Notes to Condensed Consolidated Financial Statements
(Unaudited, in thousands, except share and per share information)
Note 1.
Corporate Organization and Company Overview
(A) Company Overview
Aquestive Therapeutics, Inc. (“Aquestive”, “the Company”) is a specialty pharmaceutical company focused on identifying, developing and
commercializing differentiated products to address unmet medical needs and solve critical healthcare challenges, having been formed effective on January 1, 2018 via the conversion of MonoSol Rx, LLC, a Delaware limited liability company, to a
Delaware corporation and a simultaneous name change. The Company has a late-stage proprietary product pipeline focused on the treatment of diseases of the central nervous system, or CNS, and is developing orally administered complex molecules as
alternatives to more invasive therapies. Aquestive is pursuing its business objectives through both in-licensing and out-licensing arrangements, as well as the commercialization of its own products. Production facilities are located in Portage,
Indiana, and corporate headquarters, sales, commercialization operations and primary research laboratory facilities are based in Warren, New Jersey. The Company’s major customer and primary commercialization licensee has global operations
headquartered in the United Kingdom with principal operations in the United States; other customers are principally located in the United States.
(B)
Corporate Conversion and Reorganization, Stock Splits and IPO
Corporate Conversion and Reorganization
Effective on January 1, 2018, the Company converted from a Delaware limited liability company (LLC) into a Delaware corporation pursuant
to a statutory conversion and changed its name from MonoSol Rx, LLC (
“MonoSol”)
to Aquestive
Therapeutics, Inc., having previously operated as an LLC since January 2004. At the time of the statutory conversion, the holders of membership units of MonoSol contributed all of their LLC interests to Aquestive Partners, LLC, or APL, in
exchange for identical interests in APL. As a result of the exchange, APL was issued 5,000 shares of voting common stock in Aquestive Therapeutics, Inc. and became the parent and sole stockholder of the Company.
Stock
Splits
During 2018, the Board of Directors approved the Amended and Restated Certificate of Incorporation of the Company to:
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(i)
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increase the authorized number of shares of capital stock from 25,000 to 350,000,000 shares, and subsequently reduced that authorized total to 250,000,000,
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(ii)
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authorize certain non-voting common stock for use in settlement of performance incentive obligations, and
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(iii)
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effect a stock split of the Company’s common stock, par value $0.001 per share, such that each share be subdivided and reclassified into 37,212 shares of voting common
stock, par value $0.001 per share. Subsequent to this split, and in connection to pricing considerations related to the Company’s initial public offering (“IPO”), a reverse split was executed such that each 12.34 shares outstanding
converted into one share of common stock, par value $0.001 per share.
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The net effect of these stock splits is reflected in these financial statements as if they had occurred on January 1, 2018.
Initial Public Offering of Common Stock and Authorized Number of Capital Stock
On July 27, 2018, the Company closed the IPO of 4,500,000 shares of common stock at an offering price of $15.00 per share. The Company
received net proceeds of approximately $57,543 after deducting underwriting discounts, commissions, and offering-related transaction costs of approximately $9,957. On August 15, 2018, the Company was informed that the underwriters exercised their
over-allotment option and the Company issued 425,727 additional shares of common stock at $15.00 per share. Upon the closing of such exercise, the Company received additional net proceeds of approximately $5,939, after deducting underwriter
discounts of approximately $447. The IPO and overallotment option resulted in total net proceeds of $63,482. Immediately prior to the consummation of the IPO, all of the Company’s outstanding shares of non-voting common stock were automatically
converted to 4,922,353 shares of voting common stock.
Note 2. Basis of Presentation
The
accompanying interim unaudited condensed consolidated
financial statements were prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and with Article 10 of Regulation S-X for interim financial reporting. In compliance with those rules, certain information and
footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the
Company’s audited consolidated financial statements and related notes for the fiscal year ended December 31, 2018 included in our Annual Report on Form 10-K filed with the SEC on March 14, 2019 (the “2018 Annual Report on Form 10-K”). As included
herein, the condensed consolidated balance sheet at December 31, 2018, is derived from the audited consolidated financial statements as of that date. In the opinion of management, all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair statement of the results of interim periods have been included. The Company has evaluated subsequent events for disclosure through the date of issuance of the accompanying unaudited condensed financial statements.
Any reference in these notes to applicable guidance refers to the authoritative U.S. GAAP as found in the Accounting Standards
Codification (“ASC”) and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”).
Note 3. Summary of Significant Accounting Policies
(A) Principles of Consolidation
The interim condensed consolidated financial statements presented herein
include the accounts of Aquestive Therapeutics, Inc. and its wholly owned subsidiary, MonoSol Rx, Inc. Other than corporate formation activities, MonoSol Rx, Inc. has conducted no commercial, developmental or operational activities and has no
customers or vendors.
The results of operations and cash flows reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected in any other interim period
or for the entire fiscal year.
(B) Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions that affect the
reported amounts of assets and liabilities, including disclosure of contingent assets and contingent liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Significant items subject to estimates and assumptions include allowances for rebates from proprietary product
sales, the allowance for sales returns, the useful lives of fixed assets, valuation of share-based compensation, and contingencies.
(C) Recent Accounting Pronouncements
As an emerging growth company, the Company has elected to take advantage of the extended transition period afforded by the Jumpstart Our
Business Startups Act for the implementation of new or revised accounting standards and, as a result, the Company will comply with new or revised accounting standards no later than the relevant dates on which adoption of such standards is
required for emerging growth companies.
The Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on
its financial position or results of operations upon adoption.
In May 2014, the FASB, issued ASU 2014-09,
Revenue from Contracts with Customers
, and subsequently issued a number of amendments to this update. The new standard, as amended in Accounting Standards Codification, or ASC 606, provides a single comprehensive model to be
used in accounting for revenue arising from contracts with customers and supersedes previous revenue recognition guidance. The standard’s core principle is that an entity should recognize revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing and uncertainty of
revenue and cash flows arising from contracts with customers.
