the United States and Europe (the “Initial Milestone Payments”), all of which have been received $0to date. No payments were received during the three and $5,000six months ended June 30, 2019. We are also entitled to receive certain contingent one-time milestone payments duringrelated to product availability and regulatory approval in the nine months ended September 30, 2018United States and 2017, respectively, which was recognized as revenue and is presented in License and royalty revenue. The Company is eligible to receive remainingEurope, certain one-time milestone payments of up to $11,000 for certain regulatory events and up to $20,000 for commercial milestone events that are contingentbased on the achievement of certainspecific annual net sales levels. In addition to the milestone payments, the Company is entitled to receive low singlethresholds of APL-130277, and ongoing mid-single digit percentage royalty payments on globalrelated to the net sales of apomorphine-based productsAPL-130277 (subject to reduction to low-single digit percentage royalty payments in certain circumstances), subject to certain minimum payments. The maximum aggregate milestone payments that may be commercialized by Sunovion.paid to us pursuant to the Sunovion License Agreement is equal to $45,000. With the exception of the Initial Milestone Payments, there can be no guarantee that any such milestones will in fact be met or that additional milestone payments will be payable.
This Sunovion License Agreement will continue until terminated by us or Sunovion in accordance with the termination provisions of the Sunovion License Agreement. Absent early termination, the Sunovion License Agreement continues (on a country-by-country basis) until the expiration of all applicable licensed patents. Upon termination, all rights to intellectual property granted to Sunovion to develop and commercialize products will revert to the Company and Sunovion must continue to pay royalties to the Company on each sale of theirSunovion’s remaining inventory of products commercialized by Sunovion which include apomorphine as their API.
Collaboration and License Agreement with Mitsubishi Tanabe
In August 2017, the Company entered into an agreement with Mitsubishi Tanabe (“MT”) to perform feasibility studies related to Radicava, MT’s Amyotrophic Lateral Sclerosis treatment using the compound edaravone. The revenues earned pursuant to this arrangement totaled $240 during the nine months ended September 30, 2018.
Agreement to Terminate CLA with KemPharm
In March 2012, the Company entered into an agreement with KemPharm, Inc. (“KemPharm”), to terminate a Collaboration and License Agreement entered into in April 2011. Under this termination arrangement, we have the right to participate in any and all value that KemPharm may derive from the commercialization or any other monetization of KP 415 and KP 484 compounds or their derivatives. Among these monetization transactions are those related to any business combinations involving KemPharm and collaborations, royalty arrangements, or other transactions from which KemPharm may realize value from these compounds. The Company has not received payments under this arrangement during any of the nine months ended September 30, 2018periods presented herein, and 2017.there can be no guarantee that any such payments will be made in the future.
Note 7. | Financial Instruments – Fair Value Measurements |
Certain assets and liabilities are reported on a recurring basis at fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximizeTo increase consistency and comparability in such measurements, the FASB established a three-level hierarchy which requires maximization of the use of observable inputs and minimizeminimization of the use of unobservable inputs. Financial assets and liabilities carried atinputs when estimating fair value are to be classified and disclosed in one of the followingvalue. The three levels of the fair value hierarchy of which the first two are considered observable and the last is considered unobservable:include:
Level 1—Quoted1 — Observable quoted prices in active markets for identical assets or liabilities. Cash and cash equivalents consisted of cash in bank checking and savings accounts and money market funds which are all Level 1 assets.
Level 2—2 — Observable prices that are based on inputs (other than Level 1not quoted prices), such as quoted prices inon active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can bebut corroborated by observable market data. The Company currently has no Level 2 assets or liabilities.
Level 3—3 — Unobservable inputs that are supported by little or no market activity, and that are significant to determining the fair value of the assets or liabilities, includingsuch as pricing models, discounted cash flow methodologies and similar techniques. As of September 30,
The Company’s Level 1 assets for the periods presented included cash and cash equivalents, including money market funds. The Company hadheld no Level 2 or Level 3 assets or liabilities.
The Company’sliabilities as of either balance sheet date presented herein. Prior to exercise in connection with the July 2018 IPO, outstanding warrants held by Perceptive Credit Opportunities Fund were categorized as Level 3 liabilities at December 31, 2017 consisted of warrants totaling $7,673. The Company’sliabilities. This warrant liability was statedestimated at fair value based primarily on an independent third-party appraisalappraisals prepared as of theand reported balance sheet datesperiodically, consistent with generally-accepted valuation methods of the Uniform Standards of Professional Appraisal Practice, the American Society of Appraisers and the American Institute of Certified Public Accountants’ Accounting and Valuation Guide,Valuation of Privately-Held Company Equity Securities Issued as Compensation.See Note 13 for further information on the Company’s warrants. In addition, Level 3 inputs provide the basis for estimated fair values of stock options granted during 2018 and 2019, which values were estimated using the Black-Scholes-Merton pricing model based on assumptions disclosed in Note 15.
The carrying amounts reported in the balance sheets for tradeTrade and other receivables, prepaidPrepaid and other current assets, accountsAccounts payable and accrued expenses, and deferred revenue approximate fair value based on the short-term maturity of these instruments.
assets and liabilities.
Inventories are stated at the lowerThe components of cost orInventory, net realizable value. Cost is determined on a first-in, first-out basis. Inventory includes the cost of materials, production labor and overhead. The Company regularly reviews its inventories for impairment and reserves are established when necessary.as follows:
| | | September 30, 2018 | | | December 31, 2017 | | | June 30, 2019 | | | December 31, 2018 | | | | | | | | | | | | | | | | | Raw material | | $ | 901 | | | $ | 725 | | | $ | 1,247 | | | $ | 1,283 | | | Packaging material | | | 2,480 | | | | 2,225 | | | 2,366 | | | 2,975 | | | Finished goods | | | 1,102 | | | | 1,064 | | | | 1,034 | | | | 1,183 | | | Total inventory | | $ | 4,483 | | | $ | 4,014 | | | Total inventory, net | | | $ | 4,647 | | | $ | 5,441 | |
| Note 9. | Property and Equipment, netNet |
Property and Equipment, net as of September 30, 2018 and December 31, 2017 consisted of the following:
| | | Useful Lives | | September 30, 2018 | | | December 31, 2017 | | | Useful Lives | | June 30, 2019 | | | December 31, 2018 | | | | | | | | | | | | | | | | | | | | | Machinery | | 3-15 yrs | | $ | 20,440 | | | $ | 20,056 | | | 3-15 yrs | | $ | 20,905 | | | $ | 20,681 | | | Furniture and fixtures | | 3-15 yrs | | | 1,142 | | | | 1,109 | | | 3-15 yrs | | 1,150 | | | 1,150 | | | Leasehold improvements | | (a) | | | 21,314 | | | | 21,271 | | | (a) | | 21,333 | | | 21,333 | | | Computer, network equipment and software | | 3-7 yrs | | | 2,287 | | | | 2,108 | | | 3-7 yrs | | 2,657 | | | 2,579 | | | Construction in progress | | | | | 1,471 | | | | 921 | | | | | | 1,526 | | | | 1,655 | | | | | | | | 46,654 | | | | 45,465 | | | | | 47,571 | | | 47,398 | | | Less: accumulated depreciation and amortization | | | | | (34,443 | ) | | | (32,005 | ) | | | | | (36,638 | ) | | | (35,191 | ) | | Total property and equipment, net | | | | $ | 12,211 | | | $ | 13,460 | | | | | $ | 10,933 | | | $ | 12,207 | |
| (a) | Leasehold improvements are amortized over the shorter of the lease term or their estimated useful lives. |
Total depreciation and amortization related to property and equipment was approximately $733$711 and $944$765 for the three monthsthree-month periods ended SeptemberJune 30, 2019 and 2018, respectively. For the respective six-month periods, these expenses totaled $1,447 and 2017, respectively and $2,438 and $2,797 for the nine months ended September 30, 2018 and 2017, respectively.1,705.
| Note 10. | Intangible Assets |
The following table provides the components of identifiable intangible assets, all of which are finite lived:
| | | June 30, 2019 | | | December 31, 2018 | | | | | | | | | | Purchased technology-based intangible | | $ | 2,358 | | | $ | 2,358 | | Purchased patent | | | 509 | | | | 509 | | | | | | 2,867 | | | | 2,867 | | Less: accumulated amortization | | | (2,689 | ) | | | (2,663 | ) | Total intangible assets, net | | $ | 178 | | | $ | 204 | |
Amortization expense was $13 and $12 for the three-month periods ended June 30, 2019 and 2018, respectively. For the corresponding six-month periods, these expenses totaled $26 and $25, respectively. During the remaining life of the purchased patent, estimated annual amortization expense is $50 for each of the years from 2019 to 2022.
Note 10. | Net Loss Per Share |
Basic net loss per share is calculated by dividing net loss by the weighted-average number of common shares.
As a result of the corporate conversion and reorganization described in Note 1(B), there were no potentially dilutive instruments outstanding for the three and nine months period ended September 30, 2018. Therefore, basic and diluted net loss per share were the same for all periods presented as reflected below.
| | | For the Three Months Ended September 30, 2018 | | | For the Nine Months Ended September 30, 2018 | | | Numerator: | | | | | | | | Net loss | | $ | (15,038 | ) | | $ | (47,432 | ) | | Denominator: | | | | | | | | | | Weighted-average number of common shares – basic and diluted | | | 23,646,192 | | | | 19,335,541 | | | Income per common share – basic and diluted | | $ | (0.64 | ) | | $ | (2.45 | ) |
The LLC interests, prior to the corporate conversion and reorganization of the Company described in Note 1(B), were complex and varied across several series of LLC equity interests conveying different economics and rights. As such, loss per share information prior to the reorganization under the prior equity structure is not comparable to earnings per share for periods presented after the reorganization.
| Note 11. | Accounts Payable and Accrued Expenses |
Accounts payable and accrued expenses consisted of the following:
| | | September 30, 2018 | | | December 31, 2017 | | | June 30, 2019 | | | December 31, 2018 | | | | | | | | | | | | | | | | | Accounts payable | | $ | 12,337 | | | $ | 9,601 | | | $ | 20,034 | | | $ | 20,436 | | | Accrued salaries, performance bonuses, other compensation and benefits | | | 3,164 | | | | 3,761 | | | Accrued compensation | | | 2,282 | | | 3,604 | | | Accrued withholding tax for share-based compensation | | | 1,701 | | | | - | | | - | | | 2,515 | | | Real estate and personal property taxes | | | 338 | | | | 340 | | | 176 | | | 388 | | Accrued distribution expenses | | | 809 | | | 481 | | | Other | | | 258 | | | | 301 | | | | 178 | | | | 207 | | | Total accounts payable and accrued expenses | | $ | 17,798 | | | $ | 14,003 | | | $ | 23,479 | | | $ | 27,631 | |
On August 16, 2016, the Company entered into a Loan Agreement and Guaranty (the “Loan Agreement”) with Perceptive Credit Opportunities Fund, LP (“Perceptive”). AtUpon closing, the Company borrowed $45,000 from Perceptive Perceptive received a warrant to purchase senior common equity interests representing 4.5% of the fully diluted common units of the Company on an as converted basis (see Note 13).and the Companyand was permitted to borrow up to an additional $5,000 within one year of the closing date based upon achievement of a defined milestone. Inmilestone which was met in March 2017 and the Company met its performance obligations under the termsbalance of the credit agreement with Perceptive and submitted a formal request to draw down the remaining $5,000 of its $50,000 credit facility.facility was borrowed at that time. The initial loan proceeds were used to pay the existing debt obligation of $37,500 due to White Oak Global Advisors, LLC, with the balance available for general business purposes. On July 15, 2019, this loan from Perceptive was repaid in full as part of a refinancing transaction. See Note 18, Subsequent Events.
On May 21, 2018, the Company and Perceptive agreed to make certain amendments to the loan agreement then in effect. In the event that a qualified IPO iscould be consummated on or before December 31, 2018, the Company and Perceptive agreed to postpone the initial loan principal payments, delay the loan maturity date to December 16, 2020 and retained theretain interest rate terms, payable monthly, at one-month LIBOR or approximately 2% plus 9.75%, subject to a minimum rate of 11.75%. CommencingAccordingly, commencing on May 31, 2019, seven monthly loan principal payments arewere due in the amount of $550. Thereafter, monthly principal payments in the amount of $750 arewere due through the maturity date, December 16, 2020, at which time the full amount of the remaining outstanding loan balance iswas due. At SeptemberJune 30, 2019 and December 31, 2018, $2,750respectively, $550 and $4,600 was classified as current debt. The Company’s tangible and intangible assets are subject to first priority liens to the extent of the outstanding debt. Further, under the Loan Agreement, as amended, the Company iswas permitted, subject to Perceptive’s consent, to monetize the royalty and fees derived from sales of certain Apomorphineapomorphine products and, in connection with such monetization, Perceptive hashad agreed to release liens related to these royalties and fees. Other significant terms includeof the Loan Agreement, as amended, included financial covenants, change of control triggers and limitations on additional indebtedness, asset sales, acquisitions and dividend payments. Financial covenant requirements includeincluded (1) minimum liquidity under which a $4,000 minimum cash balance must be maintained at all times and (2) a minimum revenue requirement under which minimum revenues for the trailing twelve consecutive months, measured at the end of each calendar quarter, must also be met.quarter. As of SeptemberJune 30, 2018,2019, the Company was in compliance with all financial covenants.covenants under the Loan Agreement, as amended. Also, as of that date, the Company’s carrying value of thisthe Company’s loan payable approximated its fair market value. At closing of the Loan Agreement, as amended, Perceptive received a warrant to purchase senior common equity interests representing 4.5% of the fully diluted common units of the Company on an as converted basis, which was automatically exercised in full at the time of the IPO (see Note 13).
The Company capitalizes legal and other third-party costs incurred in connection with obtaining debt as deferred debt issuance costs and applies the unamortized portion as a reduction of the outstanding face amount of the related loan in accordance with ASU 2015-03, Interest – Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. Similarly, the Company amortizes debt discounts, such as those represented by warrants issued to its lenders, and offsets those as a direct reduction of its outstanding debt. Amortization expense arising from deferred debt issuance costs and debt discounts for the three monthssix-month periods ended SeptemberJune 30, 2019 and 2018 were $781 and 2017 totaled $374 and $471 respectively and$923, respectively; for the nine months ended September 30, 2018corresponding three-month periods these expenses totaled $392 and 2017 totaled $1,297 and $1,391, respectively.$465.
