You should read this section in conjunction with our unaudited condensed interim consolidated financial statements and related notes included in Part 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, 2018 and 2017 included in our 2018 Annual Report on Form 10-K. All dollar amounts are stated in thousands.
We are a specialty pharmaceutical company focused on developing and commercializing differentiated products with our proprietary PharmFilm® technology to addresssolve patients’ therapeutic problems and to meet patients’ 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 CNScentral nervous system (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,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 FDAFood and Drug Administration (FDA) on November 1, 2018. The Company commercially launched Sympazan in December 2018.
We have also developed a proprietary pipeline of complex molecule-based products addressing market opportunities beyond CNS indications, which include:
We manufacture all of our licensed and proprietary products at our FDA- and DEA-inspected facilities and anticipate that our current manufacturing capacity is sufficient for commercial quantities of our products and product candidates currently in development.facilities. There is no guarantee that proprietary or licensed products will necessarily be manufactured by the Company. We have produced over 2 billion doses of Suboxone and other commercial non-pharmaceutical products for all customers since 2006. Our products are developed using our proprietary PharmFilm® technology and know-how.
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 licensed product and proprietary product activities, proceeds from our IPO, equity investments from our stockholders and debt proceeds from our credit facilities. We expect to require additional capital to finance executionfacilities and issuance of our business strategy.Senior Secured Notes. Our new 12.5% Senior Secured Notes due 2025 and unregistered Warrants issued on July 15, 2019, are discussed in Note 12, 12.5% Senior Secured Notes, to our Condensed Consolidated Financial Statements and in Liquidity and Capital Resources. We expect to refinanceregistered the warrants and affiliate shares as part of our current debt facility later in 2019 in order to provideUniversal Shelf Registration described above. The Shelf Registration Statement provides increased capital flexibility as we continue to execute our business plan.
Aquestive is subject to 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 majorityportion of itsour current revenues, expected incurrence of significant 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, dependencydependency 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 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 10-K.
JOBS Act
On April 5, 2012, the Jumpstart Our Business Startups Act, or the JOBS Act, was 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. As an emerging growth company, we 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 dates on which adoption of such standards is required for 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, if as an “emerging growth company” we intend to rely on such exemptions,, 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 andor (ii) provide all of the compensation disclosure that may beis 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 as to subsection (ii) either (A) no public float or (B) a public float of less than $700 million. As a “smaller reporting company,” we are subject to reduced disclosure obligations in our SEC filings, including with respect to executive compensation in our periodic reports and proxy statements and certain reduced financial disclosures in our periodic reports.
Financial Operations Overview
Revenues
Our revenues to date have been earned from our productcommercialized partnered products, licensing and royalty initiatives, development pipeline, marketed product activitiesinitiatives for third parties and sales of self-developed medicines. 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.
Manufacture and Supply Revenue
Currently, we produce two licensed pharmaceutical products: Suboxone (as well as the authorized generic film product) 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.products and the Company has no role in or ability to participate in commercialization including marketing, pricing, sales and regulatory strategy.
We expect future manufacture and supply revenue from licensed activitiesproducts to be based on volume demand for such licensed products, new collaborations for product development, and additional licensing of our intellectual property.
Co-development and Research Fees
We work with our licensees 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 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, including with our licensees, we may out-license to our licensees the rights to utilize our intellectual property related to their marketing of such 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 licensees’ sales of products that use our intellectual property that are marketed and sold in the countries where we patented technology rights.
Proprietary Product Sales
As we commercialize our proprietary CNS product candidates, beginning with Sympazan, as well as Libervant, and Exservan, subject to regulatory approval, we expect to directly market our products to consumers in the United States, resulting in an additional source of revenue which we refer to as Proprietary Product 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 collaboratorlicensee 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-payco-pay card redemptions.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 contracted 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 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 whichsuch 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, Medicaid and Medicare Part D, rebates, Medicaid 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 waswere based in part byon 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 productsproduct sales and an increase in accrued expenses.
Co-Pay Cards
Co-pay card redemptions costs represent the costs to buy downhelp offset a customer’s co-pay or cover a predetermined amount of prescription costs based on business rules.the Company’s rules of participation in such programs. 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 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 procurement, protection, prosecution and 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 licensed 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. Costs of production reflect the costs of raw materials that are purchased at market prices and production efficiency (measured by the cost of a salable unit). These 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 ourOur manufacture and supply costs and expenses tomay 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 our ALS product candidate, Exservan.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. Research and development expenses primarily consist of:
employee-related expenses;
external research and development expenses incurred under arrangements with third parties;
the cost of acquiring, developing and manufacturing clinical study materials; and
costs associated with preclinical and clinical activities and regulatory operations.
We expect our research and development expenses to increase over the next several years as we expand our efforts to identify and develop or acquire additional product candidates.candidates and technologies. We willmay 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 progressed toward the launch of Sympazan in December 2018,2018. We anticipate launching in 2020 and began initial preparations for the launch of Libervant, an additional late-stage epilepsy product currently subject to FDA approval.product. These costs are expected to increasehave increased in 2019, as we continue to support recently launched Sympazan and progress further towards Libervant’s future commercial launch.with a full year effect of Sympazan’s commercialization. Incremental marketing spending in preparation for the commercial launcheslaunch of Libervant and Exservan is expected to be incurred prior to the PDUFA datesdate for these productsthis product and will be accordingly planned once those dates arethe PDUFA date is known. As part of the commercial launch of Sympazan, we entered into contractual arrangements with a third-party logistics provider (3PL) and wholesalers for distribution of our products. We 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 commercial launch of Sympazan, we expectour sales and marketing expenses have increased and are expected to continue to increase during 2019in subsequent periods as we continue to support our epilepsy franchise. We expect to be able to significantly leverage these now existing relationships for the future launches,launch, subject to FDA approval, of Libervant and Exservan. In addition, ourLibervant. Our general and administrative costs increased as a result of becoming a public company, including costs related to additional personnel and accounting, audit, legal, regulatory, tax-related services, and other public company costs. We continue to incur significant costs in seeking to protect our intellectual property rights, including significant litigation costs in connection with seeking to enforce our rights concerning third parties’ at-risk launch of generic products. In addition, in order to better align our selling, general and administrative expenses with expected revenue, during the second quarter we reviewed and began initiatives to reduce certain expenses in non-core functions, and we will continue to review and assess our selling, general and administrative expenses relative to planned revenues going forward.