The Company adopted this standard on January 1, 2019, using the modified retrospective method and recorded a cumulative effect
adjustment of $2,832 to increase the opening balance of accumulated deficit. The impact was primarily related to deferral of a portion of the original upfront and milestone payments of its collaborative licensing arrangements resulting in a
deferral of $3,100 of previously recognized revenue as of the adoption date. The cumulative adjustment also reflects $151 net acceleration of revenue related to feasibility and development arrangements with its customers and acceleration of $117
of revenue recognition of its manufacturing and supply product sales. Under the modified retrospective method of adoption, the comparative information in the consolidated financial statements have not been revised and continues to be reported
under the previously applicable revenue accounting guidance, ASC 605. If ASC 605 had been applied to the first quarter of 2019, deferred revenue would have been $2,683 lower on the condensed consolidated balance sheet, with $278 lower in current
portion of deferred revenue and $2,405 Deferred revenue, net of current portion.
For additional information regarding the Company’s revenue, see
Note 5, Revenues and Trade Receivables, Net
In June 2018, the FASB issued ASU 2018-07,
Compensation
– Stock Compensation (Topic 718): Improvements to Non-Employee Share-Based Payment Accounting,
which more closely aligns accounting for share-based payments to nonemployees to that of employees under existing guidance of Topic 718. This
guidance supersedes previous guidance provided by
Subtopic 505-50, Equity – Equity-Based Payments to Non-Employees
. The Company adopted the new standard
effective January 1, 2019 and recorded a cumulative effect adjustment of $20 to its Accumulated deficit upon adoption.
In January 2016, the FASB issued revised guidance governing accounting and reporting of financial instruments (ASU 2016-01) and in 2018
issued technical corrections (ASU 2018-03). This guidance requires that equity investments with readily determinable fair values that are classified as available-for-sale be measured at fair value with changes in value reflected in current
earnings. This guidance also simplifies the impairment testing of equity investments without readily determinable fair values and alters certain disclosure requirements. ASU No. 2016-01,
Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
, also provides guidance as to classification of the change in fair value of financial liabilities.
Adoption of this standard was effective on January 1, 2019 and has had no material impact on the financial statements given the lack of any such equity investments during the period presented.
In March 2016, the FASB issued ASU 2016-09,
Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. This guidance simplifies aspects of accounting for employee share-based payments, including income tax consequences, classification
of awards as either equity or liabilities, and classifications within the statement of cash flows. This guidance was effective for annual periods beginning after December 15, 2017, with early adoption permitted. Under the Company’s now-terminated
Performance Unit Plans (PUPs), vested grants were unable to be exercised prior to either a change in control of the Company or completion of an IPO, and, as a result, expense recognition related to the settlement of these awards was deferred
until the PUPs were formally terminated in April 2018. Because the Company has incurred net operating losses since its incorporation, a full valuation allowance has been provided and, accordingly, there was no financial statement impact of
adopting the ASU 2016-09 provisions regarding recognition of tax effects associated with share-based compensation.
Recent Accounting Pronouncements Not Adopted as of March 31, 2019:
In February 2016, the FASB issued ASU 2016-02,
Leases
(Topic 842),
which establishes a comprehensive new lease accounting model. The new standard: (i) clarifies the definition of a lease, (ii) requires a dual approach to lease classification similar to current lease classifications, and
(iii) causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease-term of more than twelve months. The new standard is effective for the Company for fiscal years and
interim periods beginning after December 15, 2019 and requires modified retrospective application. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its condensed
consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13,
Financial
Instruments – Credit Losses (Topic 326)
, amending existing guidance on the accounting for credit losses on financial instruments within its scope. The guidance introduces an expected loss model for estimating credit losses, replacing the
incurred loss model. The new guidance also changes the impairment model for available-for-sale debt securities, requiring the use of an allowance to record estimated credit losses (and subsequent recoveries). The new guidance is effective for the
Company beginning after December 15, 2020. The Company is currently evaluating the impact of the adoption of this guidance on its condensed consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,
Statement
of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,
providing guidance on the classification of certain cash receipts and payments in the statement of cash flows intended to reduce diversity in
practice, including cash flows related to debt prepayment or extinguishment costs and contingent consideration that may be paid following a business combination. The guidance is effective for the Company for fiscal years beginning after December
31, 2019. Early adoption is permitted. The Company is currently evaluating the effect of the standard on its Condensed Consolidated Statement of Cash Flows.
In August 2018, the FASB issued ASU 2018-13,
Fair
Value Measurement (Topic 820): Disclosure Framework.
The purpose of the update is to improve the effectiveness of the fair value measurement disclosures that allows for clear communication of information that is most important to the
users of financial statements. There were certain required disclosures that have been removed or modified. In addition, the update added the following disclosures: (i) changes in unrealized gains and losses for the period included in other
comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period and (ii) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The
standard will become effective for the Company for its periods beginning after December 15, 2019; early adoption is permitted. The Company is currently evaluating the impact of ASU 2018-13 on its condensed consolidated financial statements.
Other pronouncements issued by the FASB or other authoritative accounting standards groups with future effective dates are either not
applicable or not significant to the condensed consolidated financial statements of the Company.
Note 4. Risks and Uncertainties
The Company’s cash requirements for 2019 and beyond include expenses related to continuing development and clinical evaluation of its
products, costs of regulatory filings, patent prosecution expenses and litigation expenses, expenses related to commercialization of its products, as well as costs to comply with the requirements of being a public company. As of March 31, 2019,
working capital totaled $26,320.
The Company believes that its revenues from licensed products, its proprietary product and cash on hand, including remaining funds
received from the July 2018 IPO, are adequate to meet its operating, investing, and financing needs for at least the next twelve months. To the extent additional funds are necessary to meet long-term liquidity needs as the Company continues to
execute its business strategy, the Company anticipates that these additional funding requirements will be obtained through additional debt or equity financings, or through monetization of certain royalty streams, or via a combination of these
potential sources of funds, although the Company can provide no assurance that these sources of funding will be available on reasonable terms, if at all.
Note 5. Revenues and Trade Receivables, Net
Our revenues to date have been earned from our product development pipeline, marketed product activities and self-developed medicines.
These activities generate revenues in four primary categories: manufacturing and supply revenue, co-development and research fees, license and royalty revenue, and proprietary product sales, net.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in
the current revenue standard. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. At contract inception, we assess the goods promised
in our contracts with customers and identify a performance obligation for each promise to transfer to the customer a good that is distinct. When identifying our performance obligations, we consider all goods or services promised in the contract
regardless of whether explicitly stated in the customer contract or implied by customary business practices.
