Washington, D.C. 20549
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Indicate by check mark if disclosure of
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Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and "emerging growth company" in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the
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Based on the last sale price on the OTCQB
Market of the Common Stock of $0.3610 on June 29, 2018 (the last business day of the registrant’s most recently completed
second fiscal quarter), the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately
$2.7 million.
As of September 12, 2019, the registrant had 21,300,192 shares
of Common Stock, par value $0.01, outstanding.
Certain statements in this Report constitute
“forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or
achievements to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking
statements. Forward-looking statements may include, but are not limited to:
In some cases, you can identify forward-looking
statements by terms such as “anticipate,” “believe,” “continue,” “could,” “estimate,”
“expect,” “indicate,” “intend,” “look forward to,” “may,” “plan,”
“potential,” “predict,” “project,” “should,” “suggest,” “target,”
“will,” “would,” and other similar expressions intended to identify forward-looking statements. These statements
reflect our current views with respect to future events and are based on assumptions and subject to known and unknown risks and
uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We discuss many
of these risks in greater detail in Item 1A of this Report. In light of these risks, uncertainties and assumptions, the forward-looking
events and circumstances discussed in this Report may not occur and actual results could differ materially and adversely from those
anticipated or implied in the forward-looking statements.
Unless required by law, we undertake no
obligation to update or revise any forward-looking statements to reflect new information or future events or developments. Accordingly,
you should not assume that our silence over time means that actual events are bearing out as expressed or implied in such forward-looking
statements.
PART I
ITEM 1. BUSINESS
Overview
We are an innovative drug delivery company
engaged in the research, development and commercialization of technologies and products intended to address safe use of medications.
We have discovered and developed three proprietary platform technologies which can be used to develop multiple products. Our Limitx™
Technology is being developed to minimize the risk of opioid overdose, our Aversion® Technology is intended to address methods
of abuse associated with opioid analgesics while our Impede® Technology is directed at minimizing the extraction and conversion
of pseudoephedrine, or PSE, into methamphetamine.
Oxaydo Tablets (oxycodone HCl, CII), which
utilizes the Aversion Technology, is the first approved immediate-release oxycodone product in the United States with abuse deterrent
labeling. On January 7, 2015, we entered into a Collaboration and License Agreement with Egalet US, Inc. and Egalet Ltd., each
a subsidiary of Egalet Corporation (now known as Zyla Life Sciences), or collectively Zyla, pursuant to which we exclusively licensed
to Zyla worldwide rights to manufacture and commercialize Oxaydo. Oxaydo is currently approved by the U. S. Food and Drug Administration,
or FDA, for marketing in the United States in 5mg and 7.5mg strengths. Zyla launched Oxaydo in the United States late in the third
quarter of 2015. We are not actively developing product candidates utilizing our Aversion Technology.
We launched our first Impede Technology product, Nexafed, into
the United States market in December 2012 and launched our Nexafed Sinus Pressure + Pain product in the United States in February
2015. On March 16, 2017, we and MainPointe Pharmaceuticals, LLC, or MainPointe, entered into a License, Commercialization and Option
Agreement, or the MainPointe Agreement, pursuant to which we granted MainPointe an exclusive license to our Impede Technology in
the U.S. and Canada to commercialize our Nexafed products. The MainPointe Agreement also grants MainPointe the option to expand
the licensed territory to the European Union, Japan and South Korea and to add additional pseudoephedrine-containing products utilizing
our Impede Technology. MainPointe is controlled by John Schutte (Mr. Schutte), who became our largest shareholder pursuant to a
private placement completed in July 2017.
Our third abuse deterrent technology, Limitx,
is designed to retard the release of active drug ingredients when too many tablets are accidentally or purposefully ingested by
neutralizing stomach acid with buffer ingredients but deliver efficacious amounts of drug when taken as a single tablet with a
nominal buffer dose. We have completed four clinical studies of various product formulations utilizing the Limitx Technology which
have demonstrated proof-of-concept for the Limitx Technology and will allow us to advance a product to development for a New Drug
Application, or NDA. Studies AP-LTX-400, or Study 400, and Study AP-LTX-401, or Study 401, both utilizing our LTX-04 hydromorphone
formulation demonstrated the mean maximum drug concentration in blood, or Cmax, was reduced in healthy adult fasted subjects by
50% to 65% when excessive buffer levels were ingested or a situation consistent with over-ingestion of tablets. Study AP-LTX-301,
or Study 301 demonstrated drug Cmax from LTX-03, a Limitx hydrocodone bitartrate and acetaminophen combination product, in healthy
adult fasted subjects trended toward bioequivalence in test formulations A through E and showed an increasing reduction in Cmax
for formulations F through H; in which formulations A though H had increasing incremental amounts of buffer starting with no buffer
in formulation A. We believe the results of Study 301 demonstrated that LTX-03 is a formulation that optimizes the balance between
effective blood levels of drug for pain relief at a single tablet dose while retarding bioavailability of drug when multiple tablets
are ingested. The FDA designated the development program for LTX-04 as Fast Track, which is designed to facilitate the development,
and expedite the review of drugs to treat serious conditions and fill an unmet medical need. However, we intend to advance LTX-03,
which combines the hydrocodone micro-particles, acetaminophen and buffer ingredients into a single tablet, as our lead Limitx product
candidate due to its larger market size and its known prevalence of oral excessive tablet abuse, and we voluntarily placed the
Investigational New Drug Application, or IND, for LTX-04 on inactive status. We submitted an IND for LTX-03 to the FDA in the first
quarter of 2018 in order to advance to NDA development, which became effective in April 2018.
On June 28, 2019, we entered into License,
Development and Commercialization Agreement with Abuse Deterrent Pharma, LLC, a Kentucky limited liability company (“AD Pharma”),
a special purpose company representing a consortium of investors that will finance Acura’s operations and completion of development
of LTX-03. The Agreement grants AD Pharma exclusive commercialization rights in the United States to LTX-03.
According to the 2017 CDC Drug Surveillance Report, opioid analgesics
are one of the largest prescription drug markets in the United States with 214 million prescriptions dispensed in 2016. Prescription
opioids are also the most widely abused drugs with 12 million people abusing or misusing these products annually. Oxaydo will compete
in the immediate-release opioid product segment. Because immediate-release opioid products are used for both acute and chronic
pain, a prescription, on average, contains 66 tablets or capsules. According to IMS Health, in 2016, sales in the immediate-release
opioid product segment were approximately 194 million prescriptions, of which approximately 95% was attributable to generic products
with no known safety features. Immediate-release oxycodone tablets represent approximately 30 million of these prescriptions or
almost 1.7 billion tablets. The FDA approved label for our Oxaydo product describes the unique, and we believe promotable, abuse
deterrent features of our product which we believe makes prescribing our product attractive to some healthcare providers.
The CDC also reported approximately 45,000
suicide deaths in the U.S. in 2016 with poisoning being the third most prevalent route of suicide. Suicides have increased 30%
in the U.S. since 1999. More than 54% of suicides had no prior indication of mental health issues. We believe a significant portion
of these intentional poisonings included opioid analgesics which are known to induce respiratory depression related to overdose.
An analysis of forensic data associated with hydrocodone overdose deaths suggests a median dose of sixteen 10mg hydrocodone tablets
was measured in the bloodstream.
In 2014, the United States retail market for over-the-counter
market, or OTC, cold and allergy products containing the pseudoephedrine oral nasal decongestant was approximately $0.7 billion.
In 2014, the DEA reported 9,339 laboratory incidents involving the illegal use of OTC pseudoephedrine products to manufacture the
highly addictive drug methamphetamine, or meth. According to the Substance Abuse and Mental Health Services Administration, users
of methamphetamine surged in 20167 to 774,000 people up from 440,000 people in 2012. As of March 16, 2017, sales of Nexafed and
Nexafed Sinus are covered under the MainPointe Agreement, for which we receive a royalty.
We conduct research, development, laboratory,
manufacturing, and warehousing activities at our operations facility in Culver, Indiana and lease an administrative office in Palatine,
Illinois. In addition to internal capabilities and activities, we engage numerous clinical research organizations, or CROs, with
expertise in regulatory affairs, clinical trial design and monitoring, clinical data management, biostatistics, medical writing,
laboratory testing and related services. Our Supply Agreements with two third-party pharmaceutical product manufacturers and packagers
to supply our commercial requirements for our Nexafed and Nexafed Sinus Pressure + Pain products were assigned to MainPointe in
accordance with the MainPointe Agreement.
Our Strategy
Our goal is to become a leading specialty
pharmaceutical company focused on addressing the safe use of pharmaceuticals by developing a broad portfolio of technologies and
products with enhanced safety features and benefits. Specifically, we intend to:
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Capitalize on our experience and expertise in the research and development of innovative drug
delivery technologies that address medication safety. We have one FDA approved product containing our Aversion Technology commercially
launched in the United States by our licensee, and two products commercially launched containing our Impede Technology. We continue
to invest in improvements in these technologies and innovate new technologies, including our Limitx Technology.
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Leverage our technologies by developing a full line of pharmaceutical products which utilize
our proprietary technologies. Medication abuse and misuse is not limited to single drugs but often pervades entire drug categories.
We intend to develop or collaborate with strategically focused pharmaceutical companies to develop multiple products in the prescription
opioid and OTC cold/allergy markets with our technologies, and are seeking licensing partners for products in development utilizing
our Limitx Technology.
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Commercialize our products by licensing to strategically focused companies in the United States
and other geographic territories. We have licensed our Oxaydo product to Zyla for commercialization, have licensed our Aversion
Technology to KemPharm for use in certain of its prodrug products, have licensed our Nexafed products utilizing our Impede Technology
to MainPointe for commercialization (and granted MainPointe and AD Pharma options to other Impede products), and we are seeking
licensing partners for our products in development utilizing our Limitx, Aversion and Impede technologies. While we had developed
a small infrastructure to commercialize our OTC products that utilize the Impede Technology, this infrastructure has been discontinued
in conjunction with our entering into the MainPointe Agreement.
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Maintain an efficient internal cost structure. Our internal cost structure is focused on
discovering new technologies and developing product formulations using those technologies. We outsource many high cost elements
of development and commercialization, such as clinical trials and commercial manufacturing that minimize required fixed overhead
and capital investment and thereby reduces our business risk.
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Abuse of Prescription Opioid Products
and Development of Abuse Deterrent Formulations
Prescription opioids drugs, such as morphine
and oxycodone, have a long history of use for the management of pain. Because they are highly effective, they are one of the largest
prescribed drug categories in the U.S. However, a side effect of high doses of opioids is euphoria, or “a high”. For
these reasons, opioids are the most misused or abused prescription drugs in the U.S. Opioids are offered in a variety of dosages
including immediate-release tablets (or capsules), extended-release tablets (or capsules), patches and other formats. Abusers will
often manipulate or tamper with the formulations to achieve their high, including:
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Oral Excessive Tablet Abuse (ETA). Generally recognized as the most prevalent route of administration
by abusers, the abuser simply orally ingests more tablets (or capsules) than is recommended for pain relief.
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Oral Manipulated Tablet Abuse (MTA). Extended-release tablets or patches are sometimes crushed,
chewed or otherwise physically or chemically manipulated to defeat the extended-release mechanism and provide an immediate-release
of the opioid for oral ingestion.
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Nasal snorting. Crushed tablets are insufflated for absorption of the drug through the nasal tissues.
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Injection. The opioid is physically or chemically removed from the dosage and injected into the
vein using a syringe.
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Poly-pharmacy. Opioids are sometimes used in conjunction with alcohol, methamphetamine, or other
drugs to accentuate the high.
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Abuse deterrent formulations of opioid
dosages incorporate physical and/or chemical barriers or functionality in the formulations to prevent or discourage an abuser from
inappropriately administering the product. The extent and manner in which any of the features of abuse deterrent opioids may be
described in the FDA approved label for our pipeline products will be dependent on the results of and the acceptance by the FDA
of our and our licensees’ studies for each product.
Development of abuse deterrent products,
such our Aversion (if recommenced) product candidates, will require one or more abuse deterrent studies consistent with the FDA
2015 published guidance for industry on the evaluation and labeling of abuse-deterrent opioids (the “2015 Guidance”).
These studies may include in vitro laboratory studies to determine, among other things, syringeability of the formulation, extractability
of the opioid, and particle size of the crushed product. It is also expected that development will include human abuse liability
studies comparing the abuse liability of our product candidates to currently marketed products. Because our products use known
active ingredients in approved dosage strengths, the safety and efficacy of the opioid will need to be established by a series
of pharmacokinetic studies demonstrating: (a) bioequivalence to an approved reference drug, (b) food effect of our formulations,
and (c) dose proportionality of our formulation. A product candidate that does not achieve satisfactory pharmacokinetic results
may require a phase III clinical pain study.
Further development will likely also entail
additional safety and/or efficacy assessment as may be identified by the FDA for each specific formulation during the Investigational
New Drug application, or IND, or NDA phase of development. In accordance with the FDA’s 2015 Guidance, we will likely have
a post-approval requirement for each of our products, if approved, to perform an epidemiology study to assess the in-market impact
on abuse of our formulation.
Overdose Minimized Opioid Products and
Development
A known and FDA labelled side effect of
the overdose of opioids is respiratory depression. High doses of opioids can affect the respiratory center of the brain resulting
in a slowing and/or shallowing of the breathing which increases carbon dioxide (CO2) in the blood stream. Opioids also impact ancillary
CO2 monitoring of the blood preventing the body from taking corrective action. The increased CO2 and resulting decrease in oxygen
in the blood systematically shuts down body systems and may result in death.
Abusers as well as legitimate pain patients
are at risk of overdose. In some cases, overdose is accidental but anecdotal reports indicate suicide rates among pain patient
are increasing presumably due to their inability to access the pain medications they need to manage their condition.
In June 2019, FDA issued a draft for public
comment guidance on a Benefit-Risk Assessment Framework for Opioid Analgesic Drugs. The guidance indicates FDA will “consider
the public health risks of the [opioid] drug related to misuse, abuse, opioid use disorder, accidental exposure, and overdose in
both patients and nonpatients, as well as any properties of the drug that may mitigate such risks. We intend to develop our Limitx
Technology products consistent with this pending guidance and perform studies to demonstrate our drug candidates have properties
to mitigate the risk of overdose. Further development will likely also entail additional safety and/or efficacy assessment as may
be identified by the FDA for each specific formulation during the Investigational New Drug application, or IND, or NDA phase of
development.
Limitx™ Technology
Limitx Technology is intended to address
the accidental or intentional consumption of multiple tablets and provide a margin of safety against respiratory depression. We
believe these benefits for opioids are consistent with FDA’s proposed direction to require all newly approved opioid products
to have features of benefits that provide safety or efficacy benefits over existing available opioid therapies.
Development of our Limitx Technology was
supported by a $300 thousand grant by the National Institute on Drug Abuse of the National Institutes of Health for Phase I development,
which entailed the development of an optimized formulation of LTX-04 suitable for commercial manufacture and human testing.
NIDA
Disclaimer: Research on LTX-04 was supported by the National Institute On Drug Abuse of the National Institutes of Health under
Award Number R44DA037921. The results and content of any such research is solely the responsibility of Acura and does not necessarily
represent the official views of the National Institutes of Health.
The
LTX-04 development program was also designated as Fast Track by the FDA for its potential to address an unmet medical need but
we have voluntarily placed the IND for LTX-04 on inactive status to pursue development of LTX-03.
Limitx Technology Products in Development
We
have the following products in development utilizing our Limitx Technology:
Limitx Technology Products
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Status
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Immediate-release hydrocodone bitartrate with acetaminophen (LTX-03)
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Initial buffer dose ranging study completed October 2017
Follow on dose ranging study completed in January 2018
Manufacturing scale-up initiated
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Immediate-release oxycodone HCl (LTX-01) & (LTX-02)
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Formulation development in process
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Immediate-release non-opioid drug (LTX-09)
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Formulation development in process
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Immediate-release hydromorphone HCI (LTX-04)
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Two Phase I exploratory pharmacokinetic studies completed. IND no longer active.
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Study 400
Study 400 was a two cohort, open label,
crossover design pharmacokinetic study in healthy adult subjects. Study 400 measured the rate and extent of absorption of the active
drug ingredient into the bloodstream with the maximum concentration, or Cmax, typically associated with an increase in drug abuse.
Cohort 1 enrolled 30 subjects who were randomized into three subgroups of 10 taking either 1, 2 or 3 tablets. Each subgroup subject
orally swallowed the planned number of tablets in a randomized manner taking single doses of two different test formulations of
LTX-04 (designated as LTX-04P and LTX-04S and distinguished by their respective acid neutralizing capacity) and Purdue Pharma’s
marketed drug Dilaudid® as a comparator. The 1, 2 and 3 tablets subgroups in Cohort 1 completed 8, 10 and 8 subjects, respectively.
Cohort 2 enrolled 30 subjects who were
randomized into three subgroups of 10 taking either 4, 6 or 8 tablets. Each subgroup subject orally swallowed the planned number
of tablets in a randomized manner taking single doses of LTX-04P and the marketed drug Dilaudid as a comparator. The 4, 6 and 8
tablets subgroups in Cohort 2 completed 8, 9 and 8 subjects, respectively.
All tablets contained 2mg of hydromorphone hydrochloride. All
subjects received doses of naltrexone and there was a one week washout between doses. Blood samples were taken at pre-designated
time-points after dosing and were subsequently analyzed for the concentration of hydromorphone contained in the sample. All subjects
in Cohort 1 had continuous pH (a measure of acid concentration) monitoring of their gastric fluid. The objective of Cohort 1 was
to determine if adequate active drug entered the blood stream when one or two Limitx tablets were swallowed and to begin assessing
the ability of the Limitx Technology to start retarding the release of active ingredients when three tablets are ingested. The
objective of Cohort 2 was to further explore the extent the release of the hydromorphone active ingredient from LTX-04P tablets
is retarded as the dose level increases to abusive levels. A safety assessment of Limitx Hydromorphone will be made from both study
cohorts.
The topline results from Study 400 demonstrated that a single
tablet dose delivered a Cmax of 45% and 50% lower than the reference drug for LTX-04S and LTX-04P, respectively. For an 8 tablet
dose, the Cmax for LTX-04P was 59% lower than the reference drug. Doses between 1 and 8 tablets had similar reduction in Cmax compared
to the reference. The extent of drug absorption, measure by area under the curve (AUC) was consistent between the Limitx products
and the reference.
On December 14, 2016, we announced that
we had received advice from the FDA on the continued development of LTX-04 following the FDA’s review of summary data from
Study 400. The FDA confirmed our intention to reformulate LTX-04 to provide increased drug levels following an intended 1 or 2
tablet dose, noting that a scientific bridge of bioequivalence to the reference product will support a finding of safety and efficacy.
The FDA also recommended that we identify studies to measure the clinical impact on abuser behavior and overdose outcome (such
as drug liking and respiratory depression) associated with the reduction in Cmax when three or more LTX-04 tablets were ingested.
The FDA’s advice also identified longer term studies necessary for submitting a NDA for LTX-04, including in vitro extraction
studies, drug interaction studies, additional pharmacokinetic studies assessing the impact of food and beverages, and a category
3 abuse liability study.
Study
401
Study 401, completed in June 2017, also
was a two cohort, open label, crossover design pharmacokinetic study in fasted, health adult subjects. Study 401 utilized a modified
LTX-04 formulation containing micro-particles intended to improve drug delivery with one and two tablet dosing (LTX-04P3). Study
401 measured the rate and extent of absorption of the active drug ingredient into the blood stream with the Cmax typically associated
with an increase in drug abuse. 27 subjects completed Cohort 1 swallowing a single dose tablet of LTX-04 compared to a generic
hydromorphone tablet. 13 subjects completed Cohort 2 swallowing 7 LTX-04 and generic tablets doses. 15 subjects followed an undisclosed,
exploratory protocol.
All tablets contained 2 mg of hydromorphone
hydrochloride. All subjects received dosages of naltrexone and/or naloxone and there was a one week washout between dosages. Blood
samples were taken at pre-designated time-points after dosing and were subsequently analyzed for the concentration of hydromorphone
contained in the sample. The objective of Cohort 1 was to determine if adequate active drug entered the bloodstream when one Limitx
tablet was swallowed. The objective of Cohort 2 was to explore the extent to which the release of the hydromorphone active ingredient
from LTX-04 tablets is retarded at a seven tablet dose (oral excess abuse levels). A safety assessment of Limitx hydromorphone
would be made from both study cohorts.
The topline results from Study 401 demonstrated
that Cmax for a one tablet LTX-04P3 dose was approximately 50% less than the active comparator. The Cmax for the 7 tablet LTX-04P3
dose was 65% below the comparator. Study 401 also included a 7 tablet dose of LTX-04P3 taken simultaneously with an agent known
to increase gastric emptying time (i.e. increase retention time of the ingredients in the stomach) which demonstrated an increase
in Tmax (time of Cmax) of over 1 hour compared to LTX-04P3 taken without this agent. Since the micro-particles used in Study 401
release drug much faster than the micro-particles used in Study 400, we have concluded that the buffer levels used in both studies
were excessive and is retarding the release of drug even with a single dose. Also, given that manipulating the duration of stomach
acidity with a gastric emptying agent produced a significant increase in Tmax which is indicative of a delayed release of drug
from LTX-04P3, we concluded the Limitx micro-particles are working as designed in that when we neutralize the stomach acid we are
slowing the release of drug and subsequent absorption of drug into the blood stream.
We believe the results from Study 400 and
401 indicate the micro-particle are working as designed but that we used too much buffer for even a single tablet and did not achieve
full release of the drug at a 1 tablet dose.
Study
301
Study 301 was an open-label, parallel design
pharmacokinetic study testing our LIMITx formulation LTX-03 in 72 fasted healthy adult subjects randomized into 9 groups (8 subjects
per group). One group swallowed a single Norco® 10/325mg tablet, the marketed comparator or reference drug. The remaining 8
groups swallowed a single LTX-03 tablet with increasing buffering amounts starting with no buffer, LTX-03 formulations A through
H, respectively. All 72 subjects completed the study and the doses were generally well tolerated with no serious adverse events.
One subject in the Formulation E group was not analyzed due to emesis. LTX-03 is a combination of hydrocodone bitartrate and acetaminophen.
In Study 301 bioequivalence (BE) was examined
to generate information for future registration studies. Results demonstrated a trend toward BE for both active ingredients in
LTX-03 formulations A through E. Formulation E had BE ratios (log transformed) for hydrocodone of 0.89 and 0.97 for Cmax and Area
Under the Curve (AUC), respectively. In this small sample size study both hydrocodone BE confidence intervals were below the acceptable
lower BE range of 0.80 at 0.74 and 0.79 for Cmax and AUC, respectively. For acetaminophen, Formulation E’s BE Ratios were
1.15 and 1.03 for Cmax and AUC, respectively. While the acetaminophen AUC’s met the BE standards, the Cmax upper confidence
interval of 1.61 was above the acceptable upper BE range of 1.25. We believe that bioequivalence of this formulation may be achieved
by reducing data variability that can be achieved through an adequately powered crossover study design with sufficient numbers
of subjects in the study. For LTX-03 Formulations F though H, the higher buffer level tablets, Study 301 demonstrated a progressively
increasing reduction in hydrocodone Cmax culminating in a 34% Cmax reduction associated with Formulation H, the highest level evaluated.
The Cmax for acetaminophen did not decline in Formulations F through H in Study 301.
We believe that Study 301 identified a
formulation that optimizes the balance between providing therapeutic blood levels of drug for pain relief at a single tablet dose
while retarding the bioavailability of drug when higher buffer levels are ingested.
We intend to advance LTX-03 to clinical
development for a New Drug Application (NDA). Therefore, we submitted an Investigational New Drug Application, or IND with respect
to LTX-03, to the FDA in the first quarter of 2018, which became effective in April 2018. We are currently conducting the scale-up
of the commercial manufacturing process as to-be-marketed formulations are required for all NDA development work. Among other things,
we believe we will have to demonstrate a scientific link between Cmax reductions and a reduction in the risk of respiratory depression.
AD Pharma Agreement covering LTX-03
On June 28, 2019 we announced a License,
Development and Commercialization Agreement (the "Agreement") with Abuse Deterrent Pharma, LLC (“AD Pharma”),
a special purpose company representing a consortium of investors that will finance Acura’s operations and completion of development
of LTX-03 (hydrocodone bitartrate with acetaminophen) immediate-release tablets utilizing Acura’s patented LIMITx™
technology which addresses the consequences of excess oral administration of opioid tablets, the most prevalent route of opioid
overdose and abuse. AD Pharma retains commercialization rights from which Acura will receive royalties and potential sales related
milestones.
The Agreement grants AD Pharma exclusive
commercialization rights in the United States to LTX-03. Financial arrangements include monthly license payments by AD Pharma of
$350,000 up to the earlier of 18 months or FDA’s acceptance of a New Drug Application (“NDA”) for LTX-03 and
reimbursement by AP Pharma of Acura’s LTX-03 outside development expenses. Upon commercialization of LTX-03, Acura receives
stepped royalties on sales and is eligible for certain sales related milestones.
AD Pharma may terminate the Agreement at
any time. Additionally, if the NDA for LTX-03 is not accepted by the FDA within 18 months, AD Pharma may terminate the Agreement
and take ownership of the Limitx intellectual property.
We also granted authority to MainPointe
Pharmaceuticals, LLC (MainPointe) to assign to AD Pharma the option and the right to add, as an Option Product to the Nexafed®
Agreement, a Nexafed® 12-hour dosage (an extended-release pseudoephedrine hydrochloride product utilizing the IMPEDE® Technology
in 120mg dosage strength). In March 2017, we granted MainPointe an exclusive license to our IMPEDE ® Technology to commercialize
our Nexafed® and Nexafed® Sinus Pressure + Pain Products in the United States and Canada.
Mr. Schutte is our largest shareholder
and directly owns approximately 47.5% of our common stock (after giving effect to the exercise of warrants he holds). Mr. Schutte
also controls MainPointe and is an investor in AD Pharma.
Aversion Technology
Aversion Technology incorporates gelling
ingredients and irritants into tablets to discourage abuse by snorting and provide barriers to abuse by injection. Our Aversion
Technology and related opioid products, like Oxaydo, are covered by claims in six issued U.S. patents, which expire between November
2023 and March 2025. Our Aversion Technology products are intended to provide the same therapeutic benefits of the active drug
ingredient as currently marketed products containing the same active pharmaceutical ingredient.
Oxaydo Tablets
Oxaydo (oxycodone HCI tablets) is a Schedule II narcotic indicated
for the management of acute and chronic moderate to severe pain where the use of an opioid analgesic is appropriate. On January
7, 2015, we entered into a Collaboration and License Agreement with Zyla pursuant to which we exclusively licensed to Zyla worldwide
rights to manufacture and commercialize Oxaydo. Oxaydo is approved in 5mg and 7.5mg strengths. Zyla commenced shipping Oxaydo in
the United States in October 2015.
The 2017 market for immediate-release oxycodone
products was approximately 30 million dispensed prescriptions or 1.7 billion tablets. The current market is predominately serviced
by generic formulations that contain no abuse deterrent features and sell for approximately $0.10 to $0.40 per tablet, depending
on strength. Immediate-release opioids are prescribed by a broad cross-section of healthcare providers including primary care physicians,
surgeons and pain specialists. We believe Oxaydo, given its differentiated label compared to generic products, can offer an alternative
for opioid prescribing physicians concerned with the abuse or diversion for abuse of their prescriptions even at premium pricing
to generics
The safety and efficacy of Oxaydo 5mg and 7.5mg tablets was
established by demonstrating bioequivalence to commercially available oxycodone immediate-release tablets in the fasted state.
Oxaydo differs from oxycodone tablets when taken with a high fat meal though these differences are not considered clinically relevant,
and Oxaydo can be taken without regard to food. The FDA-approved label for Oxaydo describes elements unique to our Aversion Technology,
which differs from current commercially available oxycodone immediate-release tablets. The label for Oxaydo includes the results
from a clinical study that evaluated the effects of nasally snorting crushed Oxaydo and commercially available oxycodone tablets,
and limitations on exposing Oxaydo tablets to water and other solvents and administration through feeding tubes. The clinical study
evaluated 40 non-dependent recreational opioid users, who self-administered the equivalent of 15mg of oxycodone. After accounting
for a first sequence effect, the study demonstrated:
|
·
|
30% of subjects exposed to Oxaydo responded that they would not take the drug again compared to
5% of subjects exposed to immediate-release oxycodone;
|
|
·
|
subjects taking Oxaydo reported a higher incidence of nasopharyngeal and facial adverse events
compared to immediate-release oxycodone;
|
|
·
|
a decreased ability to completely insufflate two crushed Oxaydo tablets within a fixed time period
(21 of 40 subjects), while all subjects were able to completely insufflate the entire dose of immediate-release oxycodone; and
|
|
·
|
small numeric differences in the median and mean drug liking scores, which were lower in response
to Oxaydo than immediate-release oxycodone.
|
Although we believe these abuse deterrent characteristics differentiate
Oxaydo from immediate-release oxycodone products currently on the market, consistent with FDA guidance which requires epidemiology
studies to support a claim of abuse deterrence, the clinical significance of the difference in drug liking and difference in response
to taking the drug again in this study has not been established. There is no evidence that Oxaydo has a reduced abuse liability
compared to immediate release oxycodone. We and Zyla have a post-approval commitment with the FDA to perform an epidemiology study
to assess the actual impact on abuse of Oxaydo tablets.
Further, the Oxaydo product label guides patients not to crush
and dissolve the tablets or pre-soak, lick or otherwise wet the tablets prior to administration. Similarly, caregivers are advised
not to crush and dissolve the tablets or otherwise use Oxaydo for administration via nasogastric, gastric or other feeding tubes
as it may cause an obstruction. Our laboratory studies demonstrated that the Oxaydo tablet may gel when Oxaydo is exposed to certain
solvents, including water.
Zyla Agreement Covering Oxaydo
On January 7, 2015, we and Egalet US, Inc. and Egalet Ltd.,
each a subsidiary of Egalet Corporation, now known as Zyla Life Sciences or Zyla, entered into a Collaboration and License Agreement,
or the Zyla Agreement, to commercialize Oxaydo tablets containing our Aversion® Technology. Oxaydo is approved by the FDA for
marketing in the United States in 5 mg and 7.5 mg strengths. Under the terms of the Zyla Agreement, we transferred the approved
NDA for Oxaydo to Zyla and Zyla is granted an exclusive license under our intellectual property rights for development and commercialization
of Oxaydo worldwide, or the Territory, in all strengths, subject to our right to co-promote Oxaydo in the United States.
In accordance with the Zyla Agreement,
we and Zyla have formed a joint steering committee to oversee commercialization strategies and the development of product line
extensions. Zyla will pay a significant portion of the expenses relating to (i) annual NDA PDUFA program fees, (ii) expenses of
the FDA required post-marketing study for Oxaydo and (iii) expenses of clinical studies for product line extensions (additional
strengths) of Oxaydo for the United States and will bear all of the expenses of development and regulatory approval of Oxaydo for
sale outside the United States. Zyla is responsible for all manufacturing and commercialization activities in the Territory for
Oxaydo. Subject to certain exceptions, Zyla will have final decision making authority with respect to all development and commercialization
activities for Oxaydo, including pricing, subject to our co-promotion right. Zyla may develop Oxaydo for other countries and in
additional strengths, in its discretion.
Zyla paid us an upfront payment of $5.0
million upon signing of the Zyla Agreement and a $2.5 million milestone in October 2015 in connection with the launch of Oxaydo.
In addition, we will be entitled to a one-time $12.5 million milestone payment when worldwide Oxaydo net sales reach $150.0 million
in a calendar year. In addition, we will receive from Zyla a stepped royalty at percentage rates ranging from mid-single digits
to double-digits on net sales during a calendar year based on Oxaydo net sales during such year (excluding net sales resulting
from our co-promotion efforts). In any calendar year in which net sales exceed a specified threshold, we will receive a double
digit royalty on all Oxaydo net sales in that year (excluding net sales resulting from our co-promotion efforts). If we exercise
our co-promotion rights, we will receive a share of the gross margin attributable to incremental Oxaydo net sales from our co-promotion
activities. Zyla’s royalty payment obligations commenced on the first commercial sale of Oxaydo and expire, on a country-by-country
basis, upon the expiration of the last to expire valid patent claim covering Oxaydo in such country (or if there are no patent
claims in such country, then upon the expiration of the last valid claim in the United States or the date when no valid and enforceable
listable patent in the FDA’s Orange Book remains with respect to the Product). Royalties will be reduced upon the entry of
generic equivalents, as well as for payments required to be made by Zyla to acquire intellectual property rights to commercialize
Oxaydo, with an aggregate minimum floor.
The Zyla Agreement expires upon the expiration
of Zyla’s royalty payment obligations in all countries. Either party may terminate the Zyla Agreement in its entirety if
the other party breaches a payment obligation, or otherwise materially breaches the Zyla Agreement, subject to applicable cure
periods, or in the event the other party makes an assignment for the benefit of creditors, files a petition in bankruptcy or otherwise
seeks relief under applicable bankruptcy laws. We also may terminate the Zyla Agreement with respect to the U.S. and other countries
if Zyla materially breaches its commercialization obligations. Zyla may terminate the Zyla Agreement for convenience on 120 days
prior written notice, which termination may not occur prior to the second anniversary of Zyla’s launch of Oxaydo. Termination
does not affect a party’s rights accrued prior thereto, but there are no stated payments in connection with termination other
than payments of obligations previously accrued. For all terminations (but not expiration), the Zyla Agreement provides for the
transition of development and marketing of Oxaydo from Zyla to us, including the conveyance by Zyla to us of the trademarks and
all regulatory filings and approvals relating to Oxaydo, and for Zyla’s supply of Oxaydo for a transition period.
KemPharm Agreement Covering Opioid Prodrugs
On October 13, 2016, we and KemPharm Inc., or KemPharm, entered
into a worldwide License Agreement, or the KemPharm Agreement, pursuant to which we licensed our Aversion® Technology to KemPharm
for its use in the development and commercialization of three products using 2 of KemPharm’s prodrug candidates. KemPharm
has also been granted an option to extend the KemPharm Agreement to cover two additional prodrug candidates. KemPharm is responsible
for all development, manufacturing and commercialization activities, although we may provide initial technical assistance.
Upon execution of the KemPharm Agreement,
KemPharm paid us an upfront payment of $3.5 million. If KemPharm exercises its option to use our Aversion Technology with more
than the 2 prodrugs licensed, then KemPharm will pay us up to $1.0 million for each additional prodrug license. In addition, we
will receive from KemPharm a low single digit royalty on commercial sales by KemPharm of products developed using our Aversion
Technology under the KemPharm Agreement. KemPharm’s royalty payment obligations commence on the first commercial sale of
a product using our Aversion Technology and expire, on a country-by-country basis, upon the expiration of the last to expire patent
claim of the Aversion Technology covering a product in such country, at which time the license for the particular product and country
becomes fully paid and royalty free.
The KemPharm Agreement expires upon the expiration of KemPharm’s
royalty payment obligations in all countries. Either party may terminate the KemPharm Agreement in its entirety if the other party
materially breaches the KemPharm Agreement, subject to applicable cure periods. Acura or KemPharm may terminate the KemPharm Agreement
with respect to the U.S. and other countries if the other party challenges the patents covering the licensed products. KemPharm
may terminate the KemPharm Agreement for convenience on ninety (90) days prior written notice. Termination does not affect a party’s
rights accrued prior thereto, but there are no stated payments in connection with termination other than payments of obligations
previously accrued. For all terminations (but not expiration), the KemPharm Agreement provides for termination of our license grant
to KemPharm.
Aversion Technology Development Opioid
Products
We have suspended further development of our Aversion hydrocodone/APAP
product candidate, in order to focus our time and available resources on the development of our Limitx Technology product candidates.
We currently have 6 additional opioids at various stages of formulation development using the Aversion Technology which are not
being actively developed.
Abuse of Pseudoephedrine Products
The chemical structure of pseudoephedrine,
or PSE, is very similar to methamphetamine, facilitating a straight-forward chemical conversion to methamphetamine. OTC PSE products
are sometimes purchased and used for this conversion. There are multiple known processes to convert PSE to methamphetamine, all
of which are not complex and do not require specialized equipment; however, many do require readily available but uncommon ingredients.
Two of the three most popular processes follow two general processing steps: (1) dissolving the PSE tablets in a solvent to isolate,
by filtration, purified PSE and (2) a chemical reduction of the PSE into methamphetamine for drying into crystals. The third method,
or the “one-pot” method, involves the direct chemical reduction of the PSE to methamphetamine in the presence of the
tablet’s inactive ingredients. All the solvents used are ultimately dried off or otherwise removed, so a wide range of solvents
are amenable to the process.
Impede 1.0 Technology
Our Impede 1.0 Technology, a proprietary mixture of inactive
ingredients, prevents the extraction of PSE from tablets using known extraction methods and disrupts the direct conversion of PSE
from tablets into methamphetamine.
Studies sponsored by us at an international,
independent laboratory demonstrated our Impede 1.0 Technology prevents the extraction of PSE from tablets for conversion into methamphetamine
using what we believe are the two most common extraction methods, each requiring extraction of PSE as an initial step. Laboratory
tests conducted on our behalf by an independent Clinical Research Organization, or CRO, using the “one-pot” method
demonstrated that our Impede Technology disrupted the direct conversion of PSE from the tablets into methamphetamine. The study
compared the amount of pure methamphetamine hydrochloride produced from Nexafed and Johnson & Johnson’s Sudafed®
tablets. Using one hundred 30 mg tablets of both products, multiple one-pot tests and a variety of commonly used solvents, the
study demonstrated an average of 38% of the maximum 2.7 grams of pure methamphetamine hydrochloride was recovered from Nexafed.
Comparatively, approximately twice as much pure methamphetamine hydrochloride was recovered from Sudafed tablets. Both products
yielded a substantial amount of additional solids such that the purity of the total powder provided contained approximately 65%
methamphetamine hydrochloride.
Impede 2.0 Technology
We have previously developed a next generation,
or Impede 2.0 Technology to improve the meth-resistance of our technology. We have previously completed one-pot, direct conversion
meth testing performed by our CRO on the following commercially available products and on our Nexafed Impede 2.0 extended-release
product, with the following results:
Product/Formulation
|
|
Meth Resistant
Technology
|
|
Meth Recovery1
|
|
|
Purity2
|
|
Sudafed® 30mg Tablets
|
|
None
|
|
|
67
|
%
|
|
|
62
|
%
|
Nexafed 30mg Technology
|
|
Impede® 1.0
|
|
|
38
|
%
|
|
|
65
|
%
|
Zephrex-D® 30mg Pills
|
|
Tarex®
|
|
|
28
|
%
|
|
|
51
|
%
|
Nexafed 120mg Extended-release tablets
|
|
Impede® 2.0
|
|
|
17
|
%
|
|
|
34
|
%
|
|
1
|
Total methamphetamine HCl recovered from the equivalent
of 100 PSE 30mg tablets divided by the maximum theoretical yield of 2.7 grams.
|
|
2
|
Total methamphetamine HCl recovered from the equivalent
of 100 PSE 30mg tablets divided by the total weight of powder recovered.
|
We have previously demonstrated in a pilot clinical study the
bioequivalence of a formulation of our Nexafed extended release tablets utilizing our Impede 2.0 Technology to Sudafed® 12-hour
Tablets.
Nexafed
Products and the MainPointe Agreement
Nexafed and Nexafed Sinus Pressure + Pain, consist of immediate
release tablets. Nexafed is a 30mg pseudoephedrine tablet which until the third quarter of 2017 incorporated our patented Impede
1.0 Technology and commencing in such quarter incorporated our Impede 2.0 Technology. Nexafed Sinus Pressure + Pain is a 30/325mg
pseudoephedrine and acetaminophen tablet which incorporates our Nexafed 1.0 Technology. PSE is a widely-used nasal decongestant
available in many non-prescription and prescription cold, sinus and allergy products. While the 30mg PSE tablet is not the largest
selling PSE product on the market, we believe it is the most often used product to make meth due to: (a) its relatively low selling
price and (b) its simpler formulation provides better meth yields.
