WithAQST-109-SF – AQST-109-SF – is a next generation prodrug sublingual film formulation of epinephrine that Aquestive intends to develop for treatment of allergic reactions including anaphylaxis. In vitro tests and preclinical studies indicate that AQST-109-SF has the upfront proceeds of the monetization, we will repay $22,500 of the 12.5% Notes,potential to absorb more extensively, convert more rapidly to systemic epinephrine, utilize less drug and issue $4,000 of new senior notes in lieu of payingprovide a prepayment premium on the early repayment of the 12.5% Notes, reducing the balance of senior notes outstandingunique profile when compared to $51,500AQST-108-SF. Aquestive anticipates conducting and completing a single ascending dose PK study in the aggregate. In addition,second half of 2021. Based upon receiving favorable topline results from the holders of the 12.5% Notes have extendedstudy, Aquestive intends to December 31, 2021 our ability to access, at our option, $30,000 of senior notes re-openers under the Indenture. The first $10,000 senior notes re-opener representsrequest a commitment of such amount by current holders of 12.5% Notes, at our option, contingent upon FDA approval of our product candidate Libervant. A second $20,000 senior notes re-opener represents a right, at our option, to market to current holders of our 12.5% Notes, and/or other lenders, additional senior notes up to such amount, contingent upon FDA approval of Libervant for U.S. market access. If and to the extent that we access these re-openers, we will grant warrants to purchase up to 714,000 shares of common stock,pre-IND meeting with the strike price calculated based on the 30-day volume weighted average closing price of our common stock at the warrant grant date. In addition, as of the closing of this transaction, the Company will issue to the holders of the 12.5% Notes warrants to purchase 143,000 shares of our common stock.
We generated revenues of $38,700 and $36,190 for the respective nine-month periods ended September 30, 2020 and 2019. These revenues were derived primarily from manufacture and supply revenues from commercial products licensed to our collaboration or commercialization licensees. Total revenues also included licensing, royalty and co-development and research fees and our proprietary product sales. Our licensing and royalty revenue is subject to the normally uneven nature of the timing of licensing milestone payments and to the product volumes and sales revenues realized by our licensees from which we receive royalties. Suboxone, which was launched in 2010, was our first licensed pharmaceutical product to be commercialized, and we have other licensing relationships that contribute to our revenue and future revenue opportunities. Sympazan, which was launched in December 2018, is the first proprietary pharmaceutical product commercialized directly by the Company. As of September 30, 2020, we had $17,064 in cash and cash equivalents. As a result of our investments in product development, recent investments in commercialization initiatives, share-based compensation expenses surrounding the 2018 initial public offering, among other expenses and legal and other expenses related to patent procurement, protection and prosecution and other matters, as of September 30, 2020, we had an accumulated deficit of $165,889 resulting in a net shareholders’ deficit of $36,519 as of that date. For the nine-month periods ended September 30, 2020 and 2019, we incurred net losses of $35,415 and $53,610, respectively.
We expect to continue to incur net losses for at least the next few years as we pursue the development, commercialization and marketing of our proprietary product candidates. Our net losses may fluctuate significantly from period to period, depending on regulatory approval developments concerning both our late-stage and earlier stage product candidates, the timing of our planned clinical trials and expenditures on our other research and development, as well as our commercialization activities. We expect our expenses will continue to be substantial in 2020 and future periods over time as we continue to, subject to any delay as a result of the coronavirus pandemic:
focus on the approval of Libervant for marketing in the U.S. and, subsequently, if approved, which we cannot assure, its commercialization,FDA.
continue clinical development of AQST-108 along the 505(b)(2) pathway, having begun PK clinical trials during the third quarter of 2020, subject to any delay from the coronavirus pandemic, and
| • | AQST-305-SF – is a sublingual film formulation of octreotide, a small peptide that has a similar pharmacological profile to natural somatostatin, for the treatment of acromegaly, as well as severe diarrhea and flushing associated with carcinoid syndrome. Acromegaly is a hormone disorder that results in the overproduction of growth hormone in middle-aged adults. Octreotide is the standard of care for the treatment of acromegaly. The current market leader, Sandostatin®, is administered via deep subcutaneous or intramuscular injections once a month. This monthly treatment regimen can result in loss of efficacy toward the end of the monthly treatment cycle. We are developing AQST-305-SF as a non-invasive, pain-free alternative to Sandostatin to reduce treatment burden, healthcare costs and the potential loss of efficacy in the treatment cycle. AQST-305-SF has shown promising preclinical and human proof of concept results. While we focus our efforts on Libervant and AQST-108-SF in the short-term, we have taken the necessary steps to prepare AQST-305-SF for additional research trials. |
continue to grow Sympazan revenues as a precursorLicensed Commercial Products and complement to an eventual launch of Libervant, if approved for U.S. market access.
We expect to continue to manage the timing and level of expenses in light of the declining Suboxone revenues, offset in part by increasing revenue contributions from Sympazan, while focusing on the development and regulatory approvals of Libervant and AQST-108 and their subsequent commercialization, if approved by the FDA for U.S. market access.Product Candidates
Our business has been financed through a combination of revenue from licensed product and proprietary product activities, proceeds from our IPO and other equity issuances and proceeds from our debt instruments and facilities. Significant additional funding is expected to be required in order to execute our business strategy and operations.
Until we become profitable, if ever, we expect to need to raise significant additional capital in the future through equity or debt issuances, or both, and to continue to manage our expenses to extend our capital runway, in order to further the development, regulatory approval, commercialization and marketing of ourportfolio also includes products and product candidates and to conduct our business. Wethat we have no committed sources of additional capital and there can be no assurance that such needed capitallicensed, or will be available on favorable terms, or at all. We may seek to obtain additional capital in the future through the issuance of our common stock, through other publiclicense, or private equity or debt financings, through potential non-dilutive capital raising events that may result from royalty streams that may be realizable from ourfor which we have licensed products or licensed intellectual property, and through collaborations or licensing arrangements with other companies or other means, if available. We may not be able to raise additional capital or other funding on terms acceptable to us, or at all, and any failure to raise capital as and when needed could compromise our ability to execute 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 would experience dilution, and other debt financings, if available (and subject to all of the existing restrictions and conditions under the Indenture for the 12.5% Notes) may involve increased restrictive covenants and increased fixed payments or may otherwise further constrain our financial flexibility. To the extent that we raise additional funds through collaborative or licensing arrangements, it may be necessary to relinquish some rights to our intellectual property or grant licensesfor commercialization. In the years ended December 31, 2020 and 2019, our licensed product portfolio generated $40.2 million and $49.7 million in revenue to Aquestive, respectively. Those products include:
| • | Suboxone® – a sublingual film formulation of buprenorphine and naloxone, respectively an opioid agonist and antagonist, that is marketed in the United States and internationally for the treatment of opioid dependence. Suboxone Sublingual Film was launched by our licensee, Indivior Inc., or Indivior, in 2010. Suboxone Sublingual Film is the most prescribed branded product in its category and was the first sublingual film product for the treatment of opioid dependence. We are the sole and exclusive supplier and manufacturer of Suboxone Sublingual Film and have produced over 2.2 billion doses of Suboxone since its launch in 2010. As of January 31, 2021, Suboxone branded products retain approximately 40% film market share as generic film-based products have penetrated this market. We have filed patent infringement lawsuits against certain companies relating to generic film-based products for buprenorphine-naloxone. More details regarding these lawsuits are described in the unaudited financial statements, Note 19. Contingencies, contained herein. |
| • | ExservanTM (riluzole) – has been developed, utilizing our proprietary PharmFilm technology, for the treatment of amyotrophic lateral sclerosis (ALS). We believe that Exservan, via our orally administered dosage form, can bring meaningful assistance to patients who are diagnosed with ALS and face difficulties swallowing traditional forms of medication. Exservan was approved by the FDA on November 22, 2019. During the fourth quarter of 2019, we announced the grant of a license to Zambon S.p.A. for the development and commercialization of Exservan Oral Film in the European Union (EU) for the treatment of ALS. Zambon is a multinational pharmaceutical company with a focus on the CNS therapeutic area. Under the terms of the license agreement, an upfront payment was paid to Aquestive for the development and commercialization rights of Exservan in the EU, and Aquestive will be paid development and sales milestone payments and low double-digit royalties on net sales of the product in the EU. Zambon is responsible for the regulatory approval and marketing of Exservan in the countries where Zambon seeks to market the product, and Aquestive will be responsible for the development and manufacture of the product. |
In January 2021, we announced our exclusive license to Mitsubishi Tanabe Pharma Holdings America, Inc. (“MTHA”) for the commercialization in the United States of Exservan. MTHA is a multinational pharmaceutical company with a focus on patients with ALS. Under the terms that are not favorableof the MTHA license agreement, upfront payments were paid to us. In addition,Aquestive with additional payments made by potential collaborators or licensors generallydue upon the occurrence of certain milestone events in advance of launch. Aquestive will depend upon our achievementalso be paid double-digit royalties on net sales of negotiated developmentthe product in the United States and regulatory milestones. Failurewill earn revenue pursuant to achieve these milestonesthe exclusive supply agreement. The product is expected to launch in mid-2021. Exservan may harm our future capital position. See “Funding Requirements” belowpotentially fulfill a critical need for additional information regarding Aquestive’s cash needs.ALS patients, given it can be administered safely and easily, twice daily, without water.
| • | KYNMOBI®– a sublingual film formulation of apomorphine, which is a dopamine agonist developed to treat episodic off-periods in Parkinson’s disease. We licensed our intellectual property to Cynapsus Therapeutics, Inc., a company that was acquired by Sunovion Pharmaceuticals Inc., or Sunovion, for the commercialization of KYNMOBI under an Agreement dated April 1, 2016, as amended (the “Sunovion License Agreement”). KYNMOBI was approved by the FDA on May 21, 2020 and commercially launched by Sunovion in September 2020. On November 3, 2020, we entered into a Purchase and Sale Agreement (the “Monetization Agreement”) with MAM Pangolin Royalty, LLC, an affiliate of Marathon Asset Management (“Marathon”). Under the terms of the Monetization Agreement, we sold all of our contractual rights to receive royalties and milestone payments due under the Sunovion License Agreement related to Sunovion’s apomorphine product, KYNMOBI®. Through December 31, 2020, the Company received $50.0 million in gross proceeds pursuant to the Monetization Agreement, inclusive of an upfront payment of $40.0 million and the achievement of the first milestone payment of $10.0 million. Under the Monetization Agreement, additional aggregate contingent payments of up to $75.0 million may be due the Company upon the achievement of worldwide royalty and other commercial targets within a specified timeframe, which could result in total potential gross proceeds under the Monetization Agreement of $125.0 million. |
Zuplenz – an oral soluble film formulation of ondansetron, a 5-HT antagonist approved for the treatment of nausea and vomiting associated with chemotherapy and post-operative recovery. Ondansetron is available as branded and generic products as intravenous injections, intramuscular injections, orally dissolving tablets, oral solution tablets, and film. We licensed commercial rights for Zuplenz to Fortovia Therapeutics (previously Midatech Pharma PLC) in the United States, Canada, and China. Fortovia launched Zuplenz in the United States in 2015. We had been the sole and exclusive manufacturer of Zuplenz for Fortovia. On August 31, 2020 Fortovia filed a Chapter 11 bankruptcy proceeding in the Bankruptcy Court for the Eastern District of North Carolina. On January 29, 2021, the Bankruptcy Court approved an agreement pursuant to which the license and supply agreement between Aquestive and Fortovia was terminated, and all rights to commercialize Zuplenz returned to us, effective January 30, 2021. While not expected to be a material product for the Company, we are seeking a new partner to commercialize Zuplenz in the United States.