The Company’s performance obligations consist mainly of transferring
control of goods and services identified in the contracts, purchase orders or invoices.
The Company’s performance obligation with respect to its proprietary product sales is satisfied at a point in time, which transfers control upon
delivery of the product to its customers. The Company considers control to have transferred upon delivery because the customer has legal title to the asset, physical possession of the asset has been transferred, the customer has significant risks
and rewards of ownership of the asset and the Company has a present right to payment at that time. With respect to manufacturing and supply revenue stream, a quantity is ordered and manufactured according to customer’s specifications and represents
a single performance obligation. The products manufactured are exclusively for specific customers and have no alternative use. Under the customer arrangements, the Company is entitled to receive payments for progress made to date once the
acceptance requirements surrounding quality control are satisfied. Thus, revenues related to this product stream is recognized at a point in time, which is when the manufactured product passes quality control.
Royalty revenues are estimated based on the provisions of contracts
with customers and recognized in the same period that the royalty-based products are sold to the Company’s strategic partners, as all royalties are directly attributable to the Company’s manufacturing activities, and are therefore recognizable
at the same time the manufacturing revenue is recognizable. In addition to usage-based royalties, licensing contracts may contain provisions for one-time payments related to certain license fees and milestone achievements. Revenue recognition
of these license fees and milestone payments depend on the nature of the specific contract, typically license and milestone payments are recognized at a point in time in the period they are achieved. However, there are limited instances where
upon review of the contract, it
is determined that the license is non-distinct and limited in nature and does not provide benefit to the customer without purchasing the product, these upfront
licensing fees are recognized over time (typically the length of the contract).
Co-development and research fee revenue is recorded over time based upon the progress of services provided in order complete
the specific performance obligation identified in the related contract.
Revenues from sale of products and services and the subsequent related payments are evidenced by a contract with the customer, which
includes all relevant terms of sale. For manufacturing and supply and proprietary product sales, invoices are generally issued upon the transfer of control and co-development and research revenue is typically invoiced based on the contractual
payment schedule, or upon completion of the service. Invoices are typically payable 30 to 60 days after the invoice date, however some payment terms may reach 105 days depending on the customer. The Company performs a review of each specific
customer’s credit worthiness and ability to pay prior to acceptance as a customer. Further, the Company performs periodic reviews of its customers’ creditworthiness prospectively.
Contract Assets
In limited situations, certain customer contractual payment terms require us to bill in arrears; thus, we satisfy some, or all,
of our performance obligations before we are contractually entitled to bill the customer. In these situations, billing occurs subsequent to revenue recognition, which results in a contract asset. We reflect these contract assets as a component of
Other receivables within Trade and other receivables on the Condensed Consolidated Balance Sheet. As of March 31, 2019, and January 1, 2019, such contract assets were $275, and $284, respectively.
Contract Liabilities
In other limited situations, certain customer contractual payment terms allow us to bill in advance; thus, we receive customer
cash payment before satisfying some or all of its performance obligations. In these situations, billing occurs in advance of revenue recognition, which results in contract liabilities. We reflect these contract liabilities as Deferred revenue on
our Consolidated Balance Sheet. As we satisfy our remaining performance obligations, we release a portion of the deferred revenue balance. As of March 31, 2019, and January 1, 2019, such contract liabilities were $3,105 and $3,762, respectively.
Revenue recognized for the three-month period ended March 31, 2019 that was reflected in the deferred revenue balance as of January 1, 2019 was $657.
The Company’s revenues were comprised of the following:
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Three Months Ended
March 31,
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2019
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2018
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Manufacture and supply revenue
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$
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6,669
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|
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$
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11,560
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License and royalty revenue
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4,622
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|
|
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9,500
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Co-development and research fees
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770
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|
|
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2,351
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Proprietary product sales, net
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582
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|
|
|
—
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Total revenues
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$
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12,643
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|
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$
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23,411
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Disaggregation of Revenue
The following table provides disaggregated net revenue by geographic area:
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Three Months Ended
March 31,
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2019
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|
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2018
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United States
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|
$
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12,394
|
|
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$
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23,197
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|
Non-United States
|
|
|
249
|
|
|
|
214
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Total revenues
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$
|
12,643
|
|
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$
|
23,411
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Non-United States revenues is derived primarily from products manufactured for the Australian and Malaysian markets.
Trade and other receivables, net consist of the following:
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March 31,
|
|
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December 31,
|
|
|
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2019
|
|
|
2018
|
|
Trade receivables
|
|
$
|
7,327
|
|
|
$
|
6,610
|
|
Other receivables
|
|
|
279
|
|
|
|
33
|
|
Less: allowance for bad debt
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|
|
(64
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)
|
|
|
(58
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)
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Less: sales-related allowances
|
|
|
(53
|
)
|
|
|
(104
|
)
|
Trade and other receivables, net
|
|
$
|
7,489
|
|
|
$
|
6,481
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|
Other receivables totaled $279 as of March 31, 2019, consisting primarily of contract assets related to the adoption of ASC 606. Other
receivables totaled $33 as of December 31, 2018, consisting primarily of reimbursable costs incurred on behalf of a customer. Sales-related allowances for both periods presented are estimated in relation to revenues recognized for sales of
Sympazan® beginning with the launch of this product in December 2018.
The following table presents the changes in the allowance for bad debt:
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March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Allowance for doubtful accounts at beginning of period
|
|
$
|
58
|
|
|
$
|
55
|
|
Additions charged to bad debt expense
|
|
|
6
|
|
|
|
53
|
|
Write-downs charged against the allowance
|
|
|
—
|
|
|
|
(50
|
)
|
Allowance for doubtful accounts at end of period
|
|
$
|
64
|
|
|
$
|
58
|
|
Sales Related Allowances and Accruals
Revenues from sales of products are recorded net of prompt payment discounts, wholesaler service fees, returns allowances, rebates and
Co-pay card redemptions. These reserves are based on estimates of the amounts earned or to be claimed on the related sales. These amounts are treated as variable consideration, estimated and recognized as a reduction of the transaction price at
the time of the sale. The Company includes these estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized for such transaction will not occur, or when the uncertainty
associated with the variable consideration is resolved. The calculation of some of these items requires management to make estimates based on sales data, historical return data, contracts and other related information that may become known in the
future. The adequacy of these provisions is reviewed on a quarterly basis.
