We have also developed a proprietary pipeline of complex molecule-based products addressing market opportunities beyond CNS indications, which include:
In addition to these product candidates, we have a portfolio of commercialized and development-stage licensed products. Our largest commercialized licensed product to date is Suboxone, a sublingual film formulation of buprenorphine and naloxone, for the treatment of opioid dependence. We have a sole and exclusive worldwide manufacturing agreement with Indivior to deliver both the branded Suboxone, globally through Indivior, and, currently, the authorized generic sublingual film formulation of buprenorphine and naloxone, through Sandoz Inc. (“Sandoz”) for the United States market. As of JulyOctober 2019, these products account for greater thanapproximately 75% of the oral film products prescribed in the U.S. for recovery from opioid addictionaddiction. See “Financial Overview” below concerning Indivior’s announced intention to cease production of the authorized generic film product.
We manufacture all of our licensed and proprietary products at our FDA- and DEA-inspected 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.
On July 15, 2019, we completed a private placement of $70,000 of 12.5% Senior Secured Notes due June 2025 (“Notes” or “Senior Secured Notes”) and unregistered warrants and paid off our existing credit facility. The new financing provided net proceeds of $66,951$66,082 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 useare using the remaining balancenet cash proceeds of $14,859$13,990 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,12, 12.5% Senior Secured Notes, to our Consolidated Financial Statements and in Liquidity and Capital Resources.
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 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,12, 12.5% Senior Secured Notes, to our Condensed 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 will registerWe registered the warrants and affiliate shares as part of our Universal Shelf Registration that we expect to file later in the third quarter of 2019.described above. The Shelf Registration Statement provides increased capital flexibility as we continue to execute our business 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 majorityportion of our 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, 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 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, 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 andor (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 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 commercialized partnered products, licensing and royalty initiatives, development initiatives 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 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, 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-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 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 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 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 help 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. Additionally, we may 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 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 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, with a full year effect of Sympazan’s commercialization. Incremental marketing spending in preparation for the commercial launch of Libervant is expected to be incurred prior to the PDUFA date for this product and will be accordingly planned once the PDUFA date is known. As part of the commercial launch of Sympazan, we 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, 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 future launch, subject to FDA approval, of Libervant. 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 discount. Our interest cost, which under our Perceptive credit facility was subject to changes in one-month LIBOR, represents a monthly cash payment obligation. Our new 12.5% Senior Secured Notes due 2025 issued on July 15, 2019 are discussed in Note 18, Subsequent Event,12, 12.5% Senior Secured Notes, to our Consolidated Financial Statements and in Liquidity and Capital Resources. Interest expense is expected to increasehas 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. 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 JuneSeptember 30, 2019 and 2018
We recorded revenue of $11,129$12,418 and $13,928$13,267 in the three months ended JuneSeptember 30, 2019 and 2018, respectively, generating a net loss of $20,472$18,412 and $36,493$15,038 for the three months ended JuneSeptember 30, 2019 and 2018, respectively.