Business Update Regarding COVID-19
The current COVID-19 pandemic has continued to present substantial health and economic risks, uncertainties and challenges to our business, the U.S. and global economies and financial markets. It is not currently possible to predict how long the pandemic will last or the time it will take for the economy to return to prior levels. The extent to which COVID-19 impacts our business, operations, clinical trials, regulatory approval process, capital, financial and monetization markets, financial results and financial condition, and those of our suppliers, distributors, customers and other third parties necessary to our business including those involved in the regulatory approval process, will depend on future developments, which are highly uncertain and cannot be predicted with certainty or clarity, including the duration and continuing severity of the outbreak, resurgence of the outbreak, continued or additional government actions to contain COVID-19, timing or efficacy of any vaccine, and new information that will emerge concerning the short-term and long-term impact of COVID-19.
To date, we have been able to continue to manufacture and supply our products and currently do not anticipate any significant interruption in supply, although we continue to monitor this situation closely and there is no assurance that disruptions or delays maydelay will not occur as a result of COVID-19. We are also monitoring demand for our products, which could be negatively impacted during the COVID-19 pandemic, as well as the financial condition of our customers and licensees, one of whom delayed remittance of certain payments due the Company for development services provided but ultimately made such payments in later Q2 2020.payments.
Our office-based employeescolleagues have generally been working from home since mid-March 2020, while essentialMarch 2020. With additional protections and protocols the Company has maintained appropriate and necessary staffing levels inat both our operations remain on site, and personnel have continued in our laboratorieslaboratory and manufacturing locations.sites. In Q1 2020 we suspended in-person interactions by our sales and marketing personnel and engaged remotely to support our commercialization efforts. Sales and marketing practices continue to evolve in accordance with changing local rules and regulations with predominately virtualregulations. Virtual interactions remain a significant portion of our interactions with healthcare providers. However, theThe landscape continues to changeevolve as localities reestablish and/or ease restrictions, as the case may be, with the rise and fall of new case rates are rising in certain states and localities and these jurisdictions have or are contemplating reestablishing restrictions.
For additional information on various uncertainties and risks caused by the COVID-19 pandemic, see Part II, Item 1A, Risk Factors included in this report.rollout of vaccinations.
Critical Accounting Policies and Use of Estimates
See Note 3, Summary of Significant Accounting Policies, to our condensed 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 20192020 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 will comply with new or revised accounting standards not 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 contained therein and, as a result, 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, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, or (iii) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer’s compensation to median employee compensation. These exemptions will apply for a period of five years following the consummation of our IPO or until we no longer meet the requirements of being an emerging growth company, whichever is earlier.
We are also a “smaller reporting company,” meaning that we are not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent company that is not a “smaller reporting company,” and have either: (i) a public float of less than $250 million or (ii) annual revenues of less than $100 million during the most recently completed fiscal year and (A) no public float or (B) a public float of less than $700 million. As a “smaller reporting company,” we are subject to reduced disclosure obligations in our SEC filings compared to other issuers, including with respect to disclosure obligations regarding 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 manufactured products made to order for licensees including Suboxone and Zuplenz, as well as revenue from our self-developed, self-commercialized proprietary product, Sympazan.Sympazan®. Revenues are also earned from our product development services provided under contracts with customers, and from arrangements for the licensing of our intellectual property. These activities generate revenues in four primary categories: manufacturingmanufacture 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 commercialized pharmaceutical products: Suboxone and Zuplenz. We are the exclusive manufacturer for these products. We manufacture based on receipt of purchase orders from our licensees, and our licensees have an obligation to accept these orders once quality assurance validates compliancethe quality of the manufactured product with agreed upon technical specifications. Under ASC 606, we record revenues once the manufactured product passes quality control inspections. Our licensees are responsible for all other aspects of commercialization of these products and the Company has no role, either direct or indirect, in our customers’ commercialization activities, including those related to marketing, pricing, sales, payor access and regulatory operations.
We expect future manufacture and supply revenue from licensed products to be based on volume demand for existing licensed products, and for manufacturing and supply rights under license and supply agreements for existing or new agreements for successful product development collaborations.
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
We may realize licensing revenue from transferslicenses of our licenses.intellectual property. For licenses that do not require further development or other ongoing activities by us, our licensee has acquired the right to use the licensed intellectual property for self-development of their product candidate, for manufacturing, commercialization or other specified purposes, upon the effective transfer of those rights, and related revenues are generally recorded at a point in time, subject to contingencies or constraints, if any. For licenses that may provide substantial value only in conjunction with other performance obligations to be provided by us, such as development services or the manufacture of specific products, revenues are generally recorded over the term of the license agreement. 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 have patented technology rights. Royalty revenue related to the sale of future revenue is described further in this section under Critical Accounting Policies and Use of Estimates “Royalty Revenue and Interest Expense related to Sale of Future Revenue”.
Proprietary Product Sales, netNet
As we commercialize FDA approved proprietary CNS product candidates, we may directly sell such products to distributors of wholesale medical products in the United States, resulting in an additional and growing source of revenue. We commercialized our first proprietary CNS product, Sympazan, in December 2018. We currently sell Sympazan through wholesalers for distribution through retail and specialty pharmacies. Additionally, we may choose to access non-domestic markets by contracting with a collaborator to commercialize our product candidates in certain foreign markets. 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 proprietary product are recorded net of prompt payment discounts, wholesaler service fees, returns allowances, rebates and co-pay support redemptions, each of which are described in more detail in our 2019 Annual Report on Form 10-K.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 recordsincludes these estimated amounts in connection with 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 require adjustmentsbecome known in the future. The adequacy of these provisions is reviewed on a quarterly basis.
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 launchpost-launch commercialization efforts, related to our CNS product candidates, intellectual property procurement, protection, prosecution and litigation expenses, corporate management functions, medical and clinical affairs administration,administration; 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 primarily incurred from the manufacture of our commercialized licensed pharmaceutical products and for our self-developed, self-commercialized, approved proprietary product, including raw materials, direct labor and overhead costs principally in our Portage, Indiana facilities. Our material costs include the costs of raw materials 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. Overhead costs principally consist of indirect payroll, facilities rent, utilities and depreciation for leasehold improvements and production machinery and equipment. These costs can increase, or decrease, based on the costs of materials, purchased at market pricing, and the amount of direct labor required to produce a product, along with the allocation of fixed overhead, which is dependent on production volume.
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 to continue to seek to rationalize and manage costs to reflect the declining production volumes of Suboxone. Our unit production costsWe reduced the cost of manufacturemanufacturing and supply increased in late 2019 resulting fromand continued throughout 2020 in order to recognize the declining volume of Suboxone that beganwill continue declining in 2019 and that continues to decline in 2020.2021. We expect our overall manufacture and supply expense levelscosts and expenses to decrease over the next several years due to the effects of lowerdecline in Suboxone volume caused by competing generic products,volumes as the generics in that market continue to take market share, modestly offset by the costs to manufacturecommercialization of our proprietary products, which beganstarting with the launch of Sympazan launched in December 2018. In addition to our proprietary products coming online, we may add licensedlicensee products which may need additional resources to manufacture. If such growth should occur for higher volume product opportunities such as Suboxone, we would incur increased costs associated with hiring additional personnel to support the increased manufacturemanufacturing and supply costs arising from higher manufactured volumes from proprietary and licensed products.
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, including compensation, benefits, share-based compensation and travel expenses;expense;
external research and development expenses incurred under arrangements with third parties, such as contract research organizations, investigational sites and consultants, including costs associated with preclinical and clinical activities and regulatory operations;consultants;
the cost of acquiring, developing and manufacturing clinical study materials; and
costs associated with preclinical and clinical activities and regulatory operations and activities.operations.
We expect our research and development expenses to continue to be significant over the next several years as we continue to seek to obtain U.S. marketing access for our Libervant product candidate and continue to develop existing product candidates such as AQST-108, AQST-305AQST-108-SF, AQST-109-SF, AQST-305-SF and others, and we identify and develop or acquire additional product candidates and technologies. We may hire or engage additional skilled colleagues or third parties 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 patent-related and other legal expenses, consulting, tax and accounting services; insurance, selling,insurance; selling; market research,research; advisory board and key opinion leaders, depreciation,leaders; depreciation; and general corporate expenses, inclusive of IT systems related costs.
A significant portion of selling, general and administrative expenses relate to the salessale and marketing of our proprietary product, at this time Sympazan. Sympazan is the precursor and compliment to the launch of Libervant, assuming that it is approved and granted U.S. marketingmarket access. We believe there is a very high degree of overlap and correlation between prescribers of Sympazan and the likely prescribers of an approved Libervant.Libervant®. While Sympazan continues to grow, we will continue to rationalize its contribution to move towards profitability while continuing to introduce epilepsy prescribers and patients to Aquestive and PharmFilm® technology in advance of the anticipated launch of Libervant.Libervant, assuming FDA approval and market access. The current commercial organization would begin the launch of Libervant, subject to its approval for U.S. marketingmarket access, which cannot be assured, shortly after its approval. Until anya Libervant launch is certain, we do not plan to increase the costs of our commercial organization and will expect to continue to improve the efficiency of the Sympazan commercial investments.