Interest Expense
Interest expense consists of interest costs related to our debt facility, as well as amortization of loan costs and debt discounts.discount. Our interest iscost, which under our Perceptive credit facility was subject to changes in one-month LIBOR, and represents a monthly cash payment obligation. This debt facility isOur 12.5% Senior Secured Notes due 2025 issued on July 15, 2019 are discussed in more depthNote 12, 12.5% Senior Secured Notes, to our Consolidated Financial Statements and in Liquidity and Capital Resources. Interest expense has increased based on additional borrowings under such new Notes.
Interest Income
Interest income consists of earnings derived from an interest-bearing account. We expect to continue generating interest income in 2019 from our interest-bearing cash accounts, albeit on a declining cash balance that is expected to be applied to operating costs as needed.
Change in Fair Value of Perceptive Warrant
Changes in the fair value of Perceptive warrants resulted from non-cash periodic revaluations of the warrants issued to Perceptive Credit Opportunities Fund in connection with the 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.
Results of Operations
Comparison of the Three Months Ended March 31,September 30, 2019 and 2018
We recorded revenue of $12,643$12,418 and $23,411$13,267 in the three months ended March 31,September 30, 2019 and 2018, respectively, generating a net loss of $14,726$18,412 and $15,038 for the three months ended March 31,September 30, 2019 and net income of $4,099 for the three months ended March 31, 2018.2018, respectively.
Revenues:
| | Three Months Ended March 31, | | | Change | | |
| | 2019 | | | 2018 | | | $ | | |
| % | | | Three Months Ended September 30, | | | Change | |
(In thousands, except %) | | | | | | | | | | | | | | | 2019 | | | 2018 | | | $ | | | % | |
Manufacture and supply revenue | | $ | 6,669 | | | $ | 11,560 | | | $ | (4,891 | ) | | | (42 | %) | | $ | 9,155 | | | $ | 9,005 | | | $ | 150 | | | 2 | % |
License and royalty revenue | | | 4,622 | | | | 9,500 | | | | (4,878 | ) | | | (51 | %) | | 1,356 | | | 3,355 | | | (1,999 | ) | | (60 | %) |
Co-development and research fees | | | 770 | | | | 2,351 | | | | (1,581 | ) | | | (67 | %) | | 1,073 | | | 907 | | | 166 | | | 18 | % |
Proprietary product sales, net | | | 582 | | | | - | | | | 582 | | | NM | | | | 834 | | | | - | | | | 834 | | | 100 | % |
Revenues | | $
| 12,643 | | | $
| 23,411 | | | $
| (10,768 | ) | | | (46 | %) | |
Total revenues | | | $ | 12,418 | | | $ | 13,267 | | | $ | (849 | ) | | (6 | %) |
For the three months ended March 31,September 30, 2019, total revenues decreased 46%6% or $10,768$849 to $12,643$12,418 compared to revenues of $23,411$13,267 for the same period in 2018. The change is primarily attributable to differences in license and royalty revenue that by nature are variable as to timing and magnitude. Additionally, under the Indivior Supplemental Agreement license fees are currently suspended following the “at risk” launches of several generic buprenorphine/naloxone products into the Suboxone market. These fees are recoverable in the future under certain conditions. These are offset in part by increases in manufacture and supply revenue, co-development and research fees and proprietary product sales revenue from Sympazan, launched in December 2018.
Manufacture and supply revenue increased approximately 2% or $150 to $9,155 for the three months ended September 30, 2019 compared to $9,005 from the prior year period. This increase is attributable to a shift to a higher - priced mix of Suboxone and authorized generic products offset by modestly lower volumes year - over - year. As of the early part of fourth quarter 2019, Suboxone and its authorized generic continued to retain approximately 75% of the market share. However, as discussed above, Indivior has announced its intention to suspend marketing of the authorized generic. If suspended, our manufacturing and supply revenue would be affected in future periods possibly as early as 2020. The branded Suboxone products have maintained more than a majority of our production for Indivior because of the branded products performance in the market.
License and royalty revenue decreased 60% or $1,999 to $1,356 for the three months ended September 30, 2019 compared to revenues of $3,355 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 $1,000 for the three months ended September 30, 2019 compared to $3,000 of license fees recognized during the prior year period. Suboxone related license fees were $3,000 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.” There can be no guarantee that any such payments will be made in the future. Included in the third quarter 2019 license and royalty revenue was $1,000 from our 10% share of milestone payments paid to KemPharm during September 2019, under its licensing of KP-415 and KP-484. There can be no assurance that any such payments will be made in the future. Royalty revenues earned on Suboxone and Zuplenz were flat year-over-year on similar product sales volumes flowing through our licensees’ sales and distribution channels. License fees are generally driven by transfer of rights, patent performance contingencies, specific FDA or other regulatory achievements, sales levels achievements or other contingencies and milestones, and will likely fluctuate significantly from quarter-to-quarter.
Co-development and research fees increased 18% or $166 to $1,073 for the three months ended September 30, 2019 compared to $907 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 from one reporting period to the next.