Revenues:
| | | Three Months Ended June 30, | | Change | | | Three Months Ended September 30, | | | Change | |
| (In thousands, except %) | | 2019 | | 2018 | | $ | | |
| % | | | 2019 | | | 2018 | | | $ | | | % | |
| Manufacture and supply revenue | | $ | 8,915 | | | $ | 8,684 | | | $ | 231 | | | | 3 | % | | $ | 9,155 | | | $ | 9,005 | | | $ | 150 | | | 2 | % |
| License and royalty revenue | | | 424 | | | | 4,532 | | | | (4,108 | ) | | | (91 | %) | | 1,356 | | | 3,355 | | | (1,999 | ) | | (60 | %) |
| Co-development and research fees | | | 1,019 | | | | 712 | | | | 307 | | | | 43 | % | | 1,073 | | | 907 | | | 166 | | | 18 | % |
| Proprietary product sales, net | | | 771 | | | | - | | | | 771 | | | | 100 | % | | | 834 | | | | - | | | | 834 | | | 100 | % |
| Total revenues | | $ | 11,129 | | | $ | 13,928 | | | $ | (2,799 | ) | | | (20 | %) | | $ | 12,418 | | | $ | 13,267 | | | $ | (849 | ) | | (6 | %) |
For the three months ended JuneSeptember 30, 2019, total revenues decreased 20%6% or $2,799$849 to $11,129$12,418 compared to revenues of $13,928$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 3%2% or $231$150 to $8,915$9,155 for the three months ended JuneSeptember 30, 2019 compared to $8,684$9,005 from the prior year period. This increase is attributable to slightlya shift to a higher Suboxone product- priced mix of higher margin dose configurationsSuboxone and authorized generic products offset in part by 1.8 million fewer strips sold periodmodestly lower volumes year - over period.- year. As of the early part of thirdfourth 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 greater than 75% sharemajority of our production for Indivior because of the branded products performance in the market. While it is uncertain to predict the generic erosion effect on our Suboxone product volumes in future periods, the market for Suboxone product, including generic competitor products, continues to grow and we will continue to closely monitor these dynamics in the marketplace.
License and royalty revenue decreased 91%60% or $4,108$1,999 to $424$1,356 for the three months ended JuneSeptember 30, 2019 compared to revenues of $4,532$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 $0$1,000 for the three months ended JuneSeptember 30, 2019 compared to $4,250$3,000 of license fees recognized during the prior year period. Suboxone related license fees were $4,250$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 43%18% or $307$166 to $1,019$1,073 for the three months ended JuneSeptember 30, 2019 compared to $712$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 $771$834 or 100% for the three months ended JuneSeptember 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 June 30, | | | Change | | | Three Months Ended September 30, | | | Change | |
| (In thousands, except %) | | 2019 | | | 2018 | | | $ | | |
| % | | | 2019 | | | 2018 | | | $ | | | % | |
| Manufacture and supply | | $ | 5,420 | | | $ | 4,973 | | | $ | 447 | | | 9 | % | | $ | 4,643 | | | $ | 5,592 | | | $ | (949 | ) | | (17 | %) |
| Research and development | | 8,151 | | | 7,994 | | | 157 | | | 2 | % | | 5,063 | | | 4,534 | | | 529 | | | 12 | % |
| Selling, general and administrative | | 16,246 | | | 33,668 | | | (17,422 | ) | | (52 | )% | | 13,714 | | | 12,346 | | | 1,368 | | | 11 | % |
| Interest expense | | 1,937 | | | 1,927 | | | 10 | | | 1 | % | | 2,652 | | | 1,933 | | | 719 | | | 37 | % |
| Interest income | | (153 | ) | | - | | | 153 | | | NM | | | (138 | ) | | (216 | ) | | (78 | ) | | 36 | % |
| Loss on extinguishment of debt | | | 4,896 | | | - | | | 4,896 | | | NM | |
| Other | | - | | | 1,859 | | | (1,859 | ) | | NM | | | - | | | 4,116 | | | (4,116 | ) | | NM | |
Manufacture and supply costs and expenses increased 9%decreased 17% or $447$949 to $5,420$4,643 for the three months ended JuneSeptember 30, 2019 compared to $4,973$5,592 for the same period in 2018. This increaseThe decrease was primarily driven by lower volumes of Suboxone production and higher production costs associated with other products. Additionally, there was a $110 increase in share-based compensation costs during the three months ended June 30, 2019 asperiod compared to 2018 as well as the same period in 2018. These increases werenon-cash reversal of an accrual for manufacturing related costs that no longer represented an obligation of the Company, offset in part by $345higher costs of co-development revenue activity in compensation cost associated with the issuance of the non-voting common shares and 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, 2019.2019 period.