Our general and administrative costs include costs related to accounting, audit, legal regulatory, and tax-related services required to maintain compliance with exchange listing and SEC regulations, director and officer insurance costs, and investor and public relations 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.
We will continue to manage ourbusiness costs to appropriately reflect the declining state of Suboxone revenue, the marketing and sales costs related to Sympazan and other external factors affecting our business, including the continuing impact of the COVID-19 pandemic, as we continue to focus on our core business:
Seeking to obtain the approval and subsequent launch of Libervant, subject to approval by the FDA for marketing in the U.S., market access, which cannot be assured.assured;
Continuing the development of AQST-108AQST-108-SF and AQST-109-SF along the 505(b)(2) pathway having begun PK clinical trials during the third quarter of 2020, subject to any delays associated with the coronavirus pandemic;pathway; and
Growing the revenue contribution from Sympazan as a first step to position Aquestive in the epilepsy community.
Interest Expense
Interest expense consists of interest costs on our 12.5% Notes at a fixed rate of 12.5%, payable quarterly, related to our currently outstanding debt obligation at the face amount of $70,000, as well as amortization of related loan costs and the debt discount. The 12.5% Notes are discussed in Note 13, 12.5% Senior Secured Notes and our planned reduction in the 12.5% Notes, resulting from the KYNMOBI™ royalty monetization, is discussed in Note 19(C), Subsequent Event,due 2025, to our Consolidated Financial Statements and inconsolidated financial statements. See Liquidity and Capital Resources.Resources below for further detail on our 12.5% Notes.
Royalties and Interest expense has increased based onExpense related to the additional borrowingsSale of Future Revenue
On November 3, 2020, we entered into a Purchase and Sale Agreement (the “Monetization Agreement”) with MAM Pangolin Royalty, LLC, an affiliate of Marathon Asset Management (“Marathon”). Under the terms of the Monetization Agreement, we sold all of our contractual rights to receive royalties and milestone payments due under the 12.5% Notes periodSunovion License Agreement related to Sunovion’s apomorphine product, KYNMOBI®. KYNMOBI®, an apomorphine film therapy for the treatment of off episodes in Parkinson’s disease patients, received approval from the U.S. FDA on May 21, 2020. In exchange for the sale of these rights, we received an upfront payment of $40,000 and an additional payment of $10,000 through the achievement of the first milestone. We have received an aggregate amount of $50,000 through March 31, 2021 under the Monetization Agreement.
Under the Monetization Agreement, additional aggregate contingent payments of up to $75,000 may be due to us upon the achievement of worldwide royalty and other commercial targets within a specified timeframe, which could result in total potential proceeds of $125,000.
We recorded the upfront proceeds of $40,000 and subsequent first milestone of $10,000, reduced by $2,909 of transaction costs, as a liability related to the sale of future revenue that will be amortized using the effective interest method over period but in the life of the Monetization Agreement. As future interest expense is expectedcontingent payments are received, they will increase the balance of the liability related to decreasethe sale of future revenue. Although we sold all of our rights to receive royalties and milestones, as a result of our ongoing obligations related to the November 2020 debt reduction described above.generation of these royalties, we will account for these royalties as revenue. Our ongoing obligations include the maintenance and defense of the intellectual property and to provide assistance to Marathon in executing a new license agreement for KYNMOBI® in the event Sunovion terminates the Sunovion License Agreement in one or more jurisdictions of the licensed territory under the Sunovion License Agreement.
During the second quarter of 2020, under the Sunovion License Agreement, the Company recognized $8,000 of royalty revenue and corresponding royalty receivable, related to the $1,000 annual minimum guaranteed royalty that is due in each of the next eight years. In connection with the Monetization Agreement, the Company performed an assessment under ASC 860, Transfer and Servicing to determine whether the existing receivable was transferred to Marathon and concluded that the receivable was not transferred.
As royalties are remitted to Marathon from Sunovion, the collection of the royalty receivable and balance of the liability related to the sale of future revenue will be effectively repaid over the life of the agreement. In order to determine the amortization of the liability related to the sale of future revenue, we are required to estimate the total amount of future royalty and milestone payments to Marathon over the life of the Monetization Agreement and contingent milestone payments from Marathon to the Company. The sum of future royalty payments less the $50,000 in proceeds received and future contingent payments will be recorded as interest expense over the life of the Monetization Agreement. At execution, the estimate of this total interest expense resulted in an effective annual interest rate of approximately 24.9%. This estimate contains significant assumptions that impact both the amount recorded at execution and the interest expense that will be recognized over the life of the Monetization Agreement. The Company will periodically assess the estimated royalty and milestone payments to Marathon from Sunovion and contingent milestone payments from Marathon to the Company. To the extent the amount or timing of such payments is materially different from the original estimates, an adjustment will be recorded prospectively to increase or decrease interest expense. There are a number of factors that could materially affect the amount and timing of royalty and milestone payments to Marathon from Sunovion, and correspondingly, the amount of interest expense recorded by the Company, most of which are not under our control. Such factors include, but are not limited to, changing standards of care, the initiation of competing products, manufacturing or other delays, generic competition, intellectual property matters, adverse events that result in government health authority imposed restrictions on the use of products, significant changes in foreign exchange rates as the royalties remitted to Marathon are made in U.S. dollars (USD) while a portion of the underlying sales of KYNMOBI® will be made in currencies other than USD, and other events or circumstances that are not currently foreseen. Changes to any of these factors could result in increases or decreases to both royalty revenue and interest expense related to the sale of future revenue.
Interest Income and other income (expense), net
Interest income and other income (expense), net consists of earnings derived from an interest-bearing account. There isaccount and other miscellaneous income and expense items. The interest-bearing account has no minimum amount to be maintained in the account nor any fixed length of period for which interest is earned.
Comparison of the Three-Month Periods Ended September 30,March 31, 2021 and 2020 and 2019
We recorded revenue of $8,260 and $12,418 during the three-month periods ended September 30, 2020 and 2019, respectively, and incurred net losses of $16,551 and $18,412 for those three-month periods.
Revenues:
| | | Three Months Ended September 30, | | |
Change | |
| (In thousands, except %) | | 2020 | | | 2019 | | | $ | | |
| % | |
| Manufacture and supply revenue | | $ | 5,903 | | | $ | 9,155 | | | $ | (3,252 | ) | | | (36 | %) |
| License and royalty revenue | | | 328 | | | | 1,356 | | | | (1,028 | ) | | | (76 | %) |
| Co-development and research fees | | | 341 | | | | 1,073 | | | | (732 | ) | | | (68 | %) |
| Proprietary product sales, net | | | 1,688 | | | | 834 | | | | 854 | | | | 102 | % |
| Total revenues | | $ | 8,260 | | | $ | 12,418 | | | $ | (4,158 | ) | | | (33 | %) |
The following table sets forth our revenue data for the periods indicated.
| | | Three Months Ended March 31, | | | Change | |
| (In thousands, except %) | | 2021 | | | 2020 | | | $ | | |
| % | |
| Manufacture and supply revenue | | $ | 6,511 | | | $ | 6,916 | | | $ | (405 | ) | | | (6 | )% |
| License and royalty revenue | | | 2,361 | | | | 426 | | | | 1,935 | | | | 454 | % |
| Co-development and research fees | | | 438 | | | | 263 | | | | 175 | | | | 67 | % |
| Proprietary product sales, net | | | 1,812 | | | | 1,160 | | | | 652 | | | | 56 | % |
| Total revenues | | $ | 11,122 | | | $ | 8,765 | | | $ | 2,357 | | | | 27 | % |
For the three-month period ended September 30, 2020,March 31, 2021, total revenues decreased 33%increased 27% or $4,158$2,357 to $8,260$11,122 compared to revenues of $12,418$8,765 for the same period in 2019. the prior year. The change is primarily attributableincrease was due to decreasesincreases in license and royalty revenue, co-development and research fees, proprietary product sales, net offset in part by a decrease in manufacture and supply revenue, license and royalty revenue and co-development and research fees, offset in part by an increase in proprietary product sales, net.revenue.
Manufacture and supply revenue decreased 36%6% or $3,252$405 to $5,903$6,511 for the three-month period ended September 30, 2020March 31, 2021 compared to $9,155 recognized during$6,916 for the same period in the prior year. This decrease is attributablewas due to lower volume in 2020 partially offset by increased pricing associated with our Suboxone product affecting the current period. We expect Suboxone2021 due to continue to experience market share erosion as generic competition continues to take more market share. We continue to plan for the further erosion of this sunsetting product over time.competition.
License and royalty revenue decreased 76%increased 454% or $1,028$1,935 to $328$2,361 for the three-month period ended September 30, 2020March 31, 2021 compared to revenues of $1,356 from$426 for the same period in the prior year period.year. This changeincrease was primarily relateddue to recognition of remaining deferred revenue associated with the inclusion of $1,000 from our 10% share of milestone payments paid to KemPharm during September 2019, under its licensing of KP-415license and KP-484. There were no milestone payments received during the three months ended September 30, 2020 and there is no assurance that any such payments will be madesupply agreement with Fortovia Therapeutics which was terminated in the future. Royalty revenues earned on Suboxonefirst quarter of 2021. The Company has no further performance obligations after termination of the license and Zuplenz remained relatively flat year-over-year. 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.supply agreement.
Co-development and research fees decreased 68%increased 67% or $732$175 to $341$438 for the three-month period ended September 30, 2020March 31, 2021 compared to $1,073 from$263 for the same period in the prior year period.year. The decreaseincrease was driven by the timing of the achievement of research and development performance obligations and are normally expected to fluctuate significantly from one reporting period to the next.
Proprietary product sales, net increased 102%56% or $854$652 to $1,688$1,812 for the three-month period ended September 30, 2020March 31, 2021 compared to $834 during$1,160 for the same period in the prior year period dueyear. Since Sympazan’s launch in 2018, acceptance with the medical and patient communities has steadily improved leading to increased Sympazan prescriptions written by CNS physicians and improved payor approval rates.