Unamortized deferred debt issuance costs and deferred debt discounts totaled $3,196$2,016 as of SeptemberJune 30, 20182019 and $4,493$2,797 as of December 31, 2017.2018.
| Note 13. | Warrant LiabilityWarrants |
The warrant issued to Perceptive in connection with the Agreement was, by its terms, set to expire on August 16, 2016 Loan Agreement had2023 and provided certain rights and preferences including anti-dilution adjustments so that, upon exercise, they would represent 4.5% of the Company’s fully diluted common stock on an as converted basis, subject to dilution for certain financing transactions including the issuance of shares upon termination of our Performance Unit Plans.PUPs. The warrant also provided Perceptive with a put right which, if exercised under certain circumstances, would require the Company to purchase the warrant for $3,000 within the first year of the loan or $5,000 thereafter. TheseBecause these re-purchase terms may requirecould have required net-cash settlement, and as a result, the appraised value of this warrant at the time of issuance of $5,800 was classified as a liability, rather than as a component of equity, and iswas treated as a debt discount, with the unamortized portion applied to reduce the face amount of the loan in the accompanying Condensed Consolidated Balance Sheet.
TheImmediately prior to pricing of the Company’s IPO, Perceptive received 863,400 shares of common stock issuable pursuant to the automatic exercise of warrants at a total price of $116. As a result, the warrant liability of $12,951 was reclassified to Additional paid-in capital during the third quarter of 2018. A Level 1 market price of $15.00, the initial price at which the Company’s common stock was publicly offered, was used in determining fair value as of the warrants’ conversion date.
During interim periods, the Company used aan independent third-party valuation to assist in determining the fair value of the warrantthese warrants due to the absence of available Level 1 and Level 2 inputs priorinputs. During the three-months and six months period June 30, 2018, as a result of an increase in the estimated fair value of this warrant liability, net losses included a non-cash loss of $1,859 and $1,162, respectively. No gain or loss was recognizable for any periods subsequent to the IPO date.date of exercise of the warrants in July 2018. The fair values for periodsat both the date of the issuance and the dates of all interim balance sheets prior to the IPO dateexercise were based on unobservable Level 3 inputs. The first step in determining the fairFair value of the warrant liability was to determine the value ofbased on the aggregate equity of the Company, which was estimated utilizing the income and market valuation approaches. A probability weighted return model was then utilized to allocate the resulting aggregate equity value of the Company to the underlying securities. Estimates and assumptions impacting the fair value measurement includeincluded the following factors: the progressthen-current state of development of the Company’s pipeline products since the prior valuations,product candidates, including status of clinical trials; the Company’s progress towards an IPO;IPO, including selection of investment bankers, assessment of the IPO marketplace and other funding alternatives and a discount rate of 24.5% for the nine months ended September 30, 201726.5% and a volatility rate of 90% for the nine-month period ended September 30, 2017. .
Immediately prior to pricing of the Company’s initial public offering, Perceptive received 863,400 shares of common stock issuable pursuant to the automatic exercise of warrants from APL’s ownership interest at a total price of $116. As a result, the warrant liability of $12,951 was reclassified to additional paid in capital during the third quarter of 2018. A Level 1 market pricing of $15.00, the initial price at which the Company’s common stock was offered, was used in determining fair value as of the warrants conversion date.
A roll-forward of warrant liability is as follows:
| | | Warrant liability | | | Balance as of December 31, 2017 | | $ | 7,673 | | | Changes in fair value recognized | | | 5,278 | | | Exercise of warrants | | | (12,951) | | | Balance as of September 30, 2018 | | $ | - | |
| Note 14. | Commitments and ContingenciesNet Loss Per Share |
Basic net loss per share is calculated by dividing net loss by the weighted-average number of common shares.
As a result of the Company’s net losses incurred for the three and six-month periods ended June 30, 2019 and June 30, 2018, respectively, all potentially dilutive instruments outstanding would have anti-dilutive effects on per-share calculations for these periods. Therefore, basic and diluted net loss per share were the same, as reflected below.
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | Numerator: | | | | | | | | | | | | | | Net loss | | $ | (20,472 | ) | | $ | (36,493 | ) | | $ | (35,198 | ) | | $ | (32,394 | ) | | Denominator: | | | | | | | | | | | | | | | | | | Weighted-average number of common shares – basic | | | 24,980,861 | | | | 19,188,624 | | | | 24,972,280 | | | | 17,144,492 | | | Loss per common share - basic | | $ | (0.82 | ) | | $ | (1.90 | ) | | $ | (1.41 | ) | | $ | (1.89 | ) |
As of June 30, 2019, the Company’s potentially dilutive instruments included 1,983,142 options to purchase common shares and 142,852 unvested restricted stock units (“RSUs”) that were excluded from the computation of diluted weighted average shares outstanding because these securities had an anti-dilutive impact due to the loss reported. No such equity securities were issued as of June 30, 2018.
The Company has entered into various lease agreements for production and research facilities and offices. Most leases contain renewal options. Certain leases contain purchase options and require the Company to pay for taxes, maintenance and operating expenses. All of the Company’s leases are classified as operating leases.
Rent expense for all leased manufacturing facilities and sales, laboratory and office space was approximately $375 and $345 for three months ended September 30, 2018 and 2017, respectively and $998 and $990 for the nine months ended September 30, 2018 and 2017, respectively.
(B) | Litigation and Contingencies |
From time to time, we have been and may again become involved in legal proceedings arising in the ordinary course of our business. Except as described below, we are not presently a party to any litigation or legal proceedings that we believe to be material and we are not aware of any pending or threatened litigation against us that we believe could have a material adverse effect on our business, operating results, financial condition or cash flows.
Patent-Related Litigation
Beginning in August 2013, we were informed of ANDA filings in the United States by Watson Laboratories, Inc. (now Actavis Laboratories, Inc., or Actavis), Par Pharmaceutical, Inc., or Par, Alvogen Pine Brook, Inc., or Alvogen, Teva Pharmaceuticals USA, Inc., or Teva, Sandoz Inc., or Sandoz, and Mylan Technologies Inc. or Mylan, for the approval by the FDA of generic versions of Suboxone Sublingual Film in the United States. We filed patent infringement lawsuits against all six generic companies in the U.S. District Court for the District of Delaware. Of these, cases against three of the six generic companies have been resolved.
Sandoz. By court order in August 2016, our ANDA patent litigation case against Sandoz has been dismissed without prejudice for lack of subject matter jurisdiction because Sandoz is no longer pursuing a Paragraph IV certification for its proposed generic version of Suboxone Sublingual Film, and therefore is no longer challenging the validity or infringement of our Orange Book-listed patents.
Mylan. The case against Mylan was settled and the Court signed a Consent Judgment in September 2017 disposing of the entire case.
Par. All cases against Par were resolved pursuant to a May 2018 settlement agreement between us, Indivior, and Par and certain of its affiliates.
After the commencement of the above-mentioned ANDA patent litigation against Teva, Dr. Reddy’s Laboratories acquired the ANDA filings for Teva’s buprenorphine and naloxone sublingual film that are at issue in these trials.
Trials against Dr. Reddy’s, Actavis and Par in the lawsuits involving the Orange Book and process patents occurred in November-December of 2015 and November of 2016. On June 3, 2016, the Court issued its Trial Opinion finding that the asserted claims of U.S. Patent No. 8,603,514, or the ’514 patent, are valid and infringed by Actavis’s and Par’s ANDA Products. On August 31, 2017, the Court upheld U.S. Patent No. 8,900,497, or the ’497 patent, as valid but not infringed by Par’s, Actavis’s or Dr. Reddy’s proposed processes for making their ANDA Products. The Court also again upheld the validity of the ’514 patent but held it was not infringed by Dr. Reddy’s ANDA Products, and upheld the validity of U.S. Patent No. 8,017,150, or the ’150 patent, but held that it was not infringed by Dr. Reddy’s ANDA Products. All of these cases are consolidated on appeal to the Federal Circuit, except that the cases between Indivior and us and Par and certain affiliates have been resolved by a settlement agreement.
Trial against Alvogen was held in September, 2017. The only issue raised at trial was whether Alvogen’s ANDA Products and processes infringe the ’514 and ’497 patents; Alvogen did not challenge the validity of the patents. In March 2018, the Court issued its opinion finding that Alvogen’s ANDA products and processes would not infringe the ’514 or ’497 patents. We and Indivior appealed the ruling, and the appeal is currently pending before the Federal Circuit. If any company is able to obtain FDA approval for its generic version of Suboxone Sublingual Film, it may be able to launch the product prior to the expiration of any or all the applicable patents protecting our Suboxone Film, which could have a material adverse effect on our business, prospects, results of operations and financial condition.
We are also seeking to enforce our patent rights in multiple cases against BioDelivery Sciences International, Inc., or BDSI. Two cases are currently pending but stayed in the U.S. District Court for the Eastern District of North Carolina:
| · | The first, a declaratory judgment action brought by BDSI against Indivior and Aquestive, seeks declarations of invalidity and non-infringement of U.S. Patents Nos. 7,897,080, or the ’080 patent, 8,652,378, or the ’378 patent, and 8,475,832, or the ’832 patent. This case stayed pending inter partes review of the ’832 patent and reexamination of the ’080 patent.
|
| · | The second was filed by us and Indivior related to BDSI’s infringing Bunavail product, and alleges infringement of our patent, U.S. Patent No. 8,765,167, or the ’167 patent. This case was initially filed in September 2014 in the U.S. District Court for the District of New Jersey but was transferred to North Carolina. Shortly after the case was filed, BDSI filed an IPR challenging the asserted ’167 patent. On March 24, 2016, the Patent Trial and Appeal Board, or the PTAB, issued a final written decision finding the ’167 patent was not unpatentable. This case is stayed pending the outcome and final determination of the proceedings concerning the ’167 patent (discussed further below). |
On January 13, 2017, we also sued BDSI asserting infringement of the ’167 patent by BDSI’s Belbuca product. The case was originally filed in the U.S. District Court for the District of New Jersey and was later transferred to the U.S. District Court for the District of Delaware by agreement of the parties. On October 16, 2018, the Delaware Court issued an order transferring the case to the U.S. Court District for the Eastern District of North Carolina.
On November 28, 2016, after the PTAB issued its final written decisions finding that the ’167 patent was not unpatentable in IPR2015-00165, IPR2015-00168 and IPR2015-00169, BDSI filed a notice of appeal of those decisions to the U.S. Court of Appeals for the Federal Circuit. The case was fully briefed, and the Court heard oral arguments on February 9, 2018. On June 19, 2018, BDSI filed a motion to terminate and remand the appeal, which the Company opposed. On July 31, 2018, the Federal Circuit granted the motion, vacating the PTAB’s decisions and remanding for further proceedings before the PTAB. The review proceedings remain pending before the PTAB.
In September 2017, Indivior brought suit against Alvogen for infringement of U.S. Patent No. 9,687,454, or the ’454 patent, based on the filing of an ANDA seeking approval for a generic version of Suboxone Sublingual Film, in the U.S. District Court for the District of New Jersey. In February 2018, we and Indivior amended the complaint, which added us as a plaintiff and a claim for infringement of U.S. Patent No. 9,855,221, or the ’221 patent.
Indivior brought suits against Dr. Reddy’s and Teva in September 2017, and against Par and certain affiliates in October 2017, for infringement of the ’454 patent, in the U.S. District Court for the District of New Jersey. Indivior also brought suit in September 2017 against Actavis Laboratories UT, Inc. for infringement of the ’454 patent, in the U.S. District Court for the District of Utah. On March 13, 2018, the Court granted transfer of this case to the U.S. District Court for the District of Delaware.
In February 2018, we and Indivior brought suit against Actavis, Dr. Reddy’s, Teva, and Par and certain affiliates for infringement of the ’221 patent. The suit against Actavis was filed in the U.S. District Court for the District of Utah, and the other three cases were filed in the U.S. District Court for the District of New Jersey.
In April 2018, we brought suit with Indivior against Actavis, Alvogen, Dr. Reddy’s, Teva, and Par and certain affiliates for infringement of U.S. Patent No. 9,931,305, or the ’305 patent. The cases against Alvogen, Dr. Reddy’s, Teva, and Par are pending in the U.S. District Court for the District of New Jersey, and they have each been consolidated with the actions asserting infringement of the ’454 and ’221 patents. Following transfer of the case asserting the ’454 patent from Utah to Delaware, and by agreement of the parties, the cases against Actavis asserting infringement of the ’454, ’221, and ’305 patents are consolidated in a single action pending in the U.S. District Court for the District of Delaware.
All matters involving Par were resolved on May 11, 2018, when we, Indivior, and Par and certain of its affiliates entered into a settlement agreement resolving patent litigation related to SUBOXONE (buprenorphine and Naloxone) Sublingual Film. As required by law, the parties submitted the settlement agreement to the U.S. Federal Trade Commission and the U.S. Department of Justice for review.
On June 14, 2018, Dr. Reddy’s notified the U.S. District Court for the District of New Jersey that the FDA had granted final approval of its ANDAs and that it had launched generic versions of Suboxone Sublingual Film. The Company and Indivior filed a motion for a preliminary injunction and a request for a temporary restraining order, and the Court granted the request on June 15, 2018 enjoining and restraining Dr. Reddy’s from offering for sale, selling or importing its generic versions of Suboxone Sublingual Film. On July 13, 2018, the Court granted the preliminary injunction, which enjoins Dr. Reddy’s from launching a generic version of Suboxone during the pendency of the litigation and until further order from the Court. Dr. Reddy’s appealed the preliminary injunction ruling to the Federal Circuit. Dr. Reddy’s also requested a stay of the injunction pending appeal, which the Company and Indivior opposed. Both the District Judge and the Federal Circuit denied Dr. Reddy’s request for a stay. The Federal Circuit heard oral argument on the appeal on October 4, 2018 but has not yet issued its opinion.