Research and development expenses increased 2%12% or $157$529 to $8,151$5,063 for the three months ended JuneSeptember 30, 2019 compared to $7,994$4,534 in the prior year period. This increase resulted from an increase of clinical trials expenses of $1,625 along with added expenses of organizational growth that was substantially offset by a net reduction of share-based compensation expenses totaling $2,053 that was primarily attributable$646 due to the one-time settlement in 2018timing of the Company’s obligations arising from its Performance Unit Plan.primarily Libervant as compared to prior periods. Clinical trial and other third partythird-party product development expenses may be expected to fluctuate based on the schedule of clinical and development activities that are conducted during any reporting period.
Selling, general and administrative expenses decreased 52%increased 11% or $17,422$1,368 to $16,246$13,714 for the three months ended JuneSeptember 30, 2019 as compared to $33,668$12,346 for the prior year period. This decrease isThe increase in expense was 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 month period ended June 30, 2018 that did not occur during the three month period ended June 30, 2019, offset in partdriven by $3,631 of investments in our commercialization, branding and marketing capabilities for Sympazan and in preparation for the expected launch of Libervant.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. We incurred $535 of increasedIn addition, we recognized higher legal fees in connection with the ongoing state anti-trustantitrust 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 further assist us in operations as a public company.higher insurance premiums.
Interest expense increased 1%37% or $10$719 to $1,937$2,652 for the three months ended JuneSeptember 30, 2019 compared to 1,927$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. OurPrior to July 15, 2019, our interest expense was subject to fluctuations based on one-month LIBOR. Our new Senior Secured NoteNotes due 2025 issued on July 15, 2019 carry a 12.5% fixed interest rate per annum.annum, with an increased principal amount outstanding thereunder.
Interest income increased 100%decreased 36% or $153$78 for the three months ended JuneSeptember 30, 2019, compared to the prior year period. This increasedecrease is a result of investing the neta lower cash proceeds from our IPObalance being invested in an interest-bearing account.
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 $1,859$4,117 for the three months ended JuneSeptember 30, 2019 compared to the same period in 2018. For periods prior to our IPO, which was effective July 24, 2018, we remeasured the fair value of outstanding warrants each quarter in accordance with the AICPA Practice Aid, Valuation of Privately-Held Company Equity Securities issued as compensation. The Company had no outstanding warrants during the three months ended June 30, 2019. However, forFor 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,12, 12.5% Senior Secured Notes, to our Consolidated Financial Statements.
Comparison of the SixNine Months Ended JuneSeptember 30, 2019 and 2018
We recorded revenue of $23,772$36,190 and $37,339$50,606 in the sixnine months ended JuneSeptember 30, 2019 and 2018, respectively, generating a net loss of $35,198$53,913 and $32,394$47,432 for the sixnine months ended JuneSeptember 30, 2019 and 2018, respectively.
Revenues:
| | | Six Months Ended June 30, | | | Change | | | Nine Months Ended September 30, | | | Change | |
| (In thousands, except %) | | 2019 | | | 2018 | | | $ | | |
| % | | | 2019 | | | 2018 | | | $ | | | % | |
| Manufacture and supply revenue | | $ | 15,584 | | | $ | 20,244 | | | $ | (4,660 | ) | | (23 | %) | | $ | 24,739 | | | $ | 29,249 | | | $ | (4,510 | ) | | (15 | %) |
| License and royalty revenue | | 5,046 | | | 14,032 | | | (8,986 | ) | | (64 | %) | | 6,402 | | | 17,387 | | | (10,985 | ) | | (63 | %) |
| Co-development and research fees | | 1,789 | | | 3,063 | | | (1,274 | ) | | (42 | %) | | 2,862 | | | 3,970 | | | (1,108 | ) | | (28 | %) |
| Proprietary product sales, net | | | 1,353 | | | | - | | | | 1,353 | | | 100 | % | | | 2,187 | | | | - | | | | 2,187 | | | 100 | % |
| Total revenues | | $ | 23,772 | | | $ | 37,339 | | | $ | (13,567 | ) | | (36 | %) | | $ | 36,190 | | | $ | 50,606 | | | $ | (14,416 | ) | | (28 | %) |
For the sixnine months ended JuneSeptember 30, 2019, total revenues decreased 36%28% or $13,567$14,416 to $23,772$36,190 compared to revenues of $37,339$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 for Sympazan, launched in December 2018.