Product sales, net increased $834 or 100% for the three months ended September 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:
| | Three Months Ended September 30, | | | Change | |
(In thousands, except %) | | 2019 | | | 2018 | | | $ | | | % | |
Manufacture and supply | | $ | 4,643 | | | $ | 5,592 | | | $ | (949 | ) | | | (17 | %) |
Research and development | | | 5,063 | | | | 4,534 | | | | 529 | | | | 12 | % |
Selling, general and administrative | | | 13,714 | | | | 12,346 | | | | 1,368 | | | | 11 | % |
Interest expense | | | 2,652 | | | | 1,933 | | | | 719 | | | | 37 | % |
Interest income | | | (138 | ) | | | (216 | ) | | | (78 | ) | | | 36 | % |
Loss on extinguishment of debt | | | 4,896 | | | | - | | | | 4,896 | | | NM | |
Other | | | - | | | | 4,116 | | | | (4,116 | ) | | NM | |
Manufacture and supply costs and expenses decreased 17% or $949 to $4,643 for the three months ended September 30, 2019 compared to $5,592 for the same period in 2018. The decrease was driven by lower volumes of Suboxone in the 2019 period compared to 2018 as well as the non-cash reversal of an accrual for manufacturing related costs that no longer represented an obligation of the Company, offset in part by higher costs of co-development revenue activity in the 2019 period.
Research and development expenses increased 12% or $529 to $5,063 for the three months ended September 30, 2019 compared to $4,534 in the prior year period. This increase resulted from an increase of clinical trials expenses of $646 due to the timing of primarily Libervant as compared to prior periods. Clinical trial and other third-party product development expenses may be expected to fluctuate based on the schedule of clinical and development activities that are conducted during any reporting period.
Selling, general and administrative expenses increased 11% or $1,368 to $13,714 for the three months ended September 30, 2019 as compared to $12,346 for the prior year period. The increase in expense was primarily driven by investments in our commercialization, branding and marketing capabilities for Sympazan. 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. In addition, we recognized higher legal fees in connection with the ongoing state antitrust litigation and other patent related matters, and higher insurance premiums.
Interest expense increased 37% or $719 to $2,652 for the three months ended September 30, 2019 compared to $1,933 for the same period in 2018, primarily as a result of a higher amount of debt outstanding starting in the third quarter of 2019 as compared to 2018. Prior to July 15, 2019, our interest expense was subject to fluctuations based on one-month LIBOR. Our new Senior Secured Notes due 2025 issued on July 15, 2019 carry a 12.5% fixed interest rate per annum, with an increased principal amount outstanding thereunder.
Interest income decreased 36% or $78 for the three months ended September 30, 2019, compared to the prior year period. This decrease is a result of a lower cash balance being invested in an interest-bearing account.
Loss on the extinguishment of debt increased by $4,896 for the three months ended September 30, 2019 compared to the same period in 2018. This increase is the result of the expenses associated with early extinguishment of our loans payable with Perceptive. The amount consists of $2,944 related to the prepayment premium associated with early payment of our outstanding obligations to Perceptive along with unamortized debt discount and unamortized loan acquisition costs of $1,606 and $346, respectively.
Other represents the change in the fair value of Perceptive warrants which decreased by $4,117 for the three months ended September 30, 2019 compared to the same period in 2018. For periods prior to our IPO, which was effective July 24, 2018, we remeasured the fair value of outstanding warrants each quarter in accordance with the AICPA Practice Aid, Valuation of Privately-Held Company Equity Securities issued as compensation. For information concerning the warrants issued in connection with our 12.5% Senior Secured Notes due 2025, issued on July 18, 2019, see Note 12, 12.5% Senior Secured Notes, to our Consolidated Financial Statements.
Comparison of the Nine Months Ended September 30, 2019 and 2018
We recorded revenue of $36,190 and $50,606 in the nine months ended September 30, 2019 and 2018, respectively, generating a net loss of $53,913 and $47,432 for the nine months ended September 30, 2019 and 2018, respectively.
Revenues:
| | Nine Months Ended September 30, | | | Change | |
(In thousands, except %) | | 2019 | | | 2018 | | | $ | | | % | |
Manufacture and supply revenue | | $ | 24,739 | | | $ | 29,249 | | | $ | (4,510 | ) | | | (15 | %) |
License and royalty revenue | | | 6,402 | | | | 17,387 | | | | (10,985 | ) | | | (63 | %) |
Co-development and research fees | | | 2,862 | | | | 3,970 | | | | (1,108 | ) | | | (28 | %) |
Proprietary product sales, net | | | 2,187 | | | | - | | | | 2,187 | | | | 100 | % |
Total revenues | | $ | 36,190 | | | $ | 50,606 | | | $ | (14,416 | ) | | | (28 | %) |
For the nine months ended September 30, 2019, total revenues decreased 28% or $14,416 to $36,190 compared to revenues of $50,606 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.revenue for Sympazan, launched in December 2018.
Manufacture and supply revenue decreased approximately 42%15% or $4,891$4,510 to $6,669$24,739 for the threenine months ended March 31,September 30, 2019 compared to $11,560$29,249 from the prior year period. This decrease is attributable to lower Suboxone and authorized generic production volume due primarily toin the timing of purchase orders placed by Indivior for Suboxone. While our first half volume of orders is comparable on a year-over-year basis2019. As of the early part of fourth quarter 2019, Suboxone and higher thanits authorized generic continued to retain approximately 75% of the last six monthsmarket share. However, as discussed above, Indivior has announced its intention to suspend marketing of 2018, the timing of production of these purchase ordersauthorized generic, and therefore when they are recognizedmanufacturing and supply revenue may be affected by this suspension in future periods, likely beginning in 2020. The branded Suboxone products have maintained more than a majority of our production for revenue shifted followingIndivior because of the US court of appeals lifting a preliminary injunction allowing generic competitors intobranded products performance in the US Suboxone market “at risk” while patent infringement cases against those generic manufactures are tried to conclusion.market.