Antitrust Litigation
On September 22, 2016, forty-one states and the District of Columbia, or the States, brought suit against Indivior and us in the U.S. District Court for the Eastern District of Pennsylvania, alleging violations of federal and state antitrust statutes and state unfair trade and consumer protection laws relating to Indivior’s launch of Suboxone Sublingual Film in 2010. After filing, the case was consolidated for pre-trial purposes with the In re Suboxone (Buprenorphine Hydrochloride and Naloxone) Antitrust Litigation, MDL No. 2445, or the Suboxone MDL, a multidistrict litigation relating to putative class actions on behalf of various private plaintiffs against Indivior relating to its launch of Suboxone Sublingual Film. While we were not named as a defendant in the original Suboxone MDL cases, the action brought by the States alleges that we participated in an antitrust conspiracy with Indivior in connection with Indivior’s launch of Suboxone Sublingual Film and engaged in related conduct in violation of federal and state antitrust law. We moved to dismiss the States’ conspiracy claims, and by order dated October 30, 2017, the Court denied our motion to dismiss. We filed an answer denying the States’ claims on November 20, 2017. The fact discovery period closed July 27, 2018, but the parties agreed to conduct certain fact depositions in August 2018. The case is proceeding to expert discovery, which is scheduled to close May 3, 2019.
Product Litigation
On December 27, 2016, we were named as a co-defendant in product liability suit brought by Laurence and Michelle Allen, as Co-Administrators of the Estate of John Bradley Allen, in the U.S. District Court for the Northern District of New York. This suit, which also named Indivior Inc. and Indivior PLC as defendants, asserts causes of action for negligence, strict liability, and failure to warn against the defendants in connection with the manufacture and sale of Suboxone Sublingual Film. Plaintiffs allege that John Bradley Allen’s use of Suboxone Sublingual Film was a substantial contributing cause of his mental anguish and death and seek $100 million in damages. All defendants moved to dismiss the complaint on April 10, 2017, and those motions were fully briefed on May 18, 2017. Aquestive was dismissed from the case on May 9, 2017, and the remainder of the case was closed on August 9, 2018, after the complaint was dismissed in favor of Indivior.
| Note 15. | Share-Based Compensation |
The following table summarizes the components ofCompany recognized share-based compensation expenses, including those related to the non-voting common shares, restricted stock awards and stock option grants, reflected in theits Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the threeLoss during 2019 and nine-month periods ended September 30, 2018:2018 as follows:
| | | Periods Ended September 30, 2018 | | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | | | Three Months | | | Nine Months | | | | | | | | | | | | | Manufacturing and supply | | $ | 32 | | | $ | 377 | | | Expense classification: | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | Manufacture and supply | | | $ | 72 | | | $ | 345 | | | $ | 116 | | | $ | 345 | | | Research and development | | | 192 | | | | 2,378 | | | 140 | | | 2,186 | | | 348 | | | 2,186 | | | Selling, general and administrative | | | 1,012 | | | | 25,786 | | | | 1,598 | | | | 24,774 | | | | 2,866 | | | | 24,774 | | | Total share-based compensation expenses | | $ | 1,236 | | | $ | 28,541 | | | $ | 1,810 | | | $ | 27,305 | | | $ | 3,330 | | | $ | 27,305 | | | | | | | | | | | | | | | | | Share-based compensation from: | | | | | | | | | | | | | | Restricted stock units | | | $ | 467 | | | $ | — | | | $ | 930 | | | $ | — | | Stock options | | | 1,323 | | | 7 | | | 2,380 | | | 7 | | Non-voting common shares | | | — | | | 27,298 | | | — | | | 27,298 | | Employee stock purchase plan | | | | 20 | | | | — | | | | 20 | | | | — | | Total share-based compensation expenses | | | $ | 1,810 | | | $ | 27,305 | | | $ | 3,330 | | | $ | 27,305 | |
The table below reflects the following share-based compensation expenses incurred during 2018:
| | | Periods Ended September 30, 2018 | | | | | Three Months | | | Nine Months | | | | | | | | | | | Non-voting common shares (A) | | $ | - | | | $ | 27,298 | | | Restricted Stock Units (B) | | | 610 | | | | 610 | | | Stock Options (B) | | | 626 | | | | 633 | | | Total share-based compensation expenses | | $ | 1,236 | | | $ | 28,541 | |
There were no restricted stock unit or option grants in 2017 and consequently no share-based compensation recognized during the three and nine months ended September 30, 2017.
(A) Non-Voting Common Share Issuance
The Company had twonon-voting common shares. Under that Performance Unit Plans, both of which were considered to be within the scope of FASB ASC Subtopic 718-30, Compensation – Stock Compensation – Awards Classified as Liabilities. Pursuant to the Plans, vestedPlan, vest grants were not exercisable prior to either a change in control of the Company or completion of an IPO. These performance conditions rendered the grants contingentIPO and deferred expense recognition until either of the conditionsaccordingly, compensation expenses for these awards were satisfied. Neither of these conditions were satisfied as of December 31, 2017.initially recognized in April 2018 upon plan participant and Board approval.
On April 16 2018, the Company terminated the Performance Unit Plans. The termination was executed in accordance with the provisions
In accordance with ASC 718, Compensation — Stock Compensation, the Company recorded a total charge to earnings of $27,298 comprised of $19,934 which relates to the fair market value of the non-voting shares at the date the shares were granted and $7,364 related to withholding taxes which the Company elected to pay on behalf of the performance unit holders in the second quarter of 2018 to reflect the compensation cost associated with the issuance of 4,922,353 non-voting common shares. The compensation expense was estimated using an independent third-party valuation prepared in accordance with the American Institute of Certified Public Accountants Practice Aide, Valuation of Privately-Held Company Equity Securities Issued as Compensation.
The assumptions for the determination of the fair value of are provided in the following table:
Valuation assumptions: | | | | Discount for lack of marketability | | | 34 | % | Volatility | | | 90 | % | Weighted average cost of capital | | | 27.5 | % |
The discount for lack of marketability takes into consideration the illiquid nature of the security as well as other qualitative characteristics that would make it less marketable than the more senior securities. Volatility was based on that of comparable public companies. The weighted average cost of capital was also based on that of comparable public companies as well as market interest rate data.
(B) Share-Based Compensation Equity Awards
The Companyfollowing tables provides certain employees, non-employee directors and consultants with performance incentives under its share-based compensation plans. Under these plans,information about the Company may grantCompany’s restricted stock units and stock options in order to alignoption unit activity during the long-term financial interests of selected participants with those of its shareholders, strengthen the commitment of such persons to the Company, and attract and retain competent and dedicated persons whose efforts will enhance long-term growth, profitability and share value.six months ended June 30, 2019:
Restricted stock and option awards are subject to graded vesting over a service period, which is typically two or three years. Compensation cost is recognized for these awards on a pro-rata basis over the requisite service period for each award granted.
Restricted stock units: | | Number of Units | | | Weighted Average Grant Date Fair Value | | | | | (in thousands) | | | | | | Unvested at December 31, 2018 | | | 205 | | | $ | 14.77 | | | Granted | | | — | | | | — | | | Vested | | | (59 | ) | | | 15.03 | | | Forfeited | | | (3 | ) | | | 13.00 | | | Unvested at June 30, 2019 | | | 143 | | | $ | 14.70 | | | Grant date fair value of shares vested during the period | | $ | 896 | | | | | | | Unrecognized compensation costs of RSU awards at June 30, 2019 | | $ | 1,881 | | | | | |
Restricted stock unit awards (RSUs)
During the three months ended September 30, 2018, the Company granted to certain members of senior management and key employees a total of 264,781 restricted share units having an estimated grant date fair value of $3,926, of which 29,802 units were vested as of that date. The remaining unrecognized compensation expense of approximately $3,043, net of estimated forfeitures, isRSUs are expected to be recognized over approximatelya weighted-average period of less than three years.The RSUs granted to senior management vest in equal quarterly installments over two years; the RSUs granted to key employees are subject to a three-year graduated vesting schedule. These RSUs are not subject to performance-based criteria other than continued employment. There were no RSU grants prior to the three months ended September 30, 2018 and there were no forfeitures during the period.
Stock option awards
During the nine months ended September 30, 2018, the Company granted 1,033,042 stock options to certain members of senior management, members of its board of directors and a consultant having an estimated grant date fair value of $11,155, of which 28,666 options were vested as of that date. The remaining unrecognized compensation expense of $9,770, net of estimated forfeitures, is expected to be recognized over approximately three years. These stock options were granted with exercises prices ranging from $6.54 to $18.67 per share with three-year vesting and a 10-year contractual term. Options granted to senior management and board members vest in equal quarterly or monthly increments over three years; options granted to key employees are subject to a three-year graduated vesting schedule. These stock options are not subject to performance-based criteria other than continued employment. There were no option grants prior to the six months ended September 30, 2018, and there were no forfeitures during the period.
Stock options: | | Number of Options | | | Weighted Average Exercise Price | | | | | (in thousands) | | | | | | Outstanding at December 31, 2018 | | | 1,033 | | | $ | 14.72 | | | Granted | | | 975 | | | | 7.51 | | | Forfeited | | | (25 | ) | | | 7.77 | | | Exercised, expired | | | — | | | | — | | | Outstanding at June 30, 2019 | | | 1,983 | | | $ | 11.26 | | | Vested or expected to vest at June 30, 2019 | | | 1,868 | | | $ | 11.12 | | | Exercisable at June 30, 2019 | | | 223 | | | $ | 14.32 | |
The Company measured the fair valuevalues of these stock options at their grant datesgranted during 2019 were estimated using the Black-Scholes-Merton option pricing model. The assumptions formodel based on the determination of the fair value of options issued during 2018 are as follows:following assumptions:
| | | | | Expected dividend yield | | | 0 | % | | Expected volatility | | | 9085 - 95 | % | | Expected term (years) | | | 5.85.5 - 6.1 | | | Risk-free interest rate | | | 2.81.9 - 2.92.6 | % |
Aquestive anticipates reinvesting earnings forThe weighted average grant date fair value of stock options granted during 2019 was $7.51. During the foreseeable future in product development and other avenues of share-value growthsix months ended June 30, 2019, options were granted with exercise prices ranging from $4.38 to $8.05, and accordingly, anticipates no dividend payouts. Volatility was determined based on thatgiven Aquestive’s share price of comparable public companies, given$4.20 at the lack of any meaningful history regarding its own now-publicly-traded common stock. The expected termclose of the award was calculated using the simplified method. ACompany’s second quarter of 2019, these options provided no intrinsic value at that date. Similarly, options granted in 2018 provided no intrinsic value at June 30, 2019.
As of June 30, 2019, $11,352 of total unrecognized compensation expenses related to non-vested stock options is expected to be recognized over a weighted average was utilized taking into accountperiod of 2.3 years from the date of grant.
Employee stock purchase plan
The Company’s Board of Directors adopted the Aquestive Therapeutics, Inc. Employee Stock Purchase Plan, or ESPP in June 2018, as amended and restated effective as of January 1, 2019. The Employee Stock Plan, features two vestingsix-month offering periods per year, running from January 1 to determineJune 30 and July 1 to December 31. Under the expected term in years. The risk-free interest rate is based onESPP, employees may elect to purchase the average U.S. Treasury rate with a term that most closely resemblesCompany’s common stock at the estimated expected lifelower of 85% of the award.fair value of shares on either the first or last day of the offering period. During the six months ended June 30, 2019, 31,393 shares were purchased at a total discount of $20 and were issued under the ESPP, effective as of that date.
From its founding through October 31, 2017, theThe Company was a limited liability company (“LLC”) treated as a partnership for income tax purposes. From November 1, 2017 through December 31, 2017, the LLC elected to be taxed as a C-corporation. On January 1, 2018, MonoSol converted from a Delaware LLC into a Delaware C-corporation pursuant to a statutory conversion and changed its name to Aquestive Therapeutics, Inc.
From November 1, 2017, the Company accountshas accounted for income taxes under the asset and liability method, which requires deferred tax assets and liabilities to be recognized for the estimated future tax consequences attributable to differences between financial statement carrying amounts and respective tax bases of existing assets and liabilities, as well as net operating loss carryforwards and research and development credits. Valuation allowances are provided if it is more likely than not that some portion or all of the deferred tax asset will not be realized.
The Company’s tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items. For the three months and nine months ended SeptemberJune 30, 2019 and 2018, the Company recorded no income tax benefit of $0, onfrom its pretax losses of $15,038$20,472 and $47,432, respectively.$36,493, respectively, and similarly for the sixth months ended June 30, 2019 and 2018, the Company recorded no tax benefit from its pretax loss of $35,198 and $32,394, respectively, due to realization uncertainties.
The Company’s U.S. Federal statutory rate is 21%. The primary factor impacting the effective tax rate for the ninethree and six months ended SeptemberJune 30, 20182019 is the anticipated full year lossesoperating loss which will be incurred by the Company’s operations that haverequire full valuation allowances against theirany associated net deferred tax assets.
| Note 17. | Commitments and Contingencies |
(A) Operating Leases
The Company has entered into various lease agreements for production and research facilities and offices. Most leases contain renewal options. Certain leases contain purchase options and require the Company to pay for taxes, maintenance and operating expenses. All of the Company’s leases are classified as operating leases.
Rent expense for all leased manufacturing facilities and sales, laboratory and office space totaled $399 and $292 for the three-month periods ended June 30, 2019 and 2018, respectively and $771 and $623 for the six-month periods ended June 30, 2019 and 2018, respectively.
(B) Litigation and Contingencies
From time to time, the Company has been and may again become involved in legal proceedings arising in the ordinary course of business, including product liability, intellectual property, commercial litigation, or environmental or other regulatory matters.
Patent-Related Litigation
Beginning in August 2013, we were informed of ANDA filings in the United States by Watson Laboratories, Inc. (now Actavis Laboratories, Inc., or “Actavis”), Par Pharmaceutical, Inc.(“Par”), Alvogen Pine Brook, Inc. (“Alvogen”), Teva Pharmaceuticals USA, Inc. (“Teva”), Sandoz Inc. (“Sandoz”), and Mylan Technologies Inc. (“Mylan”), for the approval by the FDA of generic versions of Suboxone Sublingual Film in the United States. The Company filed patent infringement lawsuits against all six generic companies in the U.S. District Court for the District of Delaware. After the commencement of the ANDA patent litigation against Teva, Dr. Reddy’s Laboratories (“DRL”) acquired the ANDA filings for Teva’s buprenorphine and naloxone sublingual film that are at issue in these trials.