Manufacture and supply revenue decreased approximately 23%15% or $4,660$4,510 to $15,584$24,739 for the sixnine months ended JuneSeptember 30, 2019 compared to $20,244$29,249 from the prior year period. This decrease is attributable to lower Suboxone and authorized generic production volume.volume in the first half of 2019. As of the early part of thirdfourth quarter 2019, Suboxone and its authorized generic maintained a greater thancontinued to retain approximately 75% of the market share. While it is uncertainHowever, as discussed above, Indivior has announced its intention to predictsuspend marketing of the authorized generic, erosion effect on our Suboxone product volumesand therefore manufacturing 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 Indivior because of the market for Suboxone product, including generic competitorbranded products continues to grow and we will continue to closely monitor these dynamicsperformance in the marketplace.market.
License and royalty revenue decreased 64%63% or $8,986$10,985 to $5,046$6,402 for the sixnine months ended JuneSeptember 30, 2019 compared to revenues of $14,032$17,387 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 sixnine months ended JuneSeptember 30, 2019 compared to $13,500$16,500 of license fees recognized during the prior year period. Suboxone related license fees were $9,250$12,250 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.” 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. 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%28% or $1,274$1,108 to $1,789$2,862 for the sixnine months ended JuneSeptember 30, 2019 compared to $3,063$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, both of which are normally expected to fluctuate significantly one reporting period to the next.
Product sales, net increased $1,353$2,187 or 100% for the sixnine months ended JuneSeptember 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 | | | Nine Months Ended September 30, | | | Change | |
| (In thousands, except %) | | 2019 | | | 2018 | | | $ | | |
| % | | | 2019 | | | 2018 | | | $ | | | % | |
| Manufacture and supply | | $ | 8,926 | | | $ | 10,609 | | | $ | (1,683 | ) | | (16 | )% | | $ | 13,569 | | | $ | 16,201 | | | $ | (2,632 | ) | | (16 | )% |
| Research and development | | 12,454 | | | 12,895 | | | (441 | ) | | (3 | )% | | 17,517 | | | 17,429 | | | 88 | | | 0 | % |
| Selling, general and administrative | | 34,154 | | | 41,213 | | | (7,059 | ) | | (17 | )% | | 47,868 | | | 53,559 | | | (5,691 | ) | | (11 | )% |
| Interest expense | | 3,863 | | | 3,876 | | | (13 | ) | | 0 | % | | 6,515 | | | 5,809 | | | 706 | | | 12 | % |
| Interest income | | (427 | ) | | (22 | ) | | 405 | | | NM | | | (565 | ) | | (238 | ) | | 327 | | | NM | |
| Loss on extinguishment of debt | | | 4,896 | | | - | | | 4,896 | | | NM | |
| Other | | - | | | 1,162 | | | (1,162 | ) | | NM | | | - | | | 5,278 | | | (5,278 | ) | | NM | |
Manufacture and supply costs and expenses decreased 16% or $1,683$2,632 to $8,926$13,569 for the sixnine months ended JuneSeptember 30, 2019 compared to $10,609$16,201 for the same period in 2018. ThisThe decrease was primarily driven by lower productionvolumes of Suboxone and authorized generic in the 2019 period compared to 2018 as well as the non-cash reversal of an accrual for manufacturing related costs due tothat no longer represented an obligation of the lower volumeCompany, offset in part by higher costs of Suboxone.co-development revenue activity in the 2019 period. Further, there was a $110 increase$201 decrease 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 monthnine-month period ended JuneSeptember 30, 2018 that did not occur during2019 compared to same period the six monthnine-month period ended JuneSeptember 30, 2019.2018.