We have demonstrated that our Nexafed 30mg
tablets are bioequivalent to Johnson & Johnson’s Sudafed 30mg Tablets when a single 2 tablet dose is administered. Commencing
in 2006, the CMEA, required all non-prescription PSE products to be held securely behind the pharmacy counter, has set monthly
consumer purchase volume limits, and has necessitated consumer interaction with pharmacy personnel to purchase PSE-containing products.
On March 16, 2017, we and MainPointe entered into a License,
Commercialization and Option Agreement, or the MainPointe Agreement, pursuant to which we granted MainPointe an exclusive license
to our Impede Technology to commercialize our Nexafed products in the U.S. and Canada. We also conveyed to MainPointe our existing
inventory and equipment relating to our Nexafed products. MainPointe is responsible for all development, manufacturing and commercialization
activities with respect to products covered by the Agreement and controls the marketing and sale of our Nexafed products.
On signing the MainPointe Agreement, MainPointe paid us an upfront
licensing fee of $2.5 million plus approximately $425 thousand for inventory and equipment being transferred. The MainPointe Agreement
also provides for our receipt of a 7.5% royalty on net sales of licensed products. The royalty payment for each product will expire
on a country-by-country basis when the Impede® patent rights for such country have expired or are no longer valid; provided
that if no Impede patent right exists in a country, then the royalty term for that country will be the same as the royalty term
for the United States. After the expiration of a royalty term for a country, MainPointe retains a royalty free license to our Impede®
Technology for products covered by the Agreement in such country.
MainPointe has the option to expand the
licensed territory beyond the United States and Canada to the European Union (and the United Kingdom), Japan and South Korea for
payments of $1.0 million, $500 thousand and $250 thousand, respectively. In addition, MainPointe has the option to add to the MainPointe
Agreement certain additional products, or Option Products, containing PSE and utilizing the Impede Technology for a fee of $500
thousand per product (for all product strengths), including the product candidate Loratadine with pseudoephedrine (following termination
of the Bayer Agreement). MainPointe has assigned its option rights to a Nexafed 12-hour formulation to AD Pharma. If the territory
has been expanded prior to the exercise of a product option, the option fee will be increased to $750 thousand per product. If
the territory is expanded after the payment of the $500 thousand product option fee, a one-time $250 thousand fee will be due for
each product. If a third party is interested in developing or licensing rights to an Option Product, MainPointe must exercise its
option for that product or its option rights for such product will terminate. On June 28, 2019, we granted authority to MainPointe
to assign to AD Pharma the option and the right to add, as an Option Product to the Nexafed® Agreement, a Nexafed® 12-hour
dosage (an extended-release pseudoephedrine hydrochloride product utilizing the IMPEDE® Technology in 120mg dosage strength)
and waived the $500 thousand option fee.
The MainPointe Agreement may be terminated
by either party for a material breach of the other party, or by Acura if MainPointe challenges certain of its patents. Upon early
termination of the MainPointe Agreement, MainPointe’s licenses to the Impede Technology and all products will terminate.
Upon termination, at Acura’s request the parties will use commercially reasonable efforts to transition the Nexafed®
and Nexafed® Sinus Pressure + Pain products back to Acura.
Impede Technology Products in Development
Given the fragmented nature of the PSE market with products
containing multiple active ingredients, we have developed additional products for our Nexafed franchise:
Impede Technology Products
|
|
Status
|
|
|
|
Extended-release formulation utilizing Impede 2.0 Technology
|
|
Pilot pharmacokinetic testing demonstrated bioequivalence to
Sudafed® 12-hour Tablets. Pre-IND meeting held with the FDA.
No imminent development planned
|
Extended-release combination products
|
|
No imminent development planned
|
Loratadine with pseudoephedrine
|
|
No imminent development planned
|
In July 2015, we had a pre-IND meeting
with the FDA to discuss the results from our pharmacokinetic and meth-resistance testing studies to determine the development path
for our extended-release development product. The FDA acknowledged the potential value of the development of risk-mitigating strategies
for new formulations of pseudoephedrine products while also recognizing an approved “meth-deterrent” extended release
pseudoephedrine product would be novel in the over-the-counter (OTC) setting. The FDA did not make a formal determination whether
“meth-resistant” claims would be appropriate but is open to consider such an appropriately worded, evidence-based claim
directed to the consumer and/or retailer. As recommended by the FDA, we have submitted additional “meth-resistant”
testing information to the FDA for review prior to submitting an IND. In October 2016, we received FDA recommendations on our meth-resistant
testing protocols for our Nexafed extended release tablets. We can now scale-up our manufacture batch size at a contract manufacturer
which allows us to submit an IND to the FDA for our Nexafed extended release tablets, however, we have not yet committed to that
level of development.
In March 2017, we completed a pilot pharmacokinetic
study for the PSE and loratadine combination product using our Impede 1.0 Technology. The study in 24 healthy adult subjects demonstrated
sufficient, but not bioequivalent blood levels of PSE to the comparator while the second active ingredient achieved bioequivalence.
Based on the product profile, we believe this formulation can be moved into final development for a 505(b)(2) NDA submission. The
Company has upgraded a portion of this formulation with its Impede 2.0 Technology.
Bayer Agreement
On June 15, 2015, we and Bayer entered
into a License and Development Agreement, or the Bayer Agreement, pursuant to which we granted Bayer an exclusive worldwide license
to our Impede® Technology for use in an undisclosed methamphetamine resistant pseudoephedrine-containing product and providing
for the joint development of such product using our Impede Technology for the U.S. market. We received reimbursement of certain
our development expenses, and were entitled to success-based development and regulatory milestone payments, and low mid-single
digit royalties on the net sales of the developed product. On June 28, 2017, we received Bayer’s written notice terminating
the Bayer Agreement. Bayer exercised its convenience termination right prior to the completion of our development obligations under
the Bayer Agreement, which we believe is as a result of Bayer’s de-prioritization of development of the methamphetamine resistant
PSE-containing product contemplated in the Agreement.
U.S. Market Opportunity for Impede PSE
Products
PSE is a widely-used nasal decongestant
available in many non-prescription and prescription cold, sinus and allergy products. PSE is sold in products as the only active
ingredient in both immediate and extended-release products. In addition, PSE is combined with other cold, sinus and allergy ingredients
such as pain relievers, cough suppressants and antihistamines. PSE also competes against phenylephrine, an alternate nasal decongestant
available in non-prescription products. In 2014, a data service reported approximately $0.7 billion in retail sales of non-prescription
products containing PSE. The top retail selling PSE OTC cold/allergy products in 2014 were:
Reference
Brand1
|
|
Brand Company
|
|
Active
Ingredient(s)
|
|
2014 Retail Sales
($ Millions)
|
|
Claritin-D
|
|
Bayer
|
|
PSE & Loraditine2
|
|
$
|
208.0
|
|
Allegra-D
|
|
Chattem
|
|
PSE & Fexofenadine2
|
|
$
|
101.3
|
|
Zyrtec-D
|
|
Pfizer
|
|
PSE & Ceterizine2
|
|
$
|
101.7
|
|
Advil Sinus
|
|
Pfizer
|
|
PSE & Ibuprofen
|
|
$
|
58.4
|
|
Sudafed 12 Hour
|
|
J&J
|
|
PSE2
|
|
$
|
82.3
|
|
Sudafed 30mg
|
|
J&J
|
|
PSE
|
|
$
|
70.4
|
|
1 Branded
product only. Does not include store brand sales.
2 Extended
release PSE formulations
The 2014 market for 30mg PSE tablets, including store brands
was approximately 470 million tablets or 19 million boxes of 24 tablets. MainPointe controls the price of Nexafed and Nexafed Sinus
under the terms of the MainPointe Agreement. The market for cold, sinus and allergy products is highly competitive and many products
have strong consumer brand recognition and, in some cases, prescription drug heritage. Category leading brands are often supported
by national mass marketing and promotional efforts. Consumers often have a choice to purchase a less expensive store brand. Store
brands contain the same active ingredients as the more popular national brands but are not supported by large marketing campaigns
and are offered at a lower price. Non-prescription products are typically distributed through retail outlets including drug store
chains, food store chains, independent pharmacies and mass merchandisers. The distribution outlets for PSE products are highly
consolidated. According to Chain Drug Review, the top 50 drug, food and mass merchandising chains operate approximately 40,000
pharmacies in the U.S., of which 58% are operated by the four largest chains. Stocking decisions and pharmacists recommendations
for these chain pharmacies are often centralized at the corporate headquarters.
Product Labeling for Impede Technology
Products
Nexafed and Nexafed Sinus Pressure + Pain
products are marketed pursuant to the FDA’s OTC Monograph regulations, which require that our product have labeling as specified
in the regulations. Marketing for the Nexafed products includes advertising the extraction characteristics and methamphetamine-resistant
benefits of these products which is supported by our published research studies.
We expect that any of our other Impede
Technology products that are marketed pursuant to an NDA or ANDA will be subject to a label approved by the FDA. We expect that
such a label will require submission of our scientifically derived abuse liability data and we intend to seek descriptions of our
abuse liability studies in the FDA approved product label, although there can be no assurance that this will be the case.
U.S. Market Opportunity for Opioid Analgesic
Products
The misuse and abuse of opioid analgesics
continues to constitute a dynamic and challenging threat to the United States and is the nation’s fastest growing drug problem.
During 2017, the US Government declared opioid abuse as an epidemic and national health emergency. According to the 2017 Centers
on Disease Control Drug Surveillance Report, 11.8 million Americans aged 12 and over abused or misused prescription opioids in
2016. Further, this Report calculates that, on average, 115 Americans die every day from an opioid overdose. The majority of drug
overdose deaths (66%) involve an opioid. Immediate release, or IR, opioid products comprise the vast majority of this abuse compared
with extended release, or ER, opioid products.
It is estimated that more than 75 million
people in the United States suffer from pain and the FDA estimates more than 61 million people receive a prescription for the opioid
hydrocodone annually. For many pain sufferers, opioid analgesics provide their only pain relief. As a result, opioid analgesics
are among the largest prescription drug classes in the United States with over 214 million tablet and capsule prescriptions dispensed
in 2016 of which approximately 194 million were for IR opioid products and 204 million were for ER opioid products. However, physicians
and other health care providers at times are reluctant to prescribe opioid analgesics for fear of misuse, abuse, and diversion
of legitimate prescriptions for illicit use.
We expect our Aversion and Limitx Technology
opioid products, to compete primarily in the IR opioid product segment of the United States opioid analgesic market. Because IR
opioid products are used for both acute and chronic pain, a prescription, on average, contains 66 tablets or capsules. According
to IMS Health, in 2016, sales in the IR opioid product segment were approximately $2.7 billion, of which ~98% was attributable
to generic products. Due to fewer identified competitors and the significantly larger market for dispensed prescriptions for IR
opioid products compared to ER opioid products, we have initially focused on developing IR opioid products utilizing our Aversion
and Limitx Technologies. A summary of the IR opioid product prescription data for 2016 is provided below:
IR Opioid
Products(1)
|
|
2016 US
Prescriptions
(Millions)(2)
|
|
|
%
of Total
|
|
Hydrocodone
|
|
|
90
|
|
|
|
43
|
%
|
Oxycodone
|
|
|
55
|
|
|
|
26
|
%
|
Tramadol
|
|
|
43
|
|
|
|
21
|
%
|
Codeine
|
|
|
15
|
|
|
|
7
|
%
|
4 Others
|
|
|
5
|
|
|
|
3
|
%
|
Total
|
|
|
208
|
|
|
|
100
|
%
|
|
1
|
Includes all salts and esters of the opioid and opioids
in combination
with other active ingredients such as acetaminophen.
|
Despite considerable publicity regarding
the abuse of OxyContin® extended-release tablets and other ER opioid products, U.S. government statistics suggest that far
more people have used IR opioid products non-medically than ER opioid products. These statistics estimate that nearly four times
as many people have misused the IR opioid products Vicodin®, Lortab® and Lorcet® (hydrocodone bitartrate/acetaminophen
brands and generics) than OxyContin®.
Product Labeling for Opioid Products
Using Our Technologies
In April 2015, the FDA published guidance
for industry on the evaluation and labeling of abuse-deterrent opioids. While the 2015 FDA Guidance is non-binding on the FDA,
it outlines FDA’s current thinking on the development and labeling of abuse-deterrent products. The 2015 FDA Guidance provides
for three distinct levels of pre-marketing studies that are potentially eligible for inclusion in the labeling: (1) laboratory-based
in vitro manipulation and extraction studies, (2) pharmacokinetic studies, and (3) clinical abuse potential studies. The 2015 FDA
Guidance further prescribes additional post-approval or epidemiology studies to determine whether the marketing of a product with
abuse-deterrent properties results in meaningful reductions in abuse, misuse, and related adverse clinical outcomes, including
addiction, overdose, and death in the post-approval setting, which can also be included in the labeling. FDA notes “the science
of abuse deterrence is relatively new. Both the technologies involved and the analytical, clinical, and statistical methods for
evaluating those technologies are rapidly evolving. For these reasons, FDA will take a flexible, adaptive approach to the evaluation
and labeling of potentially abuse-deterrent opioid products”.
We or our licensee may seek to include
descriptions of studies that characterize the safety features of our technologies in the label for our Aversion and Limitx Technology
products in development. Although the FDA approved label for Oxaydo contains limitations on exposing Oxaydo tablets to water and
other solvents and administration through feeding tubes, the FDA approved Oxaydo label does not contain a description of the I.V.
injection studies we performed to characterize the abuse deterrent properties of Oxaydo. Zyla has committed to the FDA to undertake
epidemiological studies to assess the actual consequences of abuse of Oxaydo in the market. Under the terms of the Zyla Agreement,
we share a minority portion of the fees and expenses relating to such FDA required epidemiological studies, provided Zyla complies
with the sections of the agreement relating thereto. The extent to which a description of the abuse-deterrent properties or results
of epidemiological or other studies will be added to or included in the FDA approved product label for our products in development
will be the subject of our discussions with the FDA as part of the NDA review process, even after having obtained approval of Oxaydo.
Further, because the FDA closely regulates promotional materials, even if FDA initially approves labeling that includes a description
of the abuse deterrent properties of the product, the FDA’s Office of Prescription Drug Promotion, or OPDP, will continue
to review the acceptability of promotional labeling claims and product advertising campaigns for our marketed products.
Patents and Patent Applications
We have the following issued patents covering, among other things,
our Limitx Technology:
Patent No. (Jurisdiction)
|
|
Subject matter
|
|
Issued
|
|
Expires
|
|
|
|
|
|
|
|
9,101,636 (US)
|
|
Abuse deterrent products wherein the release of active ingredient is retarded when 3 or
more doses are consumed
|
|
Aug. 2015
|
|
Nov. 2033
|
|
|
|
|
|
|
|
9,320,796 (US)
|
|
Abuse deterrent products wherein the release of active ingredient is retarded when 3 or
more doses are consumed
|
|
Apr. 2016
|
|
Nov. 2033
|
|
|
|
|
|
|
|
9,662,393 (US)
|
|
Abuse deterrent products wherein the release of active ingredient is retarded when 3 or
more doses are consumed
|
|
May 2017
|
|
Nov. 2033
|
|
|
|
|
|
|
|
2,892,908 (CAN)
|
|
Abuse deterrent products wherein the release of active ingredient is retarded when excessive
doses are consumed
|
|
Apr. 2016
|
|
Nov. 2033
|
|
|
|
|
|
|
|
5,922,851 (JAPAN)
|
|
Abuse deterrent products wherein the release of active ingredient is retarded when excessive
doses are consumed
|
|
Apr. 2016
|
|
Nov. 2033
|
We have the following issued patents covering,
among other things, Oxaydo and our Aversion Technology:
Patent No. (Jurisdiction)
|
|
Subject Matter
|
|
Issued
|
|
Expires
|
|
|
|
|
|
|
|
7,201,920 (US)
|
|
Pharmaceutical compositions including a mixture of functional inactive ingredients and specific opioid analgesics
|
|
Apr. 2007
|
|
Mar. 2025
|
|
|
|
|
|
|
|
7,510,726 (US)
|
|
A wider range of compositions than those described in the 7,201,920 Patent
|
|
Mar. 2009
|
|
Nov. 2023
|
|
|
|
|
|
|
|
7,981,439 (US)
|
|
Pharmaceutical compositions including any water soluble drug susceptible to abuse
|
|
July 2011
|
|
Aug. 2024
|
|
|
|
|
|
|
|
8,409,616 (US)
|
|
Pharmaceutical compositions of immediate-release abuse deterrent dosage forms
|
|
Apr. 2013
|
|
Nov. 2023
|
|
|
|
|
|
|
|
8,637,540 (US)
|
|
Pharmaceutical compositions of immediate-release abuse deterrent opioid products
|
|
Jan. 2014
|
|
Nov. 2023
|
|
|
|
|
|
|
|
9,492,443 (US)
|
|
Pharmaceutical compositions of immediate-release abuse deterrent opioid products
|
|
Nov. 2016
|
|
Nov. 2023
|
We have the following additional issued
patents relating to our Aversion Technology:
Patent No. (Jurisdiction)
|
|
Subject Matter
|
|
Issued
|
|
Expires
|
|
|
|
|
|
|
|
7,476,402 (US)
|
|
Pharmaceutical compositions of certain combinations of kappa and mu opioid receptor agonists and other ingredients intended to deter opioid analgesic product misuse and abuse
|
|
Jan. 2009
|
|
Nov. 2023
|
|
|
|
|
|
|
|
8,822,489 (US)
|
|
Pharmaceutical compositions of certain abuse deterrent products that contain polymers, surfactant and polysorb 80
|
|
July 2014
|
|
Nov. 2023
|
|
|
|
|
|
|
|
2,004,294,953 (AUS)
|
|
Abuse deterrent pharmaceuticals
|
|
Apr. 2010
|
|
Nov. 2024
|
|
|
|
|
|
|
|
2,010,200,979 (AUS)
|
|
Abuse deterrent pharmaceuticals
|
|
Aug. 2010
|
|
Nov. 2024
|
|
|
|
|
|
|
|
2,547,334 (CAN)
|
|
Abuse deterrent pharmaceuticals
|
|
Aug. 2010
|
|
Nov. 2024
|
|
|
|
|
|
|
|
2,647,360 (CAN)
|
|
Abuse deterrent pharmaceuticals
|
|
May 2012
|
|
Apr. 2027
|
|
|
|
|
|
|
|
175,863 (ISR)
|
|
Abuse deterrent pharmaceuticals
|
|
Nov. 2004
|
|
Nov. 2024
|
|
|
|
|
|
|
|
221,018 (ISR)
|
|
Abuse deterrent pharmaceuticals
|
|
Nov. 2004
|
|
Nov. 2024
|
|
|
|
|
|
|
|
1694260 (EUR)
|
|
Abuse deterrent pharmaceuticals
|
|
Nov. 2004
|
|
Nov. 2024
|
We have the following issued patents covering,
among other things, our Nexafed product line and Impede 1.0 and 2.0 technologies:
Patent No. (Jurisdiction)
|
|
Subject Matter
|
|
Issued
|
|
Expires
|
|
|
|
|
|
|
|
8,901,113 (US)
|
|
Pharmaceutical compositions suitable for reducing the chemical conversion of precursor compounds
|
|
Dec. 2014
|
|
Feb. 2032
|
|
|
|
|
|
|
|
9,757,466 (US)
|
|
Pharmaceutical compositions suitable for reducing the chemical conversion of precursor compounds
|
|
Sep. 2017
|
|
Feb. 2032
|
|
|
|
|
|
|
|
10,004,699 (US)
|
|
Methods and compositions for interfering with extraction or conversion of a drug susceptible to abuse
|
|
Jun. 2018
|
|
Dec. 2035
|
|
|
|
|
|
|
|
2010300641 (AUS)
|
|
Pharmaceutical compositions suitable for reducing the chemical conversion of precursor compounds
|
|
June 2016
|
|
Sept. 2030
|
|
|
|
|
|
|
|
2,775,890 (CAN)
|
|
Pharmaceutical compositions suitable for reducing the chemical conversion of precursor compounds
|
|
June 2016
|
|
Sept. 2030
|
|
|
|
|
|
|
|
2,488,029 (EUR)
|
|
Pharmaceutical compositions suitable for reducing the chemical conversion of precursor compounds
|
|
Mar. 2016
|
|
Sept. 2030
|
|
|
|
|
|
|
|
218533 (ISR)
|
|
Pharmaceutical compositions suitable for reducing the chemical conversion of precursor compounds
|
|
Jan. 2016
|
|
Sept. 2030
|
|
|
|
|
|
|
|
2015274936 (AUS)
|
|
Methods and compositions for interfering with extraction or conversion of a drug susceptible to abuse
|
|
Sept. 2018
|
|
June 2035
|
|
|
|
|
|
|
|
13102020.5 (HK)
|
|
Pharmaceutical compositions suitable for reducing the chemical conversion of precursor compounds
|
|
Oct. 2016
|
|
Sept. 2030
|
In addition to our issued patents listed
above and additional unlisted issued patents, we have filed multiple U.S. patent applications and international patent applications
relating to compositions containing abusable active pharmaceutical ingredients as well as applications covering our Impede 1.0
and 2.0 Technologies and filed U.S. patent applications for our Limitx Technology. Except for the rights granted in the Zyla Agreement,
the KemPharm Agreement, and the MainPointe Agreement and in the patent infringement settlement agreements described below, we have
retained all intellectual property rights to our Aversion Technology, Impede Technology, Limitx Technology and related product
candidates.
In 2012 and 2013, we received Paragraph IV Certification Notices
from five generic sponsors of ANDAs for a generic drug listing our Oxaydo product as the reference listed drug. The Paragraph IV
Notices referred to our 920, 726 and 439 Patents, which cover our Aversion® Technology and our Oxaydo product. We filed suit
against each of such generic sponsors, Watson Laboratories, Inc., Par Pharmaceutical, Inc., Impax Laboratories, Inc., Sandoz Inc.
and Ranbaxy Inc., in the United States District Court for the District of Delaware alleging infringement of our 726 Patent listed
in the FDA’s Orange Book. Our litigation against Watson Laboratories was dismissed by us following Watson Laboratories’
change of its Paragraph IV Certification to a Paragraph III Certification, indicating it would not launch its generic product until
the expiry of our applicable Patents. Our litigation against each of the remaining generic sponsors was settled during the period
October 2013 through May 2014 on an individual basis, upon mutual agreement between us and such generic sponsors. None of such
settlements impacted the validity or enforceability of our Patents. See “Item 1A. Risk Factors – Generic manufacturers
are using litigation and regulatory means to seek approval for generic versions of Oxaydo, which could cause Zyla’s sales
to suffer and adversely impact our royalty revenue” for a discussion of the settlements and license grants relating to such
patent litigation. Notwithstanding the settlement of these prior infringement actions, it is possible that other generic manufacturers
may also seek to launch a generic version of Oxaydo and challenge our patents. Any determination in such infringement actions that
our patents covering our Aversion Technology and Oxaydo are invalid or unenforceable, in whole or in part, or that the products
covered by generic sponsors’ ANDAs do not infringe our patents could have a material adverse effect on our operations and
financial condition.
In April, 2015, Purdue Pharma L.P., Purdue Pharmaceuticals L.P.
and The P.F. Laboratories, Inc., or collectively Purdue, commenced a patent infringement lawsuit against us and our Oxaydo product
licensee Zyla in the United States District Court for the District of Delaware alleging our Oxaydo product infringes Purdue’s
U.S. Patent No. 8,389,007, or the 007 Patent. In April 2016, Purdue commenced a second patent infringement lawsuit against us and
Zyla in the United States District Court for the District of Delaware alleging our Oxaydo product infringes Purdue’s then
newly issued U.S. Patent No. 9,308,171, or the 171 Patent. The actions regarding the 007 Patent and the 171 Patent are collectively
referred to as the “Actions”. On April 6, 2016, we filed a petition for Inter Parties Review, or IPR Review, with the
USPTO seeking to invalidate Purdue’s 007 Patent.
On May 20, 2016, we, Purdue and Zyla entered into a settlement
agreement to settle the Actions and the IPR Review. Under the settlement agreement the parties dismissed or withdrew the Actions,
requested that the USPTO terminate the IPR Review and exchanged mutual releases. No payments were made by the parties under the
settlement agreement.
Reference is made to the Risk Factors contained in this report
for a discussion, among other things, of patent applications and patents owned by third parties, including claims that may encompass
our Aversion Technology and Oxaydo tablets, and the risk of infringement, interference or opposition proceedings that we may be
subject to arising from such patents and patent applications.
Research and Manufacturing
We conduct research, development, manufacture
of laboratory clinical trial supplies, and warehousing activities at our operations facility in Culver, Indiana and lease an administrative
office in Palatine, Illinois. The 25,000 square foot Culver facility is registered with the DEA to perform research, development
and manufacture of certain DEA-scheduled active pharmaceutical ingredients and finished dosage form products. We have obtained
quotas for supply of DEA-scheduled active pharmaceutical ingredients from the DEA and develop finished dosage forms in our Culver
facility. We manufacture clinical trial supplies of drug products in our Culver facility. In addition to internal capabilities
and activities, we engage numerous clinical research organizations, or CROs, with expertise in regulatory affairs, clinical trial
design and monitoring, clinical data management, biostatistics, medical writing, laboratory testing and related services. Zyla
is responsible for commercial manufacture of Oxaydo under the Zyla Agreement. We expect that future opioid product candidates developed
and licensed by us will be commercially manufactured by our licensees or other qualified third party contract manufacturers.
Prior to our entering into the MainPointe
Agreement, we relied on two contract manufacturers to manufacture, package and supply our commercial quantities of Nexafed and
Nexafed Sinus Pressure + Pain products. We assigned our existing supply agreement to MainPointe in accordance with the terms of
the MainPointe Agreement. Although we believe there are alternate sources of supply that can satisfy MainPointe’s anticipated
commercial requirements, replacing or adding a contract manufacturer may cause an interruption in supply and could adversely impact
our royalties from MainPointe on the net sales of the Nexafed products.
Competition
Our products and technologies will, if marketed, compete to
varying degrees against both brand and generic products offering similar therapeutic benefits and being developed and marketed
by small and large pharmaceutical (for prescription products) and consumer packaged goods (for OTC products) companies. Many of
our competitors have substantially greater financial and other resources and are able to expend more funds and effort than us and
our licensees in research, development and commercialization of their competitive technologies and products. Prescription generic
products and OTC store brand products will offer cost savings to third party payers and/or consumers that will create pricing pressure
on our or our licensed products. Also, these competitors may have a substantial sales volume advantage over our products, which
may result in our costs of manufacturing being higher than our competitors’ costs.
We believe potential competitors may be developing opioid abuse
deterrent technologies and products. Such potential competitors include, but may not be limited to, Pfizer Inc., Purdue Pharma,
Atlantic Pharmaceuticals, Zyla Corporation, KemPharm, Shionogi, Nektar Therapeutics, Signature Therapeutics, QRx Pharma, Tris Pharma,
Pisgah Labs, Teva Pharmaceuticals, Sun Pharmaceuticals, Ensysce Biopharma, Inspirion Delivery Sciences and Collegium Pharmaceuticals.
Zyla, our partner for Oxaydo, has developed and is marketing at least one other analgesic product and is developing other analgesic
products, all of which compete for development and commercialization resources for Oxaydo, which may adversely impact the sales
of Oxaydo.
Our Impede Technology products containing
PSE will compete in the highly competitive market for cold, sinus and allergy products generally available to the consumer without
a prescription. Some of our competitors will have multiple consumer product offerings both within and outside the cold, allergy
and sinus category providing them with substantial leverage in dealing with a highly consolidated pharmacy distribution network.
The competing products may have well established brand names and may be supported by national or regional advertising. Nexafed
will compete primarily with Johnson & Johnson’s Sudafed® brand and Nexafed Sinus Pressure + Pain with Pfizer’s
Advil® Cold and Sinus, as well as generic/store brand formulations of such products manufactured by Perrigo Company and others.
A competing product from Perrigo is being marketed with claims of methamphetamine-resistance.
In addition to our license agreement with
MainPointe, we may consider licensing our Impede Technology or other products utilizing such technology for commercialization.
Government Regulation
All pharmaceutical firms, including us,
are subject to extensive regulation by the federal government, principally by the FDA under the Federal Food, Drug and Cosmetic
Act, or the FD&C Act, and, to a lesser extent, by state and local governments. Before our prescription products and some OTC
products may be marketed in the U.S., they must be approved by the FDA for commercial distribution. Certain OTC products must comply
with applicable FDA regulations, known as OTC Monographs, in order to be marketed, but do not require FDA review and approval before
marketing. Additionally, we are subject to extensive regulation by the DEA under the Controlled Substances Act, the Combat Methamphetamine
Act of 2005, and related laws and regulations for research, development, manufacturing, marketing and distribution of controlled
substances and certain other pharmaceutical active ingredients that are regulated as Listed Chemicals. Extensive FDA, DEA, and
state regulation of our products and commercial operations continues after drug product approvals, and the requirements for our
continued marketing of our products may change even after initial approval. We are also subject to regulation under federal, state
and local laws, including requirements regarding occupational safety, laboratory practices, environmental protection and hazardous
substance control, and may be subject to other present and future local, state, federal and foreign regulations, including possible
future regulations of the pharmaceutical industry. We cannot predict the extent to which we may be affected by legislative and
other regulatory developments concerning our products and the healthcare industry in general.
The FD&C Act, the Controlled Substances
Act and other federal statutes and regulations govern the testing, manufacture, quality control, export and import, labeling, storage,
record keeping, approval, pricing, advertising, promotion, sale and distribution of pharmaceutical products. Noncompliance with
applicable requirements both before and after approval, can subject us, our third party manufacturers and other collaborative partners
to administrative and judicial sanctions, such as, among other things, warning letters, fines and other monetary payments, recall
or seizure of products, criminal proceedings, suspension or withdrawal of regulatory approvals, interruption or cessation of clinical
trials, total or partial suspension of production or distribution, injunctions, limitations on or the limitation of claims we can
make for our products, and refusal of the government to enter into supply contracts for distribution directly by governmental agencies,
or delay in approving or refusal to approve new drug applications. The FDA also has the authority to revoke or withhold approvals
of new drug applications.
FDA approval is required before any “new
drug,” can be marketed. A “new drug” is one not generally recognized, by experts qualified by scientific training
and experience, as safe and effective for its intended use. Our products not subject to and in compliance with an OTC Monograph
are new drugs and require prior FDA approval. Such approval must be based on extensive information and data submitted in a NDA,
including but not limited to adequate and well controlled laboratory and clinical investigations to demonstrate the safety and
effectiveness of the drug product for its intended use(s). In addition to providing required safety and effectiveness data for
FDA approval, a drug manufacturer’s practices and procedures must comply with current Good Manufacturing Practices (“cGMPs”),
which apply to manufacturing, receiving, holding and shipping. Accordingly, manufacturers must continue to expend time, money and
effort in all applicable areas relating to quality assurance and regulatory compliance, including production and quality control
to comply with cGMPs. Failure to so comply risks delays in approval of drug products and possible FDA enforcement actions, such
as an injunction against shipment of products, the seizure of non-complying products, criminal prosecution and/or any of the other
possible consequences described above. We are subject to periodic inspection by the FDA and DEA, which inspections may or may not
be announced in advance.
The FDA Drug Approval Process
The process of drug development is complex
and lengthy. The activities undertaken before a new pharmaceutical product may be marketed in the U.S. generally include, but are
not limited to, preclinical studies; submission to the FDA of an Investigational New Drug application, or IND, which must become
active before human clinical trials may commence; adequate and well-controlled human clinical trials to establish the safety and
efficacy of the product; submission to the FDA of an NDA; acceptance for filing of the NDA by FDA; satisfactory completion of an
FDA pre-approval inspection of the clinical trial sites and manufacturing facility or facilities at which both the active ingredients
and finished drug product are produced to assess compliance with, among other things, patient informed consent requirements, the
clinical trial protocols, current Good Clinical Practices, or GCP, and cGMPs; and FDA review and approval of the NDA prior to any
commercial sale and distribution of the product in the U.S.
Preclinical studies include laboratory
evaluation of product chemistry and formulation, and in some cases, animal studies and other studies to preliminarily assess the
potential safety and efficacy of the product candidate. The results of preclinical studies together with manufacturing information,
analytical data, and detailed information including protocols for proposed human clinical trials are then submitted to the FDA
as a part of an IND. An IND must become effective, and approval must be obtained from an Institutional Review Board, or IRB, prior
to the commencement of human clinical trials. The IND becomes effective 30 days following its receipt by the FDA unless the FDA
objects to, or otherwise raises concerns or questions and imposes a clinical hold. We, the FDA or the IRB may suspend or terminate
a clinical trial at any time after it has commenced due to safety or efficacy concerns or for commercial reasons. In the event
that FDA objects to the IND and imposes a clinical hold, the IND sponsor must address any outstanding FDA concerns or questions
to the satisfaction of the FDA before clinical trials can proceed or resume. There can be no assurance that submission of an IND
will result in FDA authorization to commence clinical trials.
Human clinical trials are typically conducted
in three phases that may sometimes overlap or be combined:
Phase 1: This
phase is typically the first involving human participants, and involves the smallest number of human participants (typically, 20-50).
The investigational drug is initially introduced into healthy human subjects or patients and tested for safety, dosage tolerance,
absorption, metabolism, distribution and excretion. In addition, it is sometimes possible to gain a preliminary indication of efficacy.
Phase 2: Once
the preliminary safety and tolerability of the drug in humans is confirmed during phase 1, phase 2 involves studies in a somewhat
larger group of study subjects. Unlike phase 1 studies, which typically involve healthy subjects, participants in phase 2 studies
may be affected by the disease or condition for which the product candidate is being developed. Phase 2 studies are intended to
identify possible adverse effects and safety risks, to evaluate the efficacy of the product for specific targeted diseases, and
to determine appropriate dosage and tolerance.
Phase 3: Phase
3 trials typically involve a large numbers of patients affected by the disease or condition for which the product candidate is
being developed. Phase 3 clinical trials are undertaken to evaluate clinical efficacy and safety under conditions resembling those
for which the product will be used in actual clinical practice after FDA approval of the NDA. Phase 3 trials are typically the
most costly and time-consuming of the clinical phases.
Phase 4 or Post-Marketing
Requirements: Phase 4 trials may be required by FDA after the approval of the NDA for the product, as a condition of the approval,
or may be undertaken voluntarily by the sponsor of the trial. The purpose of phase 4 trials is to continue to evaluate the safety
and efficacy of the drug on a long-term basis and in a much larger and more diverse patient population than was included in the
prior phases of clinical investigation.
After clinical trials have been completed,
and if they were considered successful, the sponsor may submit a NDA or Abbreviated New Drug Application, or ANDA, to the FDA including
the results of the preclinical and clinical testing, together with, among other things, detailed information on the chemistry,
manufacturing, quality controls, and proposed product labeling. There are two types of NDAs; a 505(b)(1) NDA and a 505(b)(2) NDA.
A 505(b)(1) NDA is also known as a “full NDA” and is described by section 505(b)(1) of the FD&C Act as an application
containing full reports of investigations of safety and effectiveness, in addition to other information. The data in a full NDA
is either owned by the applicant or are data for which the applicant has obtained a right of reference. A 505(b)(2) application
is one described under section 505(b)(2) of the FD&C Act as an application for which information, or one or more of the investigations
relied upon by the applicant for approval, “were not conducted by or for the applicant and for which the applicant has not
obtained a right of reference or use from the person by or for whom the investigations were conducted”. This provision permits
the FDA to rely for approval of an NDA on data not developed by the applicant, such as published literature or the FDA’s
finding of safety and effectiveness of a previously approved drug. 505(b)(2) applications are submitted under section 505(b)(1)
of the FD&C Act and are therefore subject to the same statutory provisions that govern 505(b)(1) applications that require
among other things, “full reports” of safety and effectiveness.
The 505(b)(2) NDAs must include one of
several different types of patent certifications to each patent that is listed in the FDA publication known as the Orange Book
in connection with any previously approved drug, the approval of which is relied upon for approval of the 505(b)(2) NDA. Depending
on the type of certification made, the approval of the 505(b)(2) NDA may be delayed until the relevant patent(s) expire, or in
the case of a Paragraph IV Certification may lead to patent litigation against the applicant and a potential automatic approval
delay of 30 months or more.
Under the Prescription Drug User Fee Amendments
of 2017, PDUFA VI, the FDA collects two types of fees associated with NDAs – (i) a fee collected at the time applications
are submitted, and (ii) prescription drug program fees (accounting for 80% of the total), which are collected annually for certain
prescription drugs. Exceptions to the application fee include previously filed applications and applications for drugs designated
as orphan drugs for a rare disease.
According to FDA’s fee schedule,
posted on August 1, 2018, for the 2019 fiscal year, the user fee for an application fee requiring clinical data, such as an NDA
is $2,588,478. The FDA adjusts PDUFA user fees on an annual basis. A written request can be submitted for a waiver of the application
fee for the first human drug application that is filed by a small business. Where we are subject to these fees, they are significant
expenditures that may be incurred in the future and must be paid at the time of submission of each application to FDA.
After an NDA is submitted by an applicant,
and if it is accepted for filing by the FDA, the FDA will then review the NDA and, if and when it determines that the data submitted
are adequate to show that the product is safe and effective for its intended use, the FDA will approve the product for commercial
distribution in the U.S. There can be no assurance that any of our products in development will receive FDA approval or that even
if approved, they will be approved with labeling that includes descriptions of its abuse deterrent features. Moreover, even if
our products in development are approved with labeling that includes descriptions of the abuse deterrent features of our products,
advertising and promotion for the products will be limited to the specific claims and descriptions in the FDA approved product
labeling.
In terms of program fees, subject to certain
exceptions, each sponsor is required to pay the annual fee for each new prescription drug approved as of 1 October of each fiscal
year (for 2018 such fee is $304,162 per product strength), but applicants may not be assessed more than five prescription drug
program fees for a fiscal year, for prescription drugs identified in a single application. For example, an applicant that has 10
drug products identified in an approved NDA for 10 different strengths of tablet dosage form products is eligible for an assessment
for a maximum of 5 program fees. PDUFA VI also eliminated fees for drug application supplements and, establishment fees.
The FDA requires drug manufacturers to
establish and maintain quality control procedures for manufacturing, processing and holding drugs and investigational products,
and products must be manufactured in accordance with defined specifications. Before approving an NDA, the FDA usually will inspect
the facility(ies) at which the active pharmaceutical ingredients and finished drug product is manufactured, and will not approve
the product unless it finds that cGMP compliance at those facility(ies) are satisfactory. If the FDA determines the NDA is not
acceptable, the FDA may outline the deficiencies in the NDA and often will request additional information, thus delaying the approval
of a product. Notwithstanding the submission of any requested additional testing or information, the FDA ultimately may decide
that the application does not satisfy the criteria for approval. After a product is approved, changes to the approved product,
such as adding new indications, manufacturing changes, or changes in or additions to the approved labeling for the product, may
require submission of a new NDA or, in some instances, an NDA amendment, for further FDA review. Post-approval marketing of products
in larger or different patient populations than those that were studied during development can lead to new findings about the safety
or efficacy of the products. This information can lead to a product sponsor’s requesting approval for and/or the FDA requiring
changes in the labeling of the product or even the withdrawal of the product from the market.
The Best Pharmaceuticals for Children Act,
or BPCA, became law in 2002 and was subsequently reauthorized and amended by FDAAA. The reauthorization of BPCA provides an additional
six months of market exclusivity beyond the expiration date of existing market exclusivities or eligible patents to NDA applicants
that conduct acceptable pediatric studies of new and currently-marketed drug products for which pediatric information would be
beneficial, as identified by FDA in a Pediatric Written Request. The FD&C Act, as amended by the Pediatric Research Equity
Act, or PREA, requires that most applications for drugs and biologics include a pediatric assessment (unless waived or deferred)
to ensure the drugs’ and biologics’ safety and effectiveness in children. Such pediatric assessment must contain data,
gathered using appropriate formulations for each age group for which the assessment is required, that are adequate to assess the
safety and effectiveness of the drug or the biological product for the claimed indications in all relevant pediatric subpopulations,
and to support dosing and administration for each pediatric subpopulation for which the drug or the biological product is safe
and effective. The pediatric assessments can only be deferred provided there is a timeline for the completion of such studies.