Of these, cases against three of the six generic companies have been resolved.
Mylan and Sandoz settled without a trial. Sandoz withdrew all challenges and became the distributor of the authorized generic.
All cases against Par were resolved pursuant to a May 2018 settlement agreement between the Company, Indivior, and Par and certain of its affiliates.
Actavis was found to infringe the ‘514 patent and cannot enter the market until the expiration of the patent in 2024, and the Federal Circuit affirmed that ruling on July 12, 2019.
DRL and Alvogen were found not to infringe under a different claim construction analysis, and the Federal Circuit affirmed that ruling on July 12, 2019. Teva has agreed to be bound by all DRL adjudications.
Subsequent to the above, all potential generic competitors without a settlement agreement were also sued for infringement of two additional new patents that contain new claims not adjudicated in the original case against DRL and Alvogen. On July 12, 2019, the Federal Circuit affirmed the decisions from the previously decided cases. The case(s) regarding the additional asserted patents have not been finally resolved. The case against Actavis, pending in the U.S. District Court for the District of Delaware, is scheduled for trial in December 2019. No trial date has been set in the cases against DRL and Alvogen, which are pending in the U.S. District Court for the District of New Jersey. On February 19, 2019, the Federal Circuit issued its mandate reversing the District of New Jersey’s preliminary injunction against DRL. Following issuance of the mandate, the District of New Jersey vacated preliminary injunctions against both DRL and Alvogen. On February 19, 2019, Indivior launched the authorized generic of Suboxone Sublingual Film, which is manufactured by the Company exclusively for sale and marketing by Sandoz Inc., a sublicensee of Indivior. DRL, Alvogen, and Mylan all launched generic versions of Suboxone Sublingual Film, and the launches by DRL and Alvogen are “at risk” because the products are the subject of the ongoing patent infringement litigations.
On March 22, 2019, Aquestive and Indivior brought suit against Aveva Drug Delivery Systems, Inc., Apotex Corp., and Apotex Inc. for infringement of the ’150, ’514, ’454, and ’305 patents, seeking an injunction and potential monetary damages. The case is pending in the Southern District of Florida, and the defendants filed their answers to the complaint, including counterclaims for non-infringement and invalidity of the asserted patents as well as two other patents that were not asserted in the original complaint.
The Company is also seeking to enforce its patent rights in multiple cases against BioDelivery Sciences International, Inc. (“BDSI”). Two cases are currently pending but stayed in the U.S. District Court for the Eastern District of North Carolina:
The first, a declaratory judgment action brought by BDSI against Indivior and Aquestive, seeks declarations of invalidity and non-infringement of U.S. Patents Nos. 7,897,080, or the ’080 patent, 8,652,378, or the ’378 patent, and 8,475,832, or the ’832 patent. This case is stayed pending final resolution of the above-mentioned appeals on related patents.
The second was filed by us and Indivior related to BDSI’s infringing Bunavail product, and alleges infringement of the Company’s patent, U.S. Patent No. 8,765,167, or the ’167 patent, and seeks an injunction and potential monetary damages. Shortly after the case was filed, BDSI filed four IPRs challenging the asserted ’167 patent. On March 24, 2016, the Patent Trial and Appeal Board, or the PTAB, issued a final written decision finding that all claims of the ’167 patent were valid. The case was stayed in May 2016 pending the final determination of the appeals on those decisions. Following the PTAB’s February 7, 2019 decisions on remand denying institution, Aquestive and Indivior submitted a notice to the Court on February 15, 2019 notifying the Court that the stay should be lifted as a result of the PTAB’s decisions. We are awaiting further action from the Court.
On January 13, 2017, the Company also sued BDSI asserting infringement of the ’167 patent by BDSI’s Belbuca product and seeking an injunction and potential monetary damages. Following the PTAB’s February 7, 2019 decisions on remand denying institution, the Company submitted a notice to the Court on February 15, 2019 notifying the Court that BDSI’s motion to stay should be denied as moot. BDSI also sent a letter to the Court on February 13, 2019 indicating its intent to appeal the PTAB’s decisions. The parties are awaiting further action from the Court. BDSI appealed the PTAB’s remand decisions to the Federal Circuit, and on March 20, 2019, we moved to dismiss the appeal for lack of jurisdiction.
Antitrust Litigation
On September 22, 2016, forty-one states and the District of Columbia, or the States, brought suit against Indivior and us in the U.S. District Court for the Eastern District of Pennsylvania, alleging violations of federal and state antitrust statutes and state unfair trade and consumer protection laws relating to Indivior’s launch of Suboxone Sublingual Film in 2010 and seeking an injunction, civil penalties, and disgorgement. After filing, the case was consolidated for pre-trial purposes with the In re Suboxone (Buprenorphine Hydrochloride and Naloxone) Antitrust Litigation, MDL No. 2445, or the Suboxone MDL, a multidistrict litigation relating to putative class actions on behalf of various private plaintiffs against Indivior relating to its launch of Suboxone Sublingual Film. While the Company was not named as a defendant in the original Suboxone MDL cases, the action brought by the States alleges that the Company participated in an antitrust conspiracy with Indivior in connection with Indivior’s launch of Suboxone Sublingual Film and engaged in related conduct in violation of federal and state antitrust law. The Company moved to dismiss the States’ conspiracy claims, but by order dated October 30, 2017, the Court denied this motion to dismiss. An answer denying the States’ claims was filed on November 20, 2017. The fact discovery period closed on July 27, 2018, but the parties agreed to conduct certain fact depositions in August 2018. The expert discovery phase closed May 30, 2019, but additional reports and depositions are being conducted through August 1, 2019. Summary judgement motions and Daubert motions relating to expert witnesses are due on September 26, 2019. At this time, management cannot determine or predict the ultimate outcome of this proceeding or provide a reasonable estimate, or range of estimates, of the possible outcome or loss, if any, in this matter.
Debt Refinancing & Warrant Issuance
On July 15, 2019, Aquestive Therapeutics, Inc. completed the private placement of up to $100 million aggregate principal of its 12.5% Senior Secured Notes due 2025 (the “Notes”) and issued warrants for two million shares of common stock (the “Warrants”), $.001 per value, through its structuring agent, Morgan Stanley & Co., LLC and entered into a purchase agreement and related indenture (the “Purchase Agreement” or “Indenture”) governing these Notes. The Company simultaneously entered into related agreements including a Collateral Agreement with U.S. Bank National Association as trustee and collateral agent, and a Lien Subordination and Intercreditor Agreement for the benefit of Madryn Health Partners, other institutional noteholders and U.S. Bank National Association in dual roles providing terms governing an asset-based loan facility.
Upon closing, the Company issued $70 million of the principal of the Notes (the “Initial Notes”) along with the Warrants and rights of first offer (the “First Offer Rights”) to the lenders participating in this transaction for Notes and Warrants (the “Lenders”). Issuance of the Initial Notes, Warrants and First Offer Rights has provided net proceeds of $66,951. In addition to the Initial Notes, the Indenture may provide access to further loans of up to $30,000 that may become available in two tranches of Additional Notes tied to the NDA filing for and FDA approval of Libervant, an important part of our drug candidate pipeline. Provided that no events of default exist, the Company may elect, subject to majority lenders’ approval, to offer to the Lenders participation in a $10,000 additional offering of 12.5% senior secured notes (the “First Additional Offering”) under terms similar to the Initial Notes, on or before March 31, 2021, upon the filing of the Libervant NDA with the FDA. A second identical funding opportunity would allow, on or before March 31, 2021, the Company to obtain an additional $20,000 if the first option has been elected and funded, or, if not elected or funded, an additional $30,000 may be offered for issuance following FDA approval of Libervant. There can be no assurance that any such additional financing will be consummated.
Proceeds from issuance of the Initial Notes and Warrants were used to fully repay the Company’s $52,092 outstanding indebtedness to Perceptive Credit Holdings, LP, related early repayment fees and legal and other fees incurred in executing this Indenture. Remaining proceeds of $14,859 will be used to support the advancement of Aquestive’s late-stage development pipeline, ongoing proprietary product commercialization and for general corporate operations.
The Notes provide a stated fixed rate of 12.5%, payable quarterly in arrears, with the initial quarterly principal repayment of the Initial Notes due on September 30, 2021 and the final quarterly payment due at maturity on June 30, 2025. Principal payments are scheduled to increase annually from 10% of the face amount of the debt then outstanding during the first four quarters to 40% of the initial loan principal during the final four quarters. Aquestive may elect, at its option, to prepay the Notes at any time at premiums that range from 101.56% of outstanding principal if prepayment occurs on or after the 5th anniversary of the issue date of the Notes to 112.5% if redemption occurs during the third year after the issuance of the Notes. In the event that redemption occurs within the two years after the issuance of the Notes, a make-whole fee is required, based on the present value of remaining interest payments using an agreed-upon discount rate linked to the then-current U.S. Treasury rate. The Indenture also includes change of control provisions under which the Company may be required to repurchase the Notes at 101% of remaining principal plus accrued interest at the election of the lenders.
Collateral for the loan consists of a first priority lien on substantially all property and assets, including intellectual property, of the Company. This secured obligation provides payment rights that are senior to all existing and future subordinated indebtedness of the Company and provides Lenders with perfected security interests in substantially all of the Company’s assets. In the event that asset-based loans of up to $10,000 may be obtained, subject receivables and inventory assets will provide a second priority lien to senior secured note holders. The Company’s license of its IP to a third-party drug development enterprise (specifically, Sunovion Pharmaceutical’s APL-130277 product) is one of the various assets serving as collateral for this loan. The loan indenture permits the Company to monetize this asset while specifying that a portion of the proceeds, up to $40,000 if the First Additional Offering has not been elected or funded, or, $50,000 if it has been elected and funded, must be applied to prepay the Initial Notes, at 112.5% of the principal amount of the Notes being repurchased, plus accrued and unpaid interest, if any, thereon to the date of repurchase, to the extent elected by the Note holders, assuming that such monetization , up to such $40,000 or $50,000 level, as applicable, equals or exceeds those levels and if such monetization does not equal or exceed such level, such prepayment would be pro-rated among the Note holders. To the extent that lenders do not elect repayment of the debt at the date of monetization, the amount not elected up to $40,000 (or $50,000 with the first re-opener) will be held in a collateral account until approval of Libervant by the FDA, at which time this cash collateral is to be released to the Company. Proceeds in excess of $40,000 (or $50,000 with the first re-opener) can be used immediately for general corporate purposes.
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 permitted under the Indenture, and perfection of 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.
The Warrants, expiring in June 2025, entitle the Lenders to purchase two million shares of the Company’s common stock, and include registration rights, specify an exercise price of $4.25 and a term of six years.
| Item 2. | | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSManagement’s Discussion and Analysis of Financial Condition and Results of Operations |
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.
Forward-Looking Statements” the following discussion
This Quarterly Report on Form 10-Q and analysis containscertain other communications made by us includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “may,” “will,” or the negative of those terms, and similar expressions, are intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements about our growth and future financial and operating results and financial position, regulatory approvals and pathways, clinical trial timing and plans, the achievement of clinical and commercial milestones, product orders and fulfillment, short-term and longer term liquidity and cash requirements, cash funding and cash burn, business strategies, market opportunities, financing, and other statements that involveare not historical facts.
These forward-looking statements are based on our current expectations and beliefs and are subject to a number of risks and uncertainties as well as assumptions that if they never materialize or prove incorrect, could cause ouractual results to differ materially from those expressed or implied by suchdescribed in the forward-looking statements. Factors that could cause or contribute to such differencesSuch risks and uncertainties include, but are not limited to, risks associated with the Company’s development work, including any delays or changes to the timing, cost and success of our product development activities and clinical trials; the risks of delays in FDA approval of our drug candidates or failure to receive approval; the risks inherent in commercializing a new product (including technology risks, financial risks, market risks and implementation risks and regulatory limitations); risk of development of our sales and marketing capabilities; risk of legal costs associated with and the outcome of our patent litigation challenging third party at risk generic sale of our proprietary products; risk of sufficient capital and cash resources, including access to available debt and equity financing and revenues from operations, to satisfy all of our short-term and longer term cash requirements and other cash needs, at the times and in the amounts needed; risk of availability of refinancing of existing debt facilities; risk of failure to satisfy all debt covenants and of any default under our senior secured notes; risk related to government claims against Indivior for which we license, manufacture and sell Suboxone and which accounts for the substantial part of our current operating revenues; risks related to the outsourcing of certain sales, marketing and other operational and staff functions to third parties; risk of the rate and degree of market acceptance of our products and product candidates; the success of any competing products, including generics; risk of the size and growth of our product markets; risk of the effectiveness and safety of our products and product candidates; risk of compliance with all FDA and other governmental and customer requirements for our manufacturing facilities; risks associated with intellectual property rights and infringement claims relating to the Company’s products; risk of unexpected patent developments; the impact of existing and future legislation and regulatory provisions on product exclusivity; legislation or regulatory action affecting pharmaceutical product pricing, reimbursement or access; claims and concerns that may arise regarding the safety or efficacy of the Company’s products and product candidates; risk of loss of significant customers; risks related to legal proceedings, including patent infringement, investigative and antitrust litigation matters; changes in governmental laws and regulations; risk of product recalls and withdrawals; uncertainties related to general economic, political, business, industry, regulatory and market conditions and other unusual items; and other risks and uncertainties affecting the Company including those identified below, and those underdescribed in the caption “Risk Factors” section and in other sections included in the aforementioned prospectus.Company’s Annual Report on Form 10‑K filed with the SEC on March 14, 2019 and in our quarterly reports on Form 10-Q. Given these uncertainties, you should not place undue reliance on these forward-looking statements, which address matters only as of the date made. All subsequent forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by this cautionary statement. The Company assumes no obligation to update forward-looking statements or outlook or guidance after the date of this report whether as a result of new information, future events or otherwise, except as may be required by applicable law.