Expenses and Other:
| | | Three Months Ended September 30, | | Change | | | Three Months Ended March 31, | | | Change | |
| (In thousands, except %) | | 2020 | | 2019 | | $ | | | % | | | 2021 | | | 2020 | | | $ | | |
| % | |
| Manufacture and supply | | $ | 2,978 | | | $ | 4,643 | | | $ | (1,665 | ) | | (36 | %) | | $ | 2,757 | | | $ | 3,659 | | | $ | (902 | ) | | (25 | )% |
| Research and development | | 7,260 | | | 5,063 | | | 2,197 | | | 43 | % | | 3,659 | | | 4,354 | | | (695 | ) | | (16 | )% |
| Selling, general and administrative | | 11,803 | | | 13,714 | | | (1,911 | ) | | (14 | %) | | 13,231 | | | 14,613 | | | (1,382 | ) | | (9 | )% |
| Interest expense | | 2,778 | | | 2,652 | | | 126 | | | 5 | % | | 2,761 | | | 2,771 | | | (10 | ) | | — | % |
| Interest income | | (8 | ) | | (138 | ) | | (130 | ) | | (94 | %) | |
| Loss on extinguishment of debt | | — | | | 4,896 | | | (4,896 | ) | | NM | | |
| Interest expense related to the sale of future revenue | | | 3,334 | | | — | | | 3,334 | | | 100 | % |
| Interest (income) and other (income) expense, net | | | 52 | | | (102 | ) | | 154 | | | (151 | )% |
Manufacture and supply costs and expenses decreased 36%25% or $1,665$902 to $2,978$2,757 for the three-month period ended September 30, 2020March 31, 2021 compared to $4,643$3,659 for the same period in 2019.the prior year. The decrease was primarily due to lower volumes of Suboxone in the 2020 period compared to 2019.
Research and development expenses increased 43% or $2,197 to $7,260 for the three-month period ended September 30, 2020 compared to $5,063 recorded during the prior year period. Research and development expenses are driven primarily by the timing of clinical trial and other product development activities associated with the Company’s pipeline.
Selling, general and administrative expenses decreased 14% or $1,911 to $11,803 for the three-month period ended September 30, 2020 as compared to $13,714 for the prior year period. The Company continues to tightly manage selling, general and administrative expenses to focus our investments on continued development of our key pipeline products, Libervant and AQST-108, and the continued commercial growth of Sympazan, our first commercialized proprietary product.
Interest expense increased 5% or $126 to $2,778 for the three-month period ended September 30, 2020 compared to $2,652 for the same period in 2019. This was the result of $20,000 of additional outstanding debt and related higher loan acquisition and discount costs associated with the issuance of the 12.5% Notes on July 15, 2019. Prior to July 15, 2019, our interest expense was subject to fluctuations based on one-month LIBOR under the prior Perceptive Loan and was approximately 12% to 12.5%.
Interest income decreased 94% or $130 for the three-month period ended September 30, 2020, compared to the prior year period. This decrease is a result of lower interest rates and investing lower net cash balances during 2020 compared to the same period in 2019.
Loss on the extinguishment of debt during the three-month period ended September 30, 2019 represented the expenses incurred to prepay our loans payable to Perceptive Credit Opportunities Fund including the remaining unamortized debt discount and loan acquisition costs and a prepayment premium.
Comparison of the Nine-Month Periods Ended September 30, 2020 and 2019
We recorded revenue of $38,700 and $36,190 during the nine-month periods ended September 30, 2020 and 2019, respectively, and incurred net losses of $35,415 and $53,610 for those periods.
Revenues:
| | | Nine Months Ended September 30, | | | Change | |
| (In thousands, except %) | | 2020 | | | 2019 | | | $ | | | % | |
| Manufacture and supply revenue | | $ | 20,078 | | | $ | 24,739 | | | $ | (4,661 | ) | | | (19 | %) |
| License and royalty revenue | | | 13,682 | | | | 6,402 | | | | 7,280 | | | | 114 | % |
| Co-development and research fees | | | 870 | | | | 2,862 | | | | (1,992 | ) | | | (70 | %) |
| Proprietary product sales, net | | | 4,070 | | | | 2,187 | | | | 1,883 | | | | 86 | % |
| Total revenues | | $ | 38,700 | | | $ | 36,190 | | | $ | 2,510 | | | | 7 | % |
For the nine-month period ended September 30, 2020, total revenues increased 7% or $2,510 to $38,700 compared to revenues of $36,190 for the same period in 2019. The change is primarily attributable to increases in license and royalty revenue and proprietary product sales revenue for Sympazan, offset in part by decreases in manufacture and supply revenue and in co-development and research fees.
Manufacture and supply revenue decreased 19% or $4,661 to $20,078 for the nine-month period ended September 30, 2020 compared to $24,739 recognized during the prior year period. This decrease is attributable to lower Suboxone volume in 2020 partially offset by increased pricing.
License and royalty revenue increased 114% or $7,280 to $13,682 for the nine-month period ended September 30, 2020 compared to revenues of $6,402 realized during the comparable prior year period. License fees decreased $1,250 during these periods. The 2020 period included a $4,000 milestone payment earned upon the FDA approval, in May, and commercial launch in September of Sunovion’s KYNMOBI™ product whereas the 2019 period included $1,000 from our 10% share of milestone payments paid to KemPharm and $4,250 in license and new patent fees derived from our licensed product Suboxone. In the 2020 period, royalty revenue increased significantly due to $8,000 of KYNMOBI™ royalties recognized upon the approval of KYNMOBI™ while royalty revenues earned on Suboxone and Zuplenz slightly increased year-over-year. All further license fees due from Indivior related to Suboxone have been suspended pending the outcome of litigation related to infringement claims against the generic products that have launched “at risk.”
Co-development and research fees decreased 70% or $1,992 to $870 for the nine-month period ended September 30, 2020 compared to $2,862 during the prior year period. The decrease was driven by the timing of the achievement of research and development performance obligations, which typically fluctuate significantly from one reporting period to the next.
Proprietary product sales, net increased 86% or $1,883 during the nine-month period ended September 30, 2020 to $4,070, compared to the same prior year period of $2,187. Acceptance within medical and patient communities has steadily continued to improve following Sympazan’s launch in December 2018.
Expenses and Other:
| | Nine Months Ended September 30, | | | Change | |
| (In thousands, except %) | | 2020 | | | 2019 | | | $ | | |
| % | |
| Manufacture and supply | | $ | 10,176 | | | $ | 13,569 | | | $ | (3,393 | ) | | | (25 | %) |
| Research and development | | | 15,461 | | | | 17,517 | | | | (2,056 | ) | | | (12 | %) |
| Selling, general and administrative | | | 40,310 | | | | 47,868 | | | | (7,558 | ) | | | (16 | %) |
| Interest expense | | | 8,296 | | | | 6,515 | | | | 1,781 | | | | 27 | % |
| Interest income | | | (128 | ) | | | (565 | ) | | | (437 | ) | | | (77 | %) |
| Loss on extinguishment of debt | | | — | | | | 4,896 | | | | (4,896 | ) | | NM | |
Manufacture and supply costs and expenses decreased 25% or $3,393 to $10,176 for the nine-month period ended September 30, 2020 compared to $13,569 for the same period in 2019. The decrease primarily reflected lower volumes of Suboxone in the 2020 period compared to 2019.production.
Research and development expenses decreased 12%16% or $2,056$695 to $15,461$3,659 for the nine-monththree-month period ended September 30, 2020March 31, 2021 compared to $17,517$4,354 for the same period in the prior year period.year. Research and development expenses are driven primarily by the timing of clinical trial and other product development activities associated with the Company’s pipeline.
Selling, general and administrative expenses decreased 16%9% or $7,558$1,382 to $40,310$13,231 for the nine-monththree-month period ended September 30, 2020March 31, 2021 as compared to $47,868$14,613 for the same period in the prior year period.year. The decrease was driven by careful and prudent management of expenses primarily inlower Sympazan sales and marketing as well as factory overhead costs.costs in the first quarter of 2021.
Interest expense increased 27% or $1,781decreased by $10 to $8,296$2,761 for the nine-monththree-month period ended September 30, 2020March 31, 2021 compared to $6,515$2,771 for the same period in 2019, 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 12.5% Senior Secured Notes carry a 12.5% fixed interest rate per annum, with an increased principal amount outstanding thereunder.prior year.
Interest income decreased 77% or $437expense related to the sale of future revenue was $3,334 for the nine-monththree-month period ended September 30,March 31, 2021. This amount is due to the accounting associated with the sale of future revenue related to KYNMOBI® sold to Marathon on November 3, 2020 and does not represent a monetary obligation or cash output at any time during the life of the transaction. See note 15 for details.
Interest (income) and other (income) expense, net decreased $154 to $52 for the three-month period ended March 31, 2021 compared to the same prior year period. This decrease is a result of lower interest rates and investing lower net cash balances during 2020 compared to$(102) for the same period in 2019.the prior year. This decrease was due to the fair value adjustment of the put option related to the 12.5% Senior Secured Notes. See note 13 for details.
Loss on the extinguishment of debt during the three months ended September 30, 2019 represented the expenses incurred to prepay our loans payable to Perceptive Credit Opportunities Fund including the remaining unamortized debt discount and loan acquisition costs and a prepayment premium.
Liquidity and Capital Resources
Sources of Liquidity
Since our inception in January 2004, we have incurred significantAs of March 31, 2021, the Company has experienced a history of net losses and as of September 30, 2020, wethe Company’s accumulated deficits totaled $200,929 which have a net stockholders’ deficit of $36,519. We havebeen partially funded our operations primarily with equity and debt financings, withby gross margins from sales of commercialized licensed and proprietary products, and with license fees, milestone and royalty payments from our commercial partners and co-development licensees.licensees, and with the balance of the related funding requirements met by the Company’s equity and debt offerings, including the Senior Secured Notes due 2025 (the “12.5% Notes”). In 2019, the Company raised funding totaling $52,226, consisting of net proceeds of $13,110 from the refinancing of debt in July 2019, $37,295 from the public offering of 8,050,000 shares of common stock in December 2019, and $1,821 from the exercise of warrants in connection with the debt financing. We had $17,064$27,498 in cash and cash equivalents as of September 30, 2020 and working capital of $13,311.March 31, 2021.