The following table provides a summary of activity with respect to our sales related allowances and accruals for the three months ended
March 31, 2019:
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Total Sales Related
Allowances and Accruals
|
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Balance at December 31, 2018
|
|
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585
|
|
Provision related to sales during the period
|
|
|
423
|
|
Reversals of prior provisions
|
|
|
(89
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)
|
Credits and payments
|
|
|
(225
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)
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Balance at March 31, 2019
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|
|
694
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Total reductions of gross product sales from sale-related allowances and
accruals were $423 for the three months ended March 31, 2019. Reversals of prior provisions recorded during this period totaled $89, resulting in a net effect on reported proprietary product sales of $334.
Accruals for returns
allowances and prompt pay discounts are reflected as a direct reduction to trade receivable and accruals for wholesaler fees, co-pay cards and rebates as current liabilities. The accrued balances relative to these provisions included in Trade and
other receivables, net and Accounts payable and accrued expenses were $53 and $641, respectively, at March 31, 2019 and $104 and $481, respectively, at December 31, 2018.
The were no
related allowances and accruals at March 31, 2018, as Sympazan was launched in December 2018.
Concentration of Major Customers
Customers are considered major customers when sales exceed 10% of total net sales for the period or outstanding receivable balances
exceed 10% of total receivables. For the year ended December 31, 2018, Indivior, Inc. (“Indivior”) provided 89% of the total revenues for the period, and as of that date, the Company’s outstanding receivable balance from Indivior represented
approximately 78% gross receivables. For the three months ended March 31, 2019, revenues provided by Indivior represented approximately 88% of total revenue, and outstanding accounts receivable due from Indivior represented approximately 80% of
gross receivables.
Note 6. Material Agreements
Commercial Exploitation Agreement with Indivior
In August 2008, the Company entered into a Commercial Exploitation Agreement with Reckitt Benckiser Pharmaceuticals, Inc. (with
subsequent amendments, collectively, the “Indivior License Agreement”). Reckitt Benckiser Pharmaceuticals, Inc. was later succeeded to in interest by Indivior, Inc. Pursuant to the Indivior License Agreement, the Company agreed to manufacture
and supply Indivior’s requirements for Suboxone, a sublingual film formulation, both inside and outside the United States on an exclusive basis.
Under the terms of the Indivior License Agreement, the Company is required to manufacture Suboxone in accordance with current Good
Manufacturing Practice standards and according to the specifications and processes set forth in the related quality agreements the Company entered into with Indivior. Additionally, the Company is required to obtain Active Pharmaceutical
Ingredients (“API”) for the manufacture of Suboxone directly from Indivior. The Indivior License Agreement specifies a minimum annual threshold quantity of Suboxone that the Company is obligated to fill and requires Indivior to provide the
Company with a forecast of its requirements at various specified times throughout the year.
The Indivior License Agreement provides for payment by Indivior of a purchase price per unit that is subject to adjustment based on our
ability to satisfy minimum product thresholds. Additionally, in the event Indivior purchases certain large quantities of Suboxone during a specified period, Indivior will be entitled to scaled rebates on its purchases.
In addition to the purchase price for the Suboxone supplied, Indivior is required to make certain single digit percentage royalty
payments tied to net sales value (as provided for in the Indivior License Agreement) in each of the United States and in the rest of the world subject to annual maximum amounts and limited to the life of the related United States or international
patents. Indivior exercised its right to buy out its future royalty obligations in the United States under the Indivior License Agreement in 2012. Indivior remains obligated to pay royalties for all sales outside the United States.
The Indivior License Agreement contains customary contractual termination provisions, including those for breach, a filing for bankruptcy
or corporate dissolution, an invalidation of the intellectual property surrounding Suboxone, or commission of a material breach of the Indivior License Agreement by either party. Additionally, Indivior may terminate if the U.S. Food and Drug
Administration (“FDA”) or other applicable regulatory authority declares the Company’s manufacturing site to no longer be suitable for the manufacture of Suboxone or Suboxone is no longer suitable to be manufactured due to health or safety
reasons. The initial term of the Indivior License Agreement was seven years from the commencement date. Thereafter, the Indivior License Agreement automatically renews for successive one-year periods, unless either party provides the other with
written notice of its intent not to renew at least one year prior to the expiration of the initial or renewal term.
Supplemental Agreement with Indivior
On September 24, 2017, the Company entered into an agreement with Indivior, or the Indivior Supplemental Agreement. Pursuant to the
Indivior Supplemental Agreement, we conveyed to Indivior all of our existing and future rights in the settlement of various ongoing patent enforcement legal actions and disputes related to the Suboxone product. We also conveyed to Indivior the
right to sublicense manufacturing and marketing capabilities to enable an Indivior licensed generic buprenorphine product to be produced and sold by parties unrelated to Indivior or us. Under the Indivior Supplemental Agreement, we are entitled
to receive certain payments from Indivior commencing on the date of the agreement through January 1, 2023. Once paid, all payments made under the Indivior Supplemental Agreement are non-refundable, and total payments under this agreement are
capped at $75,000. Through February 20, 2019, the at-risk launch date of the competing generic products of Dr. Reddy’s Labs and Alvogen, we received an aggregate of $40,750 from Indivior under the Indivior Supplemental Agreement, of which $4,250
was collected during the three months ended March 31, 2019. Further payments under the Indivior Supplemental Agreement are suspended until adjudication of related patent infringement litigation occurs. If such litigation is successful, in
addition to the amounts already received as described in the foregoing, we may receive up to an additional $34,250, consisting of (i) up to $33,000 in the aggregate from any combination of (a) performance or event-based milestone payments and (b)
single digit percentage royalties on net revenue earned by Indivior on sales of Suboxone and (ii) and an additional $1,250 that was earned through the issuance to the Company of additional process patent rights.
All payments made by Indivior to the Company pursuant to the Indivior Supplemental Agreement are in addition to, and not in place of, any
amounts owed by Indivior to the Company pursuant to the Indivior License Agreement. Indivior’s payment obligations under the Indivior Supplemental Agreement are subject to certain factors affecting the market for Suboxone and may terminate prior
to January 1, 2023 in the event certain contingencies relating to such market occur.
License Agreement with Sunovion Pharmaceuticals, Inc.