License and royalty revenue decreased 51%63% or $4,878$10,985 to $4,622$6,402 for the threenine months ended March 31,September 30, 2019 compared to revenues of $9,500$17,387 from the prior year period. This change was primarily related to the timing of license and new patent fees on our licensed product Suboxone. License fees totaled $4,389$4,250 for the threenine months ended March 31,September 30, 2019 compared to $9,250$16,500 of license fees recognized during the prior year comparative period. Suboxone related license fees were $5,000$12,250 lower compared to 2018, as a result of two factors;factors: the uneven timing and magnitude of the various payments owed to the companyCompany by Indivior and the fact that allcertain license fees due from Indivior have been suspended pending the outcome of litigation related to infringement claims against the generic products launched “at risk.” If these matters are not settled betweenIncluded in the parties priorthird quarter 2019 license and royalty revenue was $1,000 from our 10% share of milestone payments paid to a decision by the courts involved,KemPharm during September 2019, under its licensing of KP-415 and Indivior and the company prevail this could result in significant damages paid by the “at risk” generic manufactures sometimeKP-484. There can be no assurance that any such payments will be made in the future. 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 67%28% or $1,581$1,108 to $770$2,862 for the threenine months ended March 31,September 30, 2019 compared to $2,351$3,970 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, andboth of which are normally expected to fluctuate significantly one reporting period to the next.
Product sales, net increased $582$2,187 or 100% for the threenine months ended March 31,September 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:
| | Three Months Ended March 31, | | | Change | | |
| | 2019 | | | 2018 | | | $ | | |
| % | | | Nine Months Ended September 30, | | | Change | |
(In thousands, except %) | | | | | | | | | | | | | | | 2019 | | | 2018 | | | $ | | | % | |
Manufacturing and supply | | $ | 3,506 | | | $ | 5,636 | | | $ | (2,130 | ) | | | (38 | %) | |
Manufacture and supply | | | $ | 13,569 | | | $ | 16,201 | | | $ | (2,632 | ) | | (16 | )% |
Research and development | | | 4,303 | | | | 4,901 | | | | (598 | ) | | | (12 | %) | | 17,517 | | | 17,429 | | | 88 | | | 0 | % |
Selling, general and administrative | | | 17,908 | | | | 7,569 | | | | 10,339 | | | | 137 | % | | 47,868 | | | 53,559 | | | (5,691 | ) | | (11 | )% |
Interest expense | | | 1,926 | | | | 1,927 | | | | (1 | ) | | | 0 | % | | 6,515 | | | 5,809 | | | 706 | | | 12 | % |
Interest income | | | (274 | ) | | | (24 | ) | | | 250 | | | NM | | | (565 | ) | | (238 | ) | | 327 | | | NM | |
Change in fair value of warrants | | | -- | | | | (697 | ) | | | 697 | | | NM | | |
Loss on extinguishment of debt | | | 4,896 | | | - | | | 4,896 | | | NM | |
Other | | | - | | | 5,278 | | | (5,278 | ) | | NM | |
Manufacture and supply costs and expenses decreased 38%16% or $2,130$2,632 to $3,506 $13,569 for the threenine months ended March 31,September 30, 2019 compared to $5,636$16,201 for the same period in 2018. ThisThe decrease wasprimarily driven by lower production costs due to the lower volumevolumes of Suboxone production associated withand authorized generic in the timing2019 period compared to 2018 as well as the non-cash reversal of purchase ordersan accrual for manufacturing related costs that no longer represented an obligation of the Company, offset in part by Indivior forhigher costs of co-development revenue activity in the three months2019 period. Further, there was a $201 decrease in share-based compensation expenses during the nine-month period ended March 31, 2019.September 30, 2019 compared to same period the nine-month period ended September 30, 2018.
Research and development expenses decreased 12% or $598 to $4,303were flat for the threenine months ended March 31,September 30, 2019 compared to $4,901 in the prior year period. There was an increase in clinical trials expense in the 2019 period driven by Libervant and AQST-108 development efforts. The change was primarily attributable toincreased clinical costs were offset by a decrease of share-based compensation expense of $1,842 in clinical2019 as compared to 2018. Clinical trial and other third-party direct product development expenses of $1,332 duemay be expected to timingfluctuate based on the schedule of clinical trial activities, offset by an increase of $209 related to share-based compensation allocable to research and development organizational growth, and the addition of new functional capabilities since March 31, 2018.activities that are conducted during any reporting period.
Selling, general and administrative expenses increased 137%decreased 11% or $10,339$5,691 to $17,908$47,868 for the threenine months ended March 31,September 30, 2019 as compared to $7,569$53,559 for the prior year period. This increasedecrease is primarily due to $4,057$21,297 in lower stock-based compensation expense in the 2019 period compared to 2018 offset in part by $8,093 of higher investments in our commercialization, branding and marketing capabilities for Sympazan and in preparation for the expected launches of Libervant and Exservan.Sympazan. 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. WeIn addition, in 2019 compared to 2018, we incurred $1,318$1,900 of increased legal fees in connection with the ongoing state anti-trustantitrust litigation and other patent related matters, and $1,268 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, as well as higher factory unabsorbed factory overhead as a result of lower production of Suboxone and authorized generic period over period also contributed to the overall increase in these expenses.and higher insurance premiums.
Interest expense remained flatincreased 12% or $706 to $6,515 for the threenine months ended March 31,September 30, 2019 compared to the same period in 2018. Our2018, primarily from higher debt balances starting in the third quarter 2019. Prior to July 15, 2019, our interest expense iswas subject to fluctuations based on one-month LIBOR. Our new Senior Secured Notes due 2025 issued on July 15, 2019 carry a 12.5% fixed interest rate per annum, with an increased principal amount outstanding thereunder.