Research and development expenses decreased 3% or $441 to $12,454were flat for the sixnine months ended JuneSeptember 30, 2019 compared to $12,895 in the prior year period. This netThere was an increase in clinical trials expense reduction wasin the result of2019 period driven by Libervant and AQST-108 development efforts. The increased clinical costs were offset by a net decrease of share-based compensation expensesexpense of $1,845 due primarily$1,842 in 2019 as compared 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.2018. Clinical trial and other third partythird-party direct product development expenses may be expected to fluctuate based on the schedule of clinical and development activities that are conducted during andany reporting period.
Selling, general and administrative expenses decreased 17%11% or $7,059$5,691 to $34,154$47,868 for the sixnine months ended JuneSeptember 30, 2019 as compared to $41,213$53,559 for the prior year period. This decrease is primarily due to $24,767$21,297 in lower stock-based compensation cost associated withexpense in the issuance of the non-voting common shares and related withholding taxes allocable2019 period compared to selling, general and administrative expenses2018 offset in part by $7,692$8,093 of higher investments in our commercialization, branding and marketing capabilities for Sympazan and in preparation for the expected launch of Libervant.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 $1,885$1,900 of increased legal fees in connection with the ongoing state anti-trustantitrust litigation and other patent related matters, $2,377 of higher factory unabsorbed overhead as a result of lower production of Suboxone and authorized generic 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.insurance premiums.
Interest expense remained flatincreased 12% or $706 to $6,515 for the sixnine months ended JuneSeptember 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 was subject to fluctuations based on one-month LIBOR. Our new Senior Secured NoteNotes due 2025 issued on July 15, 2019 carry a 12.5% fixed interest rate per annum.annum, with an increased principal amount outstanding thereunder.
Interest income increased $405$327 for the sixnine months ended JuneSeptember 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.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 $1,162$5,278 for the sixnine months ended JuneSeptember 30, 2019 compared to the same period in 2018. For periods prior to our IPO, which was effective July 24, 2018, we remeasured the fair value of outstanding warrants each quarter in accordance with the AICPA Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation. The Company had no outstanding warrants during the six months ended June 30, 2019. However, forFor 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,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 JuneSeptember 30, 2019, we have a net stockholders’ deficit of $24,657.$34,459. 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 licensees.
We had $22,165$20,914 in cash and cash equivalents as of JuneSeptember 30, 2019 and working capital, including cash and cash equivalents, of $14,435.$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. On 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 the 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 the 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 facility (“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 Indenture; and perfection of security interests.
The Indenture also restricts the incurrence of additional indebtedness except only such indebtedness as is 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 issued holders of the Notes unregistered Warrants to purchase 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 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. The loan bore interest, payable monthly, at one-month LIBOR, which at June 30, 2019 was approximately 2.75%, plus 9.75%, subject to a minimum rate of 11.75%. 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.
As of June 30, 2019, we were compliant with all financial and other covenants under the Perceptive 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.
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 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 and 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 new drug application for its candidate Libervant with the FDA, provided it has obtained the written consent of the holders of a majority 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 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 Notes 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 equal 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 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 (“ABL”) facility not to exceed $10,000. The ABL Facility may be collateralized by assets constituting only inventory, accounts receivable and the proceeds thereof of the Company. The Indenture carries customary covenants and restrictions associated with Notes of this nature.
Affirmative and negative covenants specified in the Indenture are considered typical for loans of this nature, including, but not limited to, specifications relating to preservation of corporate existence, publicly traded status, intellectual property and business interests; limitations or prohibitions of dividend payments or other dispositions, repurchases of shares, additional debt, certain equity issuances, asset transfers or dispositions, creation or occurrence of additional liens, entering into licensing or monetization arrangements other than as 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.