FDA may waive (partially or fully) the pediatric assessment requirement for several reasons, including if the applicant can demonstrate
that reasonable attempts to produce a pediatric formulation necessary for that age group have failed. The FDA has indicated our
Oxaydo product is exempt from the pediatric studies requirement of the PREA.
The terms of approval of any NDA for our
product candidates, including the indication and product labeling (and, consequently permissible advertising and promotional claims
we can make) may be more restrictive than what is sought in the NDA or what is desired by us. Additionally, the FDA conditioned
approval of our Oxaydo product on our commitment to conduct Phase 4 epidemiological studies to assess the actual abuse levels of
Oxaydo in the market. The testing and FDA approval process for our product candidates requires substantial time, effort, and financial
resources, and we cannot be sure that any approval will be granted on a timely basis, if at all.
Further, drug products approved by FDA
may be subject to continuing obligations intended to assure safe use of the products. Specifically, under the FD&C Act, as
amended by the Food and Drug Administration Amendments Act of 2007, or FDAAA, FDA may require Risk Evaluation and Mitigation Strategies,
or REMS, to manage known or potential serious risks associated with drugs or biological products. If FDA finds, at the time of
approval or afterward, that a REMS is necessary to ensure that the benefits of our products outweigh the risks associated with
the products, FDA will require a REMS and, consequently, that we take additional measures to ensure safe use of the product. Components
of a REMS may include, but are not limited to, a Medication Guide and/or Patient Package Insert, a marketing and sales communication
plan for patients or healthcare providers concerning the drug, Elements To Assure Safe Use, or ETASUs such as, but not limited
to, patient, prescriber, and pharmacy registries, and restrictions on the extent or methods of distribution, a REMS implementation
system, and a timetable for assessment of the effectiveness of the REMS. Currently, all extended-release or long-acting (ERLA)
opioid products approved by the FDA are subject to a class-wide REMS program. The FDA has determined that a REMS is necessary for
immediate release opioid analgesics and has begun the process of incorporating immediate-release opioids into this class-wide REMS
program.
In addition, we, our suppliers and our
licensees are required to comply with extensive FDA requirements both before and after approval. For example, we or our licensees
are required to report certain adverse reactions and production problems, if any, to the FDA, and to comply with certain requirements
concerning the advertising and promotion of our products, which, as discussed above, may significantly affect the extent to which
we can include statements or claims referencing our abuse deterrent technology in product labeling and advertising. Also, quality
control and manufacturing procedures must continue to conform to cGMP after approval to avoid the product being rendered misbranded
and/or adulterated under the FD&C Act as a result of manufacturing problems. In addition, discovery of any material safety
issues may result in changes to product labeling or restrictions on a product manufacturer, potentially including removal of the
product from the market.
Whether or not FDA NDA approval in the
U.S. has been obtained, approvals from comparable governmental regulatory authorities in foreign countries must be obtained prior
to the commencement of commercialization of our drug products in those countries. The approval procedure varies in complexity from
country to country, and the time required may be longer or shorter than that required for FDA approval.
FDA’s OTC Monograph Process
The FDA regulates certain non-prescription
drugs using an OTC Monograph which, when final, is published in the Code of Federal Regulations at 21 C.F.R. Parts 330-358. For
example, 21 C.F.R. Part 341 sets forth the products, such as pseudoephedrine hydrochloride, that may be marketed as an OTC cold,
cough, allergy, bronchodilator, or antiasthmatic drug product in a form suitable for oral, inhalant, or topical administration
and is generally recognized as safe and effective and is not misbranded. Such products that meet each of the conditions established
in the OTC Monograph regulations and the other applicable regulations may be marketed without prior approval by the FDA.
The general conditions
set forth for OTC Monograph products include, among other things:
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the product is manufactured at FDA registered establishments and in accordance with cGMPs;
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the product label meets applicable format and content requirements including permissible “Indications”
and all required dosing instructions and limitations, warnings, precautions and contraindications that have been established in
an applicable OTC Monograph;
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the product contains only permissible active ingredients in permissible strengths and dosage forms;
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the product contains only suitable inactive ingredients which are safe in the amounts administered
and do not interfere with the effectiveness of the preparation; and
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the product container and container components meet FDA’s requirements.
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The advertising for OTC drug products is
regulated by the Federal Trade Commission, or FTC, which generally requires that advertising claims be truthful, not misleading,
and substantiated by adequate and reliable scientific evidence. False, misleading, or unsubstantiated OTC drug advertising may
be subject to FTC enforcement action and may also be challenged in court by competitors or others under the federal Lanham Act
or similar state laws. Penalties for false or misleading advertising may include monetary fines or judgments as well as injunctions
against further dissemination of such advertising claims.
A product marketed pursuant to an OTC Monograph
must be registered with the FDA and have a National Drug Code listing which is required for all marketed drug products. After marketing,
the FDA may test the product or otherwise investigate the manufacturing and development of the product to ensure compliance with
the OTC Monograph. Should the FDA determine that a product is not marketed in compliance with the OTC Monograph or is advertised
outside of its regulations, the FDA may require corrective action up to and including market withdrawal and market recall.
DEA Regulation
Our Oxaydo product is, and several of our
products in development, if approved and marketed, will be, regulated as “controlled substances” as defined in the
CSA, which establishes registration, security, recordkeeping, reporting, storage, distribution and other requirements administered
by the DEA. The DEA is concerned with the loss and diversion of potentially abused drugs into illicit channels of commerce and
closely monitors and regulates handlers of controlled substances, and the equipment and raw materials used in their manufacture
and packaging.
The DEA designates controlled substances
as Schedule I, II, III, IV or V or as List I Chemicals. Schedule I substances by definition have no established medicinal
use, and may not be marketed or sold in the United States. A pharmaceutical product may be listed as Schedule II, III, IV
or V, with Schedule II substances considered to present the highest risk of abuse and Schedule V substances the lowest
relative risk of abuse among such substances. List I Chemicals are used to regulate potentially abused raw materials, such as pseudoephedrine
HCl. We believe all of our products will receive DEA Scheduling consistent with current DEA Scheduling standards. For example,
Oxaydo Tablets are listed as a Schedule II controlled substances under the CSA, the same as all other oxycodone HCl products.
Consequently, their manufacture, shipment, storage, sale and use will be subject to a high degree of regulation. For example, generally,
all Schedule II drug prescriptions must be signed by a physician, physically presented to a pharmacist and may not be refilled
without a new prescription.
Annual DEA registration is required for
any facility that manufactures, tests, distributes, dispenses, imports or exports any controlled substance or List I Chemical.
Except for certain DEA defined co-incidental activities, each registration is specific to a particular location and activity. For
example, separate registrations are needed for import and manufacturing, and each registration must specify which schedules of
controlled substances are authorized.
The DEA typically inspects a facility to
review its security measures prior to issuing a registration and, thereafter, on a periodic basis. Security requirements vary by
controlled substance schedule, with the most stringent requirements applying to Schedule I and Schedule II substances.
Required security measures include, among other things, background checks on employees and physical control of inventory through
measures such as vaults, cages, surveillance cameras and inventory reconciliations. Records must be maintained for the handling
of all controlled substances and List I Chemicals, and periodic reports made to the DEA, for example distribution reports for Schedule I
and II controlled substances, Schedule III substances that are narcotics, and other designated substances. Reports must also
be made for thefts or significant losses of any controlled substance and List I Chemicals, and to obtain authorization to destroy
any controlled substance and List I Chemicals. In addition, special authorization, notification and permit requirements apply to
imports and exports.
In addition, a DEA quota system controls
and limits the availability and production of controlled substances in Schedule I or II and List I Chemicals. Distributions
of any Schedule I or II controlled substance must also be accomplished using special order forms, with copies provided to
the DEA. Because Oxaydo Tablets are Schedule II they are subject to the DEA’s production and procurement quota scheme.
The DEA establishes annually an aggregate quota for how much oxycodone active ingredient may be produced in total in the United
States based on the DEA’s estimate of the quantity needed to meet legitimate scientific and medicinal needs. This limited
aggregate amount of oxycodone that the DEA allows to be produced in the United States each year is allocated among individual companies,
who must submit applications annually to the DEA for individual production and procurement quotas. We or our licensees must receive
an annual quota from the DEA in order to produce or procure any Schedule I or Schedule II substance and List I Chemicals.
The DEA may adjust aggregate production quotas and individual production and procurement quotas from time to time during the year,
although the DEA has substantial discretion in whether or not to make such adjustments. Our or our licensees’ quota of an
active ingredient may not be sufficient to meet commercial demand or complete the manufacture or purchase of material required
for clinical trials. Any delay or refusal by the DEA in establishing our or our licensees’ quota for controlled substances
or List I Chemicals could delay or stop our clinical trials or product launches, or interrupt commercial sales of our products
which could have a material adverse effect on our business, financial position and results of operations.
The DEA also regulates Listed Chemicals,
which are chemicals that may be susceptible to abuse, diversion, and use in the illicit manufacture of controlled substances. Some
Listed Chemicals, including pseudoephedrine, are used in various prescription and OTC drug products. DEA and state laws and regulations
impose extensive recordkeeping, security, distribution, and reporting requirements for companies that handle, manufacture, or distribute
Listed Chemicals, including lawful drug products containing Listed Chemicals. In particular, OTC drug products containing certain
Listed Chemicals, including pseudoephedrine, are required to be secured behind the pharmacy counter and dispensed to customers
directly by a pharmacist only in limited quantities. Pharmacists must obtain proof of identity from customers, and must keep detailed
records and make reports to the DEA regarding sales of such products. Individual states may, and in some cases have, imposed stricter
requirements on the sale of drug products containing Listed Chemicals, including requiring a doctor’s prescription prior
to dispensing such products to a customer.
The DEA conducts periodic inspections of
registered establishments that handle controlled substances and Listed Chemicals. Failure to maintain compliance with applicable
requirements, particularly as manifested in loss or diversion, can result in enforcement action that could have a material adverse
effect on our business, results of operations and financial condition. The DEA may seek civil penalties, refuse to renew necessary
registrations, or initiate proceedings to revoke those registrations. In certain circumstances, violations could lead to criminal
prosecution.
Individual states also regulate controlled
substances and List I Chemicals, and we or our licensees are subject to such regulation by several states with respect to the manufacture
and future distribution of these products.
Pharmaceutical Coverage, Pricing and
Reimbursement
In the United States,
the commercial success of our product candidates will depend, in part, upon the availability of coverage and reimbursement from
third-party payers at the federal, state and private levels. Government payer programs, including Medicare and Medicaid, private
health care insurance companies and managed care plans may deny coverage or reimbursement for a product or therapy in whole or
in part if they determine that the product or therapy is not medically appropriate or necessary. Also, third-party payers have
attempted to control costs by limiting coverage and the amount of reimbursement for particular procedures or drug treatments. The
United States Congress and state legislatures from time to time propose and adopt initiatives aimed at cost containment, which
could impact our ability to sell our products profitably.
For example, in March 2010, President Obama
signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act,
which we refer to collectively as the Health Care Reform Law, a sweeping law intended to broaden access to health insurance, reduce
or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for
healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy
reforms. Among other cost containment measures, the Healthcare Reform Law establishes:
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An annual, nondeductible fee on any entity that manufactures or imports certain branded prescription
drugs and biologic agents;
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A new Medicare Part D coverage gap discount program, in which pharmaceutical manufacturers who
wish to have their drugs covered under Part D must offer discounts to eligible beneficiaries during their coverage gap period (the
“donut hole”); and
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A new formula that increases the rebates a manufacturer must pay under the Medicaid Drug Rebate
Program.
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Many of the Healthcare Reform Law’s
most significant reforms were implemented in 2014, with others thereafter, and their details will be shaped significantly by implementing
regulations, some of which have yet to be finalized. If such reforms result in an increase in the proportion of uninsured patients
who are prescribed products resulting from our proprietary or partnered programs, this could adversely impact future sales of our
products and our business and results of operations. Where patients receive insurance coverage under any of the new options made
available through the Healthcare Reform Law, the possibility exists that manufacturers may be required to pay Medicaid rebates
on that resulting drug utilization, a decision that could impact manufacturer revenues. In addition, the Administration has also
announced delays in the implementation of key provisions of the Healthcare Reform Law. The implications of these delays for our
sales, business and financial condition, if any, are not yet clear.
Although it is too early to determine the
effect of the Health Care Reform Law, the new law appears likely to continue the pressure on pharmaceutical pricing, especially
under government programs, and may also increase our or our licensees’ regulatory burdens and operating costs. Moreover,
in the coming years, additional changes could be made to governmental healthcare programs that could significantly impact the success
of our products.
The cost of pharmaceuticals continues to
generate substantial governmental and third-party payer interest. We expect that the pharmaceutical industry will experience pricing
pressures due to the trend toward managed healthcare, the increasing influence of managed care organizations and additional legislative
proposals. In addition to the Healthcare Reform Law, there will continue to be proposals by legislators at both the federal and
state levels, regulators and third-party payers to keep healthcare costs down while expanding individual healthcare benefits. Economic
pressure on state budgets may result in states increasingly seeking to achieve budget savings through mechanisms that limit coverage
or payment for drugs. State Medicaid programs are increasingly requesting manufacturers to pay supplemental rebates and requiring
prior authorization by the state program for use of any drug for which supplemental rebates are not being paid. Managed care organizations
continue to seek price discounts and, in some cases, to impose restrictions on the coverage of particular drugs. Government efforts
to reduce Medicaid expenses may lead to increased use of managed care organizations by Medicaid programs. This may result in managed
care organizations influencing prescription decisions for a larger segment of the population and a corresponding constraint on
prices and reimbursement for our products. Certain of these changes could limit the prices that can be charged for drugs we develop
or the amounts of reimbursement available for these products from governmental agencies or third-party payers, or may increase
the tax obligations on pharmaceutical companies, or may facilitate the introduction of generic competition with respect to products
we are able to commercialize. In short, our or our licensees’ results of operations could be adversely affected by current
and future healthcare reforms.
Since its enactment, there have been judicial
and Congressional challenges to certain aspects of the Healthcare Reform Law, and we expect there will be additional challenges
and amendments to the Healthcare Reform Law in the future. The Trump administration and members of the U.S. Congress have indicated
that they may continue to seek to modify, repeal, or otherwise invalidate all, or certain provisions of, the Healthcare Reform
Law. Most recently, the Tax Cuts and Jobs Acts was enacted, which, among other things, removes penalties for not complying with
the individual mandate to carry health insurance. It is uncertain the extent to which any such changes may impact our business
or financial condition. In addition, we cannot predict the likelihood, nature or extent of government regulation that may arise
from future legislation or administrative or executive action, either in the United States or abroad. For example, certain policies
of the Trump administration may impact our business and industry. Namely, the Trump administration has taken several executive
actions, including the issuance of a number of Executive Orders, that could impose significant burdens on, or otherwise materially
delay, the FDA’s ability to engage in routine regulatory and oversight activities such as implementing statutes through rulemaking,
issuance of guidance and review and approval of marketing applications. Notably, on January 30, 2017, President Trump issued an
Executive Order, applicable to all executive agencies, including the FDA, which requires that for each notice of proposed rulemaking
or final regulation to be issued in fiscal year 2017, the agency shall identify at least two existing regulations to be repealed,
unless prohibited by law. These requirements are referred to as the “two-for-one”
provisions. This Executive Order includes a budget neutrality provision that requires the total incremental cost of all new regulations
in the 2017 fiscal year, including repealed regulations, to be no greater than zero, except in limited circumstances. For fiscal
years 2018 and beyond, the Executive Order requires agencies to identify regulations to offset any incremental cost of a new regulation
and approximate the total costs or savings associated with each new regulation or repealed regulation. In interim guidance issued
by the Office of Information and Regulatory Affairs within the Office of Management and Budget, or OMB, on February 2, 2017, the
administration indicates that the “two-for-one”
provisions may apply not only to agency regulations, but also to significant agency guidance documents. In addition, on February
24, 2017, President Trump issued an executive order directing each affected agency to designate an agency official as a “Regulatory
Reform Officer” and establish a “Regulatory Reform Task Force” to implement the two-for-one
provisions and other previously issued executive orders relating to the review of federal regulations, however it is difficult
to predict how these requirements will be implemented, and the extent to which they will impact the FDA’s ability to exercise
its regulatory authority. If these executive actions impose constraints on the FDA’s ability to engage in oversight and implementation
activities in the normal course, our business may be negatively impacted.
In international markets, reimbursement
and healthcare payment systems vary significantly by country, and many countries have instituted price ceilings on specific products
and therapies. There can be no assurance that our products will be considered medically reasonable and necessary for a specific
indication, that our products will be considered cost-effective by third-party payers, that an adequate level of coverage or payment
will be available so that the third-party payers’ reimbursement policies will not adversely affect our ability to sell our
products profitably.
Other Healthcare Laws and Compliance
Requirements
We and our licensees that commercialize
our products are subject to various federal and state laws targeting fraud and abuse in the healthcare industry. For example, the
federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, receiving, offering or paying remuneration,
directly or indirectly, to induce either the referral of an individual, or the furnishing, recommending, or arranging for a good
or service, for which payment may be made under a federal healthcare program, such as the Medicare and Medicaid programs. The reach
of the Anti-Kickback Statute was broadened by the Health Care Reform Law, which, among other things, amends the intent requirement
of the statute so that a person or entity no longer needs to have actual knowledge of this statute or specific intent to violate
it in order to have committed a violation. The Healthcare Reform Law also provides that the government may assert that a claim
including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim
for purposes of the civil False Claims Act or the civil monetary penalties statute. The civil False Claims Act imposes liability
on any person who, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by
a federal healthcare program. The “qui tam” provisions of the False Claims Act allow a private individual to bring
civil actions on behalf of the federal government alleging that the defendant has submitted a false claim to the federal government,
and to share in any monetary recovery. Violations of these laws or any other federal or state fraud and abuse laws may subject
our licensees to civil and criminal penalties, including fines, imprisonment and exclusion from participation in federal healthcare
programs, which could harm the commercial success of our products and materially affect our business, financial condition and results
of operations.
Segment Reporting
We operate in one business segment; the
research, development and manufacture of innovative abuse deterrent, orally administered pharmaceutical products.
Environmental Compliance
We are subject to regulation under federal,
state and local environmental laws and believe we are in material compliance with such laws. We incur the usual waste disposal
cost associated with a pharmaceutical research, development and manufacturing operation.
Employees
We have 12 full-time employees and 1 part-time
employee, 9 of whom are engaged in the research, development and manufacture of product candidates utilizing our proprietary Aversion,
Impede, and Limitx Technologies. The remaining employees are engaged in administrative, legal, accounting, finance, market research,
and business development activities. All of our senior management and most of our other employees have prior experience in pharmaceutical
or biotechnology companies. None of our employees are covered by collective bargaining agreements. We believe that our relations
with our employees are good.
ITEM 1A. RISK FACTORS
Our future operating results may vary substantially
from anticipated results due to a number of factors, many of which are beyond our control. The following discussion highlights
some of these factors and the possible impact of these factors on future results of operations. If any of the following factors
actually occur, our business, financial condition or results of operations could be materially harmed. In that case, the value
of our common stock could decline substantially and you may lose all or part of your investment.
Risks Related to Our Business and Industry
We have a history of operating
losses and may not achieve profitability sufficient to generate a positive return on shareholders’ investment; our auditors
have included in their 2018 audit report an explanatory paragraph as to substantial doubt as to our ability to continue as a going
concern.
We had a net loss of $3.8 million, $5.7 million, and $7.4 million
for the years ended December 31, 2018, 2017 and 2016, respectively. As of September 12, 2019 we had approximately $750 thousand
of cash. In addition to this amount, AD Pharma, under the Agreement dated June 28, 2019, is to pay us up to 18 monthly license
payments of $350,000 to fund operations commencing July, 2019. However, AD Pharma has the right to terminate the Agreement for
convenience and such action would limit our ability to fund continuing operations. Our auditors have included in their report relating
to our 2018 financial statements a “going concern” explanatory paragraph as to substantial doubt of our ability to
continue as a going concern that assumes the realization of our assets and the satisfaction of our liabilities and commitments
in the normal course of business. Our future profitability will depend on several factors, including:
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the receipt of monthly license payments from AD Pharma for the 18 month period
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our receipt of royalties relating to Zyla’s sale of Oxaydo;
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MainPointe’s successful marketing and sale of our Nexafed products and other products utilizing
our Impede Technology, and market acceptance, increased demand for and sales of our Nexafed products;
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our receipt of milestone payments and royalties relating to our Limitx Technology products in development
from future licensees, of which no assurance can be given; and
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the receipt of FDA approval and the successful commercialization by future licensees (if any) of
products utilizing our Limitx Technology and our ability to commercialize our Impede Technology without infringing the patents
and other intellectual property rights of third parties.
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We are currently focused primarily on the
development of our lead Limitx product candidate, LTX-03, as well as our other Limitx programs, which we believe will result in
our continued incurrence of significant research, development and other expenses related to those programs. If preclinical studies
or the clinical trials for any of our Limitx drug candidates fail or produce unsuccessful results and those drug candidates do
not gain regulatory approval, or if any of our Limitx drug candidates, if approved, fail to achieve market acceptance, we may never
become profitable.
We cannot assure you that Oxaydo or our
Nexafed products will be successfully commercialized or our Limitx Technology or Impede Technology products in development will
be successfully developed or be approved for commercialization by the FDA.
Even if Zyla succeeds in commercializing
Oxaydo, if MainPointe is successful in commercializing our Nexafed products, or if we and AD Pharma succeed in developing and commercializing
one or more of our pipeline Limitx or Impede Technology products, we expect to continue using cash reserves for the foreseeable
future. Our expenses may increase in the foreseeable future as a result of continued research and development of our product candidates,
maintaining and expanding the scope of our intellectual property, and hiring of additional research and development staff.
We will need to generate revenues from
royalties on sales to achieve and maintain profitability. If Zyla does not successfully commercialize Oxaydo, if MainPointe does
not successfully commercialize the Nexafed products, or if we or AD Pharma cannot successfully develop, obtain regulatory approval
and commercialize our Limitx product candidates in development, specifically LTX-03, we will not be able to generate such royalty
revenues or achieve future profitability. Our failure to achieve or maintain profitability would have a material adverse impact
on our operations, financial condition and on the market price of our common stock.
We will be required to
raise additional funds to finance our operations and remain a going concern; we may not be able to do so when necessary, and/or
the terms of any financings may not be advantageous to us; if we fail to raise additional funding we will cease operations and/or
seek protection under applicable bankruptcy laws.
Our operations to date have consumed substantial
amounts of cash. Negative cash flows from our operations are expected to continue over at least the next several years. Our cash
utilization amount is highly dependent on the progress of our product development programs, particularly, the results of our preclinical
and clinical studies of our Limitx product candidates and the cost, timing and outcomes of regulatory approval for our Limitx product
candidates. In addition, the further development of our ongoing clinical trials will depend on upcoming analysis and results of
those studies and our financial resources at that time. As of September 12, 2019 our cash balance was approximately $750 thousand.
Additionally, the Agreement with AD Pharma calls for monthly license payments of $350,000 from July 2019 through November 2020
and as well as their payment of all outside development costs for LTX-03. We expect these amounts will fund operations through
2020. The monthly payments by AD Pharma cease in November 2020 at which time the Company will need to have additional capital to
fund operations until such time as LTX-03 is approved and royalty payments commence. To fund further operations beyond December
2020, we must raise additional financing or enter into license or collaboration agreements with third parties relating to our technologies
or explore a variety of capital raising and other transactions to provide additional funding.
We will require future additional capital
infusions including public or private financing, strategic partnerships or other arrangements with organizations that have capabilities
and/or products that are complementary to our own capabilities and/or products, in order to continue the development of our product
candidates. However, there can be no assurances that we will complete any financings, strategic alliances or collaborative development
agreements, and the terms of such arrangements may not be advantageous to us. Any additional equity financing will be dilutive
to our current stockholders and debt financing, if available, may involve restrictive covenants. If we raise funds through collaborative
or licensing arrangements, we may be required to relinquish, on terms that are not favorable to us, rights to some of our technologies
or product candidates that we would otherwise seek to develop or commercialize. Our failure to raise capital when needed could
materially harm our business, financial condition and results of operations. In the absence of the receipt of additional financing
or payments under third-party license or collaborative agreements, we will be required to scale
back or terminate operations and/or seek protection under applicable bankruptcy laws. This could result in a complete loss of shareholder
value of the Company. Even assuming we are successful in securing additional sources of financing to fund continued operations,
there can be no assurance that the proceeds of such financing will be sufficient to fund operations until such time, if at all,
that we generate sufficient revenue from our products and product candidate to sustain and grow our operations.
Our ongoing capital requirements will depend
on numerous factors, including: the progress and results of preclinical testing and clinical trials of our Limitx product candidates
under development; the costs of complying with the FDA and other domestic regulatory agency requirements, the progress of our research
and development programs and those of our partners; the time and costs expended and required to obtain any necessary or desired
regulatory approvals; our ability to enter into licensing arrangements, including any unanticipated licensing arrangements that
may be necessary to enable us to continue our development and clinical trial programs; the costs and expenses of filing, prosecuting
and, if necessary, enforcing our patent claims, or defending against possible claims of infringement by third-party patent or other
technology rights; the cost of commercialization activities and arrangements that we undertake; and the demand for our products,
which demand depends in turn on circumstances and uncertainties that cannot be fully known, understood or quantified unless and
until the time of approval, including the FDA approved label for any product.
If we fail to comply with the covenants and other obligations
under our loan with AD Pharma, LLC they may accelerate amounts owed and may foreclose upon the assets securing our obligation.
At June 28, 2019, we (including our wholly-owned
subsidiary Acura Pharmaceutical Technologies, Inc. (“APT”)), entered into a Promissory Note and Security Agreement
with John Schutte (Mr. Schutte) that consolidated existing promissory notes into a single Note for $6.0 million (after including
accrued interest). To secure our performance of our obligations under the Note, we granted Mr. Schutte a security interest in all
of our assets. Our failure to comply with the terms of the loan agreement, if we file bankruptcy, failure to pay interest and principal
when due on July 1, 2023, or termination of the License, Development and Commercialization Agreement could result in the acceleration
of payment of our loan, potential foreclosure on our assets, and other adverse results. With our consent, Mr. Schutte assigned
and transferred to Abuse Deterrent Pharma, LLC (“AD Pharma”) all of his right, title and interest in this Note and
associated Security Agreement effective June 28, 2019. Any declaration of an event of default by AD Pharma would significantly
harm our business and would likely cause the price of our common stock to decline.
We are largely dependent on our successful development
of our Limitx product candidates, specifically LTX-03, and on the commercial success of Oxaydo.
We anticipate that, for at least fiscal
2019 and 2020, our ability to generate revenues and become profitable will depend in large part on our successful development of
our LTX-03 as licensed to AD Pharma and potentially other Limitx product candidates and on the commercial success of our only FDA
approved product, Oxaydo. We expect that a substantial portion of our efforts and expenditures over the next few years will be
devoted to our lead Limitx product candidate, LTX-03, and other Limitx product candidates in development. We completed our first
two Phase I clinical studies for LTX-04, an opioid hydromorphone HCI, in mid-2016. We have changed our primary development focus
from immediate-release hydromorphone products (i.e., LTX-04, described above) to immediate-release hydrocodone products (i.e.,
LTX-03) because hydrocodone bitartrate is more likely to be abused in oral excessive tablet abuse, or ETA, and completed two pharmokinetic
studies for LTX-03 during 2017 and the first week of 2018. We are also engaged in formulation development or early preclinical
development for other Limitx product candidates. Accordingly, our business is currently substantially dependent on the successful
development, clinical testing, regulatory approval and commercialization of our Limitx product candidates, which may never occur.
If our clinical studies for LTX-03 are not successful we may determine that further clinical development of LTX-03 or other Limitx
product candidates should be discontinued. Also, the failure of clinical studies for LTX-03 may cause AD Pharma to terminate the
Agreement. We expect that any revenues from our Limitx product candidates, specifically LTX-03 will be derived from upfront payments,
milestone payments and royalties under license agreements with AD Pharma, of which no assurance can be given.
The commercial success of Oxaydo will depend
on many factors, including our and our licensee Zyla’s ability to:
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obtain and increase market demand for, and sales of, Oxaydo;
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obtain acceptance of Oxaydo by physicians and patients;
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obtain and maintain adequate levels of coverage and reimbursement for Oxaydo from commercial health
plans and government health programs, which we refer to collectively as third-party payors, particularly in light of the availability
of other branded and generic competitive products;
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maintain compliance with regulatory requirements;
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price Oxaydo competitively and enter into price discounting contracts with third-party payors;
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establish and maintain agreements with wholesalers and distributors on commercially reasonable
terms;
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manufacture and supply Oxaydo to meet commercial demand, including obtaining sufficient quota from
the DEA;
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maintain intellectual property protection for Oxaydo and obtain favorable drug listing treatment
by the FDA to minimize generic competition; and
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obtain approval for additional dosage strengths of Oxaydo.
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their successful execution of their court approved plan of reorganization
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There can be no assurance that Zyla will devote sufficient resources
to the further development, marketing and commercialization of Oxaydo. Zyla’s marketing of Oxaydo may result in low market
acceptance and insufficient demand for, and sales of, the product. To date we have only minimal royalties from the sale of Oxaydo.
In addition, Zyla has filed a prior approval supplement for OXAYDO® 10 mg and 15 mg dosage strengths, but received a complete
response letter from the FDA, and according to a recent filing is working to determine next steps to respond to such filing. Zyla
has advised that the FDA is requesting more information regarding the effect of food on Oxaydo 15mg and the intranasal abuse-deterrent
properties of Oxaydo 10mg and 15mg. If Zyla fails to successfully commercialize Oxaydo and increase sales, we may be unable to
generate sufficient revenues to sustain or grow our business and we may never become profitable, and our business, financial condition
and results of operations will be materially adversely affected.
If MainPointe is not successful
in commercializing our Nexafed Products, our revenues and business will suffer.
We commenced the launch and commercial
distribution of Nexafed in mid-December 2012 and launched our Nexafed Sinus Pressure + Pain product in February 2015. Our Nexafed
products compete in the highly competitive market for cold, sinus and allergy products generally available to the consumer without
a prescription. Many of our competitors have substantially greater financial and other resources and are able to expend more funds
and effort than MainPointe in marketing their competing products. Category leading brands are often supported by regional and national
advertising and promotional efforts. Our Nexafed products will compete with national brands as well as pharmacy store brands that
are offered at a lower price. There can be no assurance that MainPointe will succeed in commercializing our Nexafed products, or
that the pricing of our Nexafed products will allow us to generate significant royalty revenues. Regulations have been enacted
in several state or local jurisdictions requiring a doctor’s prescription to obtain pseudoephedrine products. An expansion
of such restrictions to other jurisdictions or even nationally will adversely impact MainPointe’s ability to market our Nexafed
products as over-the-counter, or OTC, products and negatively impact royalty payments to us from Nexafed products sales. There
can be no assurance that MainPointe will devote sufficient resources to marketing and commercialization of our Nexafed products.
MainPointe’s failure to successfully commercialize our Nexafed® products will have a material adverse effect on our business
and financial condition.
If Zyla is not successful
in commercializing Oxaydo, our revenues and our business will suffer.
Pursuant to our Collaboration and License
Agreement with Zyla, or the Zyla Agreement, Zyla is responsible for manufacturing, marketing, pricing, promotion, selling and distribution
of Oxaydo. If the Zyla Agreement is terminated in accordance with its terms, including due to a party’s failure to perform
its obligations or responsibilities under the Agreement, then we would need to commercialize Oxaydo ourselves, for which we currently
have no infrastructure, or alternatively enter into a new agreement with another pharmaceutical company, of which no assurance
can be given. If we are unable to build the necessary infrastructure to commercialize Oxaydo ourselves, which would substantially
increase our expenses and capital requirements, which we are currently unable to fund, or are unable to find a suitable replacement
commercialization partner, we would be unable to generate any revenue from Oxaydo. Even if we are successful at replacing the commercialization
capabilities of Zyla, our revenues and/or royalties from Oxaydo could be adversely impacted.
Zyla’s third party manufacturing
facility currently is the sole commercial source of supply of Oxaydo. If Zyla’s manufacturing facility fails to obtain sufficient
DEA quotas for oxycodone, fails to source adequate quantities of active and inactive ingredients, fails to comply with regulatory
requirements, or otherwise experiences disruptions in commercial supply of Oxaydo, product revenue and our royalties could be adversely
impacted.
Zyla has various products in development
and also markets other products, for which Oxaydo will vie for such licensee’s development, promotional, marketing, and selling
resources. If Zyla fails to commit sufficient promotional, marketing and selling resources to Oxaydo, our expected royalties could
be adversely impacted. Additionally, there can be no assurance that Zyla will commit the resources required for the successful
commercialization of Oxaydo.
The market for our opioid product candidates
is highly competitive with many marketed non-abuse deterrent brand and generic products and other abuse deterrent product candidates
in development. If Zyla prices Oxaydo inappropriately, fails to position Oxaydo properly, targets inappropriate physician specialties,
or otherwise does not provide sufficient promotional support, product revenue and our royalties could be materially adversely impacted.
Zyla’s promotional, marketing and
sales activities in connection with Oxaydo are subject to various federal and state fraud and abuse laws, including, without limitation,
the federal Anti-Kickback Statute and the federal False Claims Act. The federal Anti-Kickback Statute prohibits persons from knowingly
and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, to induce, or in return for, the
purchase or recommendation of an item or service reimbursable under a federal healthcare program. The federal False Claims Act
imposes liability on any person who, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim
for payment by a federal healthcare program. If Zyla’s activities are found to be in violation of these laws or any other
federal and state fraud and abuse laws, Zyla may be subject to penalties, including civil and criminal penalties, damages, fines
and the curtailment or restructuring of its activities with regard to the commercialization of Oxaydo, which could harm the commercial
success of Oxaydo and have a material adverse effect on our business, financial condition and results of operations.
Our failure to meet the development
timelines in the License Agreement with AD Pharma, including FDA acceptance of NDA submission for LTX-03 by November 28, 2020,
will allow AD Pharma to enforce termination provisions in the Agreement and seize the intellectual property pertaining to LIMITx
technology which will adversely impact our ability to develop, market and sell our Limitx Technology products and our revenues
and business will be materially adversely affected..
We are engaged in the development
of product candidates utilizing our Limitx Technology, including planning studies for LTX-03, our hydrocodone/acetaminophen lead
product candidate which has been licensed to AD Pharma. This License requires that the IND application for LTX-03 be accepted by
the FDA within 18 months from June 28, 2019. Failure to do so gives AD Pharma the right to terminate this Agreement and. take ownership
of the Limitx intellectual property. AD Pharma’s seizure of the Limitx IP would adversely impact our financial condition
and results of operations.
We must rely on current
cash reserves, monthly license payments under the License Agreement for LTX-03 with AD Pharma, royalties from Zyla on Zyla’s
sales of Oxaydo and royalties from MainPointe on its sales of Nexafed products to fund operations.
To fund our continued operations, we expect to rely on our current
cash resources, the monthly license payments under the License Agreement for LTX-03 with AD Pharma, capital raising, royalty payments
under the Zyla Agreement relating to Oxaydo, and royalty payments under the MainPointe Agreement relating to our Nexafed products,
and milestones and royalty payments that may be made under existing or future license agreements with other pharmaceutical company
partners for our product candidates in development, of which no assurances can be given. No assurance can be given that current
cash reserves, monthly license payments from AD Pharma, royalties from Zyla on Oxaydo net sales, or royalties from MainPointe on
Nexafed products net sales will be sufficient to fund continued operations and the development of our product candidates until
such time as we generate revenues from any of our products in development. Moreover, no assurance can be given that we will be
successful in raising additional financing or, if financing is obtained, that such financing will be sufficient to fund operations
until we generate sufficient revenues from LTX-03, Oxaydo and Nexafed products, or until other product candidates utilizing our
Limitx or Impede Technologies may be commercialized. In the event our cash reserves are insufficient to fund continued operations,
we may need to suspend some or all of our product development efforts or possibly discontinue operations.
Our and our licensees’
ability to market and promote Oxaydo and Limitx Technology products by describing the abuse deterrent or other beneficial features
of such products will be determined by the FDA approved label for such products.
The commercial success of Oxaydo and our
Limitx Technology products in development will depend upon our and our licensees’ ability to obtain FDA approved labeling
describing such products’ abuse deterrent features or other benefits. Our or our licensees’ failure to achieve FDA
approval of product labeling containing such information will prevent or substantially limit our and our licensees’ advertising
and promotion of such beneficial features in order to differentiate our products from other immediate release opioid products containing
the same active ingredients, and would have a material adverse impact on our business and results of operations. In April 2015,
the FDA published guidance for industry on the evaluation and labeling of abuse-deterrent opioids. While the 2015 FDA Guidance
is non-binding on the FDA, it outlines FDA’s current thinking on the development and labeling of abuse-deterrent products.
The 2015 FDA Guidance provides for three distinct levels of pre-marketing studies that are potentially eligible for inclusion in
the labeling: (1) laboratory-based in vitro manipulation and extraction studies, (2) pharmacokinetic studies, and (3) clinical
abuse potential studies. The 2015 FDA Guidance further prescribes additional post-approval or epidemiology studies to determine
whether the marketing of a product with abuse-deterrent properties results in meaningful reductions in abuse, misuse, and related
adverse clinical outcomes, including addiction, overdose, and death in the post-approval setting, which can also be included in
the labeling. FDA notes “the science of abuse deterrence is relatively new. Both the technologies involved and the analytical,
clinical, and statistical methods for evaluating those technologies are rapidly evolving. For these reasons, FDA will take a flexible,
adaptive approach to the evaluation and labeling of potentially abuse-deterrent opioid products”.
We or our licensee may seek to include
descriptions of studies that characterize the abuse-deterrent properties or safety features in the label for our Aversion and Limitx
Technology products in development. We have committed to the FDA to undertake epidemiological studies to assess the actual consequences
of abuse of Oxaydo in the market. However, the extent to which a description of the abuse deterrent properties or results of epidemiological
or other studies will be added to or included in the FDA approved product label for our products in development will be the subject
of our and our licensees’ discussions with, and agreement by, the FDA as part of the new drug application, or NDA, review
process for each of our product candidates. The outcome of those discussions with the FDA will determine whether we or our licensees
will be able to market our products with labeling that sufficiently differentiates them from other products that have comparable
therapeutic profiles. While the FDA approved label for Oxaydo includes the results from a clinical study which evaluated the effects
of nasally snorting crushed Oxaydo and commercially available oxycodone tablets and limitations on wetting or dissolving Oxaydo,
it does not, however, include the results of our laboratory studies intended to evaluate Oxaydo’s potential to limit extraction
of oxycodone HCl from dissolved Oxaydo Tablets and resist conversion into an injectable, or IV solution. According to filings made
by Zyla, a supplemental new drug application (“sNDA”) was submitted by Zyla in December 2016 for Oxaydo to support
an abuse-deterrent label claim for the intravenous route of abuse, and in February 2017, Zyla filed a prior approval supplement
(“PAS”) with data on new dosage strengths of 10 mg and 15 mg of Oxaydo. Zyla reported they received a complete response
letter from the FDA in June of 2017 where the FDA requested more information regarding the effect of food on Oxaydo 15 mg and the
intranasal abuse deterrent properties of Oxaydo 10 and 15 mg. Zyla reported that based on discussions with the FDA regarding the
sNDA, Zyla believed a contemporary intranasal human abuse potential study would be needed to complete the sNDA, and given that
the issues involved in the sNDA and PAS are intertwined, Zyla disclosed that they are evaluating their options and the costs associated
to proceed on the abuse deterrent label and/or the additional dosage strengths. The absence of the results of these extraction
and syringe studies in the FDA approved label for Oxaydo may substantially limit our licensee’s ability to differentiate
Oxaydo from other immediate release oxycodone products, which would have a material adverse effect on market acceptance of Oxaydo
and on our business and results of operations.