On November 3, 2020, we entered into the Monetizationa Purchase and Sale Agreement (the “Monetization Agreement”) with MAM Pangolin Royalty, LLC, an affiliate of Marathon that will result in proceeds to us of up to $125,000 in exchange for which we conveyed to Marathon the right to all royalties and other payments due to us under the Sunovion License Agreement (See Note 6)Asset Management (“Marathon”). Under the terms of the Monetization Agreement, we willsold all of our contractual rights to receive aroyalties and milestone payments due under the Sunovion License Agreement related to Sunovion’s apomorphine product, KYNMOBI®. KYNMOBI®, an apomorphine film therapy for the treatment of off episodes in Parkinson’s disease patients, received approval from the FDA on May 21, 2020. In exchange for the sale of these rights, we received an upfront payment of $40,000 cashand an additional payment within 12 business days of signing$10,000 through the achievement of the first milestone. We have received an aggregate amount of $50,000 through March 31, 2021 under the Monetization Agreement.
Under the Monetization Agreement, and we are eligible to receiveadditional aggregate contingent payments of up to $85,000 of contingent payments at various points, beginning as early as the fourth quarter of 2020, based on$75,000 may be due to us upon the achievement of worldwide royalty targets and certain other commercial milestones.targets within a specified timeframe, which could result in total potential proceeds of $125,000.
With the upfront proceeds paid toof the Company under the Monetization Agreement,monetization, we will repayrepaid $22,500 of the 12.5% Notes, and issueissued $4,000 of new senior notes12.5% Notes in lieu of paying a prepayment premium on the early repayment of the 12.5% Notes, reducing the aggregate principal balance of senior notes12.5% Notes outstanding to $51,500 in the aggregate.$51,500. In addition, the holders of the 12.5% Notes have extendedagreed to extend to December 31, 2021 our ability to access, at our option, and additional $30,000 of senior notes12.5% Notes re-openers under the Indenture. The first $10,000 senior notes12.5% Notes re-opener represents a commitment of such amount by current holders of 12.5% Notes, at our option, contingent upon FDA approval of our product candidate Libervant. A second $20,000 senior notes12.5% Notes re-opener represents a right, at our option, to market to current holders of our 12.5% Notes, and/or other lenders, additional senior notes up to such amount, contingent upon FDA approval of Libervant for U.S. market access. If and to the extent that we access these re-openers, we will grant warrants to purchase up to 714,000 shares of common stock, with the strike price calculated based on the 30-day volume weighted average closing price of our common stock at the warrant grant date. In addition, as of the closing of this transaction, the Company will issuewe issued to the holders of the 12.5% Notes warrants to purchase 143,000 shares of our common stock.
We generate revenue from licensed productsThe Company began utilizing its “At-The-Market” (ATM) facility in November 2020 which has generated net cash proceeds of approximately $15,945 as of March 31, 2021. On March 26, 2021, the Company entered into Amendment No. 1 to the equity distribution agreement, to permit the offering of an unlimited amount of shares of common stock of the Company thereunder, subject to the terms and proprietary product sales, certain product development and licensing agreements and related activities. We have invested the margins from product sales and our other revenue sources, as well as proceeds from debt and equity securitiesconditions set forth in the developmentequity distribution agreement. The Company filed a prospectus supplement to offer up to an additional $50,000 of those marketed productsshares of common stock pursuant to the amended equity distribution agreement. This ATM facility, as well as development of our proprietary CNS and complex molecule pipeline and in development and growth of our growing patent portfolio. We also invested those financial resources in the protection and prosecution of those patents, in developing the commercialization aspects of our organization, in bringing our first self-developed CNS product to market and in developing our organization from private ownership to publicly owned status. The costs of these initiatives and concurrent growth, along with interest expenses and other costs of funding resulted in the $165,889 deficit we have accumulated from inception.
Onamended, has approximately $57,111 available at March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law as the pandemic continued to affect our nation’s economy. Among the significant goals of the CARES Act was to provide increased liquidity for businesses through deferral of employer payroll taxes, a tax credit for retaining employees and other provisions. We currently expect to benefit from the provision to defer the payment of certain employer payroll taxes of approximately $0.5 million for calendar year 2020, of which approximately $0.3 million has been deferred as of September 30, 2020. It is currently expected that half of these deferrals will become due at each of December 31, 2021 and December 31, 2022, respectively.2021.
Cash Flows
Nine-MonthThree-Month Periods Ended September 30,March 31, 2021 and 2020 and 2019
| (in thousands) | | 2020 | | 2019 | | | 2021 | | | 2020 | |
| Net cash (used for) operating activities | | $ | (31,947 | ) | | $ | (49,635 | ) | | $ | (14,097 | ) | | $ | (13,637 | ) |
| Net cash (used for) investing activities | | (281 | ) | | (577 | ) | | (103 | ) | | (131 | ) |
| Net cash (used for)/provided by financing activities | | | (34 | ) | | | 10,527 | | | | 9,891 | | | | (37 | ) |
| Net decrease in cash and cash equivalents | | $ | (32,262 | ) | | $ | (39,685 | ) | | $ | (4,309 | ) | | $ | (13,805 | ) |
Net Cash (Used for) Operating Activities
Net cash used for operating activities for the nine-monththree-month period ended September 30, 2020March 31, 2021 was $31,947.$14,097. The use of cash can be understood as represented by three major factors: (1)was primarily the result of our net loss of $35,415, (2) incremented by a net decrease$14,672, use of cash from changes in operating assets and liabilities of $5,713$6,340 partially offset by (3) non-cash operating expenses.expenses of $6,915. The non-cash operating expenses of $9,181 primarily resulted from $5,052interest expense related to sale of future revenue of $3,302, share-based compensation expense recorded in the nine months ended September 30, 2020. Other significant components included non-cash charges of $4,129$1,507, and $2,106 related to depreciation, amortization, and amortization of debt issuance costs.
Net cash used for operating activities for the nine-monththree-month period ended September 30, 2019March 31, 2020 was $49,635.$13,637. The use of cash is attributable to: (1)was primarily the result of our net loss of $53,610, (2) a net decrease$16,530, use of cash from changes in operating assets and liabilities of $9,822$294 partially offset by (3) non-cash operating expenses.expenses of $3,187. The non-cash operating expenses of $13,797 primarily resulted from, $5,199 of share-based compensation expense of $1,860, and a $4,896 loss on early extinguishment of our debt to Perceptive Credit Opportunities Fund recorded during this period. Other significant components included non-cash charges of $3,702$1,327 related to fixed asset depreciation, amortization, and amortization of debt issuance costs.
Cash used by operations improved in 2020 compared to 2019 comparable periods due to management of costs and expenses in 2020 to focus on key priorities as discussed above.
Net Cash (Used for) Investing Activities
Net cash used for investing activities was $281$103 for the nine-monththree-month period ended September 30, 2020March 31, 2021 compared to $577$131 for the comparative prior year period.
Net Cash (Used for)/Provided by Financing Activities
Net cash usedprovided for financing activities was $34$9,891 for the nine-monththree-month period ended September 30, 2020March 31, 2021 compared to $10,527$37 net cash providedused during the corresponding period in 2019.2020. The cash provided by financing activities in the first quarter 2021 was due to net proceeds from the sale of shares under the ATM facility. The cash used in financing activities in the first quarter of 2020 is a result ofdue to payment for withholding taxes on share-based compensation offset, in part, by proceeds received from employees participating in the Company’s Employee Stock Purchase Plan. The cash provided in 2019 results primarily from the excess of proceeds received from the issuance of the 12.5% Notes, described below, of $70,000 over cash used for the repayment of the $50,000 loan principal repaid to Perceptive, a related early repayment premium of $2,944 and $3,918 of loan acquisition costs associated with the 12.5% Notes. We also paid $2,723 for withholding taxes associated with tax reimbursements connected to certain share-based compensation incurred in 2018.
12.5% Senior Secured Notes
On July 15, 2019 we issued $70,000 aggregate principal amount of the 12.5% Notes and Warrants under the Indenture for the 12.5% Notes (“Indenture”). In addition, the Indenture provides opportunity to issue up to $30,000 of additional 12.5% Notes under certain conditions for a total possible issuance amount of $100,000. Also, in July 2019, in connection with our issuance of the12.5% Notes we repaid all outstanding amounts due under the Loan Agreement with Perceptive Credit Opportunities Fund dated August 16, 2016.Funding Requirements
The net proceeds from the issuance of the12.5% Notes was $66,054, after deducting expenses of the transaction. We used a portion of the net proceeds to repay an aggregate amount of $52,092 of existing Perceptive indebtedness, comprised of the outstanding 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 used the remaining net cash proceeds of approximately $13,110 for the continued commercialization and advancement of our proprietary products and pipeline candidates, and other general corporate purposes.
The additional 12.5% Notes can be issued if we satisfy certain conditions and achieve certain milestones related to the filing and approval of our epilepsy product candidate, Libervant, and there are available purchasers for the additional 12.5% Notes. Specifically, on or prior to March 31, 2021, we may issue an additional $10,000 aggregate principal amount of the 12.5% Notes if we filed a new drug application for our candidate Libervant with the FDA prior toCompany expects that date, provided we have obtained the written consent of the holders of a majority in aggregate principal amount outstanding under the 12.5% Notes in their discretion, which cannot be assured (first reopener) and, on or prior to March 31, 2021, up to an additional $30,000 (less the amount of any first reopener additional 12.5% Notes issued by us) if the Company obtains FDA approval of Libervant for U.S. market access prior to that date. There can be no assurance that FDA approval will be granted or that such additional financing will be consummated.
Interest on the 12.5% 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 12.5% Notes pursuant to a fixed amortization schedule. The stated maturity date of the 12.5% Note is June 30, 2025.
Collateral for the loan consists of a priority lien on substantially all assets, including intellectual property, of the Company.
Under the original terms of the Indenture, we have the right to monetize our royalty and milestone interests derived from an IP licensing agreement with Sunovion Pharmaceuticals Inc.in its recently launched apomorphine-based product, KYNMOBI™. Upon any such monetization we are required to offer to purchase each holder’s 12.5% Notes on a pro rata basis at a repurchase price in cash equal to 112.5% of the principal amount of such 12.5% Notes, plus accrued interest and unpaid interest, if any, thereon to the repurchase 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 12.5% Notes repurchased will be at the discretion of the holders of the 12.5% Notes. See Note 13, 12.5% Senior Secured Notes, to our Condensed Consolidated Financial Statements. To the extent that the holders of the Notes do not elect repayment of the debt in connection with any such monetization, the amount not elected up to $40 million (or $50 million if the first reopener has been funded) is required to be held in a collateral account until Libervant is approved by the FDA for U.S. market access. Certain aspects of this Indenture were modified in November 2020, as outlined below.