Interest income increased $250 to $274$327 for the threenine months ended March 31,September 30, 2019 compared to $24 of interest income for the same period in 2018. This increase is2018, as a result of investing the net cash proceeds from our IPO in an interest-bearing account.IPO.
ChangeLoss on the extinguishment of debt increased by $4,896 for the three months ended September 30, 2019 compared to the same period in 2018. This increase is the result of the expenses associated with early extinguishment of our Loans Payable with Perceptive. The amount consists of $2,944 related to the prepayment premium associated with early payment of our outstanding obligations to Perceptive along with unamortized debt discount and unamortized loan acquisition costs of $1,606 and $346, respectively.
Other represents the change in the fair value of Perceptive warrants which decreased by $697$5,278 for the threenine months ended March 31,September 30, 2019 compared to the same period in 2018. For periods prior to our IPO, which was effective July 24, 2018, we remeasured the fair value of outstanding warrants each quarter in accordance with the AICPA Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation. For information concerning the warrants issued as compensation. The Company had no outstanding warrants during the three months ended March 31, 2019.in connection with our 12.5% Senior Secured Notes due 2025, issued on July 18, 2019, see Note 12, 12.5% Senior Secured Notes, to our Consolidated Financial Statements.
Liquidity and Capital Resources
Sources of Liquidity
Since our inception in January 2004, we have incurred significant losses and expect to incur significant operating losses and negative operating cash flow for the foreseeable future and as of March 31,September 30, 2019, we have a net stockholders’ deficit of $6,056.$34,459. We have funded our operations primarily with equity and debt financings and manufacture and supply revenue as well as and milestone and royalty payments from our licensees.
We had $39,934$20,914 in cash and cash equivalents as of September 30, 2019 and working capital, including cash and cash equivalents, of $18,007.
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 net proceeds from the Notes was $66,082, 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 and Guaranty (described below). We are using the remaining net cash proceeds of approximately $13,990 for the continued commercialization and advancement of our proprietary products and pipeline candidates, and other general corporate purposes.
The additional Notes can be issued if we satisfy certain conditions and achieves certain milestones related to the filing and approval of our epilepsy product Libervant and there are available purchasers for the additional Notes. Specifically, on or prior to March 31, 2021, we have the option to issue an additional $10,000 aggregate principal amount of the Notes if we filed a new drug application for our candidate Libervant with the FDA, provided we have obtained the written consent of the holder of a majority in aggregate principal amount of outstanding Notes, in its discretion, which cannot be assured (the “First additional Notes”), up to an additional $30,000 (less the amount of any first additional Notes issued by us) if the Company has obtained approval from the FDA of our product candidate Libervant. There can be no assurance that any such additional financing will be consummated.
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. WeOn each payment date commencing on September 30, 2021, we will also pay an installment of principal of the Notes pursuant to a fixed amortization schedule. The stated maturity date of the Notes is June 30, 2025.
Collateral for the loan consists of a priority lien on substantially all property and assets, including intellectual property, of the Company.
Under the agreement, we have no committed sourcesthe right to monetize our royalty and milestone interests in Sunovion’s Apomorphine product APL-130277 which would not be expected prior to FDA approval of capitalthe product. Upon any such monetization we must offer to purchase each holder’s Notes on a pro rata basis at a repurchase price in cash equal to 112.5% of the principal amount of such Notes, plus accrued and unpaid interest, if any, thereon to the repurchase date, and such offer will be available to be exercised up to the date of approval 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. See Note 12, 12.5% Senior Secured Notes, to our Consolidated Financial Statements, subject to the above - described cap.
The Indenture permits us, upon the continuing satisfaction of certain conditions, including that the Company (on a consolidated basis) has at least $75,000 of net revenues for the most recently completed twelve calendar month period, to enter into an asset-based borrowing capabilityfacility (“ABL Facility”) not to exceed $10,000. The ABL Facility may be collateralized by assets constituting only inventory, accounts receivable and the proceeds thereof of the Company. The Indenture carries customary covenants and restrictions associated with Notes of this nature.
Affirmative and negative covenants and restrictions 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 distributions, repurchases of shares, asset transfers or dispositions, creation or occurrence of additional liens, entering into licensing or monetization arrangements, other than as permitted under the debt facilityIndenture; and perfection of security interests.
The Indenture also restricts the incurrence of additional indebtedness except only such indebtedness as is fully drawn. However,expressly permitted under the terms of the Indenture (which includes the ABL Facility) on the terms and conditions set forth in the Indenture and such indebtedness as may be permitted under limitations set forth in the Indenture. The Indenture also restricts the issuance of any “Disqualified Stock”, including, generally, mandatorily redeemable securities or securities redeemable at the option of the holder or securities convertible or exchangeable at the option of the holder for indebtedness of the Company or for other Disqualified Stock.
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. As of September 30, 2019, the Company was compliant with all financial and other covenants under the 12.5% Senior Secured Notes Indenture.
Under the Indenture, we expectissued holders of the Notes unregistered Warrants to refinancepurchase up to an aggregate of 2,000,000 shares of common stock, $.001 par value per share of the Company at a price of $4.25 per Warrant. The Company registered the Warrants and affiliate shares as part of our senior secured debt facility during 2019.Universal Shelf Registration described above.
Credit Agreement and Guaranty
On August 16, 2016, we entered into a Credit Agreement and Guarantee with Perceptive Credit Opportunities Fund, LP, which we amended on May 21, 2018, or, as so amended, the Loan Agreement. At closing, we borrowed $45,000 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 IPO, the maturity date of the Loan Agreement was extended to December 16, 2020. The loan bearsbore interest, payable monthly, at one-month LIBOR, currentlywhich at June 30, 2019 was approximately 2.75%, plus 9.75%, subject to a minimum rate of 11.75%. The loan is interest-only through April 2019, as amended.