Overview
We are a specialty pharmaceutical company focused on identifying, developing and commercializing differentiated products with our proprietary PharmFilm® technology to meet patients’ unmet needs and solve therapeutic problems to address unmet medical needs. We have three commercial products on the market, including one that is proprietary and two that are out-licensed, as well as a late-stage proprietary product pipeline focused on the treatment of CNS diseases. We believe that the characteristics of these patient populations and shortcomings of available treatments create opportunities for the development and commercialization of meaningfully differentiated medicines. Sympazan®, an oral soluble film formulation of clobazam used as an adjunctive therapy for seizures associated with a rare, intractable form of epilepsy known as Lennox-Gastaut Syndrome, LGS, was approved by the FDA on November 1, 2018. The Company commercially launched Sympazan in December 2018.
Our most advanced proprietary investigational product candidates which we intend to commercialize ourselves, include:
Libervant™, a buccal soluble film formulation of diazepam used as a rescue therapy for breakthrough epileptic seizures and 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.
| · | Libervant, a buccal soluble film formulation of diazepam used as a rescue therapy for breakthrough epileptic seizures and an adjunctive therapy for use in recurrent convulsive seizures, for which a pre-NDA meeting has been scheduled in December 2018 with the FDA. The Company is preparing its submission to follow the pre-NDA meeting. The Company announced top-line clinical data from its Adult EMU study on October 24, 2018, which will be presented at the American Epilepsy Society annual meeting in early December, 2018; |
Exservan™, an oral soluble film formulation of riluzole for the treatment of Amyotrophic Lateral Sclerosis, or ALS, for which we submitted an NDA in the first quarter of 2019; the PDUFA goal date for FDA approval is November 30, 2019.
| · | Sympazan, an oral soluble film formulation of clobazam used as an adjunctive therapy for seizures associated with a rare, intractable form of epilepsy known as LGS, which was approved by the FDA on November 1, 2018. The Company has hired and trained its sales, access/reimbursement and marketing team, and is preparing to commercially launch Sympazan in November 2018, and |
| · | AQST-117, an oral soluble film formulation of riluzole for the treatment of Amyotrophic Lateral Sclerosis, or ALS, for which we expect to submit an NDA in the first quarter of 2019. |
We have also developed a proprietary pipeline of complex molecule-based products addressing large market opportunities beyond CNS indications, which include:
AQST-108, a sublingual soluble film formulation 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 began additional phase 1 proof of concept trials early in the second quarter of 2019; and
| · | AQST-108, a sublingual soluble film formulation for the treatment of anaphylaxis intended to provide an 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 begin additional human trials in early 2019, and |
AQST-305, a sublingual soluble film formulation of octreotide for the treatment of acromegaly and neuroendocrine tumors. As a result of early stage clinical proof of concept studies, re-formulation work is currently underway.
| · | AQST-305, a sublingual soluble film formulation of octreotide for the treatment of acromegaly and neuroendocrine tumors, for which we are undertaking human proof of concept trials at this time. |
In addition to these product candidates, we have a portfolio of commercialized and development-stage products with collaboration partners. These products includelicensed products. Our 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. In additionWe have a sole and exclusive worldwide manufacturing agreement with Indivior to several other collaboration partner products in development, AQST-119, an oral solubledeliver both the branded Suboxone, globally through Indivior, and the authorized generic sublingual film formulation of tadalafil, has a Prescription Drug User Free Act (PDUFA) date of November 18, 2018,buprenorphine and APL-130277, Sunovion’s oral soluble film formulation of apomorphinenaloxone, through Sandoz for the treatmentUnited States market. As of off-episodes associated with Parkinson’s Disease, and hasJuly 2019, these products account for greater than 75% of the oral film products prescribed in the U.S. for recovery from opioid addiction – a PDUFA date of January 29, 2019. market that continues to grow.
We manufacture all of our currently commercialized collaboration partner productslicensed and will manufacture all of our proprietary products at our FDA- and DEA-inspected facilities. We anticipateThere is no guarantee that our current manufacturing capacity is sufficient for commercial quantities of ourproprietary or licensed products and product candidates currently in development. Not all collaborative products of the Company that may be commercially launched in the future 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 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 stock.were 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 of $67,500 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 of $6,386$73,886 before underwriting discounts and other costs and expenses of the offering. Total net proceeds to Aquestive after underwritersunderwriters’ discounts and other costs and expenses of the offeringIPO totaled $63,484.$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 $13,267$11,129 and $27,146$13,928 for the three months ended SeptemberJune 30, 20182019 and 2017,2018, respectively, and $50,606$23,772 and $54,723$37,339 for the ninesix months ended SeptemberJune 30, 2019 and 2018, and 2017, respectively, largelymost significantly from commercial products marketed bylicensed to our collaboration or commercialization 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 collaboration partnerlicensed pharmaceutical product to be commercialized, and we have multiple other partnerlicensing relationships that contribute to our revenue and future revenue opportunities from collaboration partner products.opportunities. Sympazan, which was launched in December 2018, is the first proprietary pharmaceutical product commercialized directly by the Company.
As of SeptemberJune 30, 2018,2019, we had $63,982$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, as well as the settlementoperations of obligations related to our MonoSol Rx, LLC Performance Unit Plan through the issuanceCompany during the first six months of non-voting common stock, as of September 30, 2018,2019, we had a net shareholders’ equitydeficit of $23,444.$24,657. We incurred net losses of $15,038$20,472 and $36,493 for the three months ended SeptemberJune 30, 2019 and 2018, and net income of $8,451 forrespectively. For the threesix months ended SeptemberJune 30, 2017. For the nine months ended September 30,2019 and 2018, and 2017, we incurred a net losslosses of $47,432$35,198 and net income$32,394, respectively. Our working capital, inclusive of $1,097 respectively.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 LibervantSympazan (launched in December 2018) and, Sympazan,subject to FDA approval, Libervant, our epilepsy products and 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 collaborative partnerlicensed 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 collaborative partner pipelineour commercialized partnered products, 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 license fees received under such license, development and supply agreements. We also may earn royalties based on our collaborative 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.
Manufacture and Supply Revenue
Currently, we produce two collaborative partner 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 collaborative 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 growth to be derived from partnered activities based on growing production volumes of collaborative partner products, new product development with collaborative partners, and additional licensing of our intellectual property.Proprietary Product Sales
As we commercialize our proprietary CNS products,product candidates, beginning with Sympazan, as well as Libervant, subject to regulatory approval, we expect to distributedirectly market our products to wholesalersconsumers in the United States, resulting in an additional source of revenue which we 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 collaborative partner manufacture 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 collaborative partnerlicensed pharmaceutical products and for our newly approved proprietary 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 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 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 we prepare topart of the commercial launch of Sympazan, during the fourth quarter 2018, we have entered into contractual arrangements with a third party logisticthird-party logistics provider (3PL) and wholesalers for distribution of our products. Further we haveWe also entered into a contract for our contracted sales force 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 fourth quarter 2018. In addition, ourfuture launch, subject to FDA approval, of Libervant. 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, expenses arewhich 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.
Interest Income
Interest income consists of interest incomeearnings derived from an interest-bearing account which yieldsaccount. We expect to continue generating interest income in 2019 from our interest-bearing cash accounts, albeit on a fixed rate of 1.87%. Theredeclining cash balance that is no minimum amountexpected to be maintained in the account nor any fixed lengthapplied to operating costs as needed.
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Change in Fair Value of Warrant
Changes in the fair value of warrants arisesresulted from non-cash periodic revaluations of the warrants 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 SeptemberJune 30, 20182019 and 20172018
We recorded revenue of $13,267$11,129 and $27,146$13,928 in the three months ended SeptemberJune 30, 20182019 and 2017,2018, respectively, generating a net lossesloss of $15,038$20,472 and $36,493 for the three months ended SeptemberJune 30, 2019 and 2018, and net income of $8,451 forrespectively.
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 SeptemberJune 30, 2017.
The following discussion2019, total revenues decreased 20% or $2,799 to $11,129 compared to revenues of our results of operations explains the material drivers of these results of operations.
Revenues
The following table sets forth our revenue data$13,928 for the periods indicated:
| | | Three Months Ended September 30, | | | Change | | | (In thousands, except %) | | 2018 | | | 2017 | | | $ | | |
| % | | | Manufacture and supply revenue | | $ | 9,005 | | | $ | 9,020 | | | $ | (15 | ) | | | 0 | % | | License and royalty revenue | | | 3,355 | | | | 17,351 | | | | (13,996 | ) | | | (81 | %) | | Co-development and research fees | | | 907 | | | | 775 | | | | 132 | | | | 17 | % | | Revenues | | $ | 13,267 | | | $ | 27,146 | | | $ | (13,879 | ) | | | (51 | %) |
Reflecting the timing of licenses payments on collaborative partner products which were $14,000 highersame period in 2017 compared2018. The change is primarily attributable to 2018, revenues decreased 51% or $13,879 in the three months ended September 30, 2018 to $13,267 as compared to $27,146 in the three months ended September 30, 2017. Excluding the impact of the changedifferences in license and royalty revenue revenues were flat year-over-year.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 was flat duringincreased approximately 3% or $231 to $8,915 for the three months ended SeptemberJune 30, 2018 as2019 compared to $8,684 from the three months ended September 30, 2017 due primarily to timing of purchase volume demandprior 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 Zuplenzits 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 sales as offset by a more advantageous mix of various higher-revenue formulations duringvolumes in future periods, the current period.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 81%91% or $13,996$4,108 to $3,355 in$424 for the three months ended SeptemberJune 30, 2018 as2019 compared to $17,351 inrevenues of $4,532 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 $0 for the three months ended SeptemberJune 30, 2017.2019 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 a result of 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.” 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 from collaborative partner products in the 2018 period were $3,000 compared to $17,000 in the 2017 period, explaining the entirety of the decrease in license and royalty revenue. The license fees during the third quarter of both periods related to the Suboxone product, and the decrease quarter-over-quarter wasare generally driven by contractually stipulated milestones. License feestransfer of rights, patent performance contingencies, specific FDA or other regulatory achievements, sales levels achievements or other contingencies and milestones, and will likely continue to fluctuate significantly from quarter-to-quarter.
Co-development and research fees increased 17%43% or $132 in$307 to $1,019 for the three months ended SeptemberJune 30, 2018 to $907 as2019 compared to $775 in$712 from the prior year period. The increase was driven by the timing of the achievement of research and development performance obligations on licensed products and related milestones and are normally expected to fluctuate significantly one reporting period to the next.
Product sales, net increased $771 or 100% for the three months ended SeptemberJune 30, 2017. These fees are highly dependent on2019 compared to the timingprior year period, due to the launch of partnered product research and development activities and related milestones, which may fluctuate significantly quarter-to-quarter.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 | |
The following table sets forth our expense data for the periods indicated:
| | | Three Months Ended September 30, | | | Change | | | (In thousands, except %) | | 2018 | | | 2017 | | | $ | | |
| % | | | Manufacturing and supply | | $ | 5,592 | | | $ | 4,880 | | | $ | 712 | | | | 15 | % | | Research and development | | | 4,534 | | | | 5,684 | | | | (1,150 | ) | | | (20 | )% | | Selling, general and administrative | | | 12,345 | | | | 6,161 | | | | 6,184 | | | | 100 | % | | Interest expense | | | 1,933 | | | | 1,970 | | | | (37 | ) | | | (2 | )% | | Interest income | | | (216 | ) | | | - | | | | 216 | | | | NM |
| | Other | | | 4,117 | | | | - | | | | 4,117 | | | | NM
|
|
ManufacturingManufacture and supply costs and expenses increased 15%9% or $712$447 to $5,592 in$5,420 for the three months ended SeptemberJune 30, 2018 as2019 compared to $4,880$4,973 for the same period in the three months ended September 30, 2017,2018. This increase was primarily driven primarily by increasedlower volumes of Suboxone production and higher production costs excipients and labor and $32 forassociated with other products. Additionally, there was a $110 increase in share-based compensation that was not incurredcosts during the three months ended SeptemberJune 30, 2017, 2019 as compared to the same period in 2018. These increases were offset in part by lower volume$345 in compensation cost associated with the issuance of the non-voting common shares and lower scrap costs.related withholding taxes allocated to manufacture and supply costs and expense during the three month period ended June 30, 2018 that did not occur during the three month period ended June 30, 2019.
Research and development expenses decreased 20%increased 2% or $1,150$157 to $4,534 in$8,151 for the three months ended SeptemberJune 30, 2018 as2019 compared to $5,684$7,994 in the three months ended September 30, 2017.prior year period. This change was primarily due to timingincrease resulted from an increase of clinical trials activity to our proprietary products being developed during the periods. These expense reductions wereexpenses of $1,625 along with added expenses of organizational growth that was substantially offset in part by $192a net reduction of share-based compensation expenses totaling $2,053 that was not incurredprimarily 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 the three months ended September 30, 2017.any reporting period.
Selling, general and administrative expenses increased 100%decreased 52% or $6,184$17,422 to $12,345 in$16,246 for the three months ended SeptemberJune 30, 20182019 as compared to $6,161$33,668 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 during the three monthsmonth period ended SeptemberJune 30, 2017. The increase is primarily driven2018 that did not occur during the three month period ended June 30, 2019, offset in part by additional$3,631 of investments made in our commercialization, branding and marketing capabilities for Sympazan and in preparation for the expected launch of Libervant, Sympazan and AQST-117 attributing approximately $3,631 of the overall increase period over period.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 companyfurther assist us in operations as a public company.
Interest expense increased 1% or $10 to $1,937 for going public. Further contributing to the overall increase is $1,012 related to share-based compensation that was not incurred during the three months ended SeptemberJune 30, 2017 and $287 of patent defense expenses.
Interest expense decreased modestly primarily due2019 compared to lower discount and loan acquisition cost amortization associated with extended principal payment dates1,927 for the same period over 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.
Interest income increased 100% or $216 in$153 for the three months ended SeptemberJune 30, 2018 as2019, 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 by $1,859 for the three months ended SeptemberJune 30, 20172019 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 launch 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.
Other expenses increased perChange in the table above, principally due to the change in fair value of warrants.warrants 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 re-measuredremeasured 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. Market pricing of $15.00, the initial price at which the Company’s common stock was offered, was used in determining fair valueCompensation. The Company had no outstanding warrants during the threesix months ended SeptemberJune 30, 2018.