In April 2016, we entered into a license agreement with Cynapsus Therapeutics Inc. (which was later succeeded to in interest by
Sunovion), referred to as the Sunovion License Agreement, pursuant to which we granted Sunovion an exclusive, worldwide license (with the right to sub-license) to certain intellectual property, including existing and future patents and patent
applications, covering all oral films containing APL-130277 (apomorphine) for the treatment of off episodes in Parkinson’s disease patients, as well as two other fields. Our licensee, Sunovion, as sponsor of APL-130277, submitted an NDA to the
FDA on March 29, 2018. According to statements by Sunovion, following the January 2019 PDUFA date, Sunovion received a Complete Response Letter from the FDA which requires additional data, but does not require additional clinical studies.
In consideration for the rights granted to Sunovion under the Sunovion License Agreement, we received aggregate payments totaling $18,000
to date. In addition to the upfront payment of $5,000, we have also earned an aggregate of $13,000 in connection with specified regulatory and development milestones in the United States and Europe (the “Initial Milestone Payments”), all of which
of which has been received to date. No payments were received during the three months ended March 31, 2019. We are also entitled to receive certain contingent one-time milestone payments related to product availability and regulatory approval in
the United States and Europe, certain one-time milestone payments based on the achievement of specific annual net sales thresholds of APL-130277, and ongoing mid-single digit percentage royalty payments related to the net sales of APL-130277
(subject to reduction to low-single digit percentage royalty payments in certain circumstances), subject to certain minimum payments. The maximum aggregate milestone payments that may be paid to us pursuant to the Sunovion License Agreement is
equal to $45,000. With the exception of the Initial Milestone Payments, there can be no guarantee that any such milestones will in fact be met or that additional milestone payments will be payable .
This Sunovion License Agreement will continue until terminated by us or Sunovion in accordance with the termination provisions of the
Sunovion License Agreement. Absent early termination, the Sunovion License Agreement continues (on a country-by-country basis) until the expiration of all applicable licensed patents. Upon termination, all rights to intellectual property granted
to Sunovion to develop and commercialize products will revert to the Company and Sunovion must continue to pay royalties to the Company on each sale of Sunovion's remaining inventory of products which include apomorphine as their API.
Agreement to Terminate CLA with KemPharm
In March 2012, the Company entered into an agreement with KemPharm, Inc. (“KemPharm”) to terminate a Collaboration and License Agreement
entered into in April 2011. Under this termination arrangement, we have the right to participate in any and all value that KemPharm may derive from the commercialization or any other monetization of KP 415 and KP 484 compounds or their
derivatives. Among these monetization transactions are those related to any business combinations involving KemPharm and collaborations, royalty arrangements, or other transactions from which KemPharm may realize value from these compounds. The
Company has not received payments under this arrangement during any of the periods presented herein.
Note 7.
Financial Instruments – Fair Value
Measurements
Certain assets and liabilities are reported on a recurring basis at fair value. Fair value is defined as the exchange price that would be
received for an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. To increase consistency and comparability in such measurements, the
FASB established a three-level hierarchy which requires maximization of the use of observable inputs and minimization of the use of unobservable inputs when estimating fair value. The three levels of the fair value hierarchy include:
|
•
|
Level 1 — Observable quoted prices in active markets for identical assets or liabilities.
|
|
•
|
Level 2 — Observable inputs (other than Level 1 quoted prices) that are not quoted on active markets but
that can be corroborated by market data.
|
|
•
|
Level 3 — Unobservable inputs that are supported by little or no market activity, such as pricing models,
discounted cash flow methodologies and similar techniques.
|
The Company’s Level 1 assets for the periods presented included cash and cash equivalents, including money market funds. The Company held
no Level 2 or Level 3 assets or liabilities as of either balance sheet date presented herein. Prior to exercise in connection with the July 2018 IPO, outstanding warrants held by Perceptive Credit Opportunities Fund were categorized as Level 3
liabilities. This warrant liability was estimated at fair value based primarily on independent third-party appraisals prepared an reported periodically, consistent with generally-accepted valuation methods of the Uniform Standards of Professional
Appraisal Practice, the American Society of Appraisers and the American Institute of Certified Public Accountants’ Accounting and Valuation Guide,
Valuation of
Privately-Held Company Equity Securities Issued as Compensation.
See Note 13 for further information on the Company’s warrants. In addition, Level 3 inputs provide the basis for estimated fair values of stock options granted during 2018
and 2019, which values were estimated using the Black-Scholes-Merton pricing model based on assumptions disclosed in Note 15.
The carrying amounts reported in the balance sheets for Trade and other receivables, Prepaid and other current assets, Accounts payable
and accrued expenses, and deferred revenue approximate fair value based on the short-term maturity of these assets and liabilities.
Note 8. Inventories, Net
The components of Inventory, net is as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Raw material
|
|
$
|
1,431
|
|
|
$
|
1,283
|
|
Packaging material
|
|
|
2,534
|
|
|
|
2,975
|
|
Finished goods
|
|
|
1,172
|
|
|
|
1,183
|
|
Total inventories, net
|
|
$
|
5,137
|
|
|
$
|
5,441
|
|
Note 9. Property and Equipment, Net
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
Useful Lives
|
|
2019
|
|
|
2018
|
|
Machinery
|
|
3-15 yrs
|
|
$
|
20,905
|
|
|
$
|
20,681
|
|
Furniture and fixtures
|
|
3-15 yrs
|
|
|
1,150
|
|
|
|
1,150
|
|
Leasehold improvements
|
|
(a)
|
|
|
21,333
|
|
|
|
21,333
|
|
Computer, network equipment and software
|
|
3-7 yrs
|
|
|
2,657
|
|
|
|
2,579
|
|
Construction in progress
|
|
|
|
|
1,476
|
|
|
|
1,655
|
|
|
|
|
|
|
47,521
|
|
|
|
47,398
|
|
Less: accumulated depreciation and amortization
|
|
|
|
|
(35,927
|
)
|
|
|
(35,191
|
)
|
Total property and equipment, net
|
|
|
|
$
|
11,594
|
|
|
$
|
12,207
|
|
Leasehold improvements are amortized over the shorter of the lease term or their estimated useful lives.
Total depreciation and amortization related to property and equipment was $736 and $940 for the three-month periods ended March 31, 2019
and 2018, respectively.