The Indenture permits us, upon the continuing satisfaction of certain conditions, including that we 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 (“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.
Affirmative and negative covenants and restrictions specified in the Indenture are considered typical for loans of this nature, including, but not limited to, requirements 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 and security interests, and entering into licensing or monetization arrangements other than as permitted under the Indenture.
The Indenture also restricts 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.
In connection with this financing, we issued Warrants to the initial holders of the 12.5% Notes. These Warrants provide rights to purchase up to an aggregate of 2,000,000 shares of common stock at a price of $4.25 per Warrant. Warrants for 428,571 of common shares were exercised in December 2019 generating proceeds of $1,829. The Company registered the Warrants and associated shares as part of our S-3 Registration Statement. There were no Warrants exercised in the nine-month period ended September 30, 2020.
With the upfront net proceeds paid under the Monetization Agreement, we will repay $22,500 of the 12.5% Notes, and issue $4,000 of new senior notes in lieu of paying a prepayment premium on the early repayment of the 12.5% Notes, reducing the senior notes outstanding to $51,500 in the aggregate. In addition, the holders of the 12.5% Notes have extended to December 31, 2021 our ability to access, at our option, $30,000 of senior notes re-openers under the Indenture. The first $10,000 senior notes re-opener represents a commitment of such amount by current holders of 12.5% Notes, at our option, contingent upon FDA approval of our product candidate Libervant. A second $20,000 senior notes re-opener represents a right, at our option, to market to current holders of our 12.5% Notes, and/or other lenders, additional senior notes up to such amount, contingent upon FDA approval of Libervant for U.S. market access, which cannot be assured. If and to the extent that we access these re-openers, we will grant warrants to purchase up to 714,000 shares of common stock, with the strike price calculated based on the 30-day volume weighted average closing price of our common stock at the time warrant grant date. In addition, as of the closing of this transaction, the Company will issue to the holders of the 12.5% Notes warrants to purchase 143,000 shares of our common stock.
Equity Offering
Our current cash balance is also incremented as a result of the December 17, 2019 completion of an equity offering of 8,050,000 shares of common stock pursuant to our S-3 Registration Statement, including exercise of the underwriter’s over-allotment option, resulting in gross proceeds of approximately $40,250 before underwriter discounts and other costs and expenses. Net proceeds were $37,835.
Future Capital Requirements
We believe that our existing cash and cash equivalents, combinedas of March 31, 2021, together with ultimateanticipated revenues from licensed and timely realization of expected recurring revenue streamsproprietary products, ATM activity, and proceeds from potential debt or equity transactionsexpense management activities (as further described below), will be adequate to fund our expected operating and capital costs and to service our debt costscash requirements for the next 12 months. We haveIn addition, the Company has potential sources of capital under its existing shelf registration statement and re-openers under its 12.5% Notes as it continues to execute its business strategy and has access to appropriate financial markets for debt or equity financings, or a combination of these potential sources of funds, although management can provide no assurance that any of these sources of funding, either individually or in combination, will be available on reasonable terms, if at all. In addition, the Company may be required to utilize available financial resources sooner than expected. Management has based thisits expectation on an operating plan and related assumptions that depend on various forward-looking factors that could change or prove to be inaccurate, and additionally, we could utilize our available financial resources sooner than we currently expect. Our existing cash resources are not alone sufficienteither due to fund our expected development, commercializationthe impact of COVID-19 or to unrelated factors including factors arising in the capital markets, asset monetization markets, regulatory approval process, regulatory oversight and other operations and activities, and we expect to continue to require external sources of funding and capital to develop and seek regulatory approval of our product candidates and for the commercialization of our approved products.factors. Key factors and assumptions inherent in our planned continued operations and anticipated growth include, without limitation, those related to the following:
the effects of the COVID-19 pandemic on our operations, operations of our key suppliers and third-party clinical and other service providers, our employeescolleagues and contractors and debt equity and other capital markets;
continued ability of our customers to pay, in a timely manner, for presently contracted and future anticipated orders for our manufactured goods, Suboxone and Sympazan, including effects of generics and other competitive pressures as currently envisioned;
continued ability of our customers to pay, in a timely manner, for presently contracted and future anticipated orders for provided co-development and feasibility services, as well as regulatory support services for recently licensed products, such as Exservan;
access to debt or equity capital markets if, and at the time, needed for any necessary future funding;
FDA approval of our key new drug candidate, Libervant, for U.S. market access. We submitted the NDA filing for Libervant in the fourth quarter of 2019 and received a PDUFA date of September 27, 2020. We received a Complete Response Letter on September 25, 2020 denying approval of the NDA in its current form. We are planning to resubmit the NDA to the FDA and to seek to demonstrate that Libervant is “clinically superior” as a major contribution to patient care to gain U.S. market access. There can be no assurance that we will obtain approval of Libervant for U.S. market access;
our ability to issue additional lender committed debtup to $30,000 in an aggregate amount of $10,000 of additional 12.5% Notes, which is contingent upon FDA product approval of Libervant, noted above;
our ability to issue additional marketable debt in an aggregate amount of up to $20,000 of additional 12.5% Notes, which is contingent upon FDA product approval of Libervant forand U.S. market access noted above;for Libervant;
continuing review and appropriate adjustment of our cost structure consistent with our anticipated revenues and funding;
continued growth and market penetration of Sympazan within expected commercialization cost levels for this product, including anticipated patient and physician acceptance and our ability to obtain adequate price and payment support from government agencies and other private medical insurers;
effective commercialization of within anticipated cost levels and expected ramp-up timeframes of our product candidate Libervant, if approved for U.S. market access by the FDA;
infrastructure and administrative costs at expected levels to support operations as an FDA and highly regulated public company;
a manageable level of costs for ongoing efforts to protect our intellectual property rights, including litigation costs in connection with seeking to enforce our rights concerning third parties’ at-risk“at-risk” launch of generic products;
continued compliance with all covenants under our 12.5% Notes; and
absence of significant unforeseen cash requirements.
We expect to continue to manage business costs to appropriately reflect the potential declining state of Suboxone revenues,revenue, the marketing and sales costs related to Sympazan, the proceeds from any KYNMOBI™ monetizationthe KYNMOBI® Monetization Agreement, and other external resources or factors affecting our business including, if available, any future potential issuances of additional 12.5% Notes under the Indenture, net proceeds ofor future equity financing, or other future 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, as well as the uncertainties associated with the coronavirus pandemic. In doing so, we plan to continue to focus on the core drivers of value for our stockholders, including, mostmore importantly continued investments in our ongoing product development and planned commercialization activities in support of Libervant, AQST-108-SF and AQST-108.AQST-109-SF. Until profitability is achieved, if at all, additional capital and/or other financing or funding will be required, which could be material, to further advance the development and commercialization of Libervant, AQST-108-SF and AQST-108,AQST-109-SF, if approved by the FDA for U.S. market access, both of which are subject to regulatory approval, and to meet our other cash requirements, including debt service. We plan to conservatively manage our pre-launch spending as to both timing and level relating to Libervant, including cost rationalization associated with marketing and selling Sympazan. In this regard, absent spending on launch activities for Libervant, we expect to continue to spend less on commercialization in 20202021 compared to 2019.2020. Even as such, we expect to continue to incur losses and negative cash flows for the foreseeable future and therefore we expect to be dependent upon external financing and funding to achieve our operating plan.
On November 3, 2020, we entered into the Monetization Agreement with Marathon, that will result in proceeds to us of up to $125,000 in exchange for which we conveyed to Marathon the right to all royalties and other payments due to us under the Sunovion License Agreement (See Note 6). Under the terms of the Monetization Agreement, we will receive a $40,000 cash payment within 12 business days of signing and we are eligible to receive up to $85,000 of contingent payments at various points, beginning as early as the fourth quarter of 2020, based on the achievement of worldwide royalty targets and certain other commercial milestones.
With the upfront proceeds paid to the Company under the Monetization Agreement, we will repay $22,500 of the 12.5% Notes, and issue $4,000 of new senior notes in lieu of paying a prepayment premium on the early repayment of the 12.5% Notes, bringing senior notes outstanding down to $51,500 in the aggregate. In addition, the holders of the 12.5% Notes have extended to December 31, 2021 our ability to access, at our option, $30,000 of senior notes re-openers under the Indenture. The first $10,000 senior notes re-opener represents a commitment of such amount by current holders of 12.5% Notes, at our option, contingent upon FDA approval of our product candidate Libervant. A second $20,000 senior notes re-opener represents a right, at our option, to market to current holders of our 12.5% Notes, or other lenders, additional senior notes up to such amount, contingent upon FDA approval of Libervant for U.S. market access, which cannot be assured. If and to the extent that we access these re-openers, we will grant warrants to purchase up to 714,000 shares of common stock, with the strike price calculated based on the 30-day volume weighted average closing price of our common stock at the warrant grant date. In addition, as of the closing of this transaction, the Company will issue to the holders of the 12.5% Notes warrants to purchase 143,000 shares of our common stock.
The sufficiency of our short-term and longer-term liquidity is expected to be directly impacted by our level of operating revenues and our ability to achieve our operating plan for revenues, regulatory approval in the time period planned of our late-stage proprietary products and our ability to monetize other royalty streams or other licensed rights within planned timeframes. Although we may also be entitled to further potential milestones, royalty and other payments under our Indivior Supplemental Agreement, which are currently suspended and may only be reinstated if Indivior successfully adjudicates or settles the related patent infringement litigation, and under the Monetization Agreement, there can be no assurance when, or if, any such payments may be realized. Our operating revenues have fluctuated in the past and can be expected to fluctuate in the future. We expect to incur significant operating losses and negative operating cash flows for the foreseeable future, and we have a significant level of debt on which we have substantial ongoing principaldebt repayment and debt service obligations.obligations have principal repayments aggregating $2,575 related to our 12.5% Notes due in the second half of 2021. A substantial portion of our current and past revenues has been dependent upon our licensing, manufacturing and sales with one customer, Indivior, which is expected to continue while we commercialize our own proprietary products and it could take significantly longer than planned to achieve anticipated levels of cash flows to help fund our operations and cash needs from sales of our proprietary products other than Suboxone.