Notwithstanding the FDA approved labeling for Oxaydo, there
can be no assurance that our Limitx Technology products in development will receive FDA approved labeling that describes the beneficial
safety features of such products. If the FDA does not approve labeling containing such information, we or our licensees will not
be able to promote such products based on their safety features, may not be able to differentiate such products from other immediate
release opioid products containing the same active ingredients, and may not be able to charge a premium above the price of such
other products, which could materially adversely affect our business and results of operations.
Further, because the FDA closely regulates
promotional materials and other promotional activities, even if the FDA initially approves product labeling that includes a description
of the abuse deterrent characteristics of our product, as in the case of Oxaydo, the FDA’s Office of Prescription Drug Promotion,
or OPDP, will continue to review the acceptability of promotional claims and product advertising campaigns for our marketed products.
This could lead to the issuance of warning letters or untitled letters, suspension or withdrawal of Oxaydo from the market, recalls,
fines, disgorgement of money, operating restrictions, injunctions or criminal prosecution, which could harm the commercial success
of our product and materially affect our business, financial condition and results of operations.
Our product candidates
are unproven and may not be approved by the FDA.
We are committing a majority of our resources
to the development of product candidates utilizing our Limitx and Impede Technologies. Notwithstanding the receipt of FDA approval
of Oxaydo and our marketing of our Nexafed products, there can be no assurance that any product candidate utilizing our Impede
or Limitx Technologies will meet FDA’s standards for commercial distribution. Further, there can be no assurance that other
product candidates that may be developed using Limitx, Impede or Aversion Technologies will achieve the targeted end points in
the required clinical studies or perform as intended in other pre-clinical and clinical studies or lead to an NDA submission or
filing acceptance. Our failure to successfully develop and achieve final FDA approval of our product candidates in development
will have a material adverse effect on our financial condition.
If the FDA disagrees with our determination
that certain of our products meet the over-the-counter, or OTC, Monograph requirements, once those products are commercialized,
they may be removed from the market; the FDA or the U.S. Federal Trade Commission, or FTC, may object to our advertisement and
promotion of the extraction characteristics and benefits of our Nexafed products.
Drugs that have been deemed safe and effective
by the FDA for use by the general public without a prescription are classified as OTC drug products. Certain OTC drug products
may be commercialized without premarket review by the FDA if the standards set forth in the applicable regulatory monograph are
met. An OTC monograph provides the marketing conditions for the applicable OTC drug product, including active ingredients, labeling,
and other general requirements, such as compliance with current Good Manufacturing Practices, or cGMP and establishment registration.
Any product which fails to conform to each of the general conditions in a monograph is subject to regulatory action. Further, although
the FDA regulates OTC drug product labeling, the FTC regulates the advertising and marketing of OTC drug products. We believe that
our Nexafed products licensed to MainPointe are classified for OTC sale under an FDA OTC monograph, which will allow for their
commercialization without submitting an NDA or abbreviated new drug application, or ANDA to the FDA. We have also determined that,
provided MainPointe adheres to the FDA’s requirements for OTC monograph products, including product labeling, we can advertise
and promote the extraction characteristics and benefits of our Nexafed products which are supported by our research studies. No
assurance can be given, however, that the FDA will agree that our Nexafed products may be sold under the FDA’s OTC monograph
product regulations or that the FDA or FTC will not object to MainPointe’s advertisement and promotion of our Nexafed products’
extraction characteristics and benefits. If the FDA determines that our Nexafed products do not conform to the OTC monograph or
if MainPointe fails to meet the general conditions, once commercialized, the products may be removed from the market and we and
MainPointe may face various actions including, but not limited to, restrictions on the marketing or distribution of such products,
warning letters, fines, product seizure, or injunctions or the imposition of civil or criminal penalties. Any of these actions
may materially and adversely affect our financial condition and operations. Additionally, the FDA has announced that it is considering
material changes to how it regulates OTC drug products and held a hearing in late March 2014 for public comment. Changes to the
existing OTC regulations could result in a requirement that an NDA or ANDA be filed for our Nexafed products or other Impede Technology
products in order to commercialize such products. If the FDA requires the submission of a NDA or ANDA to obtain marketing approval
for our Nexafed® products or other Impede Technology products, this would result in substantial additional costs, suspend the
commercialization of our Nexafed products and require FDA approval prior to sale, of which no assurance can be provided. In such
case, the label for our Nexafed products or other Impede Technology products would be subject to FDA review and approval and there
can be no assurance that we or our licensees will be able to market Nexafed or other Impede Technology products with labeling sufficient
to differentiate it from products that have comparable therapeutic profiles. If we or our licensees are unable to advertise and
promote the extraction characteristics of Nexafed or other Impede Technology products, we or our licensees may be unable to compete
with national brands and pharmacy chain store brands.
Our Limitx, Impede and Aversion Technology products may
not be successful in limiting or impeding abuse or misuse or provide additional safety upon commercialization.
We are committing a majority of our resources
to the development of products utilizing our Limitx and Impede Technologies. Notwithstanding the receipt of FDA approval of Oxaydo
and the results of our numerous clinical and laboratory studies for Oxaydo, our Nexafed products, and our Limitx and Impede Technology
products in development, there can be no assurance that Oxaydo, our Nexafed products or any other product utilizing our Limitx,
Impede or Aversion Technologies will perform as tested and limit or impede the actual abuse or misuse of such products or provide
other benefits in commercial settings. Moreover, there can be no assurance that the post-approval epidemiological study required
by the FDA as a condition of approval of Oxaydo will show a reduction in the consequences of abuse and misuse by patients for whom
Oxaydo is prescribed. To date, Zyla has not achieved sufficient market share for Oxaydo to support a full epidemiological study.
The failure of Oxaydo, our Nexafed products or other products utilizing our Limitx and Impede Technologies to limit or impede actual
abuse or misuse or provide other safety benefits in practice will have a material adverse impact on market acceptance for such
products and on our financial condition and results of operations.
Relying on third party
contract research organizations, or CROs may result in delays in our pre-clinical, clinical or laboratory testing. If pre-clinical,
clinical or laboratory testing for our product candidates are unsuccessful or delayed, we will be unable to meet our anticipated
development and commercialization timelines.
To obtain FDA approval to commercially
sell and distribute in the United States any of our prescription product candidates, we or our licensees must submit to the FDA
a NDA demonstrating, among other things, that the product candidate is safe and effective for its intended use. As we do not possess
the resources or employ all the personnel necessary to conduct such testing, we rely on CROs for the majority of this testing with
our product candidates. As a result, we have less control over our development program than if we performed the testing entirely
on our own. Third parties may not perform their responsibilities on our anticipated schedule. Delays in our development programs
could significantly increase our product development costs and delay product commercialization.
The commencement of clinical trials with
our product candidates may be delayed for several reasons, including, but not limited to, delays in demonstrating sufficient pre-clinical
safety required to obtain regulatory approval to commence a clinical trial, reaching agreements on acceptable terms with prospective
CROs, clinical trial sites and licensees, manufacturing and quality assurance release of a sufficient supply of a product candidate
for use in our clinical trials and/or obtaining institutional review board approval to conduct a clinical trial at a prospective
clinical site. Once a clinical trial has begun, it may be delayed, suspended or terminated by us or regulatory authorities due
to several factors, including ongoing discussions with regulatory authorities regarding the scope or design of our clinical trials,
a determination by us or regulatory authorities that continuing a trial presents an unreasonable health risk to participants, failure
to conduct clinical trials in accordance with regulatory requirements, lower than anticipated recruitment or retention rate of
patients in clinical trials, inspection of the clinical trial operations or trial sites by regulatory authorities, the imposition
of a clinical hold by FDA, lack of adequate funding to continue clinical trials, and/or negative or unanticipated results of clinical
trials.
Clinical trials required by the FDA for
commercial approval may not demonstrate safety or efficacy of our product candidates. Success in pre-clinical testing and early
clinical trials does not assure that later clinical trials will be successful. Results of later clinical trials may not replicate
the results of prior clinical trials and pre-clinical testing. Even if the results of our or our licensee’s pivotal phase
III clinical trials are positive, we and our licensees may have to commit substantial time and additional resources to conduct
further pre-clinical and clinical studies before we or our licensees can submit NDAs or obtain regulatory approval for our product
candidates.
Clinical trials are expensive and at times,
difficult to design and implement, in part because they are subject to rigorous regulatory requirements. Further, if participating
subjects or patients in clinical studies suffer drug-related adverse reactions during the course of such trials, or if we, our
licensees or the FDA believes that participating patients are being exposed to unacceptable health risks, we or our licensees may
suspend the clinical trials. Failure can occur at any stage of the trials, and we or our licensees could encounter problems causing
the abandonment of clinical trials or the need to conduct additional clinical studies, relating to a product candidate.
Even if our clinical trials and laboratory
testing are completed as planned, their results may not support commercially viable product label claims. The clinical trial process
may fail to demonstrate that our product candidates are safe and effective for their intended use. Such failure may cause us or
our licensees to abandon a product candidate and may delay the development of other product candidates.
We have no commercial
manufacturing capacity and rely on third-party contract manufacturers to produce commercial quantities of our products.
We do not have the facilities, equipment
or personnel to manufacture commercial quantities of our products and therefore must rely on our licensees or other qualified third-party
contract manufactures with appropriate facilities and equipment to contract manufacture commercial quantities of products utilizing
our Limitx and Impede Technologies. These licensees and third- party contract manufacturers are also subject to cGMP regulations,
which impose extensive procedural and documentation requirements. Any performance failure on the part of our licensees or contract
manufacturers could delay commercialization of any approved products, depriving us of potential product revenue.
Our drug products, including our licensed
Nexafed products, require precise, high quality manufacturing. Failure by our contract manufacturers to achieve and maintain high
manufacturing standards could result in patient injury or death, product recalls or withdrawals, delays or failures in testing
or delivery, cost overruns, or other problems that could materially adversely affect our business. Contract manufacturers may encounter
difficulties involving production yields, quality control, and quality assurance. These manufacturers are subject to ongoing periodic
unannounced inspection by the FDA and corresponding state and foreign agencies to ensure strict compliance with cGMP and other
applicable government regulations; however, beyond contractual remedies that may be available to us, we do not have control over
third-party manufacturers’ compliance with these regulations and standards.
If for some reason our contract manufacturers
cannot perform as agreed, or if we are unable to reach agreement with our contract manufacturers on the terms of continued supply
of our products, we may be required to replace them. Although we believe there are a number of potential replacements, we will
incur added costs and delays in identifying and qualifying any such replacements. In addition, a new manufacturer would have to
be educated in, or develop substantially equivalent processes for, production of our products or drug candidates, which could adversely
impact the continued supply of our products or drug candidates.
We or our licensees may
not obtain required FDA approval; the FDA approval process is time-consuming and expensive.
The development, testing, manufacturing,
marketing and sale of pharmaceutical products are subject to extensive federal, state and local regulation in the United States
and other countries. Satisfaction of all regulatory requirements typically takes years, is dependent upon the type, complexity
and novelty of the product candidate, and requires the expenditure of substantial resources for research, development and testing.
Substantially all of our operations are subject to compliance with FDA regulations. Failure to adhere to applicable FDA regulations
by us or our licensees would have a material adverse effect on our operations and financial condition. In addition, in the event
we are successful in developing product candidates for distribution and sale in other countries, we would become subject to regulation
in such countries. Such foreign regulations and product approval requirements are expected to be time consuming and expensive.
In addition, we cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation
or administrative or executive action, either in the United States or abroad. For example, certain policies of the Trump administration
may impact our business and industry. Namely, the Trump administration has taken several executive actions, including the issuance
of a number of Executive Orders, that could impose significant burdens on, or otherwise materially delay, the FDA’s ability
to engage in routine regulatory and oversight activities such as implementing statutes through rulemaking, issuance of guidance
and review and approval of marketing applications. If these executive actions impose constraints on the FDA’s ability to
engage in oversight and implementation activities in the normal course, our business may be negatively impacted.
We or our licensees may encounter delays
or rejections during any stage of the regulatory review and approval process based upon the failure of clinical or laboratory data
to demonstrate compliance with, or upon the failure of the product candidates to meet, the FDA’s requirements for safety,
efficacy and quality; and those requirements may become more stringent due to changes in regulatory agency policy or the adoption
of new regulations. After submission of a NDA, the FDA may refuse to file the application, deny approval of the application, require
additional testing or data and/or require post-marketing testing and surveillance to monitor the safety or efficacy of a product.
For instance, the FDA’s approval of Oxaydo is conditioned on us or Zyla conducting a post-approval epidemiological study
to assess the actual abuse levels and consequences of Oxaydo in the market. The Prescription Drug User Fee Act, or PDUFA, sets
time standards for the FDA’s review of NDAs. The FDA's timelines described in the PDUFA guidance are flexible and subject
to change based on workload and other potential review issues and may delay the FDA’s review of an NDA. Further, the terms
of approval of any NDA, including the product labeling, may be more restrictive than we or our licensees desire and could affect
the marketability of our products.
Even if we comply with all the FDA regulatory
requirements, we or our licensees may not obtain regulatory approval for any of our product candidates in development. For example,
we previously submitted a NDA to the FDA for an Aversion Technology product containing niacin, intended to provide impediments
to over-ingesting the product. Such niacin containing product was not approved by the FDA. If we or our licensees fail to obtain
regulatory approval for any of our product candidates in development, we will have fewer commercialized products and correspondingly
lower revenues.
Even if regulatory approval of our products
in development is received, such approval may involve limitations on the indicated uses or promotional claims we or our licensees
may make for our products, or otherwise not permit labeling that sufficiently differentiates our product candidates from competitive
products with comparable therapeutic profiles but without abuse deterrent features (see risk factor above entitled “Our and
our licensees ability to market and promote Oxaydo and Limitx Technology products by describing the abuse deterrent features of
such products will be determined by the FDA approved label for such products”). Such events would have a material adverse
effect on our operations and financial condition. We may market certain of our products without the prior application to and approval
by the FDA. The FDA may subsequently require us to withdraw such products and submit NDA’s for approval prior to re-marketing.
The FDA also has the authority to revoke
or suspend approvals of previously approved products for cause, to debar companies and individuals from participating in the drug-approval
process, to request recalls of allegedly violative products, to seize allegedly violative products, to obtain injunctions to close
manufacturing plants allegedly not operating in conformity with current cGMP and to stop shipments of allegedly violative products.
In the event the FDA takes any such action relating to our products, such actions would have a material adverse effect on our operations
and financial condition.
We must maintain FDA approval
to manufacture clinical supplies of our product candidates at our facility; failure to maintain compliance with FDA requirements
may prevent or delay the manufacture of our product candidates and costs of manufacture may be higher than expected.
We have installed the equipment necessary
to manufacture clinical trial supplies of our Limitx and Impede Technology product candidates in tablet formulations at our Culver,
Indiana facility. To be used in clinical trials, all of our product candidates must be manufactured in conformity with cGMP regulations.
All such product candidates must be manufactured, packaged, and labeled and stored in accordance with cGMPs. Modifications, enhancements
or changes in manufacturing sites of marketed products are, in many circumstances, subject to FDA approval, which may be subject
to a lengthy application process or which we may be unable to obtain. Our Culver, Indiana facility, and those of any third-party
manufacturers that we or our licensees may use, are periodically subject to inspection by the FDA and other governmental agencies,
and operations at these facilities could be interrupted or halted if the FDA deems such inspections are unsatisfactory. Failure
to comply with FDA or other governmental regulations can result in fines, unanticipated compliance expenditures, recall or seizure
of products, total or partial suspension of production or distribution, suspension of FDA review of our product candidates, termination
of ongoing research, disqualification of data for submission to regulatory authorities, enforcement actions, injunctions and criminal
prosecution.
We develop our products,
and manufacture clinical supplies, at a single location. Any disruption at this facility could adversely affect our business and
results of operations.
We rely on our Culver, Indiana facility
for developing our product candidates and the manufacture of clinical supplies of our product candidates. If the Culver, Indiana
facility were damaged or destroyed, or otherwise subject to disruption, it would require substantial lead-time to repair or replace.
If our Culver facility were affected by a disaster, we would be forced to rely entirely on CROs and third-party contract manufacturers
for an indefinite period of time. Although we believe we possess adequate insurance for damage to our property and for the disruption
of our business from casualties, such insurance may not be sufficient to cover all of our potential losses and may not continue
to be available to us on acceptable terms, or at all. Moreover, any disruptions or delays at our Culver, Indiana facility could
impair our ability to develop our product candidates utilizing the Impede or Limitx Technologies, which could adversely affect
our business and results of operations.
Our operations are subject
to environmental, health and safety, and other laws and regulations, with which compliance is costly and which exposes us to penalties
for non-compliance.
Our business, properties and product candidates are subject
to federal, state and local laws and regulations relating to the protection of the environment, natural resources and worker health
and safety and the use, management, storage and disposal of hazardous substances, waste and other regulated materials. Because
we own and operate real property, various environmental laws also may impose liability on us for the costs of cleaning up and responding
to hazardous substances that may have been released on our property, including releases unknown to us. These environmental laws
and regulations also could require us to pay for environmental remediation and response costs at third-party locations where we
dispose of or recycle hazardous substances. The costs of complying with these various environmental requirements, as they now exist
or may be altered in the future, could adversely affect our financial condition and results of operations.
Our failure to successfully
establish new license agreements with pharmaceutical companies for the development and commercialization of our other products
in development may adversely impair our ability to develop, market and sell such products.
The AD Pharma Agreement grants AD Pharma an exclusive license
to develop and commercialize LTX-03 in the US. The Zyla Agreement grants Zyla an exclusive worldwide license to develop and commercialize
Oxaydo. Our license agreement with KemPharm Inc., or the KemPharm Agreement, grants exclusive worldwide rights to KemPharm to utilize
our Aversion technology in certain of KemPharm’s prodrug products. Our license agreement with MainPointe grants exclusive
rights in the U.S. and Canada (with option rights to expand the licensed territory) to our Nexafed products with option rights
to certain other pseudoephedrine-containing products utilizing our Impede technology. We believe that opportunities exist to enter
into license agreements similar to the AD Pharma Agreement, Zyla Agreement, the KemPharm Agreement and the MainPointe Agreement
with other pharmaceutical company partners for the development and commercialization of our Limitx, Impede and Aversion Technologies
in the United States and worldwide. However, there can be no assurance that we will be successful in entering into such license
agreements in the future. If we are unable to enter into such agreements, our ability to develop and commercialize our product
candidates, and our financial condition and results of operations, would be materially adversely affected.
If our licensees do not satisfy their obligations,
we will be unable to develop our licensed product candidates.
As part of the AD Pharma Agreement, the
Zyla Agreement, the KemPharm Agreement, the MainPointe Agreement, or any license agreement we may enter into relating to any of
our Limitx or Impede Technology products in development or our Aversion Technology, we will not have day-to-day control over the
activities of our licensees with respect to any product candidate. If a licensee fails to fulfill its obligations under an agreement
with us, we may be unable to assume the development and/or commercialization of the product covered by that agreement or to enter
into alternative arrangements with another third party. In addition, we may encounter delays in the commercialization of the products
that are the subject of a license agreement. Accordingly, our ability to receive any revenue from the products covered by such
agreements will be dependent on the efforts of our licensee. We could be involved in disputes with a licensee, which could lead
to delays in or termination of, our development and/or commercialization programs and result in time consuming and expensive litigation
or arbitration. In addition, any such dispute could diminish our licensee’s commitment to us and reduce the resources they
devote to developing and/or commercializing our products. If any licensee terminates or breaches its agreement, or otherwise fails
to complete its obligations in a timely manner, our chances of successfully developing and/or commercializing our product candidates
would be materially adversely effected. Additionally, due to the nature of the market for Oxaydo and our Limitx and Impede product
candidates, it may be necessary for us to license a significant portion of our product candidates to a single company, thereby
eliminating our opportunity to commercialize other product candidates with other licensees.
If we fail to maintain our license
agreement with Zyla, we may have to commercialize Oxaydo on our own and if we fail to maintain the license agreement with MainPointe
we may have to commercialize Nexafed Products on our own.
Our plan for manufacturing and commercializing Oxaydo currently
requires us to maintain our license agreement with Zyla. In addition to other customary termination provisions, the Zyla Agreement
provides that Zyla may terminate the Zyla Agreement upon certain notice periods. If Zyla elects to terminate the Zyla Agreement,
or if we are otherwise unable to maintain our existing relationship with Zyla, we would have to commercialize Oxaydo ourselves
for which we currently have no infrastructure, or alternatively enter into a new agreement with another pharmaceutical company,
of which no assurance can be given. Our ability to commercialize Oxaydo on our own may require additional financing, which may
not be available on acceptable terms, or at all. While, there is no provision for MainPointe to elect to terminate its license
agreement without cause, if it should fail to perform thereunder and we terminated the agreement, then we would have to commercialize
the Nexafed Products on our own. Although prior to entering into the MainPointe agreement we had been commercializing certain Nexafed
Products on our own, we would have to reestablish our capabilities, which will require additional financing which may not be available
on acceptable terms, if at all.
The market may not be receptive to products incorporating
our Aversion, Impede or Limitx Technologies.
The commercial success of our products will depend on acceptance
by health care providers and others that such products are clinically useful, cost-effective and safe. There can be no assurance
given that our products utilizing the Aversion, Impede or Limitx Technologies would be accepted by health care providers and others.
Factors that may materially affect market acceptance of our product candidates include but are not limited to:
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the relative advantages and disadvantages of our products compared to competitive products;
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the relative timing to commercial launch of our products compared to competitive products;
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the relative safety and efficacy of our products compared to competitive products;
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the product labeling approved by the FDA for our products;
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the perception of health care providers of their role in helping to prevent abuse and their willingness
to prescribe abuse-deterrent products to do so;
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the willingness of third party payers to reimburse for our prescription products;
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the willingness of pharmacy chains to stock our products;
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the willingness of pharmacists to recommend our Nexafed products to their customers; and
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the willingness of consumers to pay for our products.
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Oxaydo and our Nexafed Products compete,
and our other product candidates, such as LTX-03, if successfully developed and commercially launched will compete, with both currently
marketed and new products launched in the future by other companies. Physicians and other prescribers may not be inclined to prescribe
our prescription products unless our products demonstrate commercially viable advantages over other products currently marketed
for the same indications. Pharmacy chains may not be willing to stock any of our products and pharmacists may not recommend Nexafed
products to consumers. Further, consumers may not be willing to purchase our products. If our products do not achieve market acceptance,
we may not be able to generate significant revenues or become profitable.
If we, our licensees or
others identify serious adverse events or deaths relating to any of our products once on the market, we may be required to withdraw
our products from the market, which would hinder or preclude our ability to generate revenues.
We or our licensees are required to report
to relevant regulatory authorities all serious adverse events or deaths involving our product candidates or approved products.
If we, our licensees, or others identify such events, regulatory authorities may withdraw their approvals of such products; we
or our licensees may be required to reformulate our products; we or our licensees may have to recall the affected products from
the market and may not be able to reintroduce them onto the market; our reputation in the marketplace may suffer; and we may become
the target of lawsuits, including class actions suits. Any of these events could harm or prevent sales of the affected products
and could materially adversely affect our business and financial condition.
Our revenues may be adversely
affected if we fail to obtain insurance coverage or adequate reimbursement for our products from third-party payers.
The ability of our licensees to successfully
commercialize our products may depend in part on the availability of reimbursement for our prescription products from government
health administration authorities, private health insurers, and other third-party payers and administrators, including Medicaid
and Medicare. We cannot predict the availability of reimbursement for newly-approved products utilizing our Aversion, Impede or
Limitx Technologies. Third-party payers and administrators, including state Medicaid programs and Medicare, are challenging the
prices charged for pharmaceutical products. Government and other third-party payers increasingly are limiting both coverage and
the level of reimbursement for new drugs. Third-party insurance coverage may not be available to patients for any of our product
candidates. The continuing efforts of government and third-party payers to contain or reduce the costs of health care may limit
our commercial opportunity. If government and other third-party payers do not provide adequate coverage and reimbursement for any
product utilizing our technologies, health care providers may not prescribe them or patients may ask their health care providers
to prescribe competing products with more favorable reimbursement. In some foreign markets, pricing and profitability of pharmaceutical
products are subject to government control. In the United States, we expect there may be federal and state proposals for similar
controls. In addition, we expect that increasing emphasis on managed care in the United States will continue to put pressure on
the pricing of pharmaceutical products. Cost control initiatives could decrease the price that we or our licensees charge for any
of our products in the future. Further, cost control initiatives could impair our ability or the ability of our licensees to commercialize
our products and our ability to earn revenues from commercialization
In both the United States and certain foreign
jurisdictions, there have been and we expect there will continue to be a number of legislative and regulatory changes to the health
care system that could impact our or our licensees’ ability to sell our products profitably. In particular, in 2010, the
Patient Protection Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, collectively, the Healthcare
Reform Law, was enacted. The Healthcare Reform Law substantially changes the way healthcare is financed by both governmental and
private insurers and significantly affects the pharmaceutical industry. Among the provisions of the Healthcare Reform Law of greatest
importance to the pharmaceutical industry are the following:
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An annual, nondeductible fee on any entity that manufactures or imports certain branded prescription
drugs and biologic agents;
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An increase in the minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program;
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A new Medicare Part D coverage gap discount program, under which manufacturers must agree to offer
50 percent point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage
gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D;
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Extension of a manufacturer’s Medicaid rebate liability to covered drugs dispensed to individuals
who are enrolled in Medicaid managed care organizations;
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A new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct
comparative clinical effectiveness research;
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A revision to the definition of “average manufacturer price” for reporting purposes;
and
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Encouragement for the development of comparative effectiveness research, which may reduce the extent
of reimbursement for our products if such research results in any adverse findings.
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At this time, it remains uncertain what
the full impact of these provisions will be on the pharmaceutical industry generally or our business in particular. The full effects
of these provisions will become apparent as these laws are implemented and the Centers for Medicare & Medicaid Services and
other agencies issue applicable regulations or guidance as required by the Healthcare Reform Law. Moreover, in the coming years,
additional changes could be made to governmental healthcare programs that could significantly impact the success of our products.
In addition, since its enactment, there
have been judicial and Congressional challenges to certain aspects of the Healthcare Reform Law, and we expect there will be additional
challenges and amendments to the Affordable Care Act in the future. The Trump administration and members of the U.S. Congress have
indicated that they may continue to seek to modify, repeal, or otherwise invalidate all, or certain provisions of, the Healthcare
Reform Law. Most recently, the Tax Cuts and Jobs Acts was enacted, which, among other things, removes penalties for not complying
with the individual mandate to carry health insurance. It is uncertain the extent to which any such changes may impact our business
or financial condition.
If we are unable to establish
sales and marketing capabilities for our products that are not licensed to third parties, our revenues and our business will suffer.
We do not currently have an extensive organization
for the sales, marketing and distribution of pharmaceutical products and the cost of establishing and maintaining such an organization
may exceed the cost-effectiveness of doing so. If we do not license the commercialization of a product, we may have to build our
sales, marketing, managerial and other non-technical capabilities or make arrangements with third parties to perform these services.
If we are unable to establish or fund adequate sales, marketing and distribution capabilities, whether independently or with third
parties, it will impair our ability to sell products and have a material adverse effect on our operations.
Consolidation in the healthcare
industry could lead to demands for price concessions or for the exclusion of some suppliers from certain of our markets, which
could have an adverse effect on our business, financial condition or results of operations.
Because healthcare costs have risen significantly, numerous
initiatives and reforms by legislatures, regulators and third-party payers to curb these cost increases have resulted in a trend
in the healthcare industry to consolidate product suppliers and purchasers. As the healthcare industry consolidates, competition
among suppliers to provide products to purchasers has become more intense. This in turn has resulted, and will likely continue
to result, in greater pricing pressures and the exclusion of certain suppliers from important market segments as group purchasing
organizations, and large single accounts continue to use their market power to influence product pricing and purchasing decisions.
We expect that market demand, government regulation, third-party reimbursement policies and societal pressures will continue to
influence the worldwide healthcare industry, resulting in further business consolidations, which may exert further downward pressure
on the prices of our anticipated products. This downward pricing pressure may adversely impact our business, financial condition
or results of operations. Under each of the Zyla Agreement, the KemPharm Agreement, the MainPointe Agreement and AD Pharma Agreement,
our licensees control (or will control in the case of AD Pharma for LTLX-03) the price of the licensed products, and we expect
that our licensees, if any, of our products in development, will control the price of such products and may provide price discounts
and price reductions in its discretion. Such price discounts and reductions will reduce the net sales of our licensed products
and, correspondingly, our royalty payments under such license agreements. In addition, if any of our large customers is acquired
or merged with another provider of similar products, we may lose that customer’s business
Our success depends on our ability to protect our intellectual
property.
Our success depends on our ability to obtain
and maintain patent protection for products developed utilizing our technologies, in the United States and in other countries,
and to enforce these patents. The patent positions of pharmaceutical firms, including us, are generally uncertain and involve complex
legal and factual questions. Notwithstanding our receipt of U.S. patents covering our Aversion, Impede and Limitx Technologies,
there is no assurance that any of our patent claims in our other pending non-provisional and provisional patent applications relating
to our technologies will issue or if issued, that any of our existing and future patent claims will be held valid and enforceable
against third-party infringement or that our products will not infringe any third-party patent or intellectual property. Moreover,
any patent claims relating to our technologies may not be sufficiently broad to protect our products. In addition, issued patent
claims may be challenged, potentially invalidated or potentially circumvented. Our patent claims may not afford us protection against
competitors with similar technology or permit the commercialization of our products without infringing third-party patents or other
intellectual property rights.
Our success also depends on our not infringing patents issued
to others. We may become aware of patents belonging to competitors and others that could require us to obtain licenses to such
patents or alter our technologies. Obtaining such licenses or altering our technology could be time consuming and costly. We may
not be able to obtain a license to any technology owned by or licensed to a third party that we or our licensees require to manufacture
or market one or more of our products. Even if we can obtain a license, the financial and other terms may be disadvantageous.
Our success also depends on maintaining
the confidentiality of our trade secrets and know-how. We seek to protect such information by entering into confidentiality agreements
with employees, potential licensees, raw material suppliers, contract research organizations, contract manufacturers, consultants
and other parties. These agreements may be breached by such parties. We may not be able to obtain an adequate, or perhaps any,
remedy to such a breach. In addition, our trade secrets may otherwise become known or be independently developed by our competitors.
Our inability to protect our intellectual property or to commercialize our products without infringing third-party patents or other
intellectual property rights would have a material adverse effect on our operations and financial condition.
We also rely on or intend to rely on our
or our licensees’ trademarks, trade names and brand names to distinguish our products from the products of our competitors,
and have registered or applied to register many of these trademarks. However, our trademark applications may not be approved. Third
parties may also oppose our or our licensees’ trademark applications or otherwise challenge our use of the trademarks. In
the event that our or our licensees’ trademarks are successfully challenged, we or our licensees could be forced to rebrand
our product, which could result in loss of brand recognition and could require us or our licensees to devote resources to advertising
and marketing these new brands. Further, our competitors may infringe our trademarks, or we may not have adequate resources to
enforce our trademarks.
We may become involved
in patent litigation or other intellectual property proceedings relating to our Aversion, Impede or Limitx Technologies or product
candidates, which could result in liability for damages or delay or stop our development and commercialization efforts.
The pharmaceutical industry has been characterized
by significant litigation and other proceedings regarding patents, patent applications and other intellectual property rights.
The situations in which we may become parties to such litigation or proceedings may include:
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litigation or other proceedings we or our licensee(s) may initiate against third parties to enforce
our patent rights or other intellectual property rights, including the Paragraph IV Proceedings described below in the next risk
factor;
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litigation or other proceedings we or our licensee(s) may initiate against third parties seeking
to invalidate the patents held by such third parties or to obtain a judgment that our products do not infringe such third parties’
patents;
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litigation or other proceedings third parties may initiate against us or our licensee(s) to seek
to invalidate our patents or to obtain a judgment that third party products do not infringe our patents;
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if our competitors file patent applications that claim technology also claimed by us, we may be
forced to participate in interference, inter partes or opposition proceedings to determine the priority of invention and whether
we are entitled to patent rights on such invention; and
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if third parties initiate litigation claiming that our products infringe their patent or other
intellectual property rights, we will need to defend against such proceedings.
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The costs of resolving any patent litigation,
including the Paragraph IV Proceedings, or other intellectual property proceeding, even if resolved in our favor, could be substantial.
Many of our potential competitors will be able to sustain the cost of such litigation and proceedings more effectively than we
can because of their substantially greater resources. Uncertainties resulting from the initiation and continuation of patent litigation
or other intellectual property proceedings could have a material adverse effect on our ability to compete in the marketplace. Patent
litigation, including the Paragraph IV Proceedings, and other intellectual property proceedings may also consume significant management
time.
In the event that a competitor infringes
upon our patent or other intellectual property rights, enforcing those rights may be costly, difficult and time consuming. Even
if successful, litigation to enforce our intellectual property rights or to defend our patents against challenge could be expensive
and time-consuming and could divert our management’s attention. We may not have sufficient resources to enforce our intellectual
property rights or to defend our patent or other intellectual property rights against a challenge. If we are unsuccessful in enforcing
and protecting our intellectual property rights and protecting our products, it could harm our business. In certain circumstances,
we expect that our licensees will have first right to control the enforcement of certain of our patents against third party infringers.
Our licensees may not put adequate resources or effort into such enforcement actions or otherwise fail to restrain infringing products.
In addition, in an infringement proceeding, including the Paragraph IV Proceedings, a court may decide that a patent of ours is
invalid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents
do not cover the technology in question. An adverse result in any litigation, including the Paragraph IV Proceedings, or defense
proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent
applications at risk of not issuing.
Our technologies or products may be found
to infringe claims of patents owned by others. If we determine that we are, or if we are found to be infringing a patent held by
another party, we, our suppliers or our licensees might have to seek a license to make, use, and sell the patented technologies
and products. In that case, we, our suppliers or our licensees might not be able to obtain such license on acceptable terms, or
at all. The failure to obtain a license to any third party technology that may be required would materially harm our business,
financial condition and results of operations. If a legal action is brought against us or our licensees, we could incur substantial
defense costs, and any such action might not be resolved in our favor. If such a dispute is resolved against us, we may have to
pay the other party large sums of money and use of our technology and the testing, manufacturing, marketing or sale of one or more
of our products could be restricted or prohibited. Even prior to resolution of such a dispute, use of our technology and the testing,
manufacturing, marketing or sale of one or more of our products could be restricted or prohibited.
We are aware of certain United States and
international pending patent applications owned by third parties with claims potentially encompassing Oxaydo and our other products.
If such patent applications result in valid and enforceable issued patents, containing claims in their current form or otherwise
encompassing our products we or our licensees may be required to obtain a license to such patents, should one be available, or
alternatively, alter our products so as to avoid infringing such third-party patents. If we or our licensees are unable to obtain
a license on commercially reasonable terms, or at all, we or our licensees could be restricted or prevented from commercializing
our products. Additionally, any alterations to our products or our technologies could be time consuming and costly and may not
result in technologies or products that are non-infringing or commercially viable.
We are aware of an issued United States
patent owned by a third party having claims encompassing the use of one of our Aversion inactive ingredients. We are also aware
of an issued United States patent owned by a third party having claims encompassing a pharmaceutical preparation containing viscosity
producing ingredients that can be drawn into a syringe when dissolved in 10mL’s or less of aqueous solution. While we believe
that our Aversion products do not infringe these patents, or that such patents are otherwise invalid, there can be no assurance
that we or our licensees will not be sued for infringing these patents, and if sued, there can be no assurance that we or our licensees
will prevail in any such litigation. If we or our licensees are found to infringe either or both of these patents, we or our licensees
may seek a license to use the patented technology. If we are unable to obtain such a license, of which no assurance can be given,
we or our licensees may be restricted or prevented from commercializing our Aversion products.
We are aware of certain issued United States
patents owned by a third party having claims encompassing a process used to manufacture oxycodone HCl of high purity and pharmaceutical
products resulting therefrom. As required by the FDA, Oxaydo contains a similar high purity oxycodone HCl manufactured by a supplier
that is not the owner or licensee of such patents. The owner of these patents has filed patent infringement actions relating to
these patents against companies that have filed abbreviated new drug applications with the FDA for extended-release versions of
oxycodone HCl. To our knowledge, the patent owner has not initiated any patent infringement actions against the sellers of immediate-release
oxycodone HCl products or their suppliers of oxycodone HCl, however, we cannot be certain that these immediate-release products
actually utilize a high purity oxycodone. We cannot provide assurance that our licensee or its oxycodone HCl supplier will not
be sued for infringing these patents. In the event of an infringement action, our licensee and their oxycodone HCl supplier would
have to either: (a) demonstrate that the manufacture of the oxycodone HCl used in Oxaydo does not infringe the patent claims, (b)
demonstrate the patents are invalid or unenforceable, or (c) enter into a license with the patent owner. If our licensee or their
oxycodone HCl supplier is unable to demonstrate the foregoing, or obtain a license to these patients, our licensee may be required
or choose to withdraw Oxaydo from the market.
We are aware of a certain issued United
States patent owned by a third party having claims similar to our second generation Impede Technology directed to ingredient amounts
that are generally more than the amounts used in our technology. While we believe our technology does not infringe this patent,
we cannot provide assurance that we will not be sued under such patent or if sued, that we will prevail in any such suit.
We cannot assure you that our technologies,
products and/or actions in developing our products will not infringe third-party patents. Our failure to avoid infringing third-party
patents and intellectual property rights in the development and commercialization of our products would have a material adverse
effect on our operations and financial condition.
Generic manufacturers are
using litigation and regulatory means to seek approval for generic versions of Oxaydo, which could cause Zyla’s sales to
suffer and adversely impact our royalty revenue.
Under the Hatch-Waxman Act, the FDA can
approve an ANDA for a generic version of a branded drug and what is referred to as a Section 505(b)(2) NDA, for a branded variation
of an existing branded drug, without requiring such applicant to undertake the full clinical testing necessary to obtain approval
to market a new drug. In November 2017 the FDA issued guidance for the industry on obtaining approval for generic versions of opioids
that reference products whose labeling describes abuse-deterrent properties. An ANDA applicant usually needs to only submit data
demonstrating that its product has the same active ingredient(s) and is bioequivalent to the branded product, in addition to any
data necessary to establish that any difference in strength, dosage form, inactive ingredients, or delivery mechanism does not
result in different safety or efficacy profiles, as compared to the reference drug. Under the 2017 FDA guidance when a potential
ANDA applicant develops a generic solid oral opioid drug product, the potential ANDA applicant should evaluate its proposed generic
drug to show that it is no less abuse deterrent than the reference drug with respect to all of the potential routes of abuse.
The Hatch-Waxman Act requires an applicant
for a drug that references one of our branded drugs to notify us of their application if they assert in their application that
the patents we have listed in the Orange Book will not be infringed or otherwise are invalid or unenforceable (a Paragraph IV Certification).
Upon receipt of this notice, we or our licensee will have 45 days to bring a patent infringement suit known as a Paragraph IV Proceeding
in federal district court against such applicant. If such a suit is commenced, the FDA is generally prohibited from granting approval
of the ANDA or Section 505(b)(2) NDA until the earliest of 30 months from the date the FDA accepted the application for filing,
the conclusion of litigation in the generic applicant’s favor or expiration of the patent(s). If the litigation is resolved
in favor of the applicant or the challenged patent expires during the 30-month stay period, the stay is lifted and the FDA may
thereafter approve the application based on the standards for approval of ANDAs and Section 505(b)(2) NDAs. Frequently, the unpredictable
nature and significant costs of patent litigation leads the parties to settle to remove this uncertainty. Settlement agreements
between branded companies and generic applicants may allow, among other things, a generic product to enter the market prior to
the expiration of any or all of the applicable patents covering the branded product, either through the introduction of an authorized
generic or by providing a license to the applicant for the patents subject to the litigation.