Note 10. Intangible Assets
The following table provides the components of identifiable intangible assets, all of which are finite lived:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Purchase technology-based intangible
|
|
$
|
2,358
|
|
|
$
|
2,358
|
|
Purchased patent
|
|
|
509
|
|
|
|
509
|
|
|
|
|
2,867
|
|
|
|
2,867
|
|
Less: accumulated amortization
|
|
|
(2,676
|
)
|
|
|
(2,663
|
)
|
Intangible assets, net
|
|
$
|
191
|
|
|
$
|
204
|
|
Amortization expense was $13 for each of the three-month periods ended March 31, 2019 and 2018. During the remaining life of the
purchased patent, estimated annual amortization expense is $50 for each of the years from 2019 to 2022.
Note 11. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Accounts payable
|
|
$
|
19,145
|
|
|
$
|
20,436
|
|
Accrued compensation
|
|
|
1,754
|
|
|
|
3,604
|
|
Accrued withholding tax for share-based compensation
|
|
|
—
|
|
|
|
2,515
|
|
Real estate and personal property taxes
|
|
|
356
|
|
|
|
388
|
|
Accrued distribution expenses
|
|
|
641
|
|
|
|
481
|
|
Other
|
|
|
192
|
|
|
|
207
|
|
Total accounts payable and accrued expenses
|
|
$
|
22,088
|
|
|
$
|
27,631
|
|
Note 12. Loans Payable
On August 16, 2016, the Company entered into a Loan Agreement and Guaranty (the
“Loan Agreement”)
with Perceptive Credit Opportunities Fund, LP (“Perceptive”). At closing of the Loan Agreement, as amended, the Company borrowed $45,000 from
Perceptive and was permitted to borrow up to an additional $5,000 within one year of the closing date based upon achievement of a defined milestone. In March 2017, the Company met its performance obligations under the terms of the Loan Agreement
with Perceptive and drew down the remaining $5,000 of its $50,000 credit facility. The loan proceeds were used to pay the existing debt obligation of $37,500 due to White Oak Global Advisors, LLC, with the balance available for general business
purposes.
On May 21, 2018, the Company and Perceptive agreed to make certain amendments to the loan agreement then in effect. In the event that a
qualified IPO could be consummated on or before December 31, 2018, the Company and Perceptive agreed to postpone the initial loan principal payments, delay the loan maturity date to December 16, 2020 and retain interest rate terms, payable
monthly, at one-month LIBOR or approximately 2% plus 9.75%, subject to a minimum rate of 11.75%. Accordingly, commencing on May 31, 2019, seven monthly loan principal payments are due in the amount of $550. Thereafter, monthly principal payments
in the amount of $750 are due through the maturity date, December 16, 2020, at which time the full amount of the remaining outstanding loan balance is due. At March 31, 2019 and December 31, 2018, respectively, $6,850 and $4,600 was classified as
current debt. The Company’s tangible and intangible assets are subject to first priority liens to the extent of the outstanding debt. Further, under the Loan Agreement, as amended, the Company is permitted, subject to Perceptive’s consent, to
monetize the royalty and fees derived from sales of certain apomorphine products and, in connection with such monetization, Perceptive has agreed to release liens related to these royalties and fees. Other significant terms
of the Loan Agreement, as amended,
include financial covenants, change of control triggers and limitations on
additional indebtedness, asset sales, acquisitions and dividend payments. Financial covenant requirements include (1) minimum liquidity under which a $4,000 minimum cash balance must be maintained at all times and (2) a minimum revenue
requirement under which minimum revenues for the trailing twelve consecutive months, measured at the end of each calendar quarter, must also be met. As of March 31, 2019, the Company was in compliance with all financial covenants under the Loan
Agreement, as amended. Also, as of that date, the carrying value of the Company’s loan payable approximated its market value. At closing
of the Loan Agreement, as amended,
Perceptive received a warrant to purchase senior common equity interests representing 4.5% of the fully diluted common units of the Company on an as converted basis,
which was automatically exercised in full at the time of the IPO (see Note 13).
The Company capitalizes legal and other third-party costs incurred in connection with obtaining debt as deferred debt issuance costs and
applies the unamortized portion as a reduction of the outstanding face amount of the related loan in accordance with ASU 2015-03,
Interest – Imputation of
Interest: Simplifying the Presentation of Debt Issuance Costs
. Similarly, the Company amortizes debt discounts, such as those represented by warrants issued to its lenders, and offsets those as a direct reduction of its outstanding debt.
Amortization expense arising from deferred debt issuance costs and debt discounts for the periods ended March 31, 2019 and 2018 were $389 and $458, respectively.
Unamortized deferred debt issuance costs and deferred debt discounts totaled $2,408 as of March 31, 2019 and $2,797 as of December 31,
2018.
Note 13. Warrants
The warrant issued to Perceptive in connection with the Agreement was, by its terms, set to expire on August 16, 2023 and provided
certain rights and preferences including anti-dilution adjustments so that, upon exercise, they would represent 4.5% of the Company’s fully diluted common stock on an as converted basis, subject to dilution for certain financing including the
issuance of shares upon termination of our PUPs. The warrant also provided Perceptive with a put right which, if exercised under certain circumstances, would require the Company to purchase the warrant for $3,000 within the first year of the loan
or $5,000 thereafter. Because these re-purchase terms could have required net-cash settlement, the appraised value of this warrant at the time of issuance of $5,800 was classified as a liability, rather than as a component of equity, and was
treated as a debt discount, with the unamortized portion applied to reduce the face amount of the loan in the accompanying Condensed Consolidated Balance Sheet.
Immediately prior to pricing of the Company’s IPO, Perceptive received 863,400 shares of common stock issuable pursuant to the automatic
exercise of warrants at a total price of $116. As a result, the warrant liability of $12,951 was reclassified to Additional paid-in capital during the third quarter of 2018. A Level 1 market price of $15.00, the initial price at which the
Company’s common stock was publicly offered, was used in determining fair value as of the warrants’ conversion date.