Comparison of Nine Months Ended September 30, 2018 and 2017
We recorded revenue of $50,606 and $54,7232019. However, for information concerning the warrants issued in the nine months ended September 30, 2018 and 2017, respectively, generating a net loss of $47,432 and net income of $1,097 for each of those periods, respectively.
The following discussion ofconnection 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:
| | | Nine Months Ended September 30, | | | Change | | | | | 2018 | | | 2017 | | | $ | | |
| % | | | (In thousands, except %) | | | | | | | | | | | | | | | Manufacture and supply revenue | | $ | 29,249 | | | $ | 29,511 | | | $ | (262 | ) | | | (1 | )% | | License and royalty revenue | | | 17,387 | | | | 22,820 | | | | (5,433 | ) | | | (24 | )% | | Co-development and research fees | | | 3,970 | | | | 2,392 | | | | 1,578 | | | | 66 | % | | Revenues | | $ | 50,606 | | | $ | 54,723 | | | $ | (4,117 | ) | | | (8 | )% |
Revenues decreased 8% or $4,117 in the nine months ended September 30, 2018 to $50,606 as compared to $54,723 in the nine months ended September 30, 2017. This decrease is driven primarily from decreases in license and royalty revenue, offset, in part, by higher co-development and research fees.
Manufacture and supply revenue decreased approximately 1% or $262 to $29,249 in the nine months ended September 30, 2018 as compared to $29,511 in the nine months ended September 30, 2017 primarily due to a one-time $2,000 flat fee earned in the 2017 period for certain manufacturing exclusivity rights. Excluding this flat fee, manufacture and supply revenue increased 6% on higher Suboxone volume from $27,511 in the nine months ended September 30, 2017 to $29,249 in the nine months ended September 30, 2018.
License and royalty revenue decreased 24% or $5,433 to $17,387 in the nine months ended September 30, 2018 as compared to $22,820 in the nine months ended September 30, 2017. This decrease was primarily related to lower license fees related to Suboxone and APL-130277 (Apomorphine). License fees totaled $16,500 in the 2018 period compared to $22,000 of license fees recognized in the 2017 period. Suboxone related license fees were approximately even in the two periods and the decline was driven by the receipt of $5,000 in the 2017 period related to Apomorphine for which no amount was received in the comparable 2018 period. Royalties increased modestly 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 will likely fluctuate significantly from quarter-to-quarter.
Co-development and research fees increased 66% or $1,578 to $3,970 in the nine months ended September 30, 2018 as compared to $2,392 in the nine months ended September 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:
| | | Nine Months Ended September 30, | | | Change | | | | | 2018 | | | 2017 | | | $ | | |
| % | | | (In thousands, except %) | | | | | | | | | | | | | | | Manufacturing and supply | | $ | 16,201 | | | $ | 14,205 | | | $ | 1,996 | | | | 14 | % | | Research and development | | | 17,429 | | | | 15,862 | | | | 1,567 | | | | 10 | % | | Selling, general and administrative | | | 53,561 | | | | 17,513 | | | | 36,048 | | | | 206 | % | | Interest expense | | | 5,809 | | | | 5,737 | | | | 72 | | | | 1 | % | | Interest income | | | (238 | ) | | | - | | | | 238 | | | | NM
|
| | Other | | | 5,276 | | | | 309 | | | | 4,967 | | | NM | |
Manufacturing and supply costs and expenses increased 14% or $1,996 to $16,201 in the nine months ended September 30, 2018 as compared to $14,205 in the nine months ended September 30, 2017, driven primarily by an increase in volume, higher production costs and the $343 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 and share based compensation of $34, offset in part by lower scrap costs period over period.
Research and development expenses increased 10% or $1,567 to $17,429 in the nine months ended September 30, 2018 as compared to $15,862 in the nine months ended September 30, 2017 primarily due to $2,184 of compensation cost associated with the issuance of the non-voting common shares and related withholding taxes and $194 of share-based compensation. These increases were offset in part by decreased project spend driven by the timing of clinical trial activities on our proprietary products in development.
Selling, general and administrative expenses increased 206% or $36,048 to $53,561 in the nine months ended September 30, 2018 as compared to $17,513 primarily due to $24,771 of compensation cost associated with the issuance of the non-voting common shares and related withholding taxes and $1,015 of share-based compensation expense. The remaining increase of $10,262 is a primary result of investments in our commercialization, branding and marketing 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 the initial public offering and operations as a public company. Also contributing to this increase were higher costs incurred in the state anti-trust litigation and other patent related matters.
Interest expense increased 1% or $72 to $5,809 in the nine months ended September 30, 2018 as compared to $5,737 in the nine months ended September 30, 2017 primarily as a result of an increase in our indebtedness of $5,000 incurred on March 9, 2017, offset in part by lower discount and loan acquisition cost amortization associated with the extended debt principal payment dates. Our interest expense is subject to increases based on one-month LIBOR.
Interest income increased to $238 in the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 as a result of investing the net cash proceeds from our IPO in an interest-bearing account.
Other expenses per the table above increased in the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017, principally due to the change in fair value of warrants to $5,278 from $309.Consolidated Financial Statements.
Liquidity and Capital Resources
Sources of Liquidity
Since our inception in January 2004, we have incurred significant losses and as a result of our IPOexpect to incur significant operating losses and negative operating cash flow for the foreseeable future and as of SeptemberJune 30, 2018,2019, we hadhave a net shareholders’ equitystockholders’ deficit of $23,444.$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 September 30, 2018, we received net proceeds from debt and equity issuances of $189,083 as follows:
· | $50,000 from debt facilities further described below; |
· | $75,599 from pre-IPO equity financings, with most of these proceeds received in 2008 and prior years and |
· | $63,484 from our IPO and the underwriters exercising their over-allotment option |
We generate revenue from collaborative partner 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.licensees.
We had $63,982$22,165 in cash and cash equivalents as of SeptemberJune 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.
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 $57,545, after deducting underwriting discounts, commissions, and offering related transaction costs of approximately $9,955. 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 $5,939, after deducting underwriter discounts of approximately $447. The Company’s IPO produced total gross proceeds of approximately $73,885 and we received net proceeds of approximately $63,484, after deducting underwriter discounts and costs and expenses of the offering.$14,435.
Credit Agreement and GuaranteeGuaranty
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 $45,000 under the Loan Agreement and were permitted to borrow up to an additional $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 $5,000 available to us under the Loan Agreement. Proceeds under the Loan Agreement were used to repay an existing debt obligation of $37,500, 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, currentlywhich at June 30, 2019 was approximately 2%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. Thereafter, monthly principal payments inagreement and related security interests were terminated with the amount of $750 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 $4,000 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 SeptemberJune 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 for a total exercise price of $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, as amended, following consummationcertain conditions, including that we (on a consolidated basis) have at least $75,000 of our initial public offering, such requirement no longer applies.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.
28Affirmative 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 permitted under the Indenture, and perfection of 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.
Cash Flows
NineSix Months Ended SeptemberJune 30, 20182019 and 20172018
The following table provides information regarding our cash flows for the nine months ended September 30, 2018 and 2017:
| (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 | ) |
| (In thousands) | | 2018 | | | 2017 | | | Net cash (used for) provided by operating activities | | $ | (10,179 | ) | | $ | 13,233 | | | Net cash (used for) investing activities | | | (1,334 | ) | | | (1,980 | ) | | Net cash provided by financing activities | | | 58,116 | | | | 4,981 | | | Net increase in cash and cash equivalents | | $ | 46,603 | | | $ | 16,234 | |
Net Cash (Used for) Provided by Operating Activities
Net cash used for operating activities for the ninesix months ended SeptemberJune 30, 20182019 was $34,846. The use of $10,179 was due to acash can be understood as represented by three main factors: (1) our net loss of $47,432, changes$35,198, (2) decrease in working capitaloperating assets and liabilities of $461$5,822, partially offset in part by $37,714(3) non-cash operating expenses. The non-cash operating expenses of non-cash charges,$6,174 primarily derived by $28,541resulted 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 provided by operating activities for the six months ended June 30, 2018 was $1,296. The provision of cash can be understood as represented by three main factors: (1) non-cash operating expenses of $31,204, which included $27,298$27,305 related to the termination of the Company’s performance unit plans and $3,899 in the second quarter of 2018 and $1,243 of share-based compensation expense recorded in the second and third quarters of 2018, $5,278 related to change in the fair value of the Perceptive warrants and $3,895 related to other changesnon-cash charges such as depreciation, amortization, and amortization of debt issuance costs. Net cash provided by operating activities for the nine months ended September 30, 2017 of $13,233 was due to net income of $1,097,costs and changes in warrant valuation, (2) changes in working capital accounts totaling $2,486, primarily through collections of $7,534trade receivables and non-cash chargesincreases in trade payables as management sought to optimize our liquidity, offset in part by (3) our net loss of $4,602 which included primarily included depreciation, amortization and amortization of debt issuance costs.$32,394.
Net Cash (Used for) Investing Activities
Net cash used infor investing activities was $1,334$486 for the ninesix months ended SeptemberJune 30, 20182019 compared to $1,980$886 for the ninesix months ended SeptemberJune 30, 2017. The2018. This decrease in net cash used for investing activities was primarily attributable to timing of capital expenditures for propertyplant and equipment purchases.
Net Cash Provided by(Used for) Financing Activities
Net cash provided byused for financing activities was $58,116$3,102 for the ninesix months ended SeptemberJune 30, 20182019 compared to cash provided by financing activities of $4,981$7,151 for the ninesix months ended SeptemberJune 30, 2017.2018. The cash providedused in 2018 was a2019 is primarily the result of $68,714the payment of proceeds received$2,664 in withholding taxes associated with tax reimbursement payments from our initial offering of common stockthe 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 $4,695$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 $5,903$5,623 related to the payment of withholding taxes associated with the share-based compensation recorded during the second and third quarters ofquarter ended June 30, 2018. Net cash provided by financing activities was $4,981 for the nine months ended September 30, 2017, which was a result of $5,000 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 assessmentexpectation 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;
the levelscost and timing ofexpense reductions consistent with our anticipated revenues, and costs to commercializecontinuing review of our late stage CNS product candidates; andcost structure;
our ability to issue on or before March 31, 2021, and available purchasers of, additional senior secured notes in an aggregate amount up to $30,000 principal amount under the indenture for our 12.5% Senior Secured Notes due 2025, based on satisfying certain conditions including approval of our Libervant proprietary product, and approval of the first reopener by a majority of the holders of the Senior Secured Notes, (see “12.5% Senior Secured Notes” above);
potential monetization of royalty streams or other license or proprietary rights for our product Apomorphine at anticipated levels, which cannot be assured (and which are subject to conditions and requirements under the indenture for our new 12.5% Senior Secured Notes including note repurchase obligations at 112.500% of principal amount of such repurchased notes and accrued and unpaid interest thereon, at the option of the holders) (see “12.5% Senior Secured Notes” above);
continued funding of our commercialization costs for Sympazan, our first proprietary product launched in December 2018, and continued funding of our development and commercialization of CNS product Libervant, and our other proprietary product candidates;
the infrastructure and administrative costs to support being a public company.company;
29continued compliance with all covenants under our 12.5% Senior Secured Notes; and
absence of significant unforeseen cash requirements.
The sufficiency of our liquidity is directly impacted by our level of operating revenues and our ability to achieve our operating plan for revenues, regulatory approval of our late-stage proprietary products and our ability to monetize our royalty streams or other license rights such as apomorphine. We also are entitled to further potential milestones, royalty and other payments under our Indivior Supplemental Agreement, which are suspended and may only be reinstated if Indivior successfully adjudicates or settles the related patent infringement litigation. There is no assurance when or if any such payments may be due. Our operating revenues have no committedfluctuated in the past and can be expected to fluctuate in the future. We expect to incur operating losses and negative operating cash flow for the foreseeable future, and we have a significant level of debt on which we have ongoing debt repayment and debt service obligations. A substantial portion of our current and past revenues has been dependent upon our licensing, manufacturing and sales with one customer, Indivior, which is expected to continue while we commercialize our own proprietary products and which could take longer than planned to achieve anticipated sales levels.
Management will continue to monitor the Company’s cash requirements and liquidity and, if management believes operating results, including expected revenue from manufacture and supply sales and proprietary sales, expected license and milestone revenues, available proceeds from any future issuances of additional Notes under the Indenture for our Senior Secured Notes and from any monetization of royalty streams or other license rights, reductions in cash spend, other available future debt or equity financing, or other potential available sources of liquidity, are not sufficient or available for existing or projected cash requirements, management will seek to take further steps intended to improve the Company’s financial position and liquidity, such as by modifying our operating plan, seeking further to reduce costs and adjusting cash spend, and evaluating and pursuing other opportunities or alternatives to obtain additional capital. Weliquidity.
On July 15, 2019 we issued $70,000 aggregate principal amount of our 12.5% Senior Secured Notes due 2025 and related Warrants, resulting in approximately $66,951 in note proceeds, after transaction expenses. In connection with the issuance of the Senior Secured Notes, we repaid approximately $52,092 representing all amounts outstanding or due under our Perceptive debt facility. In addition, the indenture governing the senior secured notes provides opportunity to potentially issue in the future up to an aggregate of $30,000 of additional Senior Secured Notes based on our satisfaction of certain conditions and requirements under the indenture and having available purchasers of such additional Senior Secured Notes. The Indenture permits us, upon the continuing satisfaction of 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 facility not to exceed $10,000 (the “ABL Facility”). The ABL Facility may be collateralized by assets constituting only inventory, accounts receivable and the proceeds of the Company. See “12.5% Senior Secured Notes” above.