On September 20, 2012, we announced that
we had received a Paragraph IV Certification Notice under 21 U.S.C. 355(j) (a Paragraph IV Notice) from a generic sponsor of an
ANDA for a generic drug listing Oxaydo (formerly known as Oxecta) as the reference listed drug. Since such date, we have received
similar Paragraph IV Notices from four other generic pharmaceutical companies that have filed ANDAs listing Oxaydo as the reference
drug. The Paragraph IV Notices refer to our U.S. Patent Numbers 7,201,920, 7,510,726 and 7,981,439, which cover our Aversion Technology
and Oxaydo. The Paragraph IV Notices state that each generic sponsor believes that such patents are invalid, unenforceable or not
infringed. On October 31, 2012, we initiated suit against each of Watson Laboratories, Inc. – Florida (Watson), Par Pharmaceutical,
Inc., Impax Laboratories, Inc. and Sandoz Inc., and on April 29, 2013, we initiated suit against Ranbaxy, Inc., each in the United
States District Court for the District of Delaware alleging infringement of our U.S. Patent No. 7,510,726 listed in the FDA’s
Orange Book. The commencement of such litigation prohibits the FDA from granting approval of the filed ANDAs until the earliest
of 30 months from the date the FDA accepted the application for filing, or the conclusion of litigation. In January 2013, we dismissed
our suit against Watson on the grounds that Watson had amended its ANDA from a Paragraph IV Certification to a Paragraph III Certification,
which indicated its intent not to market its generic Oxaydo product in advance of our patent expiring.
On October 9, 2013, we announced that we
had entered into distinct Settlement Agreements with each of Par and Impax, to settle our patent infringement action pending against
them in the United States District Court for the District of Delaware. In the suit, we alleged that a generic Oxaydo product for
which each of Par and Impax is separately seeking approval to market in the United States pursuant to an ANDA filing with the FDA
infringes a U.S. patent owned by us. Par is the first filer of an ANDA for a generic Oxaydo product and is entitled to the 180-day
first filer exclusivity under applicable law and FDA regulations.
Under the terms of the Settlement Agreement
with Par, Par may launch its generic Oxaydo product in the U.S., through the grant of a non-exclusive, royalty-bearing license
from us that would trigger on January 1, 2022. We currently have Orange Book patents that are due to expire between November 2023
and March 2025. In certain limited circumstances, our license to Par would become effective prior to January 1, 2022. Par is required
to pay us royalties in the range of 10% to 15% of Par’s net profits from the sale of its generic Oxaydo product.
Under the Settlement Agreement with Impax,
Impax may launch its generic Oxaydo product in the U.S., through the grant of a non-exclusive, royalty-free license from us that
would trigger 180 days following the first sale of a generic Oxaydo product in the U.S. by an entity that is entitled to the 180
day first-filer exclusivity under applicable law and FDA regulations (or if no entity is entitled to such 180 day exclusivity period,
the date on which a generic Oxaydo product is first sold in the U.S. or November 27, 2021, whichever date occurs first). In certain
circumstances, our license to Impax would become effective prior to such time.
On May 8, 2014, we announced that we had
entered into a Settlement Agreement with Ranbaxy Inc. to settle our patent infringement action pending in the United States District
Court for the District of Delaware. In the suit, we alleged that a generic of our Oxaydo product for which Ranbaxy is seeking approval
to market in the United States pursuant to an ANDA filed with the FDA infringes U.S. patents owned by us. The Settlement Agreement
provides that Ranbaxy’s current generic of our Oxaydo product that is the subject of its ANDA filing does not infringe our
Orange Book listed patents with the FDA. We have not provided Ranbaxy a license to our patents and we may re-commence patent infringement
litigation against Ranbaxy if Ranbaxy changes the formulation of its current generic Oxaydo product.
On May 21, 2014, we announced that we had
entered into a Settlement Agreement with Sandoz Inc. to settle our patent infringement action pending against Sandoz in the United
States District Court for the District of Delaware. In the suit, we alleged that a generic of our Oxaydo product for which Sandoz
is seeking approval to market in the United States pursuant to an ANDA filed with the FDA infringes a U.S. patent owned by us.
Under the Settlement Agreement, Sandoz may launch its generic to the Oxaydo product in the U.S., through the grant of a non-exclusive
license from us that would trigger 180 days following the first sale of a generic to the Oxaydo product in the U.S. by an entity
that is entitled to the 180 day first-filer exclusivity under applicable law and FDA regulations (or if no entity is entitled to
such 180 day exclusivity period, the date on which a generic to the Oxaydo product is first sold in the U.S). In certain circumstances,
our license to Sandoz would become effective prior to such time. Sandoz is not obligated to pay us a royalty if its current formulation
of its generic to the Oxaydo product is approved by the FDA. In the event Sandoz changes or modifies the structure of its generic
Oxaydo product, or materially changes or modifies the amounts or type of any excipient used in the Sandoz formulation disclosed
in its ANDA filing with the FDA as of July 30, 2013, Sandoz is required to pay us a royalty based upon the Net Profits (as defined
in the Settlement Agreement) derived from the net sales of such changed or modified Sandoz generic Oxaydo product in the United
States.
It is possible that other generic manufacturers may also seek
to launch a generic version of Oxaydo and challenge our patents. Any determination in any such infringement actions that our patents
covering our Aversion Technology and Oxaydo are invalid or unenforceable, in whole or in part, or that the products covered by
generic sponsors’ ANDAs do not infringe our patents could have a material adverse effect on our operations and financial
condition.
We may be exposed to product
liability claims and claims regarding marketing of products and may not be able to obtain or maintain adequate product liability
insurance and some claims may not be covered by insurance.
Our business exposes us to potential product
liability risks, which are inherent in the testing, manufacturing, marketing and sale of pharmaceutical products, and in particular
opioid products. Manufacturers and distributors of prescription opioid medications, are the subject of lawsuits and have
received subpoenas and other requests for information from various state and local government agencies regarding the sales and
marketing of opioid medications. While we would not expect to be implicated in any such action or investigations, since
our business is focused on abuse deterrence, there can be no assurance that we will not be so implicated. Product liability claims
or marketing related claims might be made by patients, health care providers or others that sell or consume our products or insurance
companies that insure those affected by our products. These claims may be made even with respect to those products that possess
regulatory approval for commercial sale. We currently have clinical trial product liability insurance on a claims-made basis for
our subject clinical trials and have product liability insurance for the Nexafed and Oxaydo products. This coverage may not be
adequate to cover any product liability claims. Product liability coverage and other insurance is expensive. In the future, we
may not be able to maintain such product liability insurance or other insurance at a reasonable cost or in sufficient amounts to
protect us against losses due to product liability claims or other claims. In addition our insurance may not cover certain marketing
related claims and excludes certain products from product liability coverage. See litigation discussed below under “Item
3. Legal Proceedings” of this Report. Any claims that are not covered by product liability insurance or other insurance could
have a material adverse effect on our business, financial condition and results of operations.
The pharmaceutical industry is characterized by frequent litigation.
Those companies with significant financial resources will be better able to bring and defend any such litigation. No assurance
can be given that we would not become involved in future litigation, in addition to the ongoing Reglan/Metoclopramide mass tort
litigation and DES (diethylstilbestrol) litigation discussed below under “Item 3. Legal Proceedings” of this Report,
including litigation relating to products we manufactured or distributed several years and decades ago when we manufactured and
sold a broad range of prescription and over the counter products. Such litigation may have material adverse consequences to our
financial condition and results of operations.
We face significant competition,
which may result in others developing or commercializing products before or more successfully than we do.
Our products and technologies compete to
varying degrees against both brand and generic products offering similar therapeutic benefits and being developed and marketed
by small and large pharmaceutical (for prescription products) and consumer packaged goods (for OTC products) companies. Many of
our competitors have substantially greater financial and other resources and are able to expend more funds and effort than us and
our licensees in research, development and commercialization of their competitive technologies and products. Prescription generic
products and OTC store brand products will offer cost savings to third party payers and/or consumers that will create pricing pressure
on our products. Also, these competitors may have a substantial sales volume advantage over our products, which may result in our
licensee’s costs of manufacturing being higher than our competitors’ costs. If our products are unable to capture and
maintain market share, we or our licensees may not achieve significant product revenues and our financial condition and results
of operations will be materially adversely affected.
We believe potential competitors may be developing opioid abuse
deterrent technologies and products. Such potential competitors include, but may not be limited to, Pfizer Inc., Purdue Pharma,
Atlantic Pharmaceuticals, Zyla Life Sciences, KemPharm, Shionogi, Nektar Therapeutics, Signature Therapeutics, QRx Pharma, Tris
Pharma, Pisgah Labs, Teva Pharmaceuticals, Sun Pharmaceuticals, Inspirion Delivery Sciences, and Collegium Pharmaceuticals, Inc.
These companies appear to be focusing their development efforts on ER Opioid Products, except for Atlantic Pharmaceuticals, Pisgah
Labs, Inspirion and KemPharm.
Our Impede Technology products containing PSE, including our
licensed Nexafed products, will compete in the highly competitive market for cold, sinus and allergy products generally available
to the consumer without a prescription. Some of our competitors will have multiple consumer product offerings both within and outside
the cold, allergy and sinus category providing them with substantial leverage in dealing with a highly consolidated pharmacy distribution
network. The competing products may have well established brand names and may be supported by national or regional advertising.
Our Nexafed products compete directly with Johnson & Johnson’s Sudafed® brand as well as generic formulations manufactured
by Perrigo Company and others.
We are concentrating a substantial majority
of our efforts and resources on developing product candidates utilizing our Limitx and Impede Technologies. The commercial success
of products utilizing such technologies will depend, in large part, on the intensity of competition, FDA approved product labeling
for our products compared to competitive products, and the relative timing and sequence for commercial launch of new products by
other companies developing, marketing, selling and distributing products that compete with the products utilizing our Limitx and
Impede Technologies. Alternative technologies and non-opioid products are being developed to improve or replace the use of opioid
analgesics. In the event that such alternatives to opioid analgesics are widely adopted, then the market for products utilizing
our Limitx and Impede Technologies may be substantially decreased, thus reducing our ability to generate future revenues and adversely
affecting our ability to generate a profit
Key personnel are critical
to our business and our success depends on our ability to retain them.
We are dependent on our management and scientific team, including
Robert Jones, our President and Chief Executive Officer, Peter A. Clemens, our Chief Financial Officer, and Albert W. Brzeczko,
Ph.D., our Vice President of Pharmaceutical Sciences. We may not be able to attract and retain personnel on acceptable terms given
the competition for such personnel among biotechnology, pharmaceutical and healthcare companies, universities and non-profit research
institutions. While we have employment agreements with our CEO and CFO, all of our other employees are at-will employees who may
terminate their employment at any time. We do not have key personnel insurance on any of our officers or employees. The loss of
any of our key personnel, or the inability to attract and retain such personnel, may significantly delay or prevent the achievement
of our product and technology development and business objectives and could materially adversely affect our business, financial
condition and results of operations.
Our products are subject to regulation by the U.S. Drug
Enforcement Administration, or DEA, and such regulation may affect the development and sale of our products.
The DEA regulates certain finished drug
products and active pharmaceutical ingredients, including certain opioid active pharmaceutical ingredients and pseudoephedrine
HCl that are contained in our products. Consequently, their manufacture, research, shipment, storage, sale and use are subject
to a high degree of regulation. Furthermore, the amount of active ingredients we can obtain for our clinical trials is limited
by the DEA and our quota may not be sufficient to complete clinical trials. There is a risk that DEA regulations may interfere
with the supply of the products used in our clinical trials.
In addition, we and our licensees and contract
manufacturers are subject to ongoing DEA regulatory obligations, including, among other things, annual registration renewal, security,
recordkeeping, theft and loss reporting, periodic inspection and annual quota allotments for the raw material for commercial production
of our products. The DEA, and some states, conduct periodic inspections of registered establishments that handle controlled substances.
Facilities that conduct research, manufacture, store, distribute, import or export controlled substances must be registered to
perform these activities and have the security, control and inventory mechanisms required by the DEA to prevent drug loss and diversion.
Failure to maintain compliance, particularly non-compliance resulting in loss or diversion, can result in regulatory action that
could have a material adverse effect on our business, results of operations, financial condition and prospects. The DEA may seek
civil penalties, refuse to renew necessary registrations, or initiate proceedings to revoke those registrations. In certain circumstances,
violations could lead to criminal proceedings.
Individual states also have controlled
substances laws. Though state controlled substances laws often mirror federal law, because the states are separate jurisdictions,
they may separately schedule drugs, as well. While some states automatically schedule a drug when the DEA does so, in other states
there has to be a rulemaking or a legislative action. State scheduling may delay commercial sale of any controlled substance drug
product for which we obtain FDA approval and adverse scheduling could have a material adverse effect on the attractiveness of such
product. We or our licensees must also obtain separate state registrations in order to be able to obtain, handle, and distribute
controlled substances for clinical trials or commercial sale, and failure to meet applicable regulatory requirements could lead
to enforcement and sanctions from the states in addition to those from the DEA or otherwise arising under federal law.
Social issues around the
abuse of opioids, including law enforcement concerns over diversion of opioid and regulatory efforts to combat abuse, could decrease
the potential market for Oxaydo, and, if approved, our Limitx product candidates.
Media stories regarding prescription drug
abuse and the diversion of opioids and other controlled substances are commonplace. Law enforcement and regulatory agencies may
apply policies that seek to limit the availability of opioids. Such efforts may inhibit Zyla’s ability to commercialize Oxaydo
and, if approved, our Limitx product candidate. Aggressive enforcement and unfavorable publicity regarding, for example, the use
or misuse of oxycodone or other opioid drugs, the limitations of abuse resistant formulations, public inquiries and investigations
into prescription drug abuse, litigation or regulatory activity, sales, marketing, distribution or storage of our drug products
could harm our reputation. Such negative publicity could reduce the potential size of the market for our product candidates and
Oxaydo and decrease the revenues and royalties we are able to generate from their sale. Similarly, to the extent opioid abuse becomes
less prevalent or a less urgent public health issue, regulators and third-party payers may not be willing to pay a premium for
abuse deterrent formulations of opioids.
In addition, efforts by the FDA and other
regulatory bodies to combat abuse of opioids may negatively impact the market for our product candidates. For example, in February
2016, as part of a broader initiative led by U.S. Department of Health and Human Services to address opioid-related overdose, death
and dependence, the FDA released an action plan to address the opioid abuse epidemic and reassess the FDA’s approach to opioid
medications. The plan identifies the FDA’s focus on implementing policies to reverse the opioid abuse epidemic, while maintaining
access to effective treatments. The actions set forth in the FDA’s plan include strengthening post marketing study requirements
to evaluate the benefit of long-term opioid use, changing the REMS requirements to provide additional funding for physician education
courses, releasing a draft guidance setting forth approval standards for generic abuse-deterrent opioid formulations, and seeking
input from the FDA’s Scientific Board to broaden the understanding of the public risks of opioid abuse. Many of these changes
could require our licensing partner and us to expend additional resources in developing and commercializing Oxaydo and our product
candidates to meet additional requirements. In October 2017, the acting director of HHS under the directive of President Trump,
declared the opioid crisis a national health emergency and initiated a five point plan including (i) improving access to prevention,
treatment, and recovery support services; (ii) targeting the availability and distribution of overdose-reversing drugs; (iii) strengthening
public health data reporting and collection; (iv) supporting cutting-edge research on addiction and pain; and (v) advancing the
practice of pain management. The impact that this five point plan will have on us and our licensing partners is unclear at this
time.
We are increasingly dependent
on information technology and our systems and infrastructure face certain risks, including cybersecurity and data storage risks.
Significant disruptions to our information
technology systems or breaches of information security could adversely affect our business. In the ordinary course of business,
we collect, store and transmit confidential information, and it is critical that we do so in a secure manner in order to maintain
the confidentiality and integrity of such confidential information. Our information technology systems are potentially vulnerable
to service interruptions and security breaches from inadvertent or intentional actions by our employees, partners, vendors, or
from attacks by malicious third parties. Maintaining the secrecy of this confidential, proprietary, and/or trade secret information
is important to our competitive business position. While we have taken steps to protect such information and invested in information
technology, there can be no assurance that our efforts will prevent service interruptions or security breaches in our systems or
the unauthorized or inadvertent wrongful access or disclosure of confidential information that could adversely affect our business
operations or result in the loss, dissemination, or misuse of critical or sensitive information. A breach of our security measures
or the accidental loss, inadvertent disclosure, unapproved dissemination or misappropriation or misuse of trade secrets, proprietary
information, or other confidential information, whether as a result of theft, hacking, or other forms of deception, or for any
other cause, could enable others to produce competing products, use our proprietary technology and/or adversely affect our business
position. Further, any such interruption, security breach, loss or disclosure of confidential information could result in financial,
legal, business, and reputational harm to us and could have a material effect on our business, financial position, results of operations
and/or cash flow.
Prior ownership changes
limit our ability to use our tax net operating loss carryforwards.
Significant equity restructuring often results in an Internal
Revenue Section 382 ownership change that limits the future use of Net Operating Loss (“NOL”), carryforwards and other
tax attributes. In addition, under the Tax Cuts and Jobs Act of 2017, NOL usage in any given year will be limited to 80% of taxable
income, without regard to the NOL deduction, and losses incurred in 2018 and forward may not be carried back but can be carried
forward indefinitely, but losses incurred prior to 2018 can only be carried forward for 20 years. We have determined that we have
undergone ownership changes in both 2004 and 2017 (as defined by Section 382 of the Internal Revenue Code) and as a result, our
use of NOL carryforwards on an annual basis will be very limited. Neither the amount of our NOL carryforwards nor the amount of
limitation of such carryforwards claimed by us have been audited or otherwise validated by the Internal Revenue Service, which
could challenge the amount we have calculated. The recognition and measurement of our tax benefit includes estimates and judgment
by our management, which includes subjectivity. Changes in estimates may create volatility in our tax rate in future periods based
on new information about particular tax positions that may cause management to change its estimates.
Risks Relating to our Common Stock
Our quarterly results of operations will fluctuate,
and these fluctuations could cause our stock price to decline.
Our quarterly and annual operating results
are likely to fluctuate in the future. These fluctuations could cause our stock price to decline. The nature of our business involves
variable factors, such as the timing of any license agreement, the timing of launch and market acceptance of our products, and
the timing of the research, development and regulatory submissions of our products in development that could cause our operating
results to fluctuate. The forecasting of the timing and amount of sales of our products is difficult due to market uncertainty
and the uncertainty inherent in seeking FDA and other necessary approvals for our product candidates. As a result, in some future
quarters or years, our clinical, financial or operating results may not meet the expectations of securities analysts and investors,
which could result in a decline in the price of our stock.
Our stock price has been
and may continue to be volatile, and the value of an investment in our common stock may decline.
During 2018, our stock traded as high as
$0.872 per share and as low as $0.1011 per share. The trading price of our common stock is likely to continue to be highly volatile
and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. These factors could
include:
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results from our pre-clinical and clinical development programs, including our Limitx product candidates;
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FDA actions related to our products in development;
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FDA actions related to any of our potential products;
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announcements regarding the sales of Oxaydo;
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announcements regarding the progress of sales of Oxaydo;
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announcements regarding the progress of our preclinical and clinical programs;
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our licensee’s success in the commercialization of our Nexafed products;
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announcements regarding the sales of our Nexafed products;
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announcements regarding the execution of license agreements with third parties for our products
or product candidates;
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failure of any of our products in development, if approved, to achieve commercial success;
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quarterly variations in our results of operations or those of our competitors;
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our ability to develop and market new and enhanced products on a timely basis;
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announcements by us or our competitors of acquisitions, regulatory approvals, clinical milestones,
new products, significant contracts, commercial relationships or capital commitments;
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third-party coverage and reimbursement policies;
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additions or departures of key personnel;
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commencement of, or our involvement in, litigation;
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the inability of our contract manufacturers to provide us with adequate commercial supplies of
our products;
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changes in governmental regulations or in the status of our regulatory approvals;
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changes in earnings estimates or recommendations by securities analysts;
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any major change in our board or management;
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general economic conditions and slow or negative growth of our market; and
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political instability, natural disasters, war and/or events of terrorism.
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From time to time, we estimate the timing
of the accomplishment of various scientific, clinical, regulatory and other product development goals or milestones. These milestones
may include the commencement or completion of scientific studies and clinical trials and the submission of regulatory filings.
Also, from time to time, we expect that we will publicly announce the anticipated timing of some of these milestones. All of these
milestones are based on a variety of assumptions. The actual timing of these milestones can vary dramatically compared to our estimates,
in some cases for reasons beyond our control. If we do not meet these milestones as publicly announced, our stock price may decline
and the commercialization of our products and potential products may be delayed.
In addition, the stock market has experienced
extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of publicly
traded companies. Broad market and industry factors may seriously affect the market price of companies’ stock, including
ours, regardless of actual operating performance. These fluctuations may be even more pronounced in the trading market for our
stock. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s
securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted
against us, could result in substantial costs and a diversion of our management’s attention and resources.
We do not have
a history of paying dividends on our common stock.
Historically, we have not declared and
paid any cash dividends on our common stock. We intend to retain all of our earnings for the foreseeable future to finance the
operation and expansion of our business. As a result, you may only receive a return on your investment in our common stock if the
market price of our common stock increases.
Any future sale of a substantial
number of shares in a capital raising transaction could depress the trading price of our stock.
In order to raise additional capital, we
may in the future offer additional shares of our common stock or other securities convertible into or exchangeable for our common
stock at prices that may not be the same as the then current trading price of our common stock. The price per share at which we
sell additional shares of our common stock, or securities convertible or exchangeable into common stock, in future transactions
may be higher or lower than the then current trading price of our common stock.
As of September 12, 2019, our two largest
shareholders own an aggregate of approximately 12,651,543 shares (including 1,782,531 shares underlying warrants) (representing
approximately 54.8% of our outstanding shares). If some or all of such shares are sold by such stockholders, it may have the effect
of depressing the trading price of our common stock. In addition, such sales could make it more difficult for us to raise capital
if needed in the future.
Approximately 46.3% of
our common stock is owned by a single individual, who is also a principal of AD Pharma LLC and MainPointe Pharmaceuticals LLC,
and that individual is also party to our Second Amended and Restated Voting Agreement.
A significant amount of our common stock
is owned by a single individual, Mr. Schutte. On July 24, 2017, we completed a $4.0 million private placement with him for the
sale of 8,912,655 shares and warrants to purchase 1,782,531 shares at an exercise price of $0.528 and expiring on July 24, 2022.
Mr. Schutte is a principal of MainPointe. In March 2017, we granted MainPointe an exclusive license to our Impede Technology to
commercialize our Nexafed® and Nexafed® Sinus Pressure + Pain Products in the United States and Canada. MainPointe also
has options to expand the territory and products covered for additional sums following the termination of the Bayer Agreement.
Further, as part of the closing of the Transaction, we, Galen Partners III, L.P., and Essex Woodlands Health Ventures V, L.P. (“Essex”)
amended and restated the existing Voting Agreement between the parties to provide for Mr. Schutte to join as a party so that he
can designate a director (he has not done so). During 2018 and through June 28, 2019, Mr. Schutte has lent us an aggregate of $6.0
million (including accrued interest) on a secured basis with a security interest in all of our assets, including our intellectual
property. At June 28, 2019, we entered into a Promissory Note with Mr. Schutte that consolidated existing promissory notes into
a single Note for $6.0 million (after including accrued interest). To secure our performance of our obligations under the Note,
we granted Mr. Schutte a security interest in all of our assets. Terms of the consolidated Note provide for a July 1, 2023 maturity
date rather than the previous maturity date of January 2, 2020, interest at fixed rate of 7.5% with all payments of principle and
interest deferred to maturity. The Note is convertible into Acura common stock at $0.16 per share. As additional consideration,
Mr. Schutte received a warrant to purchase 10 million shares of the Company’s common stock at a price of $0.01 per shares.
With our consent, Mr. Schutte assigned
and transferred to Abuse Deterrent Pharma, LLC (“AD Pharma”) all of his right, title and interest in this Note, its
associated Security Agreement and the Warrant to purchase 10.0 million common shares of our stock, effective June 28, 2019. Mr.
Schutte is an investor in AD Pharma.
The combination of Mr. Schutte’s
direct share ownership, control of one of our key licensing partners, the right to designate a director to oversee the long-term
affairs of our company, his ownership interest in AD Pharm LLC and the security interest AD Pharma has in all of our assets gives
him the potential to have considerable influence over our business and affairs. As a result,
Mr. Schutte, will as a practical matter be able to control all matters requiring approval by our shareholders, including the approval
or rejection of mergers, sales or licenses of all or substantially all of our assets, or other business combination transactions.
The interests of Mr. Schutte as a shareholder and creditor may not always coincide with the interests of our other shareholders
and as such we may take action to advance his interests to the detriment of our other shareholders. Accordingly, you may not be
able to influence any action we take or consider taking, even if it requires a shareholder holder vote.
Our common stock is deemed a “penny stock,”
which would make it more difficult for our investors to sell their shares.
Our common stock is subject to the “penny
stock” rules adopted under the Exchange Act. The penny stock rules generally apply to companies whose common stock is not
listed on the NASDAQ Stock Market or other national securities exchange and trades at less than $5.00 per share, other than companies
that have had average revenue of at least $6,000,000 for the last three years or that have net tangible assets of at least $5,000,000
($2,000,000 if the company (such as Acura) has been operating for three or more years). These rules require, among other things,
that brokers who trade penny stock to persons other than “established customers” complete certain documentation, make
suitability inquiries of investors and provide investors with certain information concerning trading in the security, including
a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade penny stocks
because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers
in such securities is limited. If we remain subject to the penny stock rules for any significant period, it could have an adverse
effect on the market, if any, for our securities. If our securities are subject to the penny stock rules, investors will find it
more difficult to dispose of our securities.
At times, our shares of common stock have been thinly
traded, so you may be unable to sell at or near ask prices or even at all if you need to sell your shares to raise money or otherwise
desire to liquidate your shares.
Our common stock is quoted on the OTCQB Market Pink tier. Our
common stock experiences periods when it could be considered “thinly-traded.” This situation may be attributable to
a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers,
institutional investors and others in the investment community that generate or influence sales volume, and that even if we came
to the attention of such persons, they tend to be risk averse and would be reluctant to follow an unproven company such as ours
or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there
may be periods of several days, weeks or months when trading activity in our shares is minimal, as compared to a seasoned issuer
which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect
on share price. We cannot give you any assurance that a broader or more active public trading market for our common stock will
be sustained, or that current trading levels will be sustained or not diminish.
We are a smaller reporting
company, and we cannot be certain if the reduced disclosure requirements applicable to smaller reporting companies will make our
common stock less attractive to investors.
We are currently 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 a public float of less than $75 million, or in the absence of any public
float had annual revenues of less than $50 million during the most recently completed fiscal year. “Smaller reporting companies”
are able to provide simplified executive compensation disclosures in their filings;
are exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that independent registered public
accounting firms provide an attestation report on the effectiveness of internal control over financial reporting;
and have certain other decreased disclosure obligations in their SEC filings, including, among other things, only being
required to provide two years of audited financial statements in annual reports and in certain registration statements. Decreased
disclosures in our SEC filings due to our status as a “smaller reporting company” may make it harder for investors
to analyze our results of operations and financial prospects.
ITEM 1B. UNRESOLVED STAFF COMMENTS
The Company has received no written comments regarding periodic
or current reports from the staff of the SEC that were issued 180 days or more preceding the end of its 2018 fiscal year that remain
unresolved.
ITEM 2. PROPERTIES
We lease from an unaffiliated
Lessor, approximately 1,600 square feet of administrative office space at 616 N. North Court, Suite 120, Palatine, Illinois 60067
on a month-to-month basis. The lease agreement provides for rent, property taxes, common area maintenance, and janitorial services
on a monthly basis of approximately $2 thousand per month. We utilize this lease space for our administrative and business development
functions.
We conduct research,
development, laboratory, development scale and NDA submission batch scale manufacturing and other activities relating to developing
product candidates using Aversion, Impede and Limitx Technologies at the facility we own located at 16235 State Road 17, Culver,
Indiana. At this location, our wholly-owned subsidiary APT, is a 25,000 square foot facility with 7,000 square feet of warehouse,
8,000 square feet of manufacturing space, 4,000 square feet of research and development labs and 6,000 square feet of administrative
and storage space. The facility is located on 28 acres of land.
ITEM 3. LEGAL PROCEEDINGS
Purdue Pharma Settlement
In April 2015, Purdue Pharma L.P., Purdue
Pharmaceuticals L.P. and The P.F. Laboratories, Inc., or collectively Purdue, commenced a patent infringement lawsuit against us
and our Oxaydo product licensee Egalet US, Inc. and its parent Egalet Corporation (now known as Zyla Life Sciences or Zyla) in
the United States District Court for the District of Delaware alleging our Oxaydo product infringes Purdue’s U.S. Patent
No. 8,389,007, or the 007 Patent. In April 2016, Purdue commenced a second patent infringement lawsuit against us and Zyla in the
United States District Court for the District of Delaware alleging our Oxaydo product infringes Purdue’s newly issued U.S.
Patent No. 9,308,171, or the 171 Patent. The actions regarding the 007 Patent and the 171 Patent are collectively referred to as
the “Actions”. On April 6, 2016, we filed a petition for Inter Partes Review, or IPR Review, with the U.S. Patent and
Trademark Office, or USPTO, seeking to invalidate Purdue’s 007 Patent.
On May 20, 2016, Purdue
on behalf of themselves and certain affiliates, Zyla, on behalf of itself and its affiliates and we, on behalf of ourselves and
our affiliates entered into a settlement agreement, or the May 2016 Settlement Agreement, to settle the Actions and the IPR Review.
Under the May 2016 Settlement Agreement the parties dismissed or withdrew the Actions, requested that the USPTO terminate the IPR
Review and exchanged mutual releases. No payments were made under the May 2016 Settlement Agreement.
The May 2016 Settlement Agreement also
provides that Purdue will not, in the future, assert certain Purdue U.S. patents, including the 007 Patent, the 171 Patent and
related technologies, or collectively the Purdue Patents, against any Acura Settlement Product or Zyla Settlement Product (except
generally in an action or interference by Acura or Zyla challenging a Purdue Patent). Acura Settlement Products and Zyla Settlement
Products are certain immediate-release and extended-release products, including Oxaydo. In addition, the May 2016 Settlement Agreement
provides that Purdue will not challenge, with certain exceptions, the Acura/Zyla Patents with respect to the Purdue Settlement
Products (as defined below) and that Purdue provides Acura and/or Zyla certain waivers of non-patent marketing exclusivity with
respect to Purdue Settlement Products.
The May 2016 Settlement Agreement also
provides that Acura and Zyla will not, in the future, assert certain Acura and/or Zyla U.S. patents, or collectively the Acura/Zyla
Patents, including Acura’s Aversion® Technology patents, against any Purdue Settlement Products (except generally in
an action or interference by Purdue challenging an Acura/Zyla Patent). Purdue Settlement Products are certain immediate-release
and extended-release products. In addition, the May 2016 Settlement Agreement provides that Acura and Zyla will not challenge,
with certain exceptions, the Purdue Patents with respect to the Acura Settlement Products and Zyla Settlement Products and that
Acura and Zyla provide Purdue certain waivers of non-patent marketing exclusivity with respect to the Acura Settlement Products
and Zyla Settlement Products. In addition, Purdue has certain rights to negotiate to exclusively distribute an authorized generic
version of certain Zyla Settlement Products, including, in some circumstances, Oxaydo® and other products using Acura’s
Aversion® Technology if licensed to Zyla.
The May 2016
Settlement Agreement specifically excludes our patents related to our Impede® and Limitx™ technologies from the scope
of the Acura/Zyla Patents under the May 2016 Settlement Agreement.
In December 2014, we entered into an agreement
with Purdue Pharma L.P. to settle a patent interference action regarding certain intellectual property held by Acura (U.S. Patent
No. 8,101,630). The dispute centered upon the issue of which company has priority in developing the invention. The parties agreed
to forgo protracted litigation and the uncertainties arising therefrom by entering an agreement whereby we conceded Purdue Pharma’s
claim of priority in exchange for certain financial consideration to us including an immediate non-refundable payment of $500 thousand.
In June 2015, we received an additional $250 thousand payment from Purdue Pharma relating to the December 2014 agreement.
Reglan®/Metoclopramide
Litigation
Halsey Drug Company, as predecessor to
us, was named along with numerous other companies as a defendant in cases filed in three separate state coordinated litigations
pending in Pennsylvania, New Jersey and California, respectively captioned In re: Reglan®/Metoclopramide Mass Tort Litigation,
Philadelphia County Court of Common Pleas, January Term, 2010, No. 01997; In re: Reglan Litigation, Superior Court of New Jersey,
Law Division, Atlantic County, Case No. 289, Master Docket No. ATL-L-3865-10; and Reglan/Metoclopramide Cases, Superior Court of
California, San Francisco County, Judicial Council Coordination Proceeding No. 4631, Superior Court No.: CJC-10-004631. In
addition, we were served with a similar complaint by two individual plaintiffs in Nebraska federal court, which plaintiffs voluntarily
dismissed in December 2014. In this product liability litigation against numerous pharmaceutical product manufacturers and
distributors, including Acura, plaintiffs claim injuries from their use of the Reglan brand of metoclopramide and generic metoclopramide.
None of the plaintiffs in the lawsuits
filed to date have confirmed that they ingested any of the generic metoclopramide manufactured by us. We discontinued manufacture
and distribution of generic metoclopramide more than 20 years ago. All of these lawsuits have been effectively dismissed with the
exception of less than ten pending Philadelphia cases that we expect will be finally dismissed without the need for any action
by us. We expect that the Court will finally dismiss the small number of remaining Pennsylvania-based cases against us with
prejudice by the end of the fourth quarter of 2019. Legal fees related to this matter have been covered by our insurance carrier.
Based upon the current status and evaluation, we have not accrued for any potential loss related to these matters as of December
31, 2018.
ITEM 4. MINE SAFETY DISLCOSURES
Not Applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS
AND CORPORATE GOVERNANCE
The name, age and position of our directors,
executive officers and key employees as of March 30, 2019 are as follows:
Name
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Age
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Position
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Robert B. Jones
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60
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President, Chief Executive Officer and Director
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Peter A. Clemens
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66
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Senior Vice President, Chief Financial Officer and Secretary
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Albert W. Brzeczko, Ph.D.
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62
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Vice President, Pharmaceutical Sciences
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Robert A. Seiser
|
|
55
|
|
Vice President, Treasurer, and Corporate Controller
|
James F. Emigh
|
|
63
|
|
Vice President of Corporate Development
|
Bruce F. Wesson(1) (2) (3)
|
|
76
|
|
Director
|
William G. Skelly(1)(2) (3)
|
|
68
|
|
Director
|
Immanuel Thangaraj(2)
|
|
48
|
|
Director
|
George K. Ross(1) (3)
|
|
77
|
|
Director
|
|
(1)
|
Member of audit committee.
|
|
(2)
|
Member of compensation committee.
|
|
(3)
|
Member of strategic transaction committee.
|
Robert B. Jones
has been our President and Chief Executive Officer since July 7, 2011. From April 2011 through July 6, 2011, Mr. Jones was our
Interim President and Chief Executive Officer. Mr. Jones was our Senior Vice President and Chief Operating Officer from April 2008
to April 2011. From May, 2003 to March, 2008, Mr. Jones served first as the Vice President, Finance and then as Vice President,
Strategy and Business Analysis of Adolor Corporation. From November 2000 to May 2003 he served as Vice President, Finance and then
as Chief Operating Officer of Opt-E-Script, Inc., a privately held personalized medicine company, where Mr. Jones was responsible
for all commercialization activities. Prior to that, Mr. Jones was Vice President, Sales and Marketing for Purepac Pharmaceutical
Company. Mr. Jones received his M.B.A. from the University of North Carolina and a B.S. from Cornell University. Mr. Jones was
appointed a director of the Company in July 2011.
Peter A. Clemens
has been Senior Vice President, Chief Financial Officer and Secretary since April 2004. Mr. Clemens was our Vice President, Chief
Financial Officer and Secretary from February 1998 to March 2004 and a member of our Board of Directors from June, 1998 to August,
2004. Mr. Clemens is Certified Public Accountant (Inactive) and earned a Bachelor of Business Administration degree from the University
of Notre Dame and a Masters of Business Administration from Indiana University.
Albert W. Brzeczko,
Ph.D., has been Vice President, Pharmaceutical Sciences, of APT since January 2019 and has been Vice President, Technical Affairs
of APT from February 2009 through 2018. From 1999 through 2009, Dr. Brzeczko was Vice President, Global Pharma New Product Development
and Pharma Technologies for International Specialty Products, Inc., a contract services group specializing in the development of
technologies for the bioenhancement of poorly soluble drugs. Prior to 1999, Dr. Brzeczko held various positions of increasing responsibility
in pharmaceutical product development with UPM Pharmaceuticals, Banner Pharmacaps, Mylan Laboratories, and DuPont Merck. Dr. Brzeczko
received a Bachelor of Science degree in biochemistry and a Ph.D. in pharmaceutical sciences from the University of Maryland.
Robert A. Seiser
has been a Vice President, Treasurer and Corporate Controller since April 2004. Mr. Seiser joined us in March 1998 as our Treasurer
and Corporate Controller. Mr. Seiser is a Certified Public Accountant (Inactive) and earned a Bachelor of Business Administration
degree from Loyola University of Chicago.
James F. Emigh
has been Vice President of Corporate Development since October 2011. From April 2004 to October 2011, Mr. Emigh was our Vice President
of Marketing and Administration. Prior to such time, Mr. Emigh was our Vice President of Sales and Marketing. Mr. Emigh joined
us in May, 1998, serving first as Executive Director of Customer Relations and then as Vice President of Operations. Mr. Emigh
holds a Bachelor of Pharmacy degree from Washington State University and a Masters of Business Administration from George Mason
University.
Bruce F. Wesson
has been a member of our Board of Directors since March 1998. From January 1991 until June 30, 2011, Mr. Wesson was a Partner of
Galen Associates, a health care venture firm, and a General Partner of Galen Partners III, L.P. Prior to January 1991, he was Senior
Vice President and Managing Director of Smith Barney, Harris Upham & Co. Inc., an investment banking firm. From May 2006
until June 2016 he served on the Board of Derma Sciences, Inc. From June 1999 until January 2016 he served as director of
the Board of MedAssets, Inc. and for over eight years until January 2016 served as Vice Chairman of MedAssets, Inc. Mr. Wesson
earned a Bachelor of Arts degree from Colgate University and a Masters of Business Administration from Columbia University.
William G. Skelly
has been a member of our Board of Directors since May 1996 and served as our Chairman from October 1996 through June 2000. Since
1990, Mr. Skelly has served as Chairman, President and Chief Executive Officer of Central Biomedia, Inc. and its subsidiary SERA,
Inc. From 1985 to 1990, Mr. Skelly served as President of Martec Pharmaceutical, Inc. Mr. Skelly earned a Bachelor of Arts degree
from Michigan State University and a Masters of Business Administration from the University of Missouri-Kansas City.
Immanuel Thangaraj
has been a member of our Board of Directors since December 2002. Mr. Thangaraj has been a Managing Director of Essex Woodlands
Health Ventures, a venture capital firm specializing in the healthcare industry, since 1997. Prior to joining Essex Woodlands
Health Ventures, he helped establish a telecommunication services company, for which he served as its CEO. Mr. Thangaraj holds
a Bachelor of Arts and a Masters in Business Administration from the University of Chicago.