During interim periods, the Company used an independent third-party valuation to assist in determining the fair value of these warrants
due to the absence of available Level 1 and Level 2 inputs. During the three-month period ended March 31, 2018, as a result of a decline in the estimated fair value of this warrant liability, net income included a non-cash gain of $697. No gain
or loss was recognizable for any periods subsequent to the date of exercise of the warrants in July 2018. The fair values at both the date of the issuance and the dates of all interim balance sheets prior to exercise were based on unobservable
Level 3 inputs. Fair value was based on the aggregate equity of the Company, which was estimated utilizing the income and market valuation approaches. A probability weighted return model was then utilized to allocate the resulting aggregate
equity value of the Company to the underlying securities. Estimates and assumptions impacting the fair value measurement included the following factors: the then-current state of development of the Company’s pipeline product candidates, including
status of clinical trials; the Company’s progress towards an IPO, including selection of investment bankers, assessment of the IPO marketplace and other funding alternatives and a discount rate of 26.5% and a volatility rate of 90%.
Note 14. Net (Loss)/Income Per Share
Basic net (loss)/income per share is calculated by dividing net (loss)/income by the weighted-average number of common shares.
As a result of the Company’s net loss incurred for the quarter ended March 31, 2019, all potentially dilutive instruments outstanding
would have anti-dilutive effects on per-share calculations for this period. Therefore, basic and diluted net loss per share were the same, as reflected below.
|
|
Three Months
Ended
March 31,
2019
|
|
|
Three Months
Ended
March 31,
2018
|
|
Numerator:
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(14,726
|
)
|
|
$
|
4,099
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares – basic and diluted
|
|
|
24,963,603
|
|
|
|
15,077,647
|
|
Net (loss) income per common share – basic and diluted
|
|
$
|
(0.59
|
)
|
|
$
|
0.27
|
|
As of March 31, 2019, the Company’s potentially dilutive instruments included 1,732,426 options to purchase common shares and 172,655
unvested restricted stock units (“RSUs”) that were excluded from the computation of diluted weighted average shares outstanding because these securities had an anti-dilutive impact due to the loss reported. No such equity securities were issued
as of March 31, 2018.
Note 15. Share-Based Compensation
The Company’s share-based incentive plan costs reflected in the Condensed Consolidated Statements of Operations and Comprehensive Loss
for the period ended March 31, 2019 included those related to RSU awards and stock option grants. The Aquestive Therapeutics, Inc. 2018 Equity Incentive Plan (“the Plan”) was first adopted by the Board of Directors on June 15, 2018, and
accordingly, no charges to earnings were recorded in 2018 prior to the fiscal quarter ended June 30, 2018. The Company recognized share-based compensation in its
Condensed
Consolidated Statements of Operations and Comprehensive Loss during 2019 as follows:
Expense classification:
|
|
Three-Months
Ended
March 31,
2019
|
|
Manufacturing and supply
|
|
$
|
44
|
|
Research and development
|
|
|
208
|
|
Selling, general and administrative
|
|
|
1,268
|
|
Total share-based compensation expenses
|
|
$
|
1,520
|
|
|
|
|
|
|
Share-based compensation from:
|
|
|
|
|
Restricted Stock Units
|
|
|
463
|
|
Stock Options
|
|
|
1,057
|
|
Total share-based compensation expenses
|
|
$
|
1,520
|
|
Share-Based Compensation Equity Awards
Restricted Stock Unit Awards (RSUs)
No new RSU awards were granted during either of the three-month periods ended March 31, 2019 or 2018. The following table summarizes
activity relative to the Company’s awards of RSUs for the three-month period ended March 31, 2019.
|
|
Number
of Units
|
|
|
Weighted Average
Grant Date Fair
Value Per Share
|
|
|
|
(In thousands)
|
|
|
|
|
Unvested at December 31, 2018
|
|
|
205
|
|
|
$
|
14.77
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
(30
|
)
|
|
|
15.03
|
|
Forfeited
|
|
|
(3
|
)
|
|
|
13.00
|
|
Unvested, March 31, 2019
|
|
|
172
|
|
|
$
|
14.75
|
|
The total grant date fair value of shares vested in the period ended March 31, 2019 was $448. As of March 31, 2019, there was approximately $2,077 of
unrecognized compensation costs related to awards of RSUs. These costs are expected to be recognized over a weighted-average period of less than three years.
Stock option awards
No stock options were granted during the three-month period ended March 31, 2018 and accordingly, the following table summarizes the
Company’s stock option activity only during the three-month period ended March 31, 2019:
|
|
Number
of Options
|
|
|
Weighted Average
Exercise Price
|
|
|
|
(In thousands)
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
1,033
|
|
|
$
|
14.72
|
|
Granted
|
|
|
845
|
|
|
$
|
7.96
|
|
Exercised, Forfeited, Expired
|
|
|
—
|
|
|
|
|
|
Outstanding at March 31, 2019
|
|
|
1,878
|
|
|
$
|
11.68
|
|
Vested or expected to vest at March 31, 2019
|
|
|
1,745
|
|
|
$
|
11.68
|
|
Exercisable at March 31, 2019
|
|
|
146
|
|
|
$
|
15.04
|
|
The weighted average grant date fair value of stock options granted during 2019 was $5.81
.
The fair values of stock options granted were estimated using the Black-Scholes-Merton pricing model based on the following assumptions:
|
|
Three Months Ended
March 31, 2019
|
|
Expected dividend yield
|
|
None
|
|
Expected volatility
|
|
|
85
|
%
|
Expected term (years)
|
|
|
6.1
|
|
Risk-free interest rate
|
|
|
2.5 - 2.6
|
%
|
During the three months ended March 31, 2019, options were granted with exercise prices ranging from $7.18 to $8.05, and accordingly,
given Aquestive’s share price of $6.91 at the close of the Company’s first quarter of 2019, these options provided no intrinsic value at that date. Certain shares granted in 2018 provided intrinsic value of $30 at March 31, 2019.
As of March 31, 2019, $12,375 of total unrecognized compensation expenses
related to non-vested stock options is expected to be recognized
over a weighted average period of 2.6 years from the date of grant.
Employee stock purchase plan
The Company’s Board of Directors adopted the Aquestive Therapeutics, Inc. Employee Stock Purchase Plan (
“ESPP”
) in June 2018, as amended and restated effective as of January 1, 2019. Rollout of the ESPP began in late 2018, and initial
employee purchases are expected to be made in 2019. The Company may offer common stock purchase rights biannually under offerings that allow for the purchase of common stock at the lower of 85% of the fair value of shares on either the first or
last day of the offering period. No purchases under the ESPP occurred in the three months ended March 31, 2019.