In the future we may attempt to raisepursue additional capital due to favorable market conditionsfinancing if deemed appropriate or otherif needed for liquidity requirements, or when strategic considerations even if we have sufficient funds for planned operations.opportunities might become available. Until we become profitable, if ever, we mayexpect to continue to need to raise additional capital and/or incur debt in the future to further the commercialization of Sympazan and advance the development and commercialization of our epilepsyCNS products including Libervant, and Sympazan, our ALS product, AQST-117, andof our other product candidates.candidates and to meet our other cash requirements, including debt service. Our ability to secure additional financing could be significantly impacted by numerous factors including our operating performance and prospects, timely achievement of regulatory approval of our late-stage proprietary products, our existing level of debt which is secured by substantially all of our assets, and general market conditions, and there can be no assurance that such needed capital or debt financing will be available on favorable terms or at the times or in the amounts needed. We may seek to obtain additional financingfunding in the future through the monetization of royalty streams on collaborative partner products APL-130277from our product Apomorphine, subject to our licensing agreement with Sunovion Pharmaceuticals, Inc. (and subject to the conditions and others,requirements under the indenture for our 12.5% Senior Secured Notes due 2025 including our note repurchase obligations at the option of the holders), but we cannot be assured of any such royalty streams or monetization. We may also seek to obtain additional funding through the issuance of our common stock, throughand, subject to restrictions under the indenture for the Senior Secured Notes, other public or private equity or debt financings, third-party funding, marketing and distribution arrangements, as well as other collaborations, strategic alliances and licensing arrangements, or any combination of these approaches. We may not be able to raise additional capital or financing on terms acceptable to us, or at all, and any failure to raise capital or financing as and when needed couldfor our cash requirements would likely compromise our ability to execute on our business plan and cause us to delay or curtail our operations until such funding is received. To the extent that we raise additional funds by issuance of equity securities, our stockholders may experience dilution, and debt financings, if available, may involve restrictive covenants or may otherwise constrain our financial flexibility.dilution. To the extent that we raise additional funds through collaborative or licensing arrangements, it may be necessary to relinquish some rights to our intellectual property or grant licenses on terms that are not favorable to us. In addition, payments made by potential collaborators or licensors generally will depend upon our achievement of negotiated development and regulatory milestones. Failure to achieve these milestones may impairharm our future liquidity and capitalfunding position.
If adequate funds are not available for our liquidity needs and cash requirements, we may be required to delay, reduce the scope of, or eliminate our research and development programs, or reduce our planned commercialization efforts.efforts or otherwise reduce our other spend and adjust our operating plan, and we would seek to take other steps intended to improve our liquidity. We also may be required to evaluate partnering aspectsadditional licensing opportunities, if any become available, of our proprietary product candidate programs that we currently plan to self-commercialize.self-commercialize or explore other potential liquidity opportunities or other alternatives or options, although we cannot assure that any of these actions would be available or available on reasonable terms.
WeOur costs associated with operating as a new public company have increased, and we expect to incur significant additional costs to support the obligationsobligation of a public company to various regulatory agencies, to investors and in order to comply with certain legislation and regulations, such as the Sarbanes-Oxley Act of 2002.regulations. These expenditures will include the costs of additional employees with specific skills and experiences such as SEC reporting, orhigher insurance expense, and internal controls as well as additional costs to outside service providers such as audit, tax, and legal fees.
See also, Part II. Item 1A, Risk Factors below – concerning Indivior and recent criminal proceedings in connection with it allegedly and deceptive and misleading practices related to its marketing and distribution of its Suboxone film product, dating back a number of years. We have to date not experienced any significant reduction in purchase orders from Indivior for the manufacture and supply of Suboxone film products, other than what we believe it attributable to the entry of at-risk generics.
Off-Balance Sheet Arrangements
We do not have duringDuring the periodsperiod presented, and we do not currently have, anythere were no material changes in our operating leases, our only off-balance sheet arrangements as defined in the rules and regulations of the SEC.
Item 3. | | Quantitative and Qualitative Disclosures about Market Risk |
OurPrior to July 15, 2019, our exposure to market risk due to changes in interest rates relates primarily to the increase or decrease in the amount of interest expense from fluctuations in one-month LIBOR associated with the Loan Agreement.our debt facility. For each 1% increase in one-month LIBOR in excess of the floor of 2%, our annual interest expense would increase by approximately $500,000.
Our cash and cash equivalents are maintained in FDIC protected accounts with no exposure However, our new Senior Secured Notes due 2025 issued on July 15, 2019, carry a 12.5% fixed interest rate per annum, thereby eliminating market risk due to material changes in interest rates. We do not purchase, sell or hold derivatives or other market risk sensitive instruments to hedge interest rate risk or for trading purposes. We are in the process of developing a comprehensive investment strategy for our cash and cash equivalents whose underliningunderlying premise would be to preserve principal while at the same time maximizing the income that we receivereceived from our investments without significantly increasing risk.
Our accounts receivables are concentrated predominantly with Indivior. See Quarterly Report on Form 10-Q for the period ending June 30, 2019, Part III, Item 1A, Risk Factors concerning Indivior.
With our launch of Sympazan, in December 2018, our concentration with three large national wholesalers of pharmaceutical products is not significant presently but may become so in future periods should Sympazan sales increase and should other pipeline products become approved by the FDA and become distributed through these three national, or other, wholesalers. In the event of non-performance or non-payment by either Indivior or the wholesalers, there may be a material adverse impact on our financial condition, results of operations or net cash flow.
| Item 4. | | Controls and ProceduresProcedures. |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including to our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and we necessarily were required to apply our judgment in evaluating whether the benefits of the controls and procedures that we adopt outweigh their costs.
As required by Rule 13a-15(b) of the Exchange Act, an evaluation as of SeptemberJune 30, 20182019 was conducted under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of SeptemberJune 30, 2018,2019, were effective for the purposes stated above.
Internal Control Over Financial Reporting
Due to a transition period established by SEC rules applicable to newly public companies, our management is not required to evaluate the effectiveness ofThere was no change in our internal control over financial reporting until after the filing ofthat occurred during our Annual Report on Form 10-K for the year ended December 31, 2018. As a result, this Quarterly Report on Form 10-Q does not address whether there have been any changes inmost recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitation on Effectiveness of Controls
Our management, including the Chief Executive Officer and Chief Financial Officer, believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the control system are 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, they cannot provide absolute assurance that all control issues and instances of fraud, if any, within Aquestive have been prevented or detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by unauthorized override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Accordingly, because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and maymany not be detected.
Emerging Growth Company Status
In April 2012, the JOBS Act was enacted by the federal government. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected this provision and, as a result, we will comply with new or revised accounting standards when they are required to be adopted by public companies that are emerging growth companies.
For so long as we are an emerging growth company, we will not be required to provide an auditor’s attestation report on our internal control over financial reporting in future annual reports on Form 10-K as otherwise required by Section 404(b) of the Sarbanes-Oxley Act.
PART II – OTHER INFORMATION
| Item 1. | LEGAL PROCEEDINGSLegal Proceedings |
From time to time, we have been and may again become involved in legal proceedings arising in the ordinary course of our business. Except as described below, we are not presently a party to any litigation or legal proceedings that we believe to be material and we are not aware of any pending or threatened litigation against us that we believe could have a material adverse effect on our business, operating results, financial condition or cash flows.
Patent-Related Litigation
Beginning in August 2013, we were informed of ANDA filings in the United States by Watson Laboratories, Inc. (now Actavis Laboratories, Inc., or Actavis)“Actavis”), Par Pharmaceutical, Inc. (“Par”), or Par, Alvogen Pine Brook, Inc. (“Alvogen”), or Alvogen, Teva Pharmaceuticals USA, Inc. (“Teva”), or Teva, Sandoz Inc. (“Sandoz”), or Sandoz, and Mylan Technologies Inc. or Mylan,(“Mylan”), for the approval by the FDA of generic versions of Suboxone Sublingual Film in the United States. We filed patent infringement lawsuits against all six generic companies in the U.S. District Court for the District of Delaware. Of these, cases against three of the six generic companies have been resolved.
Sandoz. By court order in August 2016, our ANDA patent litigation case against Sandoz has been dismissed without prejudice for lack of subject matter jurisdiction because Sandoz is no longer pursuing a Paragraph IV certification for its proposed generic version of Suboxone Sublingual Film, and therefore is no longer challenging the validity or infringement of our Orange Book-listed patents.
Mylan. The case against Mylan was settled and the Court signed a Consent Judgment in September 2017 disposing of the entire case.
Par. All cases against Par were resolved pursuant to a May 2018 settlement agreement between us, Indivior, and Par and certain of its affiliates.
After the commencement of the above-mentioned ANDA patent litigation against Teva, Dr. Reddy’s Laboratories (“DRL”) acquired the ANDA filings for Teva’s buprenorphine and naloxone sublingual film that are at issue in these trials.
TrialsOf these, cases against Dr. Reddy’s, Actavis and Par in the lawsuits involving the Orange Book and process patents occurred in November-December of 2015 and November of 2016. On June 3, 2016, the Court issued its Trial Opinion finding that the asserted claims of U.S. Patent No. 8,603,514, or the ’514 patent, are valid and infringed by Actavis’s and Par’s ANDA Products. On August 31, 2017, the Court upheld U.S. Patent No. 8,900,497, or the ’497 patent, as valid but not infringed by Par’s, Actavis’s or Dr. Reddy’s proposed processes for making their ANDA Products. The Court also again upheld the validitythree of the ’514 patent but held it was not infringed by Dr. Reddy’s ANDA Products,six generic companies have been resolved.
Mylan and upheldSandoz settled without a trial. Sandoz withdrew all challenges and became the validitydistributor of U.S. Patent No. 8,017,150, or the ’150 patent, but held that it was not infringed by Dr. Reddy’s ANDA Products. authorized generic.
All of these cases are consolidated on appealagainst Par were resolved pursuant to the Federal Circuit, except that the casesa May 2018 settlement agreement between us, Indivior, and us and Par and certain affiliates have been resolvedof its affiliates.
Actavis was found to infringe the ‘514 patent and cannot enter the market until the expiration of the patent in 2024, and the Federal Circuit affirmed that ruling on July 12, 2019.
DRL and Alvogen were found not to infringe under a different claim construction analysis, and the Federal Circuit affirmed that ruling on July 12, 2019. Teva has agreed to be bound by all DRL adjudications.
Subsequent to the above, all potential generic competitors without a settlement agreement.
Trialagreement were also sued for infringement of two additional new patents that contain new claims not adjudicated in the original case against DRL and Alvogen. On July 12, 2019, the Federal Circuit affirmed the decisions from the previously decided cases. The case(s) regarding the additional asserted patents have not been finally resolved. The case against Actavis, pending in the U.S. District Court for the District of Delaware, is scheduled for trial in December 2019. No trial date has been set in the cases against DRL and Alvogen, was heldwhich are pending in September 2017. The only issue raised at trial was whether Alvogen’s ANDA Products and processes infringe the ’514 and ’497 patents; Alvogen did not challengeU.S. District Court for the validityDistrict of New Jersey. On February 19, 2019, the Federal Circuit issued its mandate reversing the District of New Jersey’s preliminary injunction against DRL. Following issuance of the patents. In March 2018,mandate, the Court issued its opinion finding that Alvogen’s ANDA productsDistrict of New Jersey vacated preliminary injunctions against both DRL and processes would not infringeAlvogen. On February 19, 2019, Indivior launched the ’514 or ’497 patents. We and Indivior appealed the ruling, and the appeal is currently pending before the Federal Circuit. If any company is able to obtain FDA approval for itsauthorized generic version of Suboxone Sublingual Film, it may be able to launchwhich we manufacture exclusively for sale and marketing by Sandoz Inc., a sublicensee of Indivior. DRL, Alvogen, and Mylan all launched generic versions of Suboxone Sublingual Film, and the product priorlaunches by DRL and Alvogen are “at risk” because the products are the subject of the ongoing patent infringement litigations.
On March 22, 2019, we and Indivior brought suit against Aveva Drug Delivery Systems, Inc., Apotex Corp., and Apotex Inc. for infringement of the ’150, ’514, ’454, and ’305 patents, seeking an injunction and potential monetary damages. The case is pending in the Southern District of Florida, and the defendants filed their answers to the expirationcomplaint, including counterclaims for non-infringement and invalidity of any or all the applicableasserted patents protecting our Suboxone Film, which could have a material adverse effect on our business, prospects, results of operations and financial condition.as well as two other patents that were not asserted in the original complaint.
We are also seeking to enforce our patent rights in multiple cases against BioDelivery Sciences International, Inc., or BDSI. (“BDSI”). Two cases are currently pending but stayed in the U.S. District Court for the Eastern District of North Carolina:
The first, a declaratory judgment action brought by BDSI against Indivior and Aquestive, seeks declarations of invalidity and non-infringement of U.S. Patents Nos. 7,897,080, or the ’080 patent, 8,652,378, or the ’378 patent, and 8,475,832, or the ’832 patent. This case is stayed pending inter partes reviewfinal resolution of the ’832 patent and reexamination of the ’080 patent.above-mentioned appeals on related patents.
The second was filed by us and Indivior related to BDSI’s infringing Bunavail product, and alleges infringement of our patent, U.S. Patent No. 8,765,167, or the ’167 patent. This case was initially filed in September 2014 in the U.S. District Court for the District of New Jersey but was transferred to North Carolina.patent, and seeks an injunction and potential monetary damages. Shortly after the case was filed, BDSI filed an IPRfour IPRs challenging the asserted ’167 patent. On March 24, 2016, the Patent Trial and Appeal Board, or the PTAB, issued a final written decision finding that all claims of the ’167 patent were valid. The case was not unpatentable. This case is stayed in May 2016 pending the outcome and final determination of the proceedings concerningappeals on those decisions. Following the ’167 patent, (discussedPTAB’s February 7, 2019 decisions on remand denying institution, we and Indivior submitted a notice to the Court on February 15, 2019 notifying the Court that the stay should be lifted as a result of the PTAB’s decisions. We are awaiting further below).action from the Court.
On January 13, 2017, we also sued BDSI asserting infringement of the ’167 patent by BDSI’s Belbuca product. The case was originally filed inproduct and seeking an injunction and potential monetary damages. Following the U.S. District Court forPTAB’s February 7, 2019 decisions on remand denying institution, the District of New Jersey and was later transferredCompany submitted a notice to the U.S. District Court foron February 15, 2019 notifying the District of Delaware by agreement of the parties. On October 16, 2018, the Delaware Court issued an order transferring the casethat BDSI’s motion to stay should be denied as moot. BDSI also sent a letter to the U.S. Court District foron February 13, 2019 indicating its intent to appeal the Eastern District of North Carolina.