In connection with the new financing, we agreed to issue to the new noteholders unregistered Warrants to purchase up to an aggregate of 2,000,000 shares of common stock at a price of $4.25 per Warrant. The Warrants also contain customary change of control provisions and are exercisable on a “cashless” basis. The Warrants include an obligation for the Company to use reasonable best efforts to register the Warrant shares for resale with the Securities and Exchange Commission within 90 days of the closing and grant customary piggy-back rights to the holders of the Warrants.
Cash Flows
SixNine Months Ended JuneSeptember 30, 2019 and 2018
| (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) | | 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 sixnine months ended JuneSeptember 30, 2019 was $34,846.$49,635. The use of cash can be understood as represented by three main factors: (1) our net loss of $35,198,$53,610, (2) decrease in operating assets and liabilities of $5,822,$9,822, partially offset by (3) non-cash operating expenses. The non-cash operating expenses of $6,174$13,797 primarily resulted from $3,330$5,199 of share-based compensation expense and the $4,896 loss on the extinguishment of debt recorded in the sixnine months ended JuneSeptember 30, 2019. Other significant components included non-cash charges of $2,844$3,702 related to depreciation, amortization and amortization of debt issuance costs.
Net cash provided byused for operating activities for the sixnine months ended JuneSeptember 30, 2018 was $1,296.$10,179. The provision of cash can be understood as represented by three main factors: (1) our net loss 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 $31,204, which$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 $27,305non-cash charges of $9,173 related to the termination of the Company’s performance unit plans and $3,899 in non-cash charges such as depreciation, amortization, changes in warrant valuation and amortization of debt issuance costs and changes in warrant valuation, (2) changes in working capital accounts totaling $2,486, primarily through collections of trade receivables and increases in trade payables as management sought to optimize our liquidity, offset in part by (3) our net loss of $32,394.costs.
Net Cash (Used for) Investing Activities
Net cash used for investing activities was $486$577 for the sixnine months ended JuneSeptember 30, 2019 compared to $886$1,334 for the sixnine months ended JuneSeptember 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 $3,102$10,527 for the sixnine months ended JuneSeptember 30, 2019 compared to $7,151$58,116 for the sixnine months ended JuneSeptember 30, 2018. The net cash usedprovided in 2019 is primarily the result of the payment of $2,664 in withholding taxes associated with tax reimbursement paymentsproceeds from the share-based compensation recorded during 2018issuance of our 12.5% Senior Secured Notes of $70,000 and a $550 principal payment made during May 2019 related to the Credit Agreement and Guaranty, offset in part by $112 of proceeds derived from common stock purchased by eligible employees through the Company’s employee stock purchase plan.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 the result of $1,528$68,714 proceeds received from our initial public offering offset in part by $4,695 in transaction costs incurred related topaid as part of our IPOinitial public offering and $5,623$5,903 related to the paymentreimbursement of withholding taxes associated with the share-based compensation recorded during the quarter ended June 30,second and third quarters of 2018.