Additionally, pursuant to the Loan Agreement, commencing on May 31, 2019, seven monthly principal payments are due in the amount of $550. Thereafter, monthly principal payments in 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 of the Loan Agreement include financial covenants, change of control triggers, and limitations 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. Further, the Loan Agreement originally contained a requirement that we make a mandatory prepayment in the amount of 25% of the net cash proceeds to us upon consummation of our IPO; however, as amended, in connection with the consummation of our IPO, such requirement did not apply.
As of March 31, 2019, we were compliant with all financial and other covenants under the Loan Agreement.
Upon the closing of our IPO, Perceptive received 863,400 shares of common stock issuable pursuant to the automatic exercise of warrants for a total exercise price of $116. The loan was interest-only through April 2019, as amended. The final payments under this agreement were due December 15, 2020, and repayment began on May 31, 2019. However, the agreement and related security interests were terminated with the payoff that occurred on July 15, 2019.
Cash Flows
ThreeNine Months Ended March 31,September 30, 2019 and 2018
(In thousands) | | 2019 | | | 2018 | |
Net cash (used for) provided by operating activities | | $ | (17,680 | ) | | $ | 785 | |
Net cash (used for) investing activities | | | (376 | ) | | | (259 | ) |
Net cash (used for) financing activities | | | (2,609 | ) | | | (1,417 | ) |
Net decrease in cash and cash equivalents | | $ | (20,665 | ) | | $ | (891 | ) |
(In thousands) | | 2019 | | | 2018 | |
Net cash used for operating activities | | $ | (49,635 | ) | | $ | (10,179 | ) |
Net cash used for investing activities | | | (577 | ) | | | (1,334 | ) |
Net cash provided by financing activities | | | 10,527 | | | | 58,116 | |
Net (decrease) increase in cash and cash equivalents | | $ | (39,685 | ) | | $ | 46,603 | |
Net Cash (Used for) Provided byUsed for Operating Activities
Net cash used for operating activities for the threenine months ended March 31,September 30, 2019 was $17,680.$49,635. The use of cash can be understood as represented by three majormain factors: 1)(1) our net loss of $14,726, 2)$53,610, (2) decrease in operating assets and liabilities of $6,128$9,822, partially offset by 3)(3) non-cash operating expenses. The non-cash operating expenses of $3,174$13,797 primarily resulted from $1,520$5,199 of share-based compensation expense and the $4,896 loss on the extinguishment of debt recorded in the first quarter ofnine months ended September 30, 2019. Other significant components included non-cash charges of $1,654$3,702 related to non-cash charges such as depreciation, amortization and amortization of debt issuance costs.
Net cash provided byused for operating activities for the threenine months ended March 31,September 30, 2018 was $785 and was attributed to $4,099$10,179. The provision of cash can be understood as represented by three main factors: (1) our net incomeloss of $47,432, (2) decrease in net operating liabilities of $461, partially offset by (3) non-cash operating expenses. The non-cash operating expenses of $37,314 primarily resulted from $28,541 of share-based compensation expense recorded in the nine months ended September 30, 2018. Other significant components included non-cash charges of $9,173 related to 2018 earnings of $771, which included depreciation, and amortization, of long-lived assets,changes in warrant valuation and amortization of debt issuance costs and changes in the fair value of the Perceptive warrants. Further offsets to the net income were provided by changes in working capital accounts totaling $4,085, primarily through collections of trade receivables and increases in trade payables as management sought to optimize our liquidity.costs.
Net Cash (Used for) Investing Activities
Net cash used for investing activities was $376$577 for the threenine months ended March 31,September 30, 2019 compared to $259$1,334 for the threenine months ended March 31,September 30, 2018. This decrease in net cash used for investing activities was primarily attributable to timing of capital expenditures for plant and equipment purchases.
Net Cash (Used for)Provided by Financing Activities
Net cash used forprovided by financing activities was $2,609$10,527 for the threenine months ended March 31,September 30, 2019 compared to $1,417$58,116 for the threenine months ended March 31,September 30, 2018. The net cash usedprovided in 2019 is aprimarily the result of the proceeds from the issuance of our 12.5% Senior Secured Notes of $70,000 and proceeds derived from common stock purchased by eligible employees through the Company’s employee stock purchase plan of $112 offset in part, by the repayment of $50,000 associated with our Perceptive Credit Agreement and Guaranty and the premium payment associated with the early retirement of that debt of $2,944 and loan acquisition cost payments associated with our 12.5% Senior Secured Notes of $3,918. Additionally, in 2019 we used $2,723 for withholding taxes associated with tax reimbursement payments from the share-based compensation recorded during 2018. Net cash used forprovided by financing activities in the prior year period was primarily athe result of $68,714 proceeds received from our initial public offering offset in part by $4,695 in transaction costs incurredpaid as part of our initial public offering and $5,903 related to our IPO.the reimbursement of withholding taxes associated with the share-based compensation recorded during the second and third quarters of 2018.