To the extent that we raise additional funds by issuance of equity securities, our stockholders would experience further 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. Our ability to secure additional equity financing could be significantly impacted by numerous factors including our operating performance and prospects, positive or negative developments in the regulatory approval process for our proprietary products, 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, restriction under the Indenture, and general market conditions, and there can be no assurance that we will continue to be successful in raising capital or that any such needed financing will be available, available on favorable or acceptable terms or at the times, or in the amounts needed. Additionally, while the potential economic impact brought on by and the duration of the coronavirus pandemic is difficult to assess or predict, the significant impact of the coronavirus pandemic on the global financial markets, and on our own stock trading price, may reduce our ability to access additional capital, which would negatively impact our short-term and longer-term liquidity.
If adequate funds are not available for our short-term or longer-term liquidity needs and cash requirements as and when needed, we maywould be required to reduceengage in expense management activities such as reducing staff, further delay,delaying, significantly scalescaling back, or discontinueeven discontinuing some or all of our current or planned research and development programs and clinical and other product development activities, or reducereducing our planned commercialization efforts and otherwise significantly reducereducing our other spendspending and adjustadjusting 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 alternativealternatives or options or strategic alternatives, although we cannot assure that any of these actions would be available or available on reasonable terms.
See also Part II, Item 1A, Risk Factorsthe risk factors below concerning the significant risks and uncertainties concerning the Company’s business, operations, financial results and capital resources associated with the impact of the global coronavirus pandemic.
Off-Balance Sheet Arrangements
During the period presented, we did not have any material off balance sheet arrangements, nor do we have any relationships with unconsolidated entities or financial partnerships, such as entries often referred to as structured finance or special purpose entities.
| Quantitative and Qualitative Disclosures about Market Risk |
Prior to July 15, 2019, our exposure to market risk due to changes in interest rates related 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 have increased by approximately $500,000. However, our 12.5% Notes carry a 12.5% fixed interest rate per annum, thereby eliminating market risk due to changes in interest rates. Our cash and cash equivalents are maintained in FDIC protected accounts with no exposure to material changes in interest rates. At September 30, 2020, our interest rate on deposited cash was 0.18%. We do not purchase, sell or hold derivatives or other market risk sensitive instruments to hedge interest rate risk or for trading purposes. Further, we do not invest in any common stock or debt instruments that have been affected by the global COVID-19 outbreak which has resulted in material market movements during the quarter ended September 30, 2020.
Our accounts receivables have historically been concentrated with Indivior and, as of September 30, 2020, includes significant amounts due from Sunovion for contractually specified minimum annual royalties. In addition, beginning with the launch of Sympazan in 2018, our receivables concentrations with three large national wholesalers of pharmaceutical products has been growing and now, taken together, comprise approximately 28% of gross receivables. These receivables for our proprietary product may become increasingly significant in future periods should Sympazan sales increase and should other pipeline products become approvedRegulation S-K promulgated by the FDA and become distributed through these three regional, or other, wholesalers,SEC under the U.S. Securities Act of 1933, as anticipated. Inamended, we are not required to provide the event of non-performance or non-paymentinformation required by any of Indivior, Sunovion or said wholesalers, there may be a material adverse impact on our financial condition, results of operations or net cash flow.this Item 3.
Management’s Evaluation of our Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to our management, including to our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
As of September 30, 2020,March 31, 2021, our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(b) and 13a-15(e) under the Exchange Act). Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our principal executive officer and principal financial officer have concluded based upon the evaluation described above that, as of September 30, 2020,March 31, 2021, our disclosure controls and procedures were effective at the reasonable assurance level.
Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act), identified in connection with the evaluation of such internal control that occurred during our last fiscal quarter, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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 abbreviated new drug application (“ANDA”) filings in the United States by Watson Laboratories, Inc. (now Actavis Laboratories, Inc.For more information on Legal Proceedings, see Part I Item I. Financial Statements (Unaudited), 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 United States District Court for the District of Delaware (the “Delaware District Court”). 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.Note 19. Contingencies.
| ● | Mylan and Sandoz settled without a trial. Sandoz withdrew all challenges and became the distributor of the authorized generic products. |
| ● | All cases against Par were resolved pursuant to a May 2018 settlement agreement between the Company, Indivior, and Par and certain of its affiliates.
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| ● | Actavis was found to infringe Patent No. 6,603,514, or the ’514 patent, and cannot enter the market until the expiration of the patent in 2024, and the United States Court of Appeals for the Federal Circuit (“Federal Circuit”) affirmed that ruling on July 12, 2019.
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| ● | 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.
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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 Delaware District Court 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. A Markman hearing in the cases against Dr. Reddy’s and Alvogen, which is pending in the United States District Court for the District of New Jersey (the “New Jersey District Court”), was held on October 17, 2019. On November 5, 2019, District Judge McNulty of the New Jersey District Court issued a Markman opinion construing the disputed terms of the asserted patents. On January 9, 2020, the New Jersey District Court entered a stipulated order of non-infringement of one of the patents, Patent No. 9,931,305, or the ’305 patent, based on the Federal Circuit Court’s claim construction ruling, and we and Indivior preserved our rights to appeal the claim construction ruling. On November 19, 2019, Magistrate Judge Waldor of the New Jersey District Court issued an order granting DRL and Alvogen’s requests to file amended answers to add antitrust counterclaims against us and Indivior. We and Indivior appealed the Magistrate Judge’s decision to District Judge McNulty on December 4, 2019, and DRL and Alvogen opposed the appeal. On January 17, 2020, we filed a motion to dismiss DRL’s and Alvogen’s antitrust counterclaims for failure to state a claim and DRL and Alvogen opposed the motion. On August 24, 2020, Judge McNulty issued an Opinion and Order denying both the appeal of the Magistrate’s decision and our Motion to Dismiss. On June 3, 2020, the court issued an order setting a schedule for ongoing fact discovery, expert discovery, and dispositive motions. The schedule currently sets the close of fact discovery for October 20, 2020, with expert discovery continuing through the end of April 2021. The schedule also sets the deadline for filing dispositive motions for May 18, 2021. No trial date has been set in those cases. 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 losses, is any, in this matter.
On February 19, 2019, the Federal Circuit issued its mandate reversing the District of New Jersey’s preliminary injunction against Dr. Reddy’s. Following issuance of the mandate, the District of New Jersey vacated preliminary injunctions against both Dr. Reddy’s and Alvogen. Dr. Reddy’s, Alvogen, and Mylan all launched generic versions of Suboxone Sublingual Film, and the launches by Dr. Reddy’s 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. in the United States District Court for the Southern District of Florida (the “Southern District of Florida Court”) for infringement of the Company’s U.S. Patents Nos. 8,017,150, 9,687,454, the ’514 patent and the ’305 patent, seeking an injunction and potential monetary damages. Following a negotiated settlement between all parties, on December 3, 2019, the parties submitted a Notice of Settlement and a Joint Motion to Approve Consent Judgment. The Southern District of Florida Court entered an order dismissing the suit on December 18, 2019.
We are also seeking to enforce our patent rights in multiple cases against BioDelivery Sciences International, Inc. (“BDSI”). Three cases are currently pending but stayed in the U.S. District Court for the Eastern District of North Carolina (the “Eastern District of North Carolina Court”):
| ● | 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 8,652,378 and 8,475,832. This case is stayed. |
| ● | 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 (4) IPR’s challenging the asserted ’167 patent. On March 24, 2016, the United States Patent Trial and Appeal Board (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 result of the PTAB’s decisions. We are awaiting further action from the Court. |
| ● | On January 13, 2017, we also sued BDSI asserting infringement of the ’167 patent by BDSI’s Belbuca product and seeking an injunction and potential monetary damages. On August 7, 2019, the Eastern District of North Carolina Court granted BDSI’s motion to dismiss the Complaint without prejudice and denied BDSI’s motion to stay as moot. On November 11, 2019, we filed a new Complaint against BDSI in the Eastern District of North Carolina Court. On November 27, 2019, BDSI filed a motion to stay the case pending BDSI’s appeal of the PTAB’s remand decisions, and we opposed the motion. The Eastern District of North Carolina Court denied BDSI’s motion to stay on April 1, 2020. BDSI’s appeal of the PTAB’s remand decisions to the United State Court of Appeals for the Federal Circuit was docketed on March 13, 2019, and on March 20, 2019, we moved to dismiss the appeal for lack of jurisdiction. On August 29, 2019, the Federal Circuit granted the motion to dismiss BDSI’s appeal. On September 30, 2019, BDSI filed a petition for rehearing in the Federal Circuit en banc, which we opposed. The Federal Circuit denied BDSI’s petition for rehearing en banc on January 13, 2020. On June 11, 2020, BDSI filed a petition for writ of certiorari at the Supreme Court of the United States. At the request of the Supreme Court, we filed an opposition to BDSI’s petition on August 17, 2020, and BDSI filed a reply on August 27, 2010. On October 5, 2020, the Supreme Court issued an order denying BDSI’s petition. After the Federal Circuit denied BDSI’s petition, on January 13, 2020, BDSI filed with the Eastern District of North Carolina Court a motion to dismiss the Complaint, and we opposed the motion on February 2, 2020. The Eastern District of North Carolina Court denied BDSI’s motion to dismiss and its motion to stay on April 1, 2020. On April 16, 2020, BDSI filed an Answer to the Complaint, including counterclaims for non-infringement, invalidity, and unenforceability of the ’167 patent. On May 7, 2020, Aquestive filed a motion to dismiss BDSI’s unenforceability counterclaim and a motion to strike BDSI’s corresponding affirmative defenses for failure to state a claim for inequitable conduct under the heightened pleading standard applicable to such claims and defenses. Rather than oppose Aquestive’s Motion to Dismiss, on May 28, 2020, BDSI amended its counterclaims and filed an Answer and Amended Counterclaims, which included additional allegations in support of BDSI’s unenforceability counterclaim. On June 25, 2020, Aquestive filed a Motion to Dismiss BDSI’s Amended Counterclaim for unenforceability and a Motion to Strike BDSI’s corresponding affirmative defense of unenforceability again for failure to state a claim under the applicable heightened pleading standard. BDSI’s filed its opposition to Aquestive’s Motion to Dismiss and Strike on July 16, 2020. Aquestive filed its Reply to BDSI’s Opposition on July 30, 2020. The parties are awaiting further action from the court on Aquestive’s motion.