George K. Ross has
been a member of our Board of Directors since January, 2008. Since April 2002, Mr. Ross has been a consultant to early stage businesses
and a financial investor. From April 1, 2015 until its sale in March 2017, Mr. Ross was an advisor to GP Shopper LLC, a provider
of mobile solutions for retail and brands. From July 2005 through December 2010 he served as Executive Director, Foundations and
Partnerships for World Vision U.S. in New York City. His business career has included senior financial officer and board member
positions with both public and private companies in diverse industries. Mr. Ross was Executive Vice President and Chief Financial
Officer and a board member of Tier Technologies Inc. from February 1997 to January 2000, which became a public company during this
period. Mr. Ross is a Certified Public Accountant (Inactive) and earned a Bachelor of Arts degree from Ohio Wesleyan University
and a Masters of Business Administration from Ohio State University.
The term of office of each director will
continue until the next annual meeting of shareholders and until such person’s successor has been elected and qualified.
Officers are appointed by the Board of Directors and serve at the discretion of the Board, although the employment of Robert B.
Jones, our President and Chief Executive Officer and Peter A. Clemens, our Senior Vice President and Chief Financial Officer are
subject to the provisions of their respective Employment Agreements.
Director Independence
Our shares of common stock were listed
on The NASDAQ Capital Market until February 22, 2017 and were quoted on the OTCQB market until June 4, 2018. From June 4,
2018 through July 2, 2018 our stock was quoted on the OTC Markets OTC Pink Tier, when we regained compliance with the OTCQB market
and resumed quotation on the OTCQB market on July 3, 2018. Since May 20, 2019 our stock has been quoted on the OTC Markets OTC
Pink Tier due to our failure to comply with the filing deadline for our 2018 Form 10K. It is our intent to remedy this non-compliance
during the 3rd quarter of 2019. In 2016 we were subject to the Nasdaq Stock Market independence standards and we continue
to follow those standards in determining whether a director is independent for Board or Committee purposes. Under the rules of
The NASDAQ Stock Market, which we were subject to until February 22, 2017, independent directors must comprise a majority of our
Board of Directors. In addition, the rules of The NASDAQ Stock Market require that, subject to specified exceptions, each member
of the Audit and Compensation Committees of our Board of Directors be independent. Audit Committee members must also satisfy the
independence criteria set forth in Rule 10A-3 under the Securities Exchange Act of 1934, as amended, or Exchange Act. Under the
rules of The Nasdaq Stock Market, a director will only qualify as an “independent director” if, in the opinion of our
Board of Directors, that person does have a relationship that would interfere with the exercise of independent judgment in carrying
out the responsibilities of a director.
In order to be considered to be independent
for purposes of Rule 10A-3, a member of the Audit Committee of our Board of Directors may not, other than in his or her capacity
as a member of the Audit Committee, the Board of Directors or any other committee of our Board of Directors:
|
·
|
accept, directly or indirectly, any consulting, advisory, or other compensatory fee from us or
any of our subsidiaries; or
|
|
·
|
be an affiliated person of us or any of our subsidiaries.
|
Our Board of Directors has undertaken a
review of its composition, the composition of its committees and the independence of each director. In connection with this review,
our Board of Directors determined that each of Messrs. Wesson, Skelly, Thangaraj and Ross, representing four of our five directors,
satisfies the independence requirements of The Nasdaq Stock Market and Rule 10A-3
of the Exchange Act. In making this determination, our Board of Directors considered the relationships that each non-employee director
has with us and all other facts and circumstances our Board of Directors deemed relevant in determining their independence, including
the beneficial ownership of our share capital by each non-employee director and their affiliates. In addition, our Board of Directors
considered information that was provided by each director concerning his or her background, employment and affiliations, including
relationships with our stockholders.
Corporate Governance
Our Board of Directors has established
an Audit Committee, a Compensation Committee, a Strategic Transaction Committee, and a Nominating Committee. Our Audit Committee
and our Compensation Committee operate under written charters approved by our Board of Directors, copies of which are available
on our website and will be made available in print to any shareholder who requests it. Currently, our entire Board serves as our
Nominating Committee. A brief description of these committees is provided below.
Audit Committee
The Audit Committee is composed of Mr.
Ross, Chairman, and Messrs. Wesson and Skelly. The Audit Committee is responsible for selecting the Company’s registered
independent public accounting firm, approving the audit fee payable to the auditors, working with independent auditors and other
corporate officials, reviewing the scope and results of the audit by, and the recommendations of, our independent auditors, approving
the services provided by the auditors, reviewing our financial statements and reporting on the results of the audits to the Board,
reviewing our insurance coverage, financial controls and filings with the SEC, including, meeting quarterly prior to the filing
of our quarterly and annual reports containing financial statements filed with the SEC, and submitting to the Board its recommendations
relating to our financial reporting, accounting practices and policies and financial, accounting and operational controls.
In assessing the independence of the Audit
Committee in 2018, our Board reviewed and analyzed the standards for independence provided in NASDAQ Marketplace Rule 5605 and
applicable SEC regulations. Based on this analysis, our Board has determined that each of Messrs. Ross, Wesson and Skelly satisfies
such standards for independence. Our Board also determined that Mr. Ross is a “financial expert” as provided in NASDAQ
Marketplace Rule 5605(c)(3) and SEC regulations.
Compensation
Committee
The Compensation Committee is composed
of Mr. Skelly, Chairman, and Messrs. Wesson and Thangaraj. This committee is responsible for consulting with and making recommendations
to the Board of Directors about executive and director compensation and compensation of employees. In 2016 the Compensation Committee
retained the Hay Group, an independent compensation consulting firm, to assist in evaluating stock option and other incentives
for our executive officers and other employees. The retention of the Hay Group was not recommended by management.
Our Board determined that each of Messrs.
Skelly, Wesson and Thangaraj were independent directors under the Nasdaq Marketplace Rules. The Board has also determined that
each of Messrs. Skelly, Thangaraj and Wesson meet the more stringent independence standards for compensation committees imposed
under NASDAQ Rule 5605(d)(2)(A).
Strategic Transaction
Committee
The Strategic Transaction
Committee is composed of Messrs. Ross, Wesson and Skelly. The Strategic Transaction Committee reviews, evaluates and recommends
to the Board, for the Board’s evaluation and determination, potential acquisitions, divestitures, capital raising transactions,
joint ventures and strategic alliances, and licensing and collaboration transactions. All members of this Committee are considered
by our Board as independent directors. The Strategic Transaction Committee does not have a Chairman.
Nominating Committee
Currently our entire Board of Directors
functions as our nominating committee. As needed, the Board will perform the functions typical of a nominating committee, including
the identification, recruitment and selection of nominees for election to our Board. Our Board determined that all members of the
Board were independent other than Mr. Jones, our CEO. We believe that a nominating committee separate from the Board is not necessary
at this time given our relative size, the size of our Board, and our opinion that an additional committee of the Board would not
add to the effectiveness of the evaluation and nomination process. The Board’s process for recruiting and selecting nominees
for Board members, if required, would be to identify individuals who are thought to have the business background and experience,
industry specific knowledge and general reputation and expertise allowing them to contribute as effective directors to our governance,
and who would be willing to serve as directors of a public company. To date, we have not engaged any third party to assist in identifying
or evaluating potential nominees. If a possible candidate is identified, the individual will meet with each member of the Board
and be sounded out concerning his/her possible interest and willingness to serve, and Board members would discuss amongst themselves
the individual’s potential to be an effective Board member. If the discussions and evaluation are positive, the individual
would be invited to serve on the Board. To date, no shareholder has presented any candidate for Board membership for consideration,
and we do not have a specific policy on shareholder-recommended director candidates. The Board believes its process for evaluation
of nominees proposed by shareholders would be no different than the process of evaluating any other candidate, and therefore the
Board believes it is appropriate to not have a policy on shareholder-recommended director candidates. The Board of Directors does
not have a policy regarding diversity in identifying nominees for director.
The experience, qualifications, attributes
or skills that led the Board to conclude that the current board members should serve are: (i) their pharmaceutical industry and
senior level management experience in the case of Messrs. Jones, Skelly, and Wesson; (ii) financial and senior level management
expertise in the case of Mr. Ross, and (iii) their experience in overseeing management as principals of private equity firms in
the case of Messrs. Wesson, and Thangaraj. Although our Certificate of Incorporation provides for a maximum of 11 directors, in
accordance with the terms of a Second Amended and Restated Voting Agreement dated as of July 24, 2017 executed by us, Mr. Schutte
(“Schutte”), and Essex Woodlands Health Ventures V, L.P. (“Essex”), (the “Second Amended and Restated
Voting Agreement”), we have agreed that the Board of Directors shall be comprised of not more than seven members (or such
greater number that is required to assure that we have a majority of independent directors after giving effect to the various designation
rights described herein), one of whom shall be the designee of Schutte, one of whom shall be the designee of Essex, one of whom
is our Chief Executive Officer and three of whom are independent directors. Mr. Thangaraj serves as the designee of Essex. The
Second Amended and Restated Voting Agreement provides that each of Schutte’s, and Essex’s right to designate one director
will terminate when it or its affiliates (determined separately for each of Schutte and Essex) fail to hold at least 600,000 shares
of our common stock (or warrants exercisable for such shares). The Board is required to nominate an independent director upon forfeiture
of a designation right. Mr. Schutte has not designated a nominee.
Compensation Committee Interlocks and
Insider Participation
No member of the Compensation Committee
was or currently is, an officer or employee of the Company, and no member of the Compensation Committee had any relationship with
us requiring disclosure under Item 404 of SEC Regulation S-K. None of our executive officers has served on the Board of Directors
or Compensation Committee of any other entity that has or had one or more executive officers who served as a member of our Board
of Directors.
Separation of Roles of Chairman and
CEO
Mr. Jones serves as Chief Executive Officer.
Our Chairman of our Board of Directors resigned on March 11, 2013. A replacement Chairman has not been elected to date. We believe
the separation of offices is beneficial because a separate chairman (i) can provide the Chief Executive Officer with guidance and
feedback on his performance, (ii) provides a more effective channel for the Board to express its views on management, (iii) allows
the chairman to focus on shareholder interests and corporate governance while the Chief Executive Officer leads the Company’s
strategy development and implementation. It is our intention to seek to add to our Board additional members having significant
senior level pharmaceutical experience, and that one of such additional Board members will be entrusted by the Board to serve as
Chairman.
Board’s Role in Risk Assessment
The Board as a whole engages in risk oversight
as part of its functions. As an emerging pharmaceutical development company we face numerous risks identified in this Annual Report
on Form 10-K, many of which are outside of our control. In addition, the Audit Committee reviews our insurance coverage and the
Board and Audit Committee regularly monitor our liquidity position and operating expenses and review our capital-funding needs.
The Company believes the Board leadership structure effectively enables it to oversee risk management.
Shareholder Communications to the Board
Shareholders who wish to send communications
to our Board of Directors may do so by sending them in care of our Secretary at Acura Pharmaceuticals, Inc., 616 N. North Court,
Suite 120 Palatine, Illinois 60067. The envelope containing such communication must contain a clear notation indicating that the
enclosed letter is a “Shareholder-Board Communication” or “Shareholder-Director Communication”
or similar statement that clearly and unmistakably indicates the communication is intended for the Board. All such communications
must clearly indicate the author as a shareholder and state whether the intended recipients are all members of the Board or just
certain specified directors. Our Secretary will have the discretion to screen and not forward to Directors communications which
the Secretary determines in his or her discretion are communications unrelated to our business or our governance, commercial solicitations,
or communications that are offensive, obscene, or otherwise inappropriate. The Secretary will, however, compile all shareholder
communications which are not forwarded and such communications will be available to any Director.
Section 16(a) Beneficial Ownership Reporting
Compliance
Section 16(a) of the Securities Exchange
Act of 1934, as amended, requires our Directors and executive officers, and persons who own beneficially more than ten percent
(10%) of our common stock, to file reports of ownership and changes of ownership with the SEC. Copies of all filed reports are
required to be furnished to us pursuant to Section 16(a). Based solely on the reports received by us and on written representations
from reporting persons, we believe that our Directors, executive officers and greater than ten percent (10%) beneficial owners
of our common stock complied with all Section 16(a) filing requirements during the year ended December 31, 2018.
Code of Ethics
Our Code of Ethics applicable to our principal
executive officer, principal financial officer, principal accounting officer and all of our other employees is available on our
website, www.acurapharm.com, by clicking on “Corporate Governance” under the “Investors” tab.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
and Discussion of Employment and Incentive Arrangements
The following table sets forth a summary
of the compensation paid by us for services rendered in all capacities to us during each of the two fiscal years ended December
31, 2018, to our Chief Executive Officer, and the two most highly compensated executive officers other than the Chief Executive
Officer who were serving as executive officers at the end of the last completed fiscal year (collectively, the “2018 named
executive officers”) whose total annual compensation for 2018 exceeded $100,000:
Name and Principal Position
|
|
Year
|
|
Salary(3)
($)
|
|
|
Bonus
($)
|
|
|
RSU Stock
Awards(1)
($)
|
|
|
Stock
Option
Awards(2)
($)
|
|
|
Non-equity
incentive plan
compensation
($)
|
|
|
Total
($)
|
|
Robert B. Jones,
|
|
2018
|
|
|
273,000
|
|
|
|
—
|
|
|
|
21,150
|
|
|
|
4,750
|
|
|
|
—
|
|
|
|
298,900
|
|
President and CEO
|
|
2017
|
|
|
393,000
|
|
|
|
—
|
|
|
|
13,530
|
|
|
|
14,617
|
|
|
|
—
|
|
|
|
421,147
|
|
Peter A. Clemens
|
|
2018
|
|
|
220,000
|
|
|
|
—
|
|
|
|
16,920
|
|
|
|
3,800
|
|
|
|
—
|
|
|
|
240,720
|
|
SVP & CFO
|
|
2017
|
|
|
286,000
|
|
|
|
20,000
|
|
|
|
9,240
|
|
|
|
10,574
|
|
|
|
—
|
|
|
|
325,814
|
|
Albert W. Brzeczko
|
|
2018
|
|
|
257,000
|
|
|
|
—
|
|
|
|
14,382
|
|
|
|
13,230
|
|
|
|
—
|
|
|
|
284,612
|
|
VP, Pharmaceutical Sciences of Acura Pharmaceutical Technologies, Inc.
|
|
2017
|
|
|
291,000
|
|
|
|
—
|
|
|
|
9,240
|
|
|
|
10,885
|
|
|
|
—
|
|
|
|
311,125
|
|
(1) The RSU Stock Award grant date fair
values are computed in accordance with FASB ASC Topic 718. The 2017 values represent (A) our last sale price of $0.3401 on 12/11/2017
less $.01 par value multiplied by (B) the number of shares underlying RSUs (41,000, 28,000 and 28,000, in the case of Messrs. Jones,
Clemens and Brzeczko, respectively). The 2018 values represent (A) our last sale price of $0.1510 on 12/11/2018 less $.01 par value
multiplied by (B) the number of shares underlying RSUs (150,000, 120,000 and 102,000, in the case of Messrs. Jones, Clemens and
Brzeczko, respectively).
(2) The Stock Option grant date fair values
are computed in accordance with FASB ASC Topic 718. The 2017 values represent (A) the computed grant date fair value of the option
of $0.3110 multiplied by (B) the number of underlying option shares (47,000, 34,000, and 35,000, in the case of Messrs. Jones,
Clemens and Brzeczko, respectively). To calculate 2017 grant date fair value, we considered an assumed risk free interest rate
of 1.8% and a historical volatility percentage for our common stock of 88%, with an expected divided yield of 0%, an expected term
of 5 years, and the option exercise price of $0.45. The 2018 values represent (A) the computed grant date fair value of the option
of $0.0950 multiplied by (B) the number of underlying option shares (50,000, 40,000, and 34,000, in the case of Messrs. Jones,
Clemens and Brzeczko, respectively). To calculate the 2018 grant date fair value, we considered an assumed risk free interest rate
of 2.8% and a historical volatility percentage for our common stock of 76%, with an expected divided yield of 0%, an expected term
of 5 years, and the option exercise price of $0.1510.
(3) Salary of $273,000, $220,000, and $257,000
for Messrs. Jones, Clemens and Brzeczko, respectively reflects impact of temporary salary reductions in 2018. The current base
salary is $150,000, $200,000 and $220,000 for Messrs. Jones, Clemens and Brzeczko, respectively.
Other Compensatory Arrangements
Our executive officers participate in medical,
dental, life and disability insurance plans provided to all of our employees.
Bonus/Non-Equity Incentive Plan
Each of Messrs. Jones, Clemens and Brzeczko
are eligible for annual bonuses. Each of Mr. Jones’ and Mr. Clemens’ bonuses are weighted 100% to achievement of organizational
goals, while the bonuses for other employees, including for Dr. Brzeczko are weighted 50% to the achievement of organizational
goals and 50% to the achievement of individual goals. Amounts paid are reflected in the “Non-equity Incentive Compensation”
column of the Summary Compensation Table and there were no amounts paid for 2017 nor 2018.
Material organizational goals for 2019
include completing a strategic transaction, partnership or financings to maximize value to the Company’s shareholders and
debt holder, advance commercial manufacturing scale-up of LTX-03, execute clinical studies for LTX-03, maintain compliance with
SOX and successfully manage our intellectual property.
Material organizational goals for 2018
included conducting clinical trials on our LTX-03 compound, complete ongoing development using Impede Technology, executing strategic
transaction, partnership or financings to maximize value to the Company’s shareholders and debt holder, compliance with SOX
and successfully managing our intellectual property. The Compensation Committee determined that 20% of the organizational goals
were met in 2018 principally due to our need to preserve cash. No bonuses were paid to the 2018 named executive officers.
No compensation will be earned with respect
to a performance measure unless a performance “floor” for that measure is exceeded; the incentive opportunity with
respect to a measure will be earned if the target is achieved; achievement between the floor and the target results in a lower
amount of award with respect to that performance measure. An amount larger than the incentive opportunity for each performance
measure can be earned, up to and possibly exceeding a specified limit, for exceeding the target for that measure. Depending on
market conditions and other circumstances, performance criteria may be modified during the course of the year, and other performance
criteria reweighted.
In ascertaining the achieved level of performance
against the targets, the effects of certain extraordinary events, as determined by the Compensation Committee, such as (i) major
acquisitions and divestitures, (ii) significant one-time charges, and (iii) changes in accounting principles required by the Financial
Accounting Standards Board, are “compensation neutral” for the year in which they occurred; that is, they are not taken
into account in determining the degree to which the targets are met in that year.
The Compensation Committee may, after a
review of an executive’s performance, recommend to the Board that a bonus award be made to such executives based upon other
non-enumerated performance targets (whether or not they are parties to employment agreements). This could result in the award of
salary increases or bonuses above a targeted range amount.
Employment Agreements
Robert B. Jones commenced employment with
us on April 7, 2008 pursuant to an Employment Agreement dated March 18, 2008 as our Senior Vice President and Chief Operating Officer.
On April 28, 2011, Mr. Jones was appointed our Interim President and Chief Executive Officer. On July 7, 2011, Mr. Jones was named
President and Chief Executive Officer. Mr. Jones’ annual salary is $150,000 (a temporary reduction from his salary under
the Employment Agreement of $392,000 because of our need to preserve cash). The term of the Employment Agreement is currently scheduled
to expire December 31, 2019, and provides for automatic one year renewals in the absence of written notice to the contrary from
us (which would give Mr. Jones the right to terminate his employment for Good Reason) or Mr. Jones at least ninety days prior to
the expiration of the initial term or any subsequent renewal period. Pursuant to the Employment Agreement Mr. Jones is eligible
for annual bonuses of up to 100% of his base salary on the achievement of such targets, conditions, or parameters as may be set
from time to time by the Board of Directors or the Compensation Committee of the Board of Directors. In 2017 and 2018, Mr. Jones
did not receive a bonus.
On December 11, 2014, December 10, 2015,
December 8, 2016, August 9, 2017 and December 11, 2018, we granted Mr. Jones stock options to purchase 50,400 shares, 70,000 shares,
47,000 shares, 47,000 shares and 50,000 shares of our common stock, respectively, in each case exercisable at the fair market value
of our common stock at the date of grant and vesting in equal installments over 24 months, except that the August 9, 2017 grant
vested in one installment on August 9, 2018; and the December 11, 2018 grant will vest in one installment on December 11, 2019
(in each case, subject to earlier exercisability as set forth in the table below entitled “Events Affecting Stock Option
Vesting and Exercise”). “Fair market value” is the closing price for a share of the common stock on the exchange
or quotation system which reports or quotes the closing prices for a share of the common stock (or alternate methodologies if no
such quote is available).
On December 11, 2017 and December 11, 2018,
we granted Mr. Jones 41,000 and 150,000 Restricted Stock Units exchangeable for shares of the Company’s common stock on a
1-for-1 basis after payment of $.01 par value per share, respectively. The 41,000 Restricted Stock Units vested on December 11,
2018. The 150,000 Restricted Stock Units will vest on December 11, 2019 or earlier if Mr. Jones’ service as an employee is
terminated by us without Cause (as defined in the 2017 Restricted Stock Unit Award Plan) or due to his death or Disability (as
defined in the 2017 Restricted Stock Unit Award Plan) or a qualifying change of control occurs. Distributions in respect of such
vested Restricted Stock Units will be made in three equal installments, and in the case of the December 11, 2017 grant, will occur
on the first business day of each of January 2020, 2021, and 2022, and in the case of the December 11, 2018 grant, will occur on
the first business day of each of January 2021, 2022, and 2023, or earlier upon a qualifying change of control which also meets
certain criteria of Section 409A of the Internal Revenue Code.
The Employment Agreement contains standard
termination provisions, including upon death, disability, for Cause, for Good Reason and without Cause. In the event that we terminate
the Employment Agreement without Cause or Mr. Jones terminates the Employment Agreement for Good Reason, we are required to pay
Mr. Jones an amount equal to the bonus for such year, calculated on a pro-rata basis assuming full achievement of the bonus criteria
for such year (to the extent it has not already been paid), as well as Mr. Jones’ base salary for one year (such salary amount
being the “Severance Pay”). Pursuant to an amendment to Mr. Jones’ Employment Agreement entered into in 2012,
in case of termination without Cause and for Good Reason or for voluntary termination more than two years after a Change of Control,
such Severance Pay and bonus is payable in equal monthly installments over a period of twelve months, with the first six installments
payable six months and one day after termination, if mandated by applicable law, which requires certain payments to certain officers
of a public company (“specified employees”) to be made commencing six months after termination. However, if such termination
is without Cause, for Good Reason or for voluntary termination within two years of a qualifying Change of Control, then the Severance
Pay and bonus is payable in a lump sum six months and one day after termination (unless a six month delay is not required by applicable
law in which case it is payable 31 days after termination). In addition, upon a termination without Cause or for Good Reason or
voluntarily after a Change of Control, any shares remaining unvested under stock options and restricted stock units granted to
Mr. Jones will vest in full and Mr. Jones will be entitled to continued coverage under our then-existing benefit plans, including
medical and life insurance, for twelve months from the date of termination.
The Employment Agreement restricts Mr.
Jones from disclosing, disseminating or using for his personal benefit or for the benefit of others, confidential or proprietary
information (as defined in the Employment Agreement) and, provided we have not breached the terms of the Employment Agreement,
from competing with us at any time prior to one year after the termination of his employment with us. In addition, Mr. Jones has
agreed not to (and not to cause or direct any person to) hire or solicit for employment any of our employees or those of our subsidiaries
or affiliates (i) for six months following the termination of his employment by us without Cause or by him for Good Reason, prior
to a Change of Control, (ii) for twelve months following the termination of his employment for Cause, prior to a Change of Control,
or (iii) twenty-four months following a Change of Control. The table entitled “Events Affecting Stock Option Vesting and
Exercise,” below, summarizes the vesting and exercisability of Mr. Jones’ options following a number of termination
scenarios or a Change of Control.
Peter A. Clemens is employed pursuant to
an Employment Agreement effective as of March 10, 1998, as amended, which provides that Mr. Clemens will serve as our Senior Vice
President and Chief Financial Officer for a term currently scheduled to expire December 31, 2019, and provides for automatic one
year renewals in the absence of written notice to the contrary from the Company or Mr. Clemens at least ninety (90) days prior
to the expiration of any renewal period. Pursuant to a 2008 amendment to the Employment Agreement, our non-renewal of the Employment
Agreement is considered as a termination without Cause for all purposes under the Employment Agreement. Mr. Clemens’ annual
salary is $200,000 (a temporary reduction from his salary under the Employment Agreement of $286,000 because of our need to preserve
cash). His maximum bonus under our bonus plan is 70% of base salary. Mr. Clemens’ bonus is based on the achievement of such
targets, conditions, or parameters as may be set from time to time by the Board of Directors or the Compensation Committee of the
Board of Directors. On August 9, 2017 we granted Mr. Clemens a special bonus outside the bonus plan of $20,000 for his efforts
in the negotiation and closing of our July 2017 private equity financing.
On December 11, 2014, December 10, 2015,
December 8, 2016 August 9, 2017 and December 11, 2018 we granted Mr. Clemens options to purchase 36,000 shares, 50,000 shares,
34,000 shares, 34,000 shares and 40,000 shares of our common stock, respectively, in each case at an exercise price equal to the
fair market value of our common stock at the date of grant and vesting in equal installments over 24 months, except that the August
9, 2017 grant vested in one installment on August 9, 2018; and the December 11, 2018 grant will vest in one installment on December
11, 2019 (in each case, subject to earlier exercisability as set forth in the table below entitled “Events Affecting Stock
Option Vesting and Exercise”). “Fair market value” is the closing price for a share of the common stock on the
exchange or quotation system which reports or quotes the closing prices for a share of the common stock (or alternate methodologies
if no such quote is available).
On December 11, 2017 and December 11, 2018,
we granted Mr. Clemens 28,000 and 120,000 Restricted Stock Units, respectively, exchangeable for shares of the Company’s
common stock on a 1-for-1 basis shares after payment of $.01 par value per share. The 28,000 Restricted Stock Units vested on December
11, 2018. The 120,000 Restricted Stock Units will vest on December 11, 2019 or earlier if Mr. Clemens’ service as an employee
is terminated by us without Cause (as defined in the 2017 Restricted Stock Unit Award Plan) or due to his death or Disability (as
defined in the 2017 Restricted Stock Unit Award Plan) or a qualifying change of control occurs. Distributions in respect of such
vested Restricted Stock Units will be made in three equal installments, and in the case of the December 11, 2017 grant, will occur
on the first business day of each of January 2020, 2021, and 2022, and in the case of the December 11, 2018 grant, will occur on
the first business day of each of January 2021, 2022, and 2023, or earlier upon a qualifying change of control which also meets
certain criteria of Section 409A of the Internal Revenue Code.
The Employment Agreement contains standard
termination provisions, including upon death, disability, for Cause, for Good Reason and without Cause. In the event the Employment
Agreement is terminated by us without Cause or by Mr. Clemens for Good Reason, we are required to pay Mr. Clemens an amount equal
to twice his then base salary, payable in the case of termination without Cause or for Good Reason six months and one day after
termination (unless he is not a specified employee at termination in which case payment is in a lump sum within 30 days following
termination) and to continue to provide Mr. Clemens coverage under our then existing benefit plans, including medical and life
insurance, for a term of 24 months. The Employment Agreement permits Mr. Clemens to terminate the Employment Agreement in the event
of a Change in Control (as defined in the Employment Agreement), in which case he would receive the same payments on the same schedule
as on a termination for Good Reason. In addition, Mr. Clemens’ estate is entitled to six month’s salary upon his death
as well as a pro rata bonus for the number of months he worked in the year of his death. The Employment Agreement also restricts
Mr. Clemens from disclosing, disseminating or using for his personal benefit or for the benefit of others confidential or proprietary
information (as defined in the Employment Agreement) and, provided we have not breached the terms of the Employment Agreement,
from competing with us at any time prior to two years after the earlier to occur of the expiration of the term and the termination
of his employment. In addition, for a period of two years from and after the effective date of the termination of his employment
with us (for any reason whatsoever), (i) induce or attempt to influence any employee of the Corporation or any of its subsidiaries
or affiliates to leave its employ, or (ii) aid any person, business, or firm, including a supplier, a competitor, licensor or customer
of or our manufacturer for the Corporation, in any attempt to hire any person who shall have been employed by us or any of our
subsidiaries or affiliates within the period of one year of the date of any such requested aid. The table entitled “Events
Affecting Stock Option Vesting and Exercise,” below, summarizes the vesting and exercisability of Mr. Clemens’ options
following a number of termination scenarios or a Change of Control.
For purposes of Mr. Jones and Mr. Clemens
severance pay, a Change of Control is generally defined, with certain exceptions, as
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·
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acquisition by a person or group of more than 50% of our outstanding shares
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·
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a merger, reorganization, consolidation of exchange, other than one in which current holders of
our voting securities hold more than 50% of our voting securities
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·
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a merger in which we are not the surviving corporation
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·
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a sale or license of substantially all of our assets
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·
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Acura going private (i.e. no longer files reports under the Exchange Act), unless the relevant
employee (e.g., Jones, in the case of Jones’ severance and Clemens in the case of Clemens’ severance) “participates”
in such transaction
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Events Affecting Stock Option Vesting
and Exercise (For Messrs. Jones and Clemens)
Event
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Vesting of All
Options (Options
are exercisable
upon vesting)
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Exercisability of Options
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Termination due to Death
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Options vest for one month after death; after that no additional vesting
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Vested options immediately exercisable for one year following termination
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Termination by Company Without Cause or by Employee for Good Reason or termination by Employee following Change of Control
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All options fully vest.
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Vested options immediately exercisable for one year following termination Vested options exercisable for 12 months for Mr. Jones (twenty four months in the case of Mr. Clemens)
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Termination due to Disability
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No additional vesting
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Vested options immediately exercisable for one year following termination
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Termination by the Company for Cause or by executive other than for Good Reason
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No additional vesting
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Vested options immediately exercisable for 40 days following termination
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Change of Control
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Options fully vest for Mr. Jones and Mr. Clemens.
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Vested options immediately exercisable
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Dr. Brzeczko is not party
to an employment agreement. Dr. Brzeczko was hired pursuant to an offer letter pursuant to which he received a $40,000 signing
bonus and commencing 2016 and thereafter, is eligible for annual bonuses of up to 50% of his base salary (increased from 35% in
effect during 2015). Dr. Brzeczko’s bonus is based on the achievement of such targets, conditions, or parameters as may be
set from time to time by the Board of Directors or the Compensation Committee of the Board of Directors. In 2017 and 2018 he received
no bonus.
Upon commencement of
his employment on February 9, 2009, Dr. Brzeczko received 4,800 RSUs vesting in equal installments over 24 months, and stock options
exercisable for 19,200 shares of common stock vesting in equal installments over 24 months. Dr. Brzeczko’s annual salary
is $220,000 (a temporary reduction from his salary of $291,000 because of our need to preserve cash). Dr. Brzeczko is eligible
for and over the years of his employment, Dr. Brzeczko has received annual option grants.
On December 8, 2016 August 9, 2017 and
December 11, 2018 we granted Dr. Brzeczko options to purchase 35,000 shares, 35,000 shares, 35,000 shares, and 34,000 shares of
our common stock, respectively, in each case at an exercise price equal to the fair market value of our common stock at the date
of grant and vesting in equal installments over 24 months, except that the August 9, 2017 grant vested in one installment on August
9, 2018; and the December 11, 2018 grant will vest in one installment on December 11, 2019 (in each case, subject to earlier exercisability
as set forth in the table below entitled “Events Affecting Stock Option Vesting and Exercise”). “Fair market
value” is the closing price for a share of the common stock on the exchange or quotation system which reports or quotes the
closing prices for a share of the common stock (or alternate methodologies if no such quote is available).
On December 11, 2017
and December 11, 2018, we granted Dr. Brzeczko 28,000 and 102,000 Restricted Stock Units exchangeable for shares of the Company’s
common stock on a 1-for-1 basis after payment of $.01 par value per share, respectively. The 28,000 Restricted Stock Units vested
on December 11, 2018. The 102,000 Restricted Stock Units will vest on December 11, 2019 or earlier if Dr. Brzeczko’s service
as an employee is terminated by us without Cause (as defined in the 2017 Restricted Stock Unit Award Plan) or due to his death
or Disability (as defined in the 2017 Restricted Stock Unit Award Plan) or a qualifying change of control occurs. Distributions
in respect of such vested Restricted Stock Units will be made in three equal installments, and in the case of the December 11,
2017 grant, will occur on the first business day of each of January 2020, 2021, and 2022, and in the case of the December 11, 2018
grant, will occur on the first business day of each of January 2021, 2022, and 2023, or earlier upon a qualifying change of control
which also meets certain criteria of Section 409A of the Internal Revenue Code.
Stock Option Plans
We maintain two stock option plans adopted
in 2008 and 2016, respectively. Our option plans are administered by the Board of Directors. The Board of Directors selects the
employees, directors and consultants to be granted options under the plans and, subject to the provisions of each plan, determines
the terms and conditions and number of shares subject to each option. Any of our employees or employees of our subsidiary are eligible
to receive incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, or the Code (“ISOs”).
Non-qualified stock options may be granted to employees as well as non-employee directors and consultants under the plans as determined
by the Board. Any person who has been granted an option may, if they are otherwise eligible, be granted an additional option or
options.
Each grant of an option is evidenced by
an option agreement, and each option agreement specifies whether the option is an ISO or a non-qualified stock option and incorporates
such other terms and conditions as the Board of Directors acting in its absolute discretion deems consistent with the terms of
the plan, including, without limitation, a restriction on the number of shares of Common Stock subject to the option which first
become exercisable during any calendar year.
To the extent that the aggregate fair market
value of the common stock of the Company underlying a grant of ISOs (determined as of the date such an ISO is granted), which first
become exercisable in any calendar year, exceeds $100,000, such Options shall be treated as non-qualified stock options. This $100,000
limitation shall be administered in accordance with the rules under Section 422(d) of the Code.
Upon the grant of an option to an employee,
director or consultant the Board will fix the number of shares of common stock that the optionee may purchase upon exercise of
the option and the price at which the shares may be purchased. The option exercise price for ISOs shall not be less than the fair
market value of the common stock at the time the option is granted, except that the option exercise price shall be at least 110%
of the fair market value where the option is granted to an employee who owns more than 10% of the voting power of all of our classes
of stock or any parent or subsidiary. The option exercise price for non-qualified stock options granted under the plans may be
less than the fair market value of our common stock (“Discounted Options”). “Fair market value” is the
closing price for a share of the common stock on the exchange or quotation system which reports or quotes the closing prices for
a share of the common stock (or alternate methodologies if no such quote is available).
All options available to be granted under
each plan must be granted within ten years after shareholder approval of the applicable plan. The Board will determine the actual
term of the options but no option will be exercisable after the expiration of 10 years from the date of grant. No ISO granted to
an employee who owns more than 10% of the combined voting power of all of our outstanding classes of stock may be exercised after
five years from the date of grant. Historically, our grants to employees generally vest 1/24th each month, although under the plans
any vesting schedule is permissible as determined by the Compensation Committee or the Board. However on August 9, 2017 we made
a special option grant to employees which generally vests 12 months from issuance instead of ratably over 24 months. Our grants
to director generally vest in equal quarterly installments over the calendar year. Since 2015 our option agreements include vesting
upon a change of control (as defined in the 2016 Stock Option Plan). In addition, the plans provide options may be accelerated
by the Board of Directors in their discretion, including, upon a change of control, a proposed dissolution or liquidation of the
Company, in the event of a proposed sale of all or substantially all of the assets of the Company, or a merger of the Company.
All of our option plans allow the participant
to elect to exercise options on a net exercise basis by allowing shares subject to the option to be withheld by the Company in
satisfaction of the option exercise price, and to satisfy the participant’s withholding tax payment obligations relating
to the option exercise.
Options granted to employees, directors
or consultants under the plans may be exercised during the optionee’s lifetime only by the optionee during his employment
or service with us or for a period not exceeding one year if the optionee ceased employment or service as a director or consultant
because of permanent or total disability within the meaning of Section 22(e)(3) of the Code. Options may be exercised by the optionee’s
estate, or by any person who acquired the right to exercise such option by bequest or inheritance from the optionee for a period
of twelve months from the date of the optionee’s death. If such option shall by its terms expire sooner, such option shall
not be extended as a result of the optionee’s death.
The
2008 Stock Option Plan
The Company’s 2008 Stock Option Plan
was adopted by the Board of Directors on March 14, 2008 and approved by our shareholders on April 30, 2008. The 2008 Stock Option
Plan permits the grant of ISO’s and non-qualified stock options to purchase up to 1,200,000 shares of our common stock. On
June 25, 2009, the 2008 Stock Option Plan was amended to allow participants to require us to withhold common stock upon exercise
of options for payment of exercise price and statutory minimum withholding taxes. In April 2018 the 2008 Stock Option Plan expired
and the remaining 196,200 unissued shares allocated to the Plan were terminated. As of December 31, 2018, stock options to purchase
approximately 980,000 shares of common stock are outstanding under the 2008 Stock Option Plan and 48,000 options are non-qualified
and 932,000 options are ISOs. The weighted average exercise price per share for all outstanding options under the 2008 Stock Option
Plan as of December 31, 2018 was $11.47.
The
2016 Stock Option Plan
The Company’s 2016 Stock Option Plan,
as amended, was adopted by the Board of Directors and approved by our shareholders in April 2016. The 2016 Stock Option Plan permits
the grant of ISO’s and non-qualified stock options to purchase in the aggregate up to 600,000 shares of our common stock.
As of December 31, 2018, stock options to purchase approximately 579,000 shares of common stock are outstanding under the 2016
Stock Option Plan and all are ISOs. Up to 60,000 shares underlying options may be granted to any participant in a calendar year
under the 2016 Stock Option Plan. The weighted average exercise price per share for all outstanding options under the 2016 Stock
Option Plan as of December 31, 2018 was $0.46.
Restricted Stock Unit Award Plan
The 2014 Restricted
Stock Unit Award Plan
The Company’s 2014 Restricted Stock
Unit Award Plan (the “2014 RSU Plan”) was approved by the Company’s Board of Directors in February 2014 and by
our shareholders in May 2014. Under the 2014 RSU Plan, a Restricted Stock Unit (“RSU”) represents the right to receive
(upon payment of $0.01 par value per share) a share of the Company’s common stock (or under certain circumstances, cash in
lieu thereof (“Cash Settled RSUs”)) at a designated time or upon designated events.
The maximum aggregate number of shares
which may be subject to RSUs granted under the 2014 RSU Plan is 400,000 shares of authorized, but unissued or reacquired common
stock. Payment of Cash Settled RSUs will reduce such limit. If an RSU should expire or become forfeited for any reason without
the underlying shares of common stock or cash subject to such RSU having been distributed, the underlying shares shall, unless
the 2014 RSU Plan shall have been terminated, become available for further grant under the 2014 RSU Plan. Unless terminated earlier
by the Board of Directors, the RSUs may be distributed under the 2014 RSU Plan until April 30, 2024.
As of March 30, 2019 we had granted RSUs
under the 2014 RSU Plan providing for our issuance of an aggregate of 400,000 shares of our common stock and there are no remaining
shares available for grant. At March 30, 2019, approximately 3,200 RSU awards remain outstanding under our 2014 RSU Plan.
Because there were a limited number of
shares available for issuance under the 2014 RSU Plan, our shareholders approved the 2017 Restricted Stock Unit Award Plan in November
2017. The description of the 2017 Restricted Stock Unit Award Plan, under the captions, “Terms”, “Administration”,
“Amendment and Termination”, and “Adjustment upon Capitalization and Merger”, below are similar to the
provisions of the 2014 RSU Plan, with the significant differences noted under such captions.
The 2017 Restricted
Stock Unit Award Plan
The Company’s 2017 Restricted Stock
Unit Award Plan (the “2017 RSU Plan”) was approved by the Company’s Board of Directors on September 8, 2017 and
approved by shareholders on November 8, 2017. Under the 2017 RSU Plan, a Restricted Stock Unit (“RSU”) represents the
right to receive (upon payment of $0.01 par value per share) a share of the Company’s common stock (or under certain circumstances,
cash in lieu thereof (“Cash Settled RSUs”)) at a designated time or upon designated events.