Funding Requirements
We believeexpect that our existing cash including the net proceeds from our initial public offering,and cash equivalents combined with our expectedanticipated revenue from our licensed product activities, including expected milestone payments, other co-development payments and Sympazanroyalty payments, manufacturing and supply revenues at anticipated levels, sales of our proprietary product at anticipated levels, cash on hand, the net proceeds from the issuance of our 12.5% Senior Secured Notes due 2025 issued on July 15, 2019 and, assuming satisfaction of all conditions and requirements for further issuances and available purchasers thereof, additional proceeds from future issuances of up to $30,000 of additional Senior Secured Notes, and potential future monetization of certain royalty streams or other license rights for Apomorphine (subject to all conditions and requirements under the Senior Secured Notes Indenture) and if needed and available to it, which cannot be assured, access to the capital markets under our shelf-registration statement filed with the SEC and declared effective September 17, 2019, 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 and other expected costs and expenses, including those related to research and development investments in our complex molecule product pipeline candidates, capital expenditures and investments in new product candidates in epilepsy and other CNS diseases. We have based this expectation 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 expectation include:
continued revenue from our proprietary and licensed products at planned levels;
our ability to issue and assuming 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 NDA filing and subsequent regulatory approval of our Libervant proprietary product, and approval of the first reopener in its discretion (for up to $10 million) by the holder of a majority in principal amount of the Senior Secured Notes, which approval is subject to review by such holder and cannot be assured (see “12.5% Senior Secured Notes” above);
our ability to monetize royalty streams or other license or proprietary rights for our product Apomorphine at anticipated levels, which cannot be assured (and which is subject to conditions and requirements under the Indenture for our 12.5% Senior Secured Notes including note repurchase obligations at 112.5% 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)) and which monetization would not be expected prior to FDA approval;
access to the capital markets if and at the time needed for any necessary future funding;
continuing to review of our cost structure and cost and expense reductions consistent with our anticipated revenues;
continued funding of our commercialization costs for Sympazan, our first proprietary product launched in December 2018,
and continued funding of our development and pre-launch commercialization of CNS productsproduct Libervant Exservan and our other proprietary product candidates;
continued revenue from our proprietary and licensed products, and;
the infrastructure and administrative costs to support being a public company.company;
Whilecontinued compliance with all covenants under our 12.5% Senior Secured Notes; and
absence of significant unforeseen cash requirements.
We continue to be in the process of transitioning to a company newly commercializing its self-developed products, with our commercialization activities first beginning with regulatory approval of our first proprietary product Sympazan in December 2018. For our commercialization efforts to be successful we must continue to train, deploy and further develop an effective sales and marketing organization and infrastructure. To become and remain profitable we must continue to develop, obtain timely regulatory approval of, and successfully commercialize or otherwise out-license or monetize, those of our proprietary products and product candidates that we believe will have the most market potential and commercial success. We may encounter unforeseen expenses, difficulties and delays and the success of our commercialization efforts may take longer to achieve than planned. As a result, we are unable to determine or forecast with certainty when or if we will achieve or sustain profitability.
We expect our expenses to continue to significantly increase as we continue to devote substantial financial resources to our ongoing product development, research and development activities, pre-clinical activities, clinical trials, regulatory approval activities, and commercialization activities. We also expect to continue to incur significant losses and negative cash flows and we therefore are dependent upon external financing and funding to achieve out operating plan.
Our future funding requirements, both short-term and long-term, will depend on many factors, including:
Achieving regulatory approval in the time period we have anticipated of our product candidate Libervant. We hope to complete the filing of our NDA for Libervant with the FDA in the fourth quarter 2019 and thereafter we hope to achieve timely regulatory approval of Libervant during 2020, which cannot be assured, which proprietary product is expected over time to provide a significant revenue source for us through our commercialization efforts. The completion of the NDA filing for, and regulatory approval of, Libervant are also among the conditions to our opportunity to access additional financing of up to $30 million under our Senior Secured Notes Indenture (see “12.5% Senior Secured Notes” above);
Sunovion Pharmaceuticals, Inc.’s achieving in the time period we have anticipated regulatory approval of Apomorphine, which we out-licensed to Sunovion and which, subject to regulatory approval, which cannot be assured, is expected to provide the opportunity for a significant revenue source for us;
Our ability to achieve successful commercialization of our proprietary product Sympazan and, subject to regulatory approval, our product Libervant, and the cost and timing of our future commercialization activities for Libervant;
Continued revenues at planned levels from our manufacture and sale of branded Suboxone to Indivior and continued market acceptance of such branded product, without the authorized generic version of Suboxone;
Cost, timing and outcome and success of our development of and clinical trials for our complex molecule-based product AQST-108 and our other product candidates;
Continuing significant costs in seeking to protect our intellectual property rights, including significant litigation costs in connection with seeking to enforce our rights concerning third parties’ at-risk launch of generic products;
Patient and doctor acceptance of and our ability to obtain adequate reimbursement for our products which we commercialize;
The effect of competing products on our commercialized and licensed products, including Suboxone; and
All other costs of executing our business plan and absence of unforeseen cash requirements.
The sufficiency of our short-term and longer-term 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 in the time period planned 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, and there is no assurance when or if any such payments may be due. Our operating revenues have fluctuated in the past and can be expected to fluctuate in the future. We expect to incur significant operating losses and negative operating cash flows 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 it could take longer than planned to achieve anticipated sales levels of our proprietary products.
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, any 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 equity financing, including if needed and available to it, which cannot be assured, access to the capital markets under our shelf registration statement filed with the SEC and effective September 17, 2019 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, adjusting the timing and scope of our development activities, seeking further to reduce costs and adjusting cash spend, and evaluating and pursuing other opportunities or alternatives to obtain additional liquidity.
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 $66,082 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 also 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.
On September 11, 2019, the Company filed with the SEC a Registration Statement on Form S-3, which was effective on September 17, 2019 (File No. 333-233716) (“the Registration Statement”). Under the Registration Statement the Company may sell up to $150 million of our securities, including without limitation, common stock, preferred stock, warrants, and debt securities, which in all cases would be subject to the terms of the Indenture. Also, in connection with the Registration Statement the Company entered into an equity distribution agreement with Piper Jaffray & Co., as sales agent, providing the opportunity for an at-the-market offering of up to approximately $17,055 of our common stock from time to time. No securities have been offered or sold by the Company under the Registration Statement as of the date hereof. In the event that we are or believe we may be unable to access in the time period we expect, or at all, additional indebtedness under the first reopener under our Senior Secured Notes Indenture upon the filing of the Libervant NDA or under the second reopener which is conditional on regulatory approval of Libervant, or if we are or believe we may be unable to monetize our product Apomorphine in the time period we expect or at all, then we can be expected to seek to access the capital markets at such times we deem appropriate for our cash needs, or at such other time as we may deem appropriate under the circumstances. In the event of any such sales of common stock or other securities thereunder, the Company currently would intend to use the net proceeds of any such offering primarily for working capital, capital expenditures and development costs and general corporate purposes.