Funding Requirements
We expect that our existing cash and cash equivalents 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 andat 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 senior secured notes issuances of additional senior secured notes, 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 such as apomorphinefor Apomorphine (subject to all conditions and requirements under the indenture),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 adequate to fund our expected cash requirements for at least the next 12 months, including planned investments in the commercialization of our late stage CNS product candidates and other expected costs and expenses, 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;
cost and expense reductions consistent with our anticipated revenues, and continuing review of our cost structure;
our ability to issue on or before March 31, 2021, and assuming available purchasers of, additional senior secured notesSenior Secured Notes in an aggregate amount up to $30,000 principal amount under the indentureIndenture 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 of the holdersin 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);
potential monetization ofour ability to monetize royalty streams or other license or proprietary rights for our product Apomorphine at anticipated levels, which cannot be assured (and which areis subject to conditions and requirements under the indentureIndenture for our new 12.5% Senior Secured Notes including note repurchase obligations at 112.500%112.5% of principal amount of such repurchased notes and accrued and unpaid interest thereon, at the option of the holders)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;
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;
continued 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.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. Therelitigation, 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 flowflows 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 whichit could take longer than planned to achieve anticipated sales levels.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 debt or 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 $66,951$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 indentureIndenture governing the senior secured notesSenior 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 indentureIndenture 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 futureevent that we are or believe we may attemptbe unable to pursueaccess in the time period we expect, or at all, additional capital financing if deemed appropriateindebtedness 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 neededwe 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 liquidity requirements,our cash needs, or when strategic opportunities might become available. Untilat 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, if ever, we expect to continue to need to raise additional capital and/or incur debtother 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 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 the times or in the amounts needed. We may seek to obtain additional funding in the future through the monetization of royalty streams from our 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 indentureIndenture 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. Our ability to obtain any additional indebtedness or other debt financing is limited by the terms of the Indenture for our Senior Secured Notes and the Indenture also restricts or prohibits certain types of equity financing (see “12.5% Senior Secured Notes” above). We may also seek to obtain additional funding through the issuance of our common stock, and, 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 financingother funding on terms acceptable to us, or at all, and any failure to raise additional capital or financingother funding as and when needed for our cash requirements would likely compromisehave 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.dilution and the terms of these securities could include liquidation or other preferences (if and to the extent permitted under the Indenture) that would adversely affect our 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 liquidity 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 orand 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 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 obligation of a public company to various regulatory agencies, to investors and in order to comply with certain legislation and regulations. These expenditures include the costs of additional employees with specific skills and experiences such as SEC reporting, higher 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 itits allegedly and 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 it 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 |
Prior 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.$500. 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 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 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 Quarterly Report on Form 10-Q for the period ending June 30, 2019, Part III,II, Item 1A, Risk Factors below 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.
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 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.
As required by Rule 13a-15(b) of the Exchange Act, an evaluation as of JuneSeptember 30, 2019 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 JuneSeptember 30, 2019, were effective for the purposes stated above.
Internal Control Over Financial Reporting
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.
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 many not be detected.
PART II – OTHER INFORMATION
From time to time, we have been and may again become involved in legal proceedings arising in the course of our business.
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. 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.
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 us, 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 remaining case against Actavis was dismissed in light of the infringement ruling above, which prevents Actavis from entering the market until 2024. The case(s) against the remaining defendants, regarding the additional asserted patents have not been finally resolved. The case against Actavis, pendingA Markman hearing in the U.S. District Court forcases against DRL and Alvogen was held on October 17, 2019, with the District of Delaware, is scheduled for trial in December 2019.court taking the claim construction issues under advisement. No trial date has been set in thethose 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 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 launches 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 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:
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 our 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, 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 action from the Court.
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 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, but 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 expert discovery phase closed May 30, 2019, but additional reports and depositions are beingwere conducted through August 1, 2019. Summary judgement motions and Daubert motions relating to expert witnesses are due on September 26, 2019.currently stayed pending the Court’s resolution of discovery motions in the MDL case. We are not able to 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.
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.
In April 2019 the U.S. Department of Justice announced that a federal grand jury sitting in the Western District of Virginia had criminally indicted Indivior PLC, for which we exclusively 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 contest the allegations vigorously. Indivior accounted for approximately 89% of our revenues for 2018 and in the future will continue to account for a substantial part of our revenues. However, there can be no assurance that the claims against Indivior could not materially and adversely affect Indivior which, if this were to occur, could impact our supply and licensing relationship with Indivior and the volume and timing of its purchases from us and our revenues from Indivior, which could have a material adverse financial impact on our business, liquidity and operating results. On July 11, 2019, Reckitt Benckiser Group plc, the predecessor in interest of Indivior, reached agreements with the U.S. Department of Justice and the Federal Trade Commission (FTC) to resolve their investigation into the sales and marketing of 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 this filing, Indivior has provided no indication that is has settlednot disclosed any settlement or other disposition of this matter with the DOJ.
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.
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.