Number of RSUs that may be granted.
The maximum aggregate number of shares which may be subject to RSUs granted under the 2017 RSU Plan is 1,500,000 shares of authorized,
but unissued, or reacquired common stock. (See “Adjustments Upon Changes in Capitalization or Merger” below.) If an
RSU should expire or become forfeited for any reason without the underlying shares of common stock or cash subject to such RSU
having been distributed, the underlying shares shall, unless the 2017 RSU Plan shall have been terminated, become available for
further grant under the 2017 RSU Plan. The 2017 RSU Plan has no limit on the number of RSUs that may be granted to an individual
employee, consultant or director in any calendar year. Payment of Cash Settled RSUs (as hereinafter defined) will reduce such limit.
As of March 30, 2019 approximately 1,281,000 RSUs have been granted and approximately 1,014,000 RSU awards were outstanding under
our 2017 RSU Plan. Unless terminated earlier by the Board of Directors, the RSUs may be distributed under the 2017 RSU Plan until
November 7, 2027, however we expect that RSUs available under the Plan will have been distributed within the next three years.
The 2017 RSU Plan allows for amendment by the Board of Directors, provided shareholder approval for the amendment is not required
under the rules of an exchange on which our stock is listed or applicable law.
Purpose. The 2017 RSU Plan is intended
to assist the Company in securing and retaining employees, consultants and directors by allowing them to participate in the ownership
and growth of the Company through the RSUs. The granting of RSUs serves as partial consideration for and gives key employees, directors
and consultants an additional inducement to, remain in the service of the Company and will provide them with an increased incentive
to work for the Company’s success. Cash Settled RSUs give Non-Employee Directors the ability to pay tax on their other RSUs
distributed simultaneously therewith. Employees have a separate right to have stock withheld in payment of withholding taxes.
Administration
The 2017 RSU Plan is administered by the
Company’s Board of Directors, or, except with respect to matters involving non-employee Directors (“Non-Employee Directors”),
the Compensation Committee, provided it is comprised of not less than two members of the Board, each of whom must be Non-Employee
Directors as that term is defined in Rule 16b-3(b)(3)(i) of the Exchange Act (the “Committee”).
Powers of the Board/Committee.
The Board/Committee has the authority, subject to the provisions of the 2017 RSU Plan, to establish, adopt and revise such rules,
regulations and forms and agreements and to interpret the 2017 RSU Plan and make all determinations relating to the 2017 RSU Plan
as it may deem necessary or advisable. The Board/Committee also has the authority, subject to the provisions of the 2017 RSU Plan,
to delegate ministerial, day-to-day administrative details and non-discretionary duties and functions to officers and employees
of the Company. In the administration of the 2017 RSU Plan with respect to Non-Employee Directors, the Board has all of the authority
and discretion otherwise granted to the Committee with respect to the administration of the 2017 RSU Plan. All decisions, determinations
and interpretations of the Board/Committee are binding and conclusive on participants in the 2017 RSU Plan and on their legal representatives
and beneficiaries.
Director Participation in the RSU Plan.
Non-Employee Directors are eligible to receive RSU grants under the 2017 RSU Plan, and it is expected that RSU awards under the
2017 RSU Plan will represent the annual equity compensation component of Non-Employee Directors’ compensation.
RSU Plan Eligibility. RSUs may be
granted to any of the Company’s Non-Employee Directors, any of the Company’s employees or consultants, or any employees
or consultants of any of the Company’s subsidiary corporations, including officers (collectively, “Eligible Participants”).
For purposes of the 2017 RSU Plan employees or consultants of the Company also mean employees or consultants of the Company’s
subsidiary. As of March 30, 2018 all of the Company’s 14 full-time employees and four Non-Employee Directors of the Company
will be eligible participants (“Participants”) in the 2017 RSU Plan. Any Eligible Participant who has been granted
an RSU may be granted additional RSUs. The RSU Plan does not confer any rights upon any Participant with respect to continuation
of employment or service as an employee, consultant or a Non-Employee Director.
Terms
RSU Award Agreement. Each RSU granted
under the 2017 RSU Plan is evidenced by a written award agreement (“RSU Award Agreement”), which contains the terms
and conditions of the specific RSU granted.
Vesting of RSUs. RSUs generally
vest as set forth in the RSU Award Agreement. In addition, unless expressly provided otherwise in the RSU Award Agreement, each
RSU immediately vests and is nonforfeitable to the Participant upon the occurrence of any of the following events:
(1) a Participant’s
service as an employee of the Company is terminated by the Company without Cause (as defined) or due to the Participant’s
death or disability (as defined), or in the case of a Non-Employee Director, upon the Participant’s death or Disability or
if the Participant is not renominated as a director (other than for “Cause” or refusal to stand for re-election) or
is not elected by the Company’s stockholders, if nominated; or
(2) a qualifying change
of control, referred to as a Change in Control-Plan (as defined in the 2017 RSU Plan)
Accelerated vesting does not directly translate
into accelerated distribution of shares subject to an RSU Award. For instance if the Company terminates an employee’s employment
without Cause, such employee’s RSUs will immediately vest (unless otherwise provided in the RSU Award Agreement) but, absent
a qualifying change of control the employee will not commence to receive the shares underlying his RSU award until the scheduled
distribution date.
Distribution of Shares Underlying RSUs.
Under the 2017 RSU Plan, (unless an award provides otherwise, vesting is accelerated as provided above under “Vesting of
RSUs” or a Change of Control-Plan occurs as described below), stock underlying vested RSUs is generally distributed on the
first business day of the year after they vest. Hence, if an award to a Non-Employee Director vests as scheduled in full over four
quarters during 2018, it will be generally be distributed the first business day of January 2019. However, the Company may set
other distribution dates, with respect to awards to Participants, including Non-Employee Directors. Under the 2014 RSU Plan Non-Employee
Directors (but not other Participants) could designate the length of the deferrals. This is not the case with the 2017 RSU Plan,
where only the Company can set the distribution dates for all Participants. Non-Employee-Directors may elect to take payment in
cash instead of stock for up to 40% of the RSUs in an award (rendering such RSUs as “Cash Settled RSUs”). With respect
to Participants for whom the Company is required to withhold taxes (generally employees) the Company may mandate such Participants
or such Participants may elect that the Company withhold stock otherwise payable on exchange of an RSU to pay withholding taxes
(this differs from the 2014 RSU Plan where the Company could not mandate withholding stock to pay withholding taxes). The cash
payment election or withholding election may be made at any time before distribution, but any such cash payment or withholding
is subject to any limits on redemption under any preferred stock, loan or other financing agreement. The Company has the option
of establishing a RSU award that defers distributions to a Participant, including in installments (e.g., 25% of RSUs to be paid
in 2019, 2020, 2021 and 2022). If a Change of Control-Plan which is also a Change in Control-409A occurs, all vested shares of
common stock underlying an RSU (after payment or withholding of $0.01 per share par value) will be distributed by the Company to
the holder of the RSU at or about the time of the Change in Control-Plan. No dividends accrue on shares of common stock underlying
RSUs prior to distribution. Participants need not be employees, consultants or directors of the Company on a distribution date.
A Change in Control-409A for distribution purposes is generally the same as a Change in Control-Plan for vesting purposes, except
that in order to have a Change in Control-409A for distribution purposes, a change in control qualifying under Section 409A of
the Code must occur. In lieu of requiring cash payment of par value, the Company may, in its discretion or shall at the Participant’s
request, accept payment of any such par value by withholding from stock payments a number of whole shares of stock whose value
is equal to the amount of such par value, provided the same does not cause the Redemption Limit to be exceeded.
Non Transferability of RSUs. RSUs
may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner by the Participant other than by will
or by the laws of descent or distribution and the Committee may, in its discretion, authorize all or a portion of the RSUs to be
granted to a Participant to be on terms which permit transfer by such Participant to (i) the spouse, children or grandchildren
of the awardee (the “Immediate Family Members”), (ii) a trust or trusts for the exclusive benefit of such Immediate
Family Members, or (iii) a partnership in which such Immediate Family Members are the only partners, provided that (x) there may
be no consideration for any such transfer, (y) subsequent transfers of transferred RSUs shall be prohibited except those made by
will or by the laws of descent or distribution, and (z) such transfer is approved in advance by the Committee (or Board in absence
of a Committee). A married Participant may generally designate only a spouse as a beneficiary unless spousal consent is obtained.
Termination of Status as an Employee
or Non-Employee Director. See “Vesting of RSUs”, above for a discussion of vesting upon termination of employment
or service as a Non-Employee Director.
Dividend and Voting Rights. Unless
other provided in an RSU Award Agreement, Participants have no dividend rights and no voting rights with respect to the shares
underlying RSUs until the RSUs settle in shares of common stock.
Amendment and Termination
of the RSU Plan
The Board may terminate and, without shareholder
approval, unless the same is required by the rules of the exchange where the Company’s stock trades, or applicable law, amend
the 2017 RSU Plan.
Adjustments upon
Changes in Capitalization or Merger
Upon or in contemplation of any reclassification,
recapitalization, stock split (including a stock split in the form of a stock dividend) or reverse stock split; any merger, combination,
consolidation or other reorganization; any split-up; spin-off, or similar extraordinary dividend distribution with respect to the
common stock (whether in the form of securities or property); any exchange of stock or other securities of the Company, or any
similar, unusual or extraordinary corporate transaction with respect to the common stock; or a sale of substantially all the assets
of the Company as an entirety; then the Board shall proportionately adjust any or all of (a) the number and type of shares of common
stock (or other securities or property) that thereafter may be made the subject of RSUs, (b) the number, amount and type of shares
of common stock (or other securities or property) payable with respect to RSUs, and (c) and the number and type of RSUs (both credited
and vested) under the 2017 RSU Plan.
Outstanding Equity
Awards at 2018 Year End
The following table presents information
regarding outstanding restricted stock unit and stock option awards at December 31, 2018 for each of the 2018 named executive officers.
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Stock Option Awards
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Stock Awards
(in Form of Restricted
Stock Units)
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Name
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Number of Securities
Underlying Unexercised
Options (#) Exercisable
|
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
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|
Option
Exercise
Price ($)
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Option
Expiration
Date
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|
Number of
Restricted
Stock Units
that have not
vested (3)
|
|
|
Market value
of shares of
units of stock
that have not
vested ($) (4)
|
|
Robert B. Jones
|
|
|
32,000
|
|
|
|
—
|
|
|
$
|
31.45
|
|
|
04/23/2019
|
|
|
150,000
|
|
|
$
|
15,735
|
|
|
|
|
50,000
|
|
|
|
—
|
|
|
$
|
15.10
|
|
|
12/15/2020
|
|
|
|
|
|
|
|
|
|
|
|
16,000
|
|
|
|
—
|
|
|
$
|
18.60
|
|
|
12/14/2021
|
|
|
|
|
|
|
|
|
|
|
|
47,000
|
|
|
|
—
|
|
|
$
|
0.450
|
|
|
08/08/2022
|
|
|
|
|
|
|
|
|
|
|
|
18,000
|
|
|
|
—
|
|
|
$
|
13.05
|
|
|
12/13/2022
|
|
|
|
|
|
|
|
|
|
|
|
27,500
|
|
|
|
—
|
|
|
$
|
7.75
|
|
|
12/11/2023
|
|
|
|
|
|
|
|
|
|
|
|
50,400
|
|
|
|
—
|
|
|
$
|
2.60
|
|
|
12/10/2024
|
|
|
|
|
|
|
|
|
|
|
|
70,000
|
|
|
|
—
|
|
|
$
|
2.01
|
|
|
12/09/2025
|
|
|
|
|
|
|
|
|
|
|
|
47,000
|
|
|
|
—
|
|
|
$
|
0.915
|
|
|
12/07/2026
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
50,000
|
(2)
|
|
$
|
0.151
|
|
|
12/11/2023
|
|
|
|
|
|
|
|
|
Peter A. Clemens
|
|
|
24,000
|
|
|
|
—
|
|
|
$
|
31.45
|
|
|
04/23/2019
|
|
|
120,000
|
|
|
$
|
12,588
|
|
|
|
|
8,000
|
|
|
|
—
|
|
|
$
|
15.10
|
|
|
12/15/2020
|
|
|
|
|
|
|
|
|
|
|
|
7,000
|
|
|
|
—
|
|
|
$
|
18.60
|
|
|
12/14/2021
|
|
|
|
|
|
|
|
|
|
|
|
34,000
|
|
|
|
—
|
|
|
$
|
0.450
|
|
|
08/08/2022
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
—
|
|
|
$
|
13.05
|
|
|
12/13/2022
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
—
|
|
|
$
|
7.75
|
|
|
12/11/2023
|
|
|
|
|
|
|
|
|
|
|
|
36,000
|
|
|
|
—
|
|
|
$
|
2.60
|
|
|
12/10/2024
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
—
|
|
|
$
|
2.01
|
|
|
12/09/2025
|
|
|
|
|
|
|
|
|
|
|
|
34,000
|
|
|
|
—
|
|
|
$
|
0.915
|
|
|
12/07/2026
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
40,000
|
(2)
|
|
$
|
0.151
|
|
|
12/11/2023
|
|
|
|
|
|
|
|
|
Albert W. Brzeczko
|
|
|
19,200
|
|
|
|
—
|
|
|
$
|
28.50
|
|
|
02/08/2019
|
|
|
102,000
|
|
|
$
|
10,700
|
|
|
|
|
6,400
|
|
|
|
—
|
|
|
$
|
15.10
|
|
|
12/15/2020
|
|
|
|
|
|
|
|
|
|
|
|
7,000
|
|
|
|
—
|
|
|
$
|
18.60
|
|
|
12/14/2021
|
|
|
|
|
|
|
|
|
|
|
|
14,000
|
|
|
|
—
|
|
|
$
|
13.05
|
|
|
12/13/2022
|
|
|
|
|
|
|
|
|
|
|
|
35,000
|
|
|
|
—
|
|
|
$
|
0.450
|
|
|
08/08/2022
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
—
|
|
|
$
|
7.75
|
|
|
12/11/2023
|
|
|
|
|
|
|
|
|
|
|
|
28,800
|
|
|
|
—
|
|
|
$
|
2.60
|
|
|
12/10/2024
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
—
|
|
|
$
|
2.01
|
|
|
12/09/2025
|
|
|
|
|
|
|
|
|
|
|
|
35,000
|
|
|
|
—
|
|
|
$
|
0.915
|
|
|
12/07/2026
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
32,000
|
(2)
|
|
$
|
0.151
|
|
|
12/11/2023
|
|
|
|
|
|
|
|
|
|
(2)
|
Options vest on December 31, 2019.
|
|
(3)
|
Restricted Stock Units vest on December 11, 2019 or earlier under certain circumstances. Distributions
in respect of vested Restricted Stock Units will be made in three equal installments on the first business day of each of January
2021, 2022, and 2023 or earlier upon a qualifying change of control which also meets certain criteria of Section 409A of the Internal
Revenue Code.
|
|
(4)
|
Based on market price of $0.1149 at December 29, 2018, less $0.01 par value, multiplied by number
of units.
|
Director Compensation
The following table sets forth a summary
of the compensation paid by us to our Directors (other than Robert Jones, whose compensation, is reflected in the Summary Compensation
Table) for services rendered in all capacities to us during the fiscal year ended December 31, 2018:
2018 DIRECTOR COMPENSATION
Director
|
|
Fees Earned or Paid
in Cash ($)(4)
|
|
|
Stock Awards
(in form of
Restricted
Stock Units)
($)(1)
|
|
|
Option Awards ($)(2)
|
|
|
Total ($)
|
|
William G. Skelly
|
|
$
|
—
|
|
|
$
|
23,333
|
|
|
|
—
|
|
|
$
|
23,333
|
|
Bruce F. Wesson
|
|
$
|
—
|
|
|
$
|
23,333
|
|
|
|
—
|
|
|
$
|
23,333
|
|
Immanuel Thangaraj
|
|
$
|
—
|
(3)
|
|
$
|
23,333
|
|
|
|
—
|
|
|
$
|
23,333
|
|
George K. Ross
|
|
$
|
—
|
|
|
$
|
23,333
|
|
|
|
—
|
|
|
$
|
23,333
|
|
|
(1)
|
Represents the grant date fair value of restricted stock
units, or RSUs with respect to the 66,666 RSUs granted to Messrs. Skelly, Wesson, Thangaraj and Ross under our 2017 RSU Plan based
on a closing common stock price of $0.36 on January 2, 2018 less $0.01 par value.
|
In January 2018, based on a
closing common stock price of $0.4039 on December 29, 2017 less $0.01 par value, Messrs. Skelly and Wesson each realized approximately
$23,500 by exchanging 59,523 RSUs at 0.01 par value per share received from their 2017 grant for 59,523 shares of common stock;
Mr. Ross realized approximately $32,600 by exchanging 82,774 RSUs at $0.01 par value per share received from his 2017 and prior
year grants, for 82,774 shares of common stock; and Mr. Thangaraj realized approximately $23,500 by exchanging 35,714 RSUs at $0.01
par value per share he received from his 2017 grant, for 35,714 shares of common stock and exchanging the remaining 23,809 RSUs
for approximately $9,600 in cash.
As of December 31, 2018, Messrs.
Skelly, Wesson, Thangaraj and Ross each held 66,666 fully vested RSUs and are distributable to them on January 2, 2019.
|
(2)
|
Each of Messrs. Skelly, Wesson, Thangaraj and Ross held
vested options with respect to 15,000 underlying shares as of December 31, 2018.
|
|
(3)
|
Director fees for Mr. Thangaraj are remitted to Essex Woodlands.
|
|
(4)
|
In order to conserve cash, the directors waived all cash
compensation for 2018
|
Had the nonemployee Directors not waived
their cash compensation for 2018 they would have received the following:
|
·
|
the annual retainer for each non-employee director of $30,000;
|
|
·
|
there are no separate Board meeting fees;
|
|
·
|
an additional retainer for the Chairman of the Board (unfilled at present) of $20,000;
|
|
·
|
Audit Committee members receive a retainer of $7,500 per year (with no separate per meeting fee);
|
|
·
|
Audit Committee Chairperson receives an additional annual retainer of $10,000 (in addition to the
$7,500 retainer as an Audit Committee member);
|
|
·
|
Compensation Committee members receive an annual retainer of $5,000 with no separate per meeting
fee;
|
|
·
|
Compensation Committee Chairperson receives a $5,000 annual retainer (in addition to the $5,000
retainer for Compensation Committee members); and
|
|
·
|
Strategic Transaction Committee Members receive a $250 per meeting fee.
|
In addition, commencing
in 2014, directors receive annual equity awards valued at $50,000 in the form of stock options or RSUs. For RSUs this is determined
by dividing $50,000 by the greater of (i) the Company’s closing stock price on the date of grant, or (ii) the minimum stock
price or floor (if any) imposed by the Board.
|
·
|
For the 2017 award, each director was awarded 59,523 RSUs using the Company’s closing stock
price of $0.84 as it was higher than the minimum stock price set at $0.83. These awards were distributed to them on January 2,
2018.
|
|
·
|
For the 2018 award, the Board decided there would be a minimum stock price of $0.75, and as a result,
each director was awarded 66,666 RSUs. The Company’s closing stock price on January 2, 2018 of $0.75 was not used. These
awards were distributed to them on January 2, 2019.
|
|
·
|
For the 2019 award and beyond, the Board decided the minimum stock price will be $1.00, but in
each case, subject to reevaluation by them. For the 2019 award, the Board reevaluated the minimum stock price and it was changed
to $0.60 resulting in each director being awarded 83,333 RSUs. The Company’s closing stock price on January 2, 2019 of $0.1149
was not used.
|
We also reimburse directors
for travel and lodging expenses, if any, incurred in connection with attendance at Board meetings. Directors who are also our employees
receive no additional or special remuneration for their services as directors.
ITEM 12. SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information
regarding the beneficial ownership of the common stock, as of July 15, 2019, for individuals or entities in the following categories:
(i) each of the Company’s Directors; (ii) the Company’s principal executive officer, and the next two highest paid
executive officers of the Company whose total annual compensation for 2018 exceeded $100,000 (the “2018 named executive officers”);
(iii) all Directors and executive officers as a group; and (iv) each person known by the Company to be a beneficial owner of more
than 5% of the common stock. Unless indicated otherwise, each of the shareholders has sole voting and investment power with respect
to the shares beneficially owned. At July 15, 2019, there were 21,300,192 shares of our common stock outstanding. Shares of common
stock issuable pursuant to stock options, warrants and restricted stock units exercisable or exchangeable within 60 days are deemed
outstanding and held by the holder of such options warrants or restricted stock units for computing the percentage of the person
holding such options, warrants or restricted stock units, but are not deemed outstanding for computing the percentage of any other
person. There were no restricted stock units or common stock options exchangeable within 60 days of July 15, 2019.
Name of Beneficial Owner
|
|
Amount Owned
|
|
|
Percent of
Class (1)
|
|
John Schutte
c/o MainPointe Pharmaceuticals, LLC
333 E. Main Street, Suite 200
Louisville, KY 40202
|
|
|
10,695,186
|
(2)
|
|
|
46.3
|
%
|
Abuse Deterrent Pharma, LLC
333 E. Main Street, Suite 220
Louisville, KY 40202
|
|
|
47,400,000
|
(3)
|
|
|
69.0
|
%
|
Essex Woodlands Health Ventures Fund V, L.P.
21 Waterway Avenue, Suite 225
Woodlands, TX 77380
|
|
|
1,956,357
|
(4)
|
|
|
9.2
|
%
|
Robert B. Jones
|
|
|
738,455
|
(5)
|
|
|
3.4
|
%
|
William G. Skelly
|
|
|
266,534
|
(6)
|
|
|
1.3
|
%
|
Bruce F. Wesson
|
|
|
532,593
|
(7)
|
|
|
2.5
|
%
|
Peter A. Clemens
|
|
|
549,133
|
(8)
|
|
|
2.6
|
%
|
Immanuel Thangaraj
|
|
|
138,192
|
(9)
|
|
|
0.6
|
%
|
Albert W. Brzeczko
|
|
|
507,200
|
(10)
|
|
|
2.4
|
%
|
George K. Ross
|
|
|
223,005
|
(11)
|
|
|
1.0
|
%
|
All Officers and Directors as a Group (9 persons)
|
|
|
3,906,581
|
(12)
|
|
|
17.6
|
%
|
|
*
|
Represents less than 1% of the outstanding shares of the
Company’s common stock.
|
|
(1)
|
Shows percentage ownership assuming (i) such party converts all of its currently convertible securities
or securities convertible within 60 days of July 15, 2019 into the Company’s common stock, and (ii) no other Company security
holder converts any of its convertible securities. No shares held by any Director or 2018 named executive officer has been pledged
as collateral security.
|
|
(2)
|
Includes warrants to purchase 1,782,531 shares held by Mr. Schutte.
|
|
(3)
|
Includes warrant to purchase 10,000,000 shares and 37,500,000 shares upon conversion of $6.0 million
Note at $0.16 held by AD Pharma.
|
|
(4)
|
Mr. Thangaraj is the Board designee of Essex Woodlands Health Ventures Fund V, L.P. (“Essex”).
Essex Woodlands Health Ventures V, L.L.C., a Delaware limited liability company is the general partner of Essex. Martin P. Sutter
and Immanuel Thangaraj may be deemed to have shared dispositive power and voting power with respect to the securities held by the
Essex. Messrs. Sutter and Thangaraj disclaim beneficial ownership of such securities except to the extent of their respective pecuniary
interests therein.
|
|
(5)
|
Includes 325,900 shares subject to stock options exercisable within 60 days of July 15, 2019. Does
not include RSUs.
|
|
(6)
|
Includes 12,000 shares subject to stock options exercisable within 60 days of July 15, 2019. Does
not include RSUs.
|
|
(7)
|
Includes 12,000 shares subject to stock options exercisable within 60 days of July 15, 2019. Does
not include RSUs.
|
|
(8)
|
Includes 194,000 shares subject to stock options exercisable within 60 days of July 15, 2019. Does
not include RSUs.
|
|
(9)
|
Includes 12,000 shares subject to stock options exercisable within 60 days of July 15, 2019. Mr.
Thangaraj’s holdings do not include securities held by Essex. Mr. Thangaraj disclaims beneficial ownership in securities
held by Essex except to the extent of his pecuniary interest therein. Does not include RSUs.
|
|
(10)
|
Includes 191,200 shares subject to stock options exercisable within 60 days of July 15, 2019. Does
not include RSUs.
|
|
(11)
|
Includes 12,000 shares subject to stock options exercisable within 60 days of July 15, 2019. Does
not include RSUs.
|
|
(12)
|
Includes 948,419 shares which Directors and executive officers have the right to acquire within
60 days of July 15, 2019 through exercise of outstanding stock options. Does not include RSUs.
|
Securities Authorized For Issuance under
Equity Compensation Plans
The following table includes information
as of December 31, 2018 relating to our 1998 Stock Option Plan, our 2008 Stock Option Plan, our 2016 Stock Option Plan, our 2014
Restricted Stock Unit Award Plan, and our 2017 Restricted Stock Award Plan, which comprise all of our equity compensation plans.
The table provides the number of securities to be issued upon the exercise of outstanding options and distributions under outstanding
Restricted Stock Unit Awards under such plans, the weighted-average exercise price of outstanding options and the number of securities
remaining available for future issuance under such equity compensation plans:
Plan Category
|
|
Number Of
Securities
to Be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
(Column a)
|
|
|
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(Column b)
|
|
|
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in Column a
(Column c)
|
|
Stock Option Equity Compensation Plans Approved by Security Holders
|
|
|
1,559,501
|
|
|
$
|
7.37
|
|
|
|
19,478
|
|
Stock Option Equity Compensation Plans Not Approved by Security Holders
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Restricted Stock Unit Equity Compensation Plans Approved by Security Holders
|
|
|
950,664
|
|
|
$
|
0.01
|
|
|
|
552,492
|
|
Restricted Stock Unit Equity Compensation Plans Not Approved by Security Holders
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
TOTAL
|
|
|
2,510,165
|
|
|
$
|
4.58
|
|
|
|
571,970
|
|
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Certain Relationships and Related Transactions
The Company and certain investors are party
to a Voting Agreement. As amended in October 2012 (but prior to the 2017 amendment), the Voting Agreement provided our Board of
Directors will be comprised of not more than seven (7) members one of whom shall be the CEO, three of whom would be independent
under Nasdaq standards, and that Essex had the right to designate one director as a member of our Board of Directors as long as
such shareholder held 600,000 shares of our common stock (including warrants to purchase shares), provided that once such shareholder
no longer held such securities, the additional forfeited seat would become a seat for an independent director to thereafter be
nominated and elected to the Board of Directors from time to time by the then current directors and, as applicable to be elected
by the directors to fill the vacancy created by the forfeited seat or submitted to the Company’s shareholders at the next
annual meeting. The Voting Agreement provided that if the majority of the Board of Directors were not independent under Nasdaq
Marketplace Rules then, the Board would be expanded so that additional independent directors would be added. At the time of the
October 2012 amendment, Mr. Thangaraj became the designee of Essex, as one of three remaining successors to GCE Holdings, LLC (an
entity controlled by others including Essex). In addition, Essex has the right to designate a member to any committee of our Board
of Directors, provided that in the case of the Audit and Compensation committees they are independent under applicable NASDAQ rules.
Mr. Schutte is chief executive officer
and owner of MainPointe Pharmaceuticals, LLC. (“MainPointe”), a Kentucky limited liability company. In March 2017,
prior to Mr. Schutte becoming a shareholder, we entered into a License, Commercialization and Option Agreement (the “MainPointe
Agreement”) with MainPointe to commercialize Nexafed® and Nexafed® Sinus Pressure + Pain in the United States and
Canada. Nexafed® and Nexafed® Sinus Pressure + Pain utilize our Impede Technology and were previously marketed by us in
the United States. Our Impede Technology is directed at minimizing the extraction and conversion of pseudoephedrine, or PSE, into
methamphetamine. Under the terms of the Agreement we transferred existing inventory and equipment relating to such products to
MainPointe and licensed our Impede Technology intellectual property rights to MainPointe for such products as well as certain future
PSE-containing products. MainPointe is responsible for all development, manufacturing and commercialization activities with respect
to products covered by the Agreement.
On signing, MainPointe paid us an upfront
licensing fee of $2.5 million plus approximately $425,000 for inventory and equipment being transferred. We will receive a 7.5%
royalty on sales of licensed products. The royalty payment for each product will expire on a country-by-country basis when the
Impede® patent rights for such country have expired or are no longer valid; provided that if no Impede patent right exists
in a country, then the royalty term for that country will be the same as the royalty term for the United States. After the expiration
of a royalty term for a country, MainPointe retains a royalty free license to our Impede® Technology for products covered by
the Agreement in such country.
MainPointe has the option to expand the
territory beyond the United States and Canada to the European Union (and the United Kingdom), Japan and South Korea for payments
of $1.0 million, $500,000 and $250,000, respectively. In addition, MainPointe has the option to add to the Agreement certain additional
products, or Option Products, containing PSE and utilizing the Impede Technology for a fee of $500,000 per product (for all such
product strengths). If the territory has been expanded prior to the exercise of a product option, the option fee will be increased
to $750,000 per product. If the territory is expanded after the payment of the $500,000 product option fee, a one-time $250,000
fee will be due for each product. If a third party is interested in developing or licensing rights to an Option Product, MainPointe
must exercise its option for that product or its option rights for such product will terminate.
On July 24, 2017 we completed the sale
to Mr. Schutte of 8,912,655 shares and warrants to purchase 1,782,531 shares exercisable at $0.528 per share and expiring in July
23, 2022 for $4 million and amended the Voting Agreement described above (as so amended the “Second Amended and Restated
Voting Agreement”) in connection with that purchase. The Second Amended and Restated Voting Agreement provides that our Board
of Directors will be comprised of not more than seven (7) members, one of whom shall be the CEO, three of whom would be independent
under Nasdaq standards, and that each of Mr. Schutte and Essex had the right to designate one director as a member of our Board
of Directors as long as such shareholder continues to hold 600,000 shares of our common stock (including warrants to purchase shares),
provided that once such shareholder no longer holds such securities, the additional forfeited seat would become a seat for an independent
director to thereafter be nominated to the Board of Directors from time to time by the then current directors and as applicable,
to be elected by the directors to fill the vacancy created by the forfeited seat or submitted to the vote of shareholders at the
Company’s next annual meeting. The Second Amended and Restated Voting Agreement provides that in the event the majority of
the Board of Directors were not independent under Nasdaq Marketplace Rules then, the Board would be expanded so that additional
independent directors would be added. In addition, each of Essex and Mr. Schutte has the right to designate a member to any committee
of our Board of Directors, provided that in the case of the Audit and Compensation committees they are independent under applicable
NASDAQ rules.
We borrowed an aggregate $6.0 million (including
accrued interest) as of June 28, 2019 from Mr. Schutte, a related-party, and issued various promissory notes (the Schutte Notes).
The Schutte Notes bear interest at prime plus 2.0%, and mature on January 2, 2020, at which time all principal and interest is
due, and was unsecured until all obligations to Oxford were satisfied at which time we were required to grant a security interest
to Mr. Schutte in all of our assets. On October 5, 2018 we borrowed $1.8 million from Mr. Schutte and used $1.5 million of the
loan to fully pay-off the debt outstanding under the Oxford Loan Agreement and therefore, all our assets are pledged as collateral
under the Schutte Notes, including our intellectual property.
At June 28, 2019, we entered into a Promissory
Note with Mr. Schutte that consolidated existing promissory notes into a single Note for $6.0 million (after including accrued
interest). To secure our performance of our obligations under the Note, we granted Mr. Schutte a security interest in all of our
assets. Terms of the consolidated Note provide for a July 1, 2023 maturity date instead of January 2, 2020 in the previous notes,
interest at fixed rate of 7.5% per annum with all payments of principle and interest deferred to maturity. The Note is convertible
into Acura common stock at $0.16 per share. As additional consideration, Mr. Schutte received a warrant to purchase 10 million
shares of the Company’s common stock at a price of $0.01 per shares.
With our consent, Mr. Schutte assigned
and transferred to Abuse Deterrent Pharma, LLC (“AD Pharma”) all of his right, title and interest in this Note, its
associated Security Agreement and the Warrant to purchase 10.0 million common shares of our stock, effective June 28, 2019. Mr.
Schutte is an investor in AD Pharma.
On June 28, 2019, we entered into License,
Development and Commercialization Agreement (the "Agreement") with Abuse Deterrent Pharma, LLC, a Kentucky limited liability
company (“AD Pharma”), a special purpose company representing a consortium of investors that will finance Acura’s
operations and completion of development of LTX-03. Mr. Schutte is an investor in AD Pharma.
The Agreement grants AD Pharma exclusive
commercialization rights in the United States to LTX-03. Financial arrangements include monthly license payments by AD Pharma of
$350,000 up to the earlier of 18 months or FDA’s acceptance of a New Drug Application (“NDA”) for LTX-03 and
reimbursement by AP Pharma of Acura’s LTX-03 outside development expenses. Upon commercialization of LTX-03, Acura receives
stepped royalties on sales and is eligible for certain sales related milestones.
AD Pharma may terminate the Agreement at
any time upon convenience. Additionally, if the NDA application for LTX-03 is not accepted by the FDA within 18 months, AD Pharma
may terminate the Agreement and take ownership of the Limitx intellectual property.
Our Board has not adopted formalized written
policies and procedures for the review or approval of related party transactions. As a matter of practice, however, our Board has
required that all related party transactions, be subject to review and approval by a committee of independent directors established
by the Board. The Board’s practice is to evaluate whether a related party (including a director, officer, employee, Essex
or other significant shareholder) will have a direct or indirect interest in a transaction in which we may be a party. Where the
Board determines that such proposed transaction involves a related party, the Board may establish a committee comprised solely
of independent directors to review and evaluate such proposed transaction. Currently, the Board is comprised of 4 independent directors
and the CEO and as such, the entire Board, with the exception of the CEO, may perform the function of an Independent Committee.
In this capacity, the 4 independent directors are authorized to review any and all information deemed necessary and appropriate
to evaluate the fairness of the transaction to us and our shareholders (other than the interested related party to such transaction),
including meeting with management, retaining third- party experts (including counsel and financial advisors if determined necessary)
and evaluating alternative transactions, if any. They are also empowered to negotiate the terms of such proposed related party
transaction on our behalf. The proposed related party transaction may proceed only following the approval and recommendation of
the 4 independent directors. Following such approval, the related party transaction is subject to final review and approval of
the Board as a whole. As the transactions described above with Abuse Deterrent Pharma LLC and Mr. Schutte involved a related party
(Mr. Schutte being a significant shareholder at the time such transactions were entered into), such transactions were reviewed
and approved solely by the Board as a whole.
Director Independence
In assessing the independence of our Board
members, our Board has reviewed and analyzed the standards for independence required under the NASDAQ Capital Market, including
NASDAQ Marketplace Rule 5605 and applicable SEC regulations. Based on this analysis, our Board has determined that during 2018,
each of Messrs. Bruce F. Wesson, Immanuel Thangaraj, William Skelly and George Ross met the standards for independence provided
in the listing requirements of the NASDAQ Capital Market and SEC regulations.
Our Board has determined that during 2018
with respect to our Compensation Committee that Messrs. Skelly, Wesson, and Thangaraj meet the standards for independence described
above and that Messrs. Skelly, Wesson and Thangaraj meet the additional independence standards of NASDAQ Rule 5605 relating to
Compensation Committees.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES
Our registered independent public accounting
firm is BDO USA, LLP. The fees billed by this firm in 2018 and 2017 were as follows:
|
|
2018
|
|
|
2017
|
|
Audit Fees
|
|
$
|
145,989
|
|
|
$
|
149,898
|
|
Audit-Related Fees
|
|
|
-
|
|
|
|
-
|
|
Total Audit and Audit-Related Fees
|
|
|
145,989
|
|
|
|
149,898
|
|
Tax Fees
|
|
|
39,200
|
|
|
|
41,090
|
|
All Other Fees
|
|
|
-
|
|
|
|
-
|
|
Total for BDO USA, LLP
|
|
$
|
185,189
|
|
|
$
|
190,988
|
|
Audit Fees include professional services
rendered in connection with the annual audit of our financial statements, and the review of the financial statements included in
our Form 10-Qs for the related periods. Additionally, Audit Fees include other services that only an independent registered public
accounting firm can reasonably provide, such as services associated with our SEC registration statements or other documents filed
with the SEC or used in connection with financing activities. We had no Audit-Related Fees which would include accounting consultations
related to accounting, financial reporting or disclosure matters not classified as Audit Fees. Tax Fees include tax compliance,
tax advice and tax planning services. These services related to the preparation of various state income tax returns, our federal
income tax return, and reviews of IRC Section 382.
Audit Committee’s Pre-Approval Policies
and Procedures
Consistent with policies of the SEC regarding
auditor independence and the Audit Committee Charter, the Audit Committee has the responsibility for appointing, setting compensation
and overseeing the work of the registered independent public accounting firm (the “Firm”). The Audit Committee’s
policy is to pre-approve all audit and permissible non-audit services provided by the Firm. Pre-approval is detailed as to the
particular service or category of services and is generally subject to a specific budget. The Audit Committee may also pre-approve
particular services on a case-by-case basis. In assessing requests for services by the Firm, the Audit Committee considers whether
such services are consistent with the Firm’s independence, whether the Firm is likely to provide the most effective and efficient
service based upon their familiarity with the Company, and whether the service could enhance the Company’s ability to manage
or control risk or improve audit quality.
All of the tax services provided by BDO USA, LLP in 2018 and 2017 and related fees (as described in the captions above) were approved in advance
by the Audit Committee.
Supplemental disclosures of noncash investing and financing
activities (amounts presented are rounded to the nearest thousand):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 and 2017
NOTE 1 – OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Principal Operations
Acura Pharmaceuticals, Inc., a New York
corporation, and its subsidiary (the “Company”, “Acura”, “We”, “Us” or “Our”)
is an innovative drug delivery company engaged in the research, development and commercialization of technologies and products
intended to address safe use of medications. We have discovered and developed three proprietary platform technologies which can
be used to develop multiple products. Our Limitx™ Technology is being developed to minimize the risk of opioid overdose,
our Aversion® Technology is intended to address methods of abuse associated with opioid analgesics while our Impede® Technology
is directed at minimizing the extraction and conversion of pseudoephedrine, or PSE, into methamphetamine.
|
·
|
Our Limitx Technology is in development with immediate-release tablets containing hydrocodone bitartrate
and acetaminophen as the lead product candidate due to its large market size and its known prevalence of oral excessive tablet
abuse. The technology is designed to retard the release of active drug ingredients when too many tablets are accidentally or purposefully
ingested by neutralizing stomach acid with buffer ingredients but deliver efficacious amounts of drug when taken as a single tablet
with a nominal buffer dose.
|
|
·
|
Our Aversion Technology has been licensed to Zyla Life Sciences or Zyla (formerly known as Egalet
Corporation) for use in Oxaydo® Tablets (oxycodone HCl, CII), and is the first approved immediate-release oxycodone product
in the United States with abuse deterrent labeling. Oxaydo is currently approved by the FDA for marketing in the United States
in 5mg and 7.5mg strengths (See Note 3).
|
|
·
|
Our Impede Technology is used in Nexafed® Tablets (30mg pseudoephedrine HCl) and Nexafed®
Sinus Pressure + Pain Tablets (30/325mg pseudoephedrine HCl and acetaminophen). We have licensed to MainPointe Pharmaceuticals,
LLC (MainPointe), our Impede Technology in the United States and Canada to commercialize these Nexafed products (See Note 3).
|
Basis of Presentation, Liquidity and Substantial Doubt
in Going Concern
The accompanying consolidated financial
statements of the Company have been prepared assuming the Company will continue as a going concern and in accordance with generally
accepted accounting principles in the United States of America. The going concern basis of
presentation assumes that we will continue in operation one year after the date these financial statements are issued and we will
be able to realize our assets and discharge our liabilities and commitments in the normal course of business. As of December
31, 2018, we had cash of $91 thousand, working capital deficit of $974 thousand and an accumulated deficit of $384.2 million. We
had a loss from operations of $3.92 million and a net loss of $3.84 million for the year ended December 31, 2018. We
have suffered recurring losses from operations and have not generated positive cash flows from operations. We anticipate operating
losses to continue for the foreseeable future.