On November 28, 2016, afterPTAB’s decisions. The parties are awaiting further action from the PTAB issued its final written decisions finding thatCourt. BDSI appealed the ’167 patent was not unpatentable in IPR2015-00165, IPR2015-00168 and IPR2015-00169, BDSI filed a notice of appeal of thosePTAB’s remand decisions to the U.S. Court of Appeals for the Federal Circuit. The case was fully briefed,Circuit, and the Court heard oral arguments on February 9, 2018. On June 19, 2018, BDSI filed a motionMarch 20, 2019, we moved to terminate and remanddismiss the appeal which the Company opposed. On July 31, 2018, the Federal Circuit granted motion, vacating the PTAB’s decisions and remanding for further proceedings before the PTAB. The review proceedings remain pending before the PTAB.
In September 2017, Indivior brought suit against Alvogen for infringementlack of U.S. Patent No. 9,687,454, or the ’454 patent, based on the filing of an ANDA seeking approval for a generic version of Suboxone Sublingual Film, in the U.S. District Court for the District of New Jersey. In February 2018, we and Indivior amended the complaint, which added us as a plaintiff and a claim for infringement of U.S. Patent No. 9,855,221, or the ’221 patent.jurisdiction.
Indivior brought suits against Dr. Reddy’s and Teva in September 2017, and against Par and certain affiliates in October 2017, for infringement of the ’454 patent, in the U.S. District Court for the District of New Jersey. Indivior also brought suit in September 2017 against Actavis Laboratories UT, Inc. for infringement of the ’454 patent, in the U.S. District Court for the District of Utah. On March 13, 2018, the Court granted transfer of this case to the U.S. District Court for the District of Delaware.
In February 2018, we and Indivior brought suit against Actavis, Dr. Reddy’s, Teva, and Par and certain affiliates for infringement of the ’221 patent. The suit against Actavis was filed in the U.S. District Court for the District of Utah, and the other three cases were filed in the U.S. District Court for the District of New Jersey.
In April 2018, we brought suit with Indivior against Actavis, Alvogen, Dr. Reddy’s, Teva, and Par and certain affiliates for infringement of U.S. Patent No. 9,931,305, or the ’305 patent. The cases against Alvogen, Dr. Reddy’s, Teva, and Par are pending in the U.S. District Court for the District of New Jersey, and they have each been consolidated with the actions asserting infringement of the ’454 and ’221 patents. Following transfer of the case asserting the ’454 patent from Utah to Delaware, and by agreement of the parties, the cases against Actavis asserting infringement of the ’454, ’221, and ’305 patents are consolidated in a single action pending in the U.S. District Court for the District of Delaware.
All matters involving Par were resolved on May 11, 2018, when we, Indivior, and Par and certain of its affiliates entered into a settlement agreement resolving patent litigation related to SUBOXONE (buprenorphine and Naloxone) Sublingual Film. As required by law, the parties submitted the settlement agreement to the U.S. Federal Trade Commission and the U.S. Department of Justice for review.
On June 14, 2018, Dr. Reddy’s notified the U.S. District Court for the District of New Jersey that the FDA had granted final approval of its ANDAs and that it had launched generic versions of Suboxone Sublingual Film. The Company and Indivior filed a motion for a preliminary injunction and a request for a temporary restraining order, and the Court granted the request on June 15, 2018 enjoining and restraining Dr. Reddy’s from offering for sale, selling or importing its generic versions of Suboxone Sublingual Film. On July 13, 2018, the Court granted the preliminary injunction, which enjoins Dr. Reddy’s from launching a generic version of Suboxone during the pendency of the litigation and until further order from the Court. Dr. Reddy’s appealed the preliminary injunction ruling to the Federal Court. Dr. Reddy’s also requested a stay of the injunction pending appeal which the Company and Indivior opposed. Both the District Judge and the Federal Court denied Dr. Reddy’s request for a stay. The Federal Circuit heard oral argument on the appeal on October 4, 2018 but has not yet issued its opinion.
Antitrust Litigation
On September 22, 2016, forty-one states and the District of Columbia, or the States, brought suit against Indivior and us in the U.S. District Court for the Eastern District of Pennsylvania, alleging violations of federal and state antitrust statutes and state unfair trade and consumer protection laws relating to Indivior’s launch of Suboxone Sublingual Film in 2010.2010 and seeking an injunction, civil penalties, and disgorgement. After filing, the case was consolidated for pre-trial purposes with the In re Suboxone (Buprenorphine Hydrochloride and Naloxone) Antitrust Litigation, MDL No. 2445, or the Suboxone MDL, a multidistrict litigation relating to putative class actions on behalf of various private plaintiffs against Indivior relating to its launch of Suboxone Sublingual Film. While we were not named as a defendant in the original Suboxone MDL cases, the action brought by the States alleges that we participated in an antitrust conspiracy with Indivior in connection with Indivior’s launch of Suboxone Sublingual Film and engaged in related conduct in violation of federal and state antitrust law. We moved to dismiss the States’ conspiracy claims, andbut by order dated October 30, 2017, the Court denied our motion to dismiss. We filed an answer denying the States’ claims on November 20, 2017. The fact discovery period closed on July 27, 2018, but the parties agreed to conduct certain fact depositions in August 2018. The case is proceedingexpert discovery phase closed May 30, 2019, but additional reports and depositions are being conducted through August 1, 2019. Summary judgement motions and Daubert motions relating to expert discovery, which is scheduledwitnesses are due on September 26, 2019. We are not able to close May 3, 2019.
Product Litigation
On December 27, 2016, we were named asthis proceeding or provide a co-defendant in product liability suit brought by Laurence and Michelle Allen, as Co-Administratorsreasonable estimate, or range of estimates, of the Estate of John Bradley Allen,possible outcome or loss, if any, in the U.S. District Court for the Northern District of New York. This suit, which also named Indivior Inc. and Indivior PLC as defendants, asserts causes of action for negligence, strict liability, and failure to warn against the defendants in connection with the manufacture and sale of Suboxone Sublingual Film. Plaintiffs allege that John Bradley Allen’s use of Suboxone Sublingual Film was a substantial contributing cause of his mental anguish and death and seek $100 million in damages. All defendants moved to dismiss the complaint on April 10, 2017, and those motions were fully briefed on May 18, 2017. Aquestive was dismissed from the case on May 9, 2017, and the remainder of the case was closed on August 9, 2018, after the complaint was dismissed in favor of Indivior.this matter.
We rely significantlyOur risk factors have not changed materially from those described in “Part I, Item 1A. Risk Factors” of our 2018 Annual Report on information technologyForm 10-K except as set forth in the risk factor below.
A substantial portion of our revenues is currently derived from relatively few customers and licensees and any failure, inadequacy, interruptionloss or security lapsematerial reduction in revenues from one or more significant customers could adversely affect our business.
Historically, a substantial portion of that technology, including any cybersecurity incidents,our revenues in each quarter and year has been derived from relatively few customers and licensees and this trend is expected to continue while we continue to develop, seek regulatory approvals of and seek to commercialize our proprietary products and product candidates. If revenues from a key customer were to decline significantly, it could harm our ability to operatematerially adversely affect our business, effectively.financial condition and results of operations.
DespiteIn April 2019 the implementationU.S. Department of security measures, our internal computer systems and thoseJustice announced that a federal grand jury sitting in the Western District of third parties withVirginia had criminally indicted Indivior, for which we contract are vulnerableexclusively manufacture and supply Suboxone film products and license certain of our intellectual property, in connection with Indivior’s allegedly deceptive and misleading marketing and distribution practices in its distribution and sale of Suboxone film products, dating back a number of years, and seeking a monetary judgement of not less than $3 billion. Indivior has denied the claims and stated that it intends to damage from cyber-attacks, computer viruses, unauthorized access, natural disasters, terrorism, warcontest the allegations vigorously. Indivior accounted for approximately 89% of our revenues for 2018 and telecommunication and electrical failures. We have previously beenin the targetfuture will continue to account for a substantial part of a phishing attack that resulted in unauthorized access to email. While our systems have been secured and strengthened,revenues. However, there can be no assurance that we willthe claims against Indivior could not experience cyber-attacks inmaterially and adversely affect Indivior which, if this were to occur, could impact our supply and licensing relationship with Indivior and the future, suffer indirect consequencesvolume and timing of its purchases from a cyber-attack on a third party, or fail to anticipate, identify or offset such threats of potential cyber-attacks or security breaches in a timely manner. This is especially so in light of the nature of cyber-attack techniques,us, which change frequently, can be difficult to detect for extended periods of time and often are not recognized until after they succeed. System failures, accidents or security breaches could cause interruptions in our operations, and could result inhave a material disruptionadverse financial impact on our business, liquidity and operating results. On July 11, 2019, Reckitt Benckiser Group plc, the predecessor in interest of our product development and clinical activities and business operations, in addition to possibly requiring substantial expendituresIndivior, reached agreements with the U.S. Department of resources to remedy. The loss of product development or clinical trial data could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and our development programsJustice and the developmentFederal Trade Commission (FTC) to resolve their investigation into the sales and marketing of our product candidates could be delayed.
Suboxone Film by its former prescription pharmaceuticals business, now Indivior, a business that was wholly demerged from Reckitt Benckiser in 2014. Reckitt Benckiser will pay a total of up to $1.4 billion to fully resolve all federal investigations. As of the date of this Quarterly Report on Form 10Q, there have beenfiling, Indivior has provided no material changes during the three months ended September 30, 2018 to the risk factors discussed in our prospectus dated July 24, 2018, filedindication that is has settled this matter with the SEC, pursuant to Rule 424(b) under the Securities Act except as set forth above.DOJ.
| Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSUnregistered Sales of Equity Securities and Use of Proceeds |
None.
Use of Proceeds
On July 27,24, 2018, we completed the initial public offering (the “IPO”) of 4,500,000 shares ofSEC declared our common stock at an offering price to the public of $15.00. The shares were registered under the Securities ActRegistration Statement on Form S-1 (Registration Nos. 333-225924 and 333-226326), on a registration statement on Form S-1, which was declared effective by for our IPO effective. There have been no material changes in the SEC, on July 24, 2018 (the “Form S-1”). From the effective dateplanned use of the Form S-1 through September 30, 2018, we have used the proceeds from theour IPO as described in our final prospectus filed with the SEC on July 25, 2018, pursuant to Rule 424(b) of the Securities Act.
| Item 3. | DEFAULTS UPON SENIOR SECURITIESDefaults Upon Senior Securities |
None.
| Item 4. | MINE SAFETY DISCLOSURESMine Safety Disclosures |
Not applicable.
| Item 5. | OTHER INFORMATIONOther Information |
None.
Exhibits IndexThe exhibits listed below are filed or furnished as part of this report.
Exhibit
Number | | Exhibit Description | | | | | | Amended and Restated CertificateIndenture Dated as of Incorporation ofJuly 15, 2019, among Aquestive Therapeutics, Inc.Inc, as Issuer, any Guarantor that becomes party thereto and U.S. Bank National Association, as Trustee and Collateral Agent, (incorporated by reference to Exhibit 3.14.1 to the Current Report on Form 8-K filed by Aquestive Therapeutics, Inc. on July 27, 2018.)16, 2019). | | | Amended and Restated BylawsForm of Aquestive Therapeutics, Inc.Warrant (incorporated by reference to Exhibit 3.64.2 to the Registration StatementCurrent Report on Form S-1 (Filed 333-225924))8-K filed by Aquestive Therapeutics, Inc. in July 16, 2019). | | + | Aquestive Therapeutics, Inc., 2018 Equity Incentive PlanForm of Purchase Agreement (incorporated by reference to Exhibit 10.1410.1 to the Registration StatementCurrent Report on Form S-1 (File No. 333-225924))8-K filed by Aquestive Therapeutics, Inc. in July 16, 2019). | | + | Collateral Agreement dated as of July 15, 2019, among Aquestive Therapeutics, Inc. Employee Stock Purchase Plan, as Issuer, the Other Grantors for time to time party thereto, U.S. Bank National Association, as Trustee, and U.S. Bank National Association, as Collateral Agent (incorporated by reference to Exhibit 10.1510.2 to the Registration StatementCurrent Report on Form S-1 (File No. 333-225924)). | | + | Employment Agreement dated July 9, 2018,8-K filed by and between Aquestive Therapeutics, Inc., LLC and A. Mark Schobel (incorporated by reference to Exhibit 10.8 to the Registration Statement on Form S-1 (File No. 333-225924))July 16, 2019). | | + | Employment Agreement dated September 10, 2018, by and between Aquestive Therapeutics, Inc., LLC and Lori J. Braender. | | | Certification of Principal Executive Officer pursuantPursuant to Rules 13a-14(a) and 15d-14(a), as amended, under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes OxleySarbanes-Oxley Act of 2002 (filed herewith). | | | Certification of Principal Financial Officer pursuantPursuant to Rules 13a-14(a) and 15d-14(a), as amended, under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes OxleySarbanes-Oxley Act of 2002 (filed herewith). | | | Certification of Principal Executive Officer pursuantPursuant to 18 U.S.C. Section 1350, as adopted pursuantAdopted Pursuant to Section 906 of the Sarbanes OxleySarbanes-Oxley Act of 2002 (furnished herewith). | | | Certification of Principal Financial Officer pursuantPursuant to 18 U.S.C. Section 1350, as adopted pursuantAdopted Pursuant to Section 906 of the Sarbanes OxleySarbanes-Oxley Act of 2002 (furnished herewith). | 101.INS | | XBRL Instance Document (filed herewith)– the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the inline XBRL document. | 101.SCH | | XBRL Taxonomy Extension Schema (filed herewith)Document | 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase (filed herewith)Document | 101.DEF | | XBRL Taxonomy Extension Definition Linkbase (filed herewith)Document | 101.LAB | | XBRL Taxonomy Extension Label Linkbase (filed herewith)Document | 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase (filed herewith)Document |
+Indicates compensatory plan or management contract.
Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the County of Somerset, State of New Jersey.
| Aquestive Therapeutics, Inc. |
| (REGISTRANT) | | | | | Date: | August 6, 2019 | /s/ Keith J. Kendall | Dated: | November 6, 2018 | | Keith J. Kendall | | | | President and Chief Executive Officer | | | | (Principal Executive Officer) | | | | Date: | August 6, 2019 | /s/ John T. Maxwell | Dated: | November 6, 2018 | | John T. Maxwell | | | | Chief Financial Officer | | | (Principal Financial Officer) |
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