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Antitrust Litigation
On September 22, 2016, forty-one states and the District of Columbia, or the States, brought suit against Indivior and us in the U.S. District Court for the Eastern District of Pennsylvania, alleging violations of federal and state antitrust statutes and state unfair trade and consumer protection laws relating to Indivior’s launch of Suboxone Sublingual Film in 2010 and seeking an injunction, civil penalties, and disgorgement. After filing the suit, 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 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 were conducted through August 1, 2019. The remainder of the case schedule, including summary judgment briefing, is stayed pending resolution of Indivior’s appeal of the District Court’s class certification ruling in a co-pending multi-district litigation to which we are not a party. On July 28, 2020, the U.S. Court of Appeals for the Third Circuit issued its opinion affirming the District Court’s order certifying the class. On August 27, 2020, the district court issued a scheduling order, setting the deadline for filing remaining Daubert challenges and summary judgment. Under the scheduling order, the remaining Daubert motions were filed on September 28, 2020, and oppositions are due on October 19, 2020. The court will set oral argument on the motions, but the date for oral argument is not yet known. Summary judgment motions are due January 11, 2021, and responses to summary judgment motions are due February 11, 2021. No trial date has yet been set. We are not able to determine or predict the ultimate outcome of this proceeding or provide a reasonable estimate, or range of estimate, of the possible outcome or loss, if any, in this matter.
Humana and Centene Actions
On September 18, 2020, Humana, Inc., a health insurance payer, filed a suit against Aquestive and Indivior in the Eastern District of Pennsylvania relating to Suboxone. The Humana action, which alleges facts similar to those at issue in the Antitrust Case and the Suboxone MDL described above, was assigned to the same judge that is presiding over those actions. Humana’s Complaint alleges five causes of action against Aquestive, including conspiracy to violate the RICO Act, fraud under state law, unfair and deceptive trade practices under state law, insurance fraud, and unjust enrichment. On September 21, 2020, Centene Corporation and other related insurance payers filed a similar suit against Aquestive and Indivior in the Eastern District of Missouri. The counsel representing Humana is also representing Centene. On September 21, 2020, the Centene action was provisionally transferred to the Eastern District of Pennsylvania by the United States Judicial Panel on Multidistrict Litigation. No other proceedings have occurred, and the schedule is not yet known. We are not able to determine or predict the ultimate outcome of this proceeding or provide a reasonable estimate, or range of estimate, of the possible outcome or loss, if any, in this matter.
California Complaint
On December 5, 2019, Neurelis Inc. (“Neurelis”) filed a complaint against Aquestive in the Superior Court of California, County of San Diego alleging Unfair Competition, Defamation, and Malicious Prosecution related to the Company’s pursuit of FDA approval for Libervant. Neurelis filed a First Amended Complaint on December 9, 2019, alleging the same three causes of action. The Company filed a Motion to Strike Neurelis’s Complaint under California’s anti-SLAPP (“strategic lawsuit against public participation”) statute on January 31, 2020, which Neurelis is expected to oppose. Neurelis filed a motion for leave to file a Supplemental Complaint on February 5, 2020, which we will oppose. On February 5, 2020, Neurelis filed a Motion for Leave to File a Supplemental Complaint (“Motion”). On June 5, 2020, Neurelis filed a Motion for Limited Discovery related to Aquestive’s anti-SLAPP motion.
The court previously scheduled a hearing on both Aquestive’s anti-SLAPP Motion and on Neurelis’s Motion for April 24, 2020. However, on April 3, 2020, in response to the COVID-19 pandemic, the court issued an order continuing all hearings scheduled through April 30, 2020. The court held ultimately a telephonic status conference on June 25, 2020 to determine a schedule for hearing the pending motions. During that status conference, the court set Aquestive’s anti-SLAPP motion for hearing on July 24, 2020. The court also declined Neurelis’s request to hear its Motion and its Motion for Limited Discovery. Neurelis filed its response to Aquestive’s anti-SLAPP Motion on July 13, 2020, and we filed our reply on July 17, 2020. The court held a telephonic hearing on Aquestive’s anti-SLAPP motion on July 24, 2020. On August 6, 2020, the Court issued an order granting in part and denying in part Aquestive’s anti-SLAPP motion. Aquestive filed a notice of appeal to the California Court of Appeal on September 1, 2020, and Neurelis filed a notice of cross-appeal on October 5, 2020. We are not able to determine or predict the ultimate outcome of this proceeding or provide a reasonable estimate, or range of estimate, of the possible outcome or loss, if any, in this matter.
In light of continuing developments relating toYou should carefully review and consider the COVID-19 global pandemic, the Company is supplementing the risk factors previously disclosed in Item 1A of its 2019 Annual Report on Form 10-K to include the following risk factor under the heading “Risks Related to our Business Operations and Industry”:
Our business may be adversely affected by the ongoing coronavirus pandemic.
Beginning in late 2019, the outbreak of COVID-19, has evolved into a global pandemic. Depending upon the length and severity of the pandemic or any resurgence, which cannot be predicted, we may experience disruptions that could materially and adversely impact our business including:
| ● | Various aspects of our clinical trials, including delays or difficulties in enrolling patients in our clinical trials, in clinical trial site initiation, and in recruiting clinical site investigators and clinical site staff; increased rates of patients withdrawing from clinical trials; diversion of healthcare resources away from the conduct of clinical trials; interruption of key clinical trial activities such as clinical trials site data monitoring due to limitations on travel imposed or recommended by federal or state governments; impact on employees and others or interruption of clinical trial visits or study procedures which may impact the integrity of subject data and clinical study endpoints; and interruption or delays in the operations of the U.S. FDA, and comparable foreign regulatory agencies, which may impact regulatory review and approval timelines. |
| ● | If any third-party in our supply chain for any materials, including active pharmaceutical ingredients and other raw materials supply, which we need for our product candidates for our clinical trials and for the approved products we manufacture and distribute, are adversely impacted by restrictions resulting from the coronavirus pandemic, including staffing shortages, production slowdowns, or disruptions in freight and other transportation services and delivery distribution systems, our supply chain may be disrupted, limiting our ability to manufacture our product candidates for our clinical trials, conduct our research, development and clinical operations, and manufacture, distribute and sell our approved products. |
| ● | We have closed our business office and requested most of our colleagues located there to work from home, restricted full-time on-site staff generally to those colleagues who must perform essential activities on-site and implemented staggered schedules for full-time on-site staff in our research and development laboratory in order to reduce risk of transmission. Our increased reliance on colleagues and other third parties on whom we rely working from home or having health issues may negatively impact productivity and has limited our in-person commercialization activities for our existing approved proprietary product and would limit commercial launch activities for any new approved product, or disrupt, delay, or otherwise adversely impact our business. In addition, this could increase our cybersecurity risk, create data accessibility concerns, and make us more susceptible to communication disruptions, any of which could adversely impact our business operations. Our colleagues conducting research and development activities might not be able to access our laboratory or manufacturing facilities for an extended period of time as a result of any further closure of our facilities as well as the possibility of further governmental restrictions. As a result, this could delay timely completion of pre-clinical activities, including completing Investigational New Drug (IND)/Clinical Trial Application (CTA) enabling studies or our ability to select future development candidates, and initiation of clinical or other of our development programs and production and delivery of our products. |
| ● | The FDA and comparable foreign regulatory agencies may experience disruptions, have slower response times or be under-resourced to continue to monitor our clinical trials or to conduct required activities and review of our product candidates seeking regulatory review and such disruptions could materially affect the development, timing and approval of our product candidates. |
| ● | The coronavirus pandemic may impact the requirements of our customers and growth of our approved products. For example, Indivior, our significant customer for Suboxone, had announced that it anticipated coronavirus impact on its product sales. Further, sales force expansion may not be as productive during a time when a significant number of interactions are virtual and such interactions may not be as effective as face-to-face interactions. Additionally, an increasing number of patient visits to their Healthcare Professionals have been virtual during the coronavirus pandemic which may reduce the likelihood that a change in medicine would occur which could impact Sympazan growth. We cannot accurately predict the adverse impact the coronavirus pandemic will have on orders of our approved products Suboxone and Sympazan. We also have experienced in one instance, and could in the future experience, extended customer payment cycles. |
| ● | As a result of concerns caused by the continuing effects of the coronavirus, we may face issues and investor concerns in raising capital through sales of our common stock or other securities, or in seeking to monetize our licensed royalty and milestone rights. In addition, a recession, depression or other sustained adverse market event could materially and adversely affect the financial markets, our business, the value of our common stock and our ability to obtain on favorable terms, or at all, equity or debt financing or any potential monetization of our royalty streams. |
The coronavirus pandemic continues to rapidly evolve. The ultimate impact of the coronavirus pandemic on us is highly uncertain and subject to change and will depend on future developments, which cannot be accurately predicted. We do not yet know the full extent of potential delays or impacts on our business, our clinical trials, our research programs, the manufacturing, marketing, distribution and sale of our approved products, the healthcare system or the global economy. Given the uncertainties, the Company is unable to provide assurance that operations can be maintained as planned prior to the COVID-19 pandemic.
Please also refer to the complete Item 1A of the Company’s 2019 Annual Report on Form 10-K for additionalinformation regarding certain risks and uncertainties facing the Company any of which risks and uncertainties may be further heightened by the coronavirus pandemic andthat could have a material adverse effect on the Company’s business prospects, financial condition, results of operations, liquidity and available capital resources.resources set forth in Part I, Item 1A of the Company’s 2020 Annual Report on Form 10-K .
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
| Item 3. | Defaults Upon Senior Securities |
None.
Not applicable.
None.
The exhibits listed below are filed or furnished as part of this report.
| Number | | Description |
| | | |
| | Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a), as amended, under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
| | Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a), as amended, under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
| | Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). |
| | Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). |
| 101.INS | | XBRL Instance Document |
| 101.SCH | | XBRL Taxonomy Extension Schema Document |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
*Portions of this exhibit have been omitted pursuant to Rule 601(b)(10) of Regulation S-K. The omitted information is not material and would likely cause competitive harm to the registrant if publicly disclosed.
Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the County of Somerset, State of New Jersey.
| Aquestive Therapeutics, Inc. (REGISTRANT) |
| |
| Date: | NovemberMay 4, 20202021 | /s/ Keith J. Kendall |
| | Keith J. Kendall |
| | President and Chief Executive Officer |
| | (Principal Executive Officer) |
| | |
| Date: | NovemberMay 4, 20202021 | /s/ John T. MaxwellA. Ernest Toth, Jr. |
| | John T. MaxwellA. Ernest Toth, Jr. |
| | Interim Chief Financial Officer |
| | (Principal Financial Officer) |