Unless and until we become profitable, we expect to pursue non-dilutive capital opportunities around our future royalty streams and our refinancing options surrounding our secured debt facility, at this time we have no committed sources of additional capital. We are currently pursuing refinancing of our debt facility in order to provide financial flexibility in executing our business plan. Additionally, we may attempt to pursue additional capital during favorable conditions, or when other strategic opportunities may become available, even if we have sufficient funds for planned operations. Until we become profitable, if ever, we expectcontinue to need to raise additional capital and/or other financing or funding in the future, any of which could be material, to further the commercialization of Sympazan and advance the development and commercialization of our CNS products including Libervant, and Exservan, and of our other product candidates and to meet our other cash requirements, including debt service. We do not currently have any committed external sources of financing. Our ability to secure additional equity 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, restrictions under our Senior Secured Note Indenture, and general market conditions, and there can be no assurance that such needed capital or debt financing will be available, available on favorable terms or at all.the times or in the amounts needed. We may seek to obtain additional financingfunding in the future through the monetization of royalty streams from licensed products such as APL-130277our product Apomorphine, subject to our licensing agreement withregulatory approval thereof , which product candidate is licensed to Sunovion Pharmaceuticals, Inc. (and subject to the conditions and requirements under the Indenture for our 12.5% Senior Secured Notes due 2025 including our note repurchase obligations at the option of the holders), and KP-415 and KP-484, both associated with KemPharm, Inc., and/or others (butbut we cannot be assured of any such royalty streams or monetizationmonetization. Our ability to obtain any additional indebtedness or other debt financing is limited by the terms of any such streams), the issuanceIndenture for our Senior Secured Notes and the Indenture also restricts or prohibits certain types of our common stock, other public or private equity or debt financings,financing (see “12.5% Senior Secured Notes” above). We may also seek to obtain additional funding through 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 financingother funding on terms acceptable to us, or at all, and any failure to raise additional capital or financingother funding as and when needed could compromisefor our cash requirements would have a negative impact on our financial condition and on our ability to execute onand achieve 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 maywould experience dilution and debt financings, if available, may involve restrictive covenantsthe terms of these securities could include liquidation or may otherwise constrainother preferences (if and to the extent permitted under the Indenture) that would adversely affect our financial flexibility.stockholders’ rights. To the extent that we raise additional funds through collaborative, strategic alliances or licensing arrangements with third parties, it may be necessary to relinquish some(subject to required consent under our Indenture for the disposition or transfer of assets other than Apomorphine) valuable rights to our intellectual property or future revenue 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 harm our future capitalliquidity and funding position.
If adequate funds are not available for our liquidity needs and cash requirements as and when needed, we may be required to delay, reduce the scope of, or eliminate our research and development programs and clinical and other product development activities, or reduce our planned commercialization efforts.efforts and otherwise reduce our other spend and adjust our operating plan, and we would need to seek to take other steps intended to improve our liquidity. We also may be required to evaluate additional 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.
Our costs associated with operating as a new public company have increased, and we expect to incur 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 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,II. Item 1A, Risk Factors below – concerning Indivior and recent criminal proceedings in connection with its allegedly deceptive and misleading practices related to its marketing and distribution of its Suboxone film product, dating back a number of years.years as well as Indivior’s announced notice of its intention to cease production of its authorized generic version of Suboxone. We have to date not experienced any significant reduction in purchase orders from Indivior for the manufacture and supply of Suboxone and the authorized generic film products, other than what we believe isit attributable to the entry of at-risk generics.
Off-Balance Sheet Arrangements
During the period presented, there 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 relatesrelated primarily to the increase or decrease in the amount of interest expense from fluctuations in one-month LIBOR associated with 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. For$500. However, our Senior Secured Notes due 2025 issued on July 15, 2019, ourcarry a 12.5% fixed interest rate received is approximately 2.3% for cash depositedper annum, thereby eliminating market risk due to changes in the interest-bearing account.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 underlying premise would be to preserve principal while at the same time maximizing the income that we received from our investments without significantly increasing risk.
Our accounts receivables are concentrated predominantly with Indivior. See Part II, Item 1A, Risk Factors below concerning Indivior.
With the recentour 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.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (“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 are necessarily were required to apply our judgment in evaluating whether the benefits of the controls and procedures that we adopt outweigh their costs.
There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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 many not be detected.
From time to time, we have been and may again become involved in legal proceedings arising in the 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.
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. We 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.
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 have not yet 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. On July 29, 2019, we and Indivior filed a motion to dismiss Aveva and Apotex’s counterclaim for inequitable conduct relating to Indivior’s ‘454 patent. The hearing on that motion originally scheduled for October 30, 2019, was cancelled by the Court, subject to possible rescheduling.
We are also seeking to enforce our 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:
Our risk factors have not changed materially from those described in “Part I, Item 1A. Risk Factors” of our 2018 Annual Report on Form 10-K except as set forth in the risk factorfactors below.
Historically, a substantial portion of our revenues in each quarter and year has been derived from relatively few customers and licenseesa single customer 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 asuch key customer were to decline significantly, it could materially adversely affect our business, financial condition and results of operations.
None.
On July 24, 2018, the SEC declared our Registration Statement on Form S-1 (Registration Nos. 333-225924 and 333-226326) for our IPO effective. There have been no material changes in the planned use of proceeds from our IPO as described in our final prospectus filed with the SEC on July 25, 2018, pursuant to Rule 424(b) of the Securities Act.
None.
Not applicable.
None.
The exhibits listed below are filed or furnished as part of this report.