Note 16. Income Taxes
The Company has accounted for income taxes under the asset and liability method, which requires deferred tax assets and liabilities to be recognized for the
estimated future tax consequences attributable to differences between financial statement carrying amounts and respective tax bases of existing assets and liabilities, as well as net operating loss carryforwards and research and development
credits. Valuation allowances are provided if it is more likely than not that some portion or all of the deferred tax asset will not be realized.
The Company’s tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items. For the
three months ended March 31, 2019 and 2018, the Company recorded no income tax benefit from its pretax loss of $14,726 and pretax income of $4,099, respectively, due to realization uncertainties.
The Company’s U.S. Federal statutory rate is 21%. The primary factor impacting the effective tax rate for the three months ended March 31, 2019 is the
anticipated full year operating loss which will require full valuation allowances against any associated net deferred tax assets.
Note 17. Commitments and Contingencies
(A) Operating Leases
The Company has entered into various lease agreements for production and research facilities and offices. Most leases contain renewal
options. Certain leases contain purchase options and require the Company to pay for taxes, maintenance and operating expenses. All of the Company’s leases are classified as operating leases.
Rent expense for all leased manufacturing facilities and sales, laboratory and office space was $372 and $331 for the three-month periods
ended March 31, 2019 and 2018, respectively.
(B) Litigation and Contingencies
From time to time, the Company has been and may again become involved in legal proceedings arising in the ordinary
course of business, including product liability, intellectual property, commercial litigation, or environmental or other regulatory matters. Except as described below, Aquestive is not presently a party to any litigation or legal proceedings
that is believed to be material.
Patent-Related Litigation
Beginning in August 2013, we were informed of ANDA filings in the United States by Watson Laboratories, Inc. (now Actavis Laboratories,
Inc., or “Actavis”), Par Pharmaceutical, Inc.(“Par”), Alvogen Pine Brook, Inc. (“Alvogen”), Teva Pharmaceuticals USA, Inc. (“Teva”), Sandoz Inc. (“Sandoz”), and Mylan Technologies Inc. (“Mylan”), for the approval by the FDA of generic versions
of Suboxone Sublingual Film in the United States. We filed patent infringement lawsuits against all six generic companies in the U.S. District Court for the District of Delaware. After the commencement of the ANDA patent litigation against Teva,
Dr. Reddy’s Laboratories (“DRL”) acquired the ANDA filings for Teva’s buprenorphine and naloxone sublingual film that are at issue in these trials.
Of these, cases against three of the six generic companies have been resolved.
|
•
|
Mylan
and
Sandoz
settled without a trial. Sandoz withdrew all challenges and became the distributor of the authorized generic.
|
|
•
|
All cases against
Par
were resolved pursuant to a May 2018 settlement
agreement between us, Indivior, and Par and certain of its affiliates.
|
|
•
|
Actavis
was found to infringe the ‘514 patent and cannot enter the market. The
case is on appeal.
|
|
•
|
DRL
and
Alvogen
were found not to infringe under a different claim construction analysis, and the case is on appeal.
Teva
has agreed to be bound by all DRL adjudications.
|
Subsequent to the above, all potential generic competitors without a settlement agreement were also sued for infringement of
two additional new patents that contain new claims not adjudicated in the original case against DRL and Alvogen. All previously decided cases are on appeal and oral arguments were heard on April 1, 2019. The case(s) regarding the additional
asserted patents have not been finally resolved. The case against Actavis, pending in the U.S. District Court for the District of Delaware, is scheduled for trial in December 2019. No trial date has been set in the cases against DRL and
Alvogen, which are pending in the U.S. District Court for the District of New Jersey. On February 19, 2019, the Federal Circuit issued its mandate reversing the District of New Jersey’s preliminary injunction against Dr. Reddy’s. Following
issuance of the mandate, the District of New Jersey vacated preliminary injunctions against both Dr. Reddy’s and Alvogen. Thereafter, on February 19, 2019, Indivior launched the authorized generic of Suboxone Sublingual Film, which we
manufacture exclusively for sale and marketing by Sandoz, a sublicensee of Indivior. 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. for infringement
of the ‘150, ‘514, ‘454, and ‘305 patents, seeking an injunction and potential monetary damages. The case is pending in the Southern District of Florida, and the defendants have not yet filed their answers to the complaint.
We are also seeking to enforce our patent rights in multiple cases against BioDelivery Sciences International, Inc. (“BDSI”). Two cases
are currently pending but stayed in the U.S. District Court for the Eastern District of North Carolina:
|
•
|
T
he first, a declaratory judgment action brought by BDSI against Indivior and Aquestive, seeks
declarations of invalidity and non-infringement of U.S. Patents Nos. 7,897,080, or the ‘080 patent, 8,652,378, or the ‘378 patent, and 8,475,832, or the ‘832 patent. This case is stayed pending final resolution of the above-mentioned
appeals on related patents.
|
|
•
|
The second was filed by us and Indivior related to BDSI’s infringing Bunavail product, and alleges infringement of our patent, U.S. Patent No. 8,765,167, or the ‘167
patent, and seeks an injunction and potential monetary damages. Shortly after the case was filed, BDSI filed four (4) IPR’s challenging the asserted ‘167 patent. On March 24, 2016, the Patent Trial and Appeal Board, or the PTAB,
issued a final written decision finding that all claims of the ‘167 patent were valid. The case was stayed in May 2016 pending the final determination of the appeals on those decisions. Following the PTAB’s February 7, 2019 decisions
on remand denying institution, we and Indivior submitted a notice to the Court on February 15, 2019 notifying the Court that the stay should be lifted as 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.
Following the PTAB’s February 7, 2019 decisions on remand denying institution, the Company submitted a
notice to the Court on February 15, 2019 notifying the Court that BDSI’s motion to stay should be denied as moot. BDSI also sent a letter to the Court on February 13, 2019 indicating its intent to appeal the PTAB’s decisions. The
parties are awaiting further action from the Court. BDSI appealed the PTAB’s remand decisions to the Federal Circuit, and on March 20, 2019, we moved to dismiss the appeal for lack of jurisdiction.
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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 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 case is currently in the expert discovery phase, which is
scheduled to close May 30, 2019. We are not able to determine or predict the ultimate outcome of this proceeding or provide a reasonable estimate, or range of estimates, of the possible outcome or loss, if any, in this matter.