From January 1, 2019 and through June 27,
2019, we borrowed an aggregate of $650 thousand from Mr. Schutte and issued various promissory notes to him with the same terms
and conditions from the previous loans. On June 28, 2019 the aggregate principal of the promissory notes was $5.0 million and the
accrued interest was $274 thousand. On June 28, 2019 we borrowed $726 thousand from Mr. Schutte, bringing the aggregate principal
of the loans and accrued interest to $6.0 million, and consolidated the loans into a single promissory note with a fixed interest
rate of 7.5%, maturity date of July 1, 2023, granted conversion rights into 37.5 million shares of our common stock at a price
of $0.16 per share, issued a warrant for 10.0 million common shares having an exercise price of $0.01 per share, and granted a
security interest in all of the Company’s assets. On June 28, 2019 we entered into License, Development and Commercialization
Agreement with Abuse Deterrent Pharma, LLC (AD Pharma) and the $6.0 million promissory note, the common stock purchase warrant
and the security agreement were all assigned and transferred by Mr. Schutte to AD Pharma. (See Subsequent Event - Note 15). AD
Pharma has the right to terminate the agreement for “convenience”. Should AD Pharma exercise their right to terminate
the agreement, we would need to raise additional financing or enter into license or collaboration agreements with third parties
relating to our technologies. No assurance can be given that we will be successful in obtaining any such financing or in securing
license or collaboration agreements with third parties on acceptable terms, if at all, or if secured, that such financing or license
or collaboration agreements will provide payments to the Company sufficient to fund continued operations. In the absence of such
financing or third-party license or collaboration agreements, the Company will be required to scale back or terminate operations
and/or seek protection under applicable bankruptcy laws. An extended delay or cessation of the Company’s continuing product
development efforts will have a material adverse effect on the Company’s financial condition and results of operations.
In view of the matters described above,
management has concluded that substantial doubt exists with respect to the Company’s ability to continue as a going concern
within one year after the date the financial statements are issued. The recoverability of a major portion of the recorded asset
amounts shown in the Company’s accompanying consolidated balance sheets is dependent upon continued operations of the Company,
which in turn is dependent upon the Company’s ability to meet its funding requirements on a continuous basis, to maintain
existing financing and to succeed in its future operations. The Company’s financial statements do not include any adjustment
relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary
should the Company be unable to continue in existence.
NOTE 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of Accounting
The consolidated financial statements include
the accounts of our wholly-owned subsidiary, Acura Pharmaceutical Technologies Inc., after elimination of intercompany accounts
and transactions. Amounts presented have been rounded to the nearest thousand, where indicated, except share and per share data.
Use of Estimates
Management is required to make certain
estimates and assumptions in order to prepare consolidated financial statements in conformity with GAAP. Such estimates and assumptions
affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities in
the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Management periodically
evaluates estimates used in the preparation of the consolidated financial statements for continued reasonableness. Appropriate
adjustments, if any, to the estimates used are made prospectively based on such periodic evaluations.
Concentration of Credit Risk
Financial instruments that potentially
subject the Company to a significant concentration of credit risk consist primarily of cash and cash equivalents and royalty receivable.
The Company maintains deposits in federally insured financial institutions which are in excess of federally insured limits. However,
management believes the Company is not exposed to significant credit risk due to the financial position of the depository institutions
in which those deposits are held.
Cash and Cash Equivalents
The Company considers cash and cash equivalents
to include cash in financial institutions and money market funds, and considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Our cash and cash equivalents are governed by our investment policy as
approved by our Board of Directors. The carrying amount of cash and cash equivalents approximates its fair value due to its short-term
nature.
Fair Value Measurements
The Company’s financial instruments
consist primarily of cash and cash equivalents, receivables from royalties, trade accounts payable, and our debt to related
party. The carrying amounts of these financial instruments are representative of their respective fair values due to their relatively
short maturities.
Share-based Compensation Expense
We have several share-based compensation
plans covering stock options and RSUs for our employees and directors, which are described more fully in Note 11.
We measure our compensation cost related
to share-based payment transactions based on fair value of the equity or liability instrument issued. For purposes of estimating
the fair value of each stock option unit on the date of grant, we utilize the Black-Scholes option-pricing model. Option valuation
models require the input of highly subjective assumptions including the expected volatility factor of the market price of our common
stock (as determined by reviewing our historical public market closing prices). Our accounting for share-based compensation for
RSUs is based on the market price of our common stock on the date of grant, less its exercise cost.
Our share-based compensation expense recognized in the Company’s
results of operations from non-cash and cash-portioned instruments issued to our employees and directors comprised the following
(in thousands):
|
|
Year Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Research and development expense:
|
|
|
|
|
|
|
|
|
Stock option awards
|
|
$
|
38
|
|
|
$
|
136
|
|
RSU awards
|
|
|
27
|
|
|
|
3
|
|
|
|
$
|
65
|
|
|
$
|
139
|
|
|
|
|
|
|
|
|
|
|
Selling, marketing, general and administrative expense:
|
|
|
|
|
|
|
|
|
Stock option awards
|
|
|
61
|
|
|
|
203
|
|
RSU awards
|
|
|
104
|
|
|
|
156
|
|
|
|
$
|
165
|
|
|
$
|
359
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense
|
|
$
|
230
|
|
|
$
|
498
|
|
Property, Plant and Equipment
Property, plant and equipment are stated
at cost, less accumulated depreciation. We have no leasehold improvements. Betterments are capitalized and maintenance and repairs
are charged to operations as incurred. When a depreciable asset is retired from service, the cost and accumulated depreciation
is removed from the respective accounts.
Depreciation expense is recorded on a straight-line
basis over the estimated useful lives of the related assets. The estimated useful lives of the major classification of depreciable
assets are:
Building and improvements
|
10 - 40 years
|
Land and improvements
|
20 - 40 years
|
Machinery and equipment
|
7 - 10 years
|
Scientific equipment
|
5 - 10 years
|
Computer hardware and software
|
3 - 10 years
|
Intangible and Long-Lived Assets
Long-lived assets such as the intangible
asset and property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. Recoverability of the assets to be held and used is measured by a comparison
of the carrying amount of the asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying
value of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. We had no impairment charges during the years 2018 or 2017.
License Fee Revenue
On signing the MainPointe Agreement in
March 2017, MainPointe paid us an upfront licensing fee of $2.5 million. The payment was non-refundable and non-creditable when
made and we had no further requirements to earn the payment. The amount was recognized as revenue when received (See Note 3).
Collaboration Revenue
Collaboration revenue is derived from reimbursement
of development expenses, such as under our agreement with Bayer, and are recognized when costs are incurred pursuant to the agreements.
The ongoing research and development services being provided under the collaboration are priced at fair value based upon
the reimbursement of expenses incurred pursuant to the collaboration agreements. We recognized $59 thousand of collaboration revenue
during the year 2017.
Royalty Revenue
We recognize revenue
from royalties based on our licensees' sales of our products or products using our technologies. Royalties are sales-based royalties
which are recognized as the related sales occur. These royalties were promised in exchange for a license of intellectual property.
In connection with our
Collaboration and License Agreement with Zyla to commercialize Oxaydo tablets we will receive a stepped royalty at percentage rates
ranging from mid-single digits to double-digits based on Oxaydo net sales during each calendar year over the term of the agreement
(excluding net sales resulting from any co-promotion efforts by us). We recognize royalty revenue each calendar quarter based on
net sales reported to us by Zyla in accordance with the agreement. Zyla’s first commercial sale of Oxaydo occurred in October
2015 and we have recorded royalties of $386 thousand and $281 thousand on net sales for the years 2018 and 2017, respectively (See
Note 3).
In connection with the
MainPointe Agreement, which occurred on March 16, 2017, we are receiving a royalty of 7.5% on net sales of the licensed products
over the term of the agreement. Such royalty shall be payable for sales made during each calendar quarter and payment will be remitted
within forty-five (45) days after the end of the quarter to which it relates. We have recorded royalties of $24 thousand and $19
thousand for the years 2018 and 2017 (See Note 3).
Net Product Sales
Nexafed was launched in mid-December 2012
and Nexafed Sinus Pressure + Pain was launched in February 2015. Prior to entering into the MainPointe Agreement in March 2017,
we sold our Nexafed products in the United States to wholesale pharmaceutical distributors as well as directly to chain drug stores.
Our Nexafed products were sold subject to the right of return usually for a period of up to twelve months after the product expiration.
Both products had an initial shelf life of twenty-four months from the date of manufacture, which shelf life had been extended
to thirty-six months for Nexafed product supplied to us during 2016 from one of the Company’s contract manufacturers.
Advertising and Shipping/Handling
Costs
The Company records the cost of its advertising
efforts in marketing expenses when services are performed or goods are delivered. We record shipping and handling costs in selling
expenses. As of mid-March 2017 we no longer manufacture, distribute or sell the Nexafed product line as the Company granted MainPointe
an exclusive license to our Impede technology to commercialize our Nexafed products in the U.S. and Canada. The amounts recorded
as selling expenses from the shipments of the Nexafed product line as well as amounts recorded as marketing expenses from our advertising
activities during 2017 were not material.
Deferred Debt Issuance Costs and Debt Discount
Deferred debt issuance costs include costs
of debt financing undertaken by the Company, including legal fees, placement fees and other direct costs of the financing. Debt
discount can be incurred from value attributable to warrants issued in conjunction with the financing and/or attributable to the
below market rate element of the loan if we believe the loan’s rate of interest is below current market rates for us, as
in the case of the Schutte Loans. Debt issuance costs and debt discount are amortized into interest expense over the term of the
related debt using the effective interest method. Deferred debt issuance costs and debt discount are presented on the consolidated
balance sheets as a direct reduction against the debt.
Research and Development Activities
Research and Development (“R&D”)
costs include internal R&D activities, external Contract Research Organization (“CRO”) services and their clinical
research and investigative sites, and other activities. Internal R&D activity costs can include facility overhead, equipment
and facility maintenance and repairs, laboratory supplies, pre-clinical laboratory experiments, formulation work, depreciation,
salaries, benefits, insurance and share-based compensation expenses. CRO activity costs can include preclinical laboratory experiments
and clinical trial studies. Other activity costs can include regulatory consulting, regulatory legal counsel, cost of acquiring,
developing and manufacturing pre-clinical trial materials, costs of manufacturing scale-up, and cost sharing expenses under license
agreements. Internal R&D costs and other activity costs are charged to expense as incurred. We make payments to the CRO's based
on agreed upon terms and may include payments in advance of a study starting date. Payments in advance will be reflected in the
consolidated financial statements as prepaid expenses. We review and charge to expense accrued CRO costs and clinical trial study
costs based on services performed and rely on estimates of those costs applicable to the stage of completion of a study as provided
by the CRO. Our accrued CRO costs are subject to revisions as such studies progress towards completion. Revisions are charged to
expense in the period in which the facts that give rise to the revision become known.
We did not have prepaid CRO costs or prepaid
clinical trial study expenses at December 31, 2018 and 2017. We did not have obligations under non-cancelable arrangements at December
31, 2018 and 2017.
Income Taxes
We account for income taxes under the liability
method. Under this method, deferred income tax assets and liabilities are determined based on differences between the financial
reporting and the income tax basis of assets and liabilities and are measured using the enacted income tax rates and laws that
will be in effect when the differences are expected to reverse. Additionally, net operating loss and tax credit carryforwards are
reported as deferred income tax assets. The realization of deferred income tax assets is dependent upon future earnings. A valuation
allowance is required against deferred income tax assets if, based on the weight of available evidence, it is more likely than
not that some or all of the deferred income tax assets may not be realized. At December 31, 2018 and 2017, 100% of all remaining
net deferred income tax assets were offset by a valuation allowance due to uncertainties with respect to future utilization of
net operating loss carryforwards. If in the future it is determined that additional amounts of our deferred income tax assets would
likely be realized, the valuation allowance would be reduced in the period in which such determination is made and an additional
benefit from income taxes in such period would be recognized.
Basic and Diluted Net Loss per Share
Basic net loss per share is computed by
dividing net income or loss by the weighted average common shares outstanding during a period, including shares weighted related
to vested Restricted Stock Units (“RSUs”) (See Note 12). Diluted net loss per share is based on the treasury stock
method and computed based on the same number of shares used in the basic share calculation and includes the effect from potential
issuance of common stock, such as shares issuable pursuant to the exercise of stock options and common stock purchase warrants,
assuming the exercise of all in-the-money stock options and common stock purchase warrants. Common stock equivalents are excluded
from the computation where their inclusion would be anti-dilutive. As the Company reported a net loss in 2018 and 2017 the effects
of common stock equivalents were excluded as the diluted net loss per share calculation would have been antidilutive.
Customer Concentration
In March 2017, we licensed our Nexafed
product line to MainPointe. Until that time our accounts receivable arose from our sales of our Nexafed product line and represented
amounts due from wholesalers in the health care and pharmaceuticals industries and from chain drug stores.
Under our license agreement with Zyla,
we earn royalties from the Zyla’s sale of the licensed product Oxaydo. Zyla filed for voluntary bankruptcy reorganization
during the fourth quarter 2018 and emerged with a court approved plan in January 2019. We have not established a reserve for uncollectable
accounts as we believed these amounts were fully collectable. In February 2019, we received payments from Zyla for these amounts.
Recent Accounting Pronouncements
Revenue from Contracts with Customers
The Company adopted Accounting Standards
Codification Topic 606, Revenue from Contracts with Customers, or Topic 606, on January 1, 2018, resulting in a change
to its accounting policy for revenue recognition. The Company used the modified retrospective method and the cumulative effect
of initially applying Topic 606 would have been recognized as an adjustment to the opening accumulated deficit at January 1,
2018. Accordingly, comparative information has not been adjusted and continues to be reported under the previous accounting standards.
The implementation of Topic 606 had no financial impact to opening accumulated deficit at January 1, 2018 (See Note 4).
Scope of Modification Accounting, Stock
Based Compensation
In May 2017, the FASB issued ASU No. 2017-09,
Compensation – Stock Compensation, which provides guidance as to how an entity should apply modified accounting in
Topic 718 when changing the terms and conditions of its share-based payment awards. The guidance clarifies that modification accounting
will be applied if the value, vesting conditions or classification of the award changes. The ASU is effective for annual reporting
periods, including interim periods within those annual periods, beginning after December 15, 2017 but early adoption is permitted.
The Company adopted this new standard on January 1, 2018 which did not have a material impact on the Company’s financial
statements.
Statement of Cash Flows - Classification
of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows, which clarifies existing guidance on how companies present and classify certain cash receipts and
cash payments in the statement of cash flows by addressing specific cash flow issues in an effort to reduce diversity in practice,
including guidance on debt prepayment or extinguishment costs and contingent consideration payments made after a business
combination. This update is effective for annual reporting periods beginning after December 15, 2017, with early adoption
permitted. The Company adopted this new standard on January 1, 2018 which did not have a material impact on the Company’s
financial statements.
Intra-Entity Transfers of Assets Other
than Inventory
In October 2016, the FASB issued ASU 2016-16, Intra-Entity
Transfers of Assets Other Than Inventory. ASU 2016-16 eliminates from Topic 740, Income Taxes, the recognition exception for
intra-entity asset transfers other than inventory so that an entity’s financial statements reflect the current and deferred
tax consequences of those intra-entity asset transfers when they occur. The new standard is effective for annual and interim periods,
within those fiscal years, beginning after December 15, 2017 but early adoption is permitted. The Company adopted this new standard
on January 1, 2018 which did not have a material impact on the Company’s financial statements.
Statements of Cash Flows - Restricted
Cash
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows – Restricted Cash, which requires that at statement of cash flows explain the change during
the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.
The new standard is effective for annual and interim periods, within those fiscal years beginning after December 15, 2017 but early
adoption is permitted. The Company early adopted the guidance in the first quarter of 2017 which did not have a material impact
on the Company’s consolidated financial statements or related footnote disclosures.
Business Combinations – Clarifying
the Definition of a Business
In January 2017, the FASB issued ASU No.
2017-01, Business Combinations – Clarifying the Definition of a Business, which clarifies the definition of a business
with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions
(or disposals) of assets or businesses. The amendments in this update provide a screen to determine when an integrated set of assets
and activities (collectively referred to as a “set”), is not a business. The screen requires that when substantially
all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of
similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further
evaluated. ASU 2017-01 is effective for annual periods beginning after December 15, 2017, but early application of the amendments
in this update is allowed. The amendments in this update should be applied prospectively on or after the effective date. The Company
early adopted this new standard on January 1, 2017 which did not have a material impact on the Company’s consolidated financial
statements.
Simplification of Employee
Share-Based Payment Accounting
In March 2016, the FASB issued ASU 2016-09,
Compensation – Stock Compensation, which provides for simplification of certain aspects of employee share-based payment
accounting including income taxes, classification of awards as either equity or liabilities, accounting for forfeitures and classification
on the statement of cash flows. ASU 2016-09 is to be applied either prospectively, retrospectively or using a modified retrospective
transition approach depending on the area covered in this update. The new standard was effective for annual and interim periods,
within those fiscal years, beginning after December 15, 2016. The Company adopted the guidance in the first quarter of 2017 which
did not have a material impact on the Company’s consolidated financial statements.
Simplifying the Measurement of Inventory
In July 2015, the FASB issued ASU No. 2015-11,
Inventory, which simplifies the measurement of inventory, applying to inventories for which cost is determined by methods
other than last-in first-out (LIFO) and the retail inventory method (RIM), specifying that an entity should measure inventory at
the lower of cost and net realizable value instead of at the lower of cost or market. The amendments in this ASU were effective
for annual and interim periods, within those fiscal years, beginning after December 15, 2016. The Company adopted the guidance
of the standard in the first quarter of 2017 which did not have a material impact on the Company’s consolidated financial
statements.
New accounting standards which have
not yet been adopted on or before December 31, 2018
Fair Value Measurements
In
August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to
the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 eliminates
certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain new
information and modifies some disclosure requirements. This standard is effective for fiscal
years beginning after December 15, 2019, including interim reporting periods
within those years, with early adoption permitted. The Company is currently evaluating the impact that the standard
will have on the financial statements and related footnote disclosures.
Leases
In February 2016, the FASB issued ASU 2016-02,
Leases, which establishes a comprehensive new lease accounting model. The new standard will require most leases (with the
exception of leases with terms of one year or less) to be recognized on the balance sheet as a lease liability with a corresponding
right-of-use asset. Leases will be classified as an operating lease or a financing lease. Operating leases are expensed using the
straight-line method whereas financing leases will be treated similarly to a capital lease under the current standard. The new
standard will be effective for annual and interim periods, within those fiscal years, beginning after December 15, 2018 but early
adoption is permitted. The new standard must be presented using the modified retrospective transition method existing at or entered
into after the beginning of the earliest comparative period presented in the financial statements, but it does not require transition
accounting for leases that expire prior to the date of initial application. Upon adoption, operating leases will be reported on
the balance sheet as a gross-up of assets and liabilities. The Company is currently evaluating the impact of the standard to the
financial statements and footnote disclosure but does not expect a material impact as the Company does not have any material leases
other than those entered into on a month-to-month basis.
NOTE 3 – LICENSE AND COMMERCIALIZATION
AGREEMENTS
Zyla Agreement covering Oxaydo
In April 2014, we terminated an agreement
with Pfizer which resulted in the return to us of Aversion Oxycodone (formerly known as Oxecta®) and all Aversion product rights
in exchange for a one-time termination payment of $2.0 million. Our termination payment of $2.0 million has been recorded in our
financial statements as an intangible asset and is being amortized over the remaining useful life of the patent covering Aversion
Oxycodone, which was 9.7 years as of the date the Pfizer agreement was terminated. The recoverability of the Aversion intangible
asset is contingent upon future Zyla royalty revenues to us. We have recorded amortization expense of $207 thousand in each of
the years ended December 31, 2018 and 2017. Annual amortization of the patent for its remaining life is expected to approximate
$207 thousand per year.
In January 2015, we and Egalet US, Inc.
and Egalet Ltd., each a subsidiary of Egalet Corporation (now known as Zyla Life Sciences), or collectively Zyla, entered into
a Collaboration and License Agreement (the “Zyla Agreement”) to commercialize Aversion Oxycodone under our tradename
Oxaydo. Oxaydo is approved by the FDA for marketing in the United States in 5 mg and 7.5 mg strengths. Under the terms of the Zyla
Agreement, we transferred the approved New Drug Application, or NDA, for Oxaydo to Zyla and Zyla is granted an exclusive license
under our intellectual property rights for development and commercialization of Oxaydo worldwide (the “Territory”)
in all strengths, subject to our right to co-promote Oxaydo in the United States. Eaglet launched Oxaydo in the United States late
in the third quarter of 2015.
In accordance with the Zyla Agreement Zyla
is responsible for the fees and expenses relating to the product line extensions of Oxaydo, provided that Zyla will pay a substantial
majority of the fees and expenses and we will pay for the remaining fees and expense relating to (i) annual NDA PDUFA product fees,
(ii) expenses of the FDA required post-marketing study for Oxaydo and (iii) expenses of clinical studies for product line extensions
(additional strengths) of Oxaydo for the United States. Zyla will bear all of the expenses of development and regulatory approval
of Oxaydo for sale outside the United States. Zyla is responsible for all manufacturing and commercialization activities in the
Territory for Oxaydo. Subject to certain exceptions, Zyla will have final decision making authority with respect to all development
and commercialization activities for Oxaydo, including pricing, subject to our co-promotion right. Zyla may develop Oxaydo for
other countries and in additional strengths, in its discretion.
Zyla paid us a $5.0 million license fee
upon signing of the Zyla Agreement and on October 9, 2015, paid us a $2.5 million milestone in connection with the first commercial
sale of Oxaydo. We will be entitled to a one-time $12.5 million sales-based milestone payment when worldwide Oxaydo net sales reach
$150 million in a calendar year. We are entitled to receive from Zyla a stepped royalty at percentage rates ranging from mid-single
digits to double-digits based on Oxaydo net sales during each calendar year (excluding net sales resulting from our co-promotion
efforts). In any calendar year of the agreement in which net sales exceed a specified threshold, we will receive a double digit
royalty on all Oxaydo net sales in that year (excluding net sales resulting from our co-promotion efforts). If we exercise our
co-promotion rights, we will receive a share of the gross margin attributable to incremental Oxaydo net sales from our co-promotion
activities. Zyla’s royalty payment obligations commenced on the first commercial sale of Oxaydo and expire, on a country-by-country
basis, upon the expiration of the last to expire valid patent claim covering Oxaydo in such country (or if there are no patent
claims in such country, then upon the expiration of the last valid claim in the United States or the date when no valid and enforceable
listable patent in the FDA’s Orange Book remains with respect to Oxaydo). Royalties will be reduced upon the entry of generic
equivalents, as well as for payments required to be made by Zyla to acquire intellectual property rights to commercialize Oxaydo,
with an aggregate minimum floor.
The Zyla Agreement expires
upon the expiration of Zyla’s royalty payment obligations in all countries. Either party may terminate the Zyla Agreement
in its entirety if the other party breaches a payment obligation, or otherwise materially breaches the Zyla Agreement, subject
to applicable cure periods, or in the event the other party makes an assignment for the benefit of creditors, files a petition
in bankruptcy or otherwise seeks relief under applicable bankruptcy laws. We also may terminate the Zyla Agreement with respect
to the U.S. and other countries if Zyla materially breaches its commercialization obligations. Zyla may terminate the Zyla Agreement
for convenience on 120 days prior written notice, which termination may not occur prior to the second anniversary of Zyla’s
launch of Oxaydo. Termination does not affect a party’s rights accrued prior thereto, but there are no stated payments in
connection with termination other than payments of obligations previously accrued. For all terminations (but not expiration), the
Zyla Agreement provides for the transition of development and marketing of Oxaydo from Zyla to us, including the conveyance by
Zyla to us of the trademarks and all regulatory filings and approvals relating to Oxaydo, and for Zyla’s supply of Oxaydo
for a transition period.
MainPointe Agreement covering Nexafed Products
In March 2017, we and MainPointe entered
into the MainPointe Agreement, pursuant to which we granted MainPointe an exclusive license to our Impede Technology to commercialize
both of our Nexafed and Nexafed Sinus Pressure + Pain product (“Nexafed products”) in the U.S. and Canada. We also
conveyed to MainPointe our existing inventory and equipment relating to our Nexafed products. MainPointe is responsible for all
development, manufacturing and commercialization activities with respect to products covered by the Agreement.
On signing the MainPointe Agreement, MainPointe
paid us an upfront licensing fee of $2.5 million. The MainPointe Agreement also provides for our receipt of a 7.5% royalty on net
sales of the licensed products. The royalty payment for each product will expire on a country-by-country basis when the Impede®
patent rights for such country have expired or are no longer valid; provided that if no Impede patent right exists in a country,
then the royalty term for that country will be the same as the royalty term for the United States. After the expiration of a royalty
term for a country, MainPointe retains a royalty free license to our Impede® Technology for products covered by the Agreement
in such country.
MainPointe has the option to expand the
licensed territory beyond the United States and Canada to the European Union (and the United Kingdom), Japan and South Korea for
payments of $1.0 million, $500 thousand and $250 thousand, respectively. In addition, MainPointe has the option to add to the MainPointe
Agreement certain additional products, or Option Products, containing PSE and utilizing the Impede Technology for a fee of $500
thousand per product (for all product strengths). Such Option Products include the product candidate Loratadine with pseudoephedrine.
If the territory has been expanded prior to the exercise of a product option, the option fee will be increased to $750 thousand
per product. If the territory is expanded after the payment of the $500 thousand product option fee, a one-time $250 thousand fee
will be due for each product. If a third party is interested in developing or licensing rights to an Option Product, MainPointe
must exercise its option for that product or its option rights for such product will terminate.
The MainPointe Agreement may be terminated
by either party for a material breach of the other party, or by Acura if MainPointe challenges certain of its patents. Upon early
termination of the MainPointe Agreement, MainPointe’s licenses to the Impede Technology and all products will terminate.
Upon termination, at Acura’s request the parties will use commercially reasonable efforts to transition the Nexafed®
and Nexafed® Sinus Pressure + Pain products back to Acura.
KemPharm Agreement Covering Certain Opioid Prodrugs
In October 2016, we and KemPharm Inc. (”KemPharm”)
entered into a worldwide License Agreement (the “KemPharm Agreement”) pursuant to which we licensed our Aversion®
Technology to KemPharm for its use in the development and commercialization of three products using 2 of KemPharm’s prodrug
candidates. KemPharm has also been granted an option to extend the KemPharm Agreement to cover two additional prodrug candidates.
KemPharm is responsible for all development, manufacturing and commercialization activities.
Upon execution of the KemPharm Agreement,
KemPharm paid us an upfront payment of $3.5 million. If KemPharm exercises its option to use our Aversion Technology with more
than the two licensed prodrugs, then KemPharm will pay us up to $1.0 million for each additional prodrug license. In addition,
we will receive from KemPharm a low single digit royalty on commercial sales by KemPharm of products developed using our Aversion
Technology under the KemPharm Agreement. KemPharm’s royalty payment obligations commence on the first commercial sale of
a product using our Aversion Technology and expire, on a country-by-country basis, upon the expiration of the last to expire patent
claim of the Aversion Technology covering a product in such country, at which time the license for the particular product and country
becomes fully paid and royalty free.
The KemPharm Agreement expires upon the
expiration of KemPharm’s royalty payment obligations in all countries. Either party may terminate the KemPharm Agreement
in its entirety if the other party materially breaches the KemPharm Agreement, subject to applicable cure periods. Acura or KemPharm
may terminate the KemPharm Agreement with respect to the U.S. and other countries if the other party challenges the patents covering
the licensed products. KemPharm may terminate the KemPharm Agreement for convenience on ninety (90) days prior written notice.
Termination does not affect a party’s rights accrued prior thereto, but there are no stated payments in connection with termination
other than payments of obligations previously accrued. For all terminations (but not expiration), the KemPharm Agreement provides
for termination of our license grant to KemPharm.
Terminated Bayer Agreement Covering Methamphetamine Resistant
Pseudoephedrine-containing Product
In June 2015, we and Bayer entered into
a License and Development Agreement (the “Bayer Agreement”) granting Bayer an exclusive worldwide license to our Impede
Technology for use in an undisclosed methamphetamine resistant pseudoephedrine–containing product (the “Bayer Licensed
Product”) and providing for the joint development of such product utilizing our Impede Technology for the U.S. market. In
June 2017, we received Bayer’s notice of termination of the Bayer Agreement pursuant to its convenience termination right
exercised prior to the Company’s completion of its product development obligations under the Bayer Agreement. We have received
reimbursement of certain of our development costs under the Bayer Agreement. Following Bayer’s termination of the Bayer Agreement
the Bayer Licensed Product is now subject to MainPointe’s option rights under the MainPointe Agreement.
NOTE 4 – REVENUE FROM CONTRACTS
WITH CUSTOMERS
Adoption of ASC Topic 606, Revenue
from Contracts with Customers
The Company adopted ASC Topic 606 on January
1, 2018 applying the modified retrospective method to all contracts that were not completed as of January 1, 2018. While the
timing of future revenues under ASC Topic 606 may differ from the Company’s historical accounting practices under ASC Topic
605, the cumulative effect recorded through the Consolidated Statement of Stockholder’s Deficit was zero because there was
no change in timing or measurement of revenues for open contracts at January 1, 2018.
Under ASC 606, revenue is recognized when,
or as, performance obligations under terms of a contract are satisfied, which occurs when control of the promised service is transferred
to a customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring services
to a customer (“transaction price”). The Company will then recognize as revenue the amount of the transaction price
that is allocated to the respective performance obligation when, or as, the performance obligation is satisfied. When determining
the transaction price of the contract, an adjustment is made if payment from a customer occurs either significantly before or significantly
after performance, resulting in a significant financing component. None of the Company’s licenses and collaboration agreements
contained a significant financing component at December 31, 2018.
The Company’s existing license and
collaboration agreements may contain a single performance obligation or may contain multiple performance obligations. Those which
contain multiple performance obligations will require an allocation of the transaction price based on the estimated relative standalone
selling prices of the promised services underlying each performance obligation.
The Company’s existing license and
collaboration agreements contain customer options for the license of additional products and territories. We determined the option’s
standalone selling prices based on the option product’s potential market size in the option territory as compared to the
currently licensed product and U.S. territory. Some of our existing license and collaboration agreements contain a license to the
technology as well as licenses to tradenames or trademarks. The Company determined that the licenses to the tradenames or trademarks
were immaterial in context of the contract.
Net Product Sales
Prior to the licensing the Nexafed products
to MainPointe in March 2017, we sold our Nexafed products in the United States to wholesale pharmaceutical distributors as well
as directly to chain drug stores. Our Nexafed products were sold subject to the right of return usually for a period of up to twelve
months after the product expiration. Both products had an initial shelf life of twenty-four months from the date of manufacture,
which shelf life had been extended to thirty-six months for Nexafed product supplied to us during 2016 from one of the Company’s
contract manufacturers. We recognized revenue from our Nexafed products sales when the price was fixed and determinable at the
date of sale, title and risk of ownership were transferred to the customer, and returns could be reasonably estimated, which generally
occurred at the time of product shipment. ASC 606 did not change the practice under which the Company previously recognized the
product revenue from sales of the Nexafed products, which was at the time the product was shipped to a customer. As a result of
the Company’s license agreement with MainPointe completed in March 2017, the Company no longer sold the Nexafed products.
There was no impact from the recognition of revenue for Nexafed product sales under the adoption of ASC 606.
Sales-based Milestones and Royalty Revenues
The commercial sales-based milestones and
sales royalties earned under the license and collaboration for Oxaydo and sales royalties earned under the license for the Nexafed
products, are recorded in the period of the related sales by Zyla and MainPointe. Payments of sales-based milestones are generally
due within 30 days after the end of a calendar year. Payments of royalties are generally due within 45 days after the end of a
calendar quarter.
License and Collaboration Agreement Revenues
The achievement of milestones under the
Company’s license and collaboration agreements will be recorded during the period the milestone’s achievement becomes
probable, which may result in earlier recognition as compared to the previous accounting standards. The license fee of an option
product or option territory under the Company’s license and collaboration agreements will be recorded when the option is
exercised and any obligations on behalf of the Company, such as to transfer know-how, has been fulfilled, which may result in later
recognition as compared to the previous accounting standards.
Disaggregation of Total Revenues
The Company has two license agreements
for currently marketed products containing its technologies; the Oxaydo product containing the Aversion Technology has been licensed
to Zyla and the Nexafed products containing the Impede Technology have been licensed to MainPointe. All of the Company’s
royalty revenues are earned from these two license agreements by the licensee’s sale of products in the United State. Royalty
revenues by licensee are summarized below:
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
Zyla
|
|
$
|
386
|
|
|
$
|
281
|
|
MainPointe
|
|
|
24
|
|
|
|
19
|
|
Royalty revenues
|
|
$
|
410
|
|
|
$
|
300
|
|
Contract Balance and Performance Obligations
The Company’s reported contract assets
and contract liability balances under the license and collaboration agreements at either December 31, 2018 or 2017 were $0. Contract
assets may be reported in future periods under prepaid expenses or other current assets on the consolidated balance sheet. Contract
liabilities may be reported in future periods consisting of deferred revenue as presented on the consolidated balance sheet.
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows (in thousands):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Building and improvements
|
|
$
|
1,273
|
|
|
$
|
1,273
|
|
Scientific equipment
|
|
|
598
|
|
|
|
598
|
|
Computer hardware and software
|
|
|
107
|
|
|
|
107
|
|
Machinery and equipment
|
|
|
275
|
|
|
|
275
|
|
Land and improvements
|
|
|
162
|
|
|
|
162
|
|
Other personal property
|
|
|
70
|
|
|
|
70
|
|
Office equipment
|
|
|
27
|
|
|
|
27
|
|
|
|
|
2,512
|
|
|
|
2,512
|
|
Less: accumulated depreciation
|
|
|
(1,906
|
)
|
|
|
(1,833
|
)
|
Total property, plant and equipment, net
|
|
$
|
606
|
|
|
$
|
679
|
|
We do not have leasehold improvements nor
do we have capitalized leases. Costs of betterments are capitalized while maintenance costs and repair costs are charged to operations
as incurred. When a depreciable asset is retired from service, the cost and accumulated depreciation will be removed from the respective
accounts.
Depreciation expense was $73 thousand and
$87 thousand for each of the years ended December 31, 2018 and 2017, respectively.
NOTE 6 – ACCRUED EXPENSES
Accrued expenses are summarized as follows (in thousands):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Cost sharing expenses under license agreements
|
|
$
|
237
|
|
|
$
|
328
|
|
Other fees and services
|
|
|
36
|
|
|
|
36
|
|
Payroll, payroll taxes and benefits
|
|
|
6
|
|
|
|
70
|
|
Professional services
|
|
|
132
|
|
|
|
149
|
|
Financed premiums on insurance policies
|
|
|
102
|
|
|
|
-
|
|
Clinical, non-clinical and regulatory services
|
|
|
63
|
|
|
|
326
|
|
Property taxes
|
|
|
7
|
|
|
|
16
|
|
Franchise taxes
|
|
|
13
|
|
|
|
14
|
|
Total
|
|
$
|
596
|
|
|
$
|
939
|
|
NOTE 7 – DEBT
Fully Paid Loan due December 1, 2018
In December 2013, we entered into a Loan
and Security Agreement (the “Oxford Loan Agreement”) with Oxford Finance LLC (“Oxford” or the “Lender”),
for a term loan to the Company in the principal amount of $10.0 million (the “Term Loan”). On October 5, 2018 we borrowed
$1.8 million from Mr. Schutte and used $1.5 million from the loan proceeds to fully pay-off the debt outstanding under the Oxford
Loan Agreement. All security interests of Oxford with respect to the Oxford Term Loan have been released.
The Oxford Term Loan accrued interest at
a fixed rate of 8.35% per annum (with a default rate of 13.35% per annum). The Company was required to make monthly interest−only
payments until April 1, 2015 (“Amortization Date”) and beginning on the Amortization Date, the Company began to make
payments of principal and accrued interest in equal monthly installments of $260 thousand, sufficient to amortize the Term Loan
through the maturity date of December 1, 2018. All unpaid principal and accrued and unpaid interest with respect to the Term Loan
was due and payable in full on December 1, 2018. As security for its obligations under the initial Oxford Loan Agreement (prior
to the Third Amendment), the Company granted the Lender a security interest in substantially all of its existing and after−acquired
assets, exclusive of its intellectual property assets. Upon the execution of the Oxford Loan Agreement, we issued to the Lender
warrants to purchase an aggregate of up to 60 thousand shares of our common stock at an exercise price equal to $7.98 per share
(after adjustment for our one-for-five reverse stock split) (the “Warrants”). We recorded $400 thousand as debt discount
associated with the relative fair value of the Warrants and amortized it to interest expense over the term of the loan using the
loan’s effective interest rate. The Warrants were immediately exercisable for cash or by net exercise and will expire December
27, 2020.
In January 2015, we and Oxford amended
the Oxford Loan Agreement providing for the exercise price of the Warrants to be lowered from $7.98 to $2.52 per share (the average
closing price of our common stock on Nasdaq for the 10 trading days preceding the date of the amendment and after giving effect
to our one-for-five reverse stock split) and we recorded additional debt discount of $33 thousand representing the fair value of
the Warrant modification.
The Company was obligated to pay customary
lender fees and expenses, including a one-time facility fee of $50 thousand and the Lender’s expenses, in connection with
the Oxford Loan Agreement. Combined with the Company’s own expenses and a $100 thousand consulting placement fee, the Company
incurred a total $231 thousand in deferred debt issue costs. We amortized these costs, including debt modification additional costs,
into interest expense over the term of the Term Loan using the loan’s effective interest rate of 10.16%.
In October 2018, we negotiated and settled
the Oxford Loan for $1.5 million and recognized a net gain of $296 thousand on principal and interest which has been reflected
in our statement of operations as non-operating income.
Related Party Loans due January 2,
2020
We have borrowed an aggregate of $4.350
million as of December 31, 2018 (and additional amounts aggregating $650 thousand during the period January 1, 2019 through June
27, 2019) from Mr. Schutte, a related-party, and issued various promissory notes (the Schutte Notes) to him. The Schutte Notes
bear interest at prime plus 2.0%, and mature on January 2, 2020, at which time all principal and interest is due. The Schutte Notes
were unsecured until all obligations to Oxford were satisfied at which time we were required to grant a security interest to Mr.
Schutte in all of our assets, including our intellectual property. Because we believe the Schutte Notes’ rate of interest
is below current market rates for us, we impute interest on the below market rate element of the loans using the 10.16% interest
rate under the Oxford Loan Agreement and this has aggregated to $172 thousand as of December 31, 2018. We recorded these benefits
to interest income, with a corresponding like amount as debt discount against the principal amount of the loan. The debt discount
will be amortized to interest expense over the term on the loans. At December 31, 2018, the unamortized debt discount balance is
$126 thousand and the accrued interest balance is $110 thousand.
The events of default under the Schutte
Notes are limited to bankruptcy defaults and failure to pay interest and principal when due on January 2, 2020. The Schutte Notes
may be prepaid at any time in whole or in part.
Included in the $4.350 million loan outstanding
from Mr. Schutte as of December 31, 2018 is a borrowing of $1.8 million completed on October 5, 2018 of which we used $1.5 million
to fully pay-off the debt outstanding under the Oxford Loan Agreement. All our assets are pledged as collateral under the Schutte
Notes, including our intellectual property.
During the period January 1, 2019 through
June 27, 2019 we borrowed $650 thousand from Mr. Schutte. On June 28, 2019 we borrowed an additional $726 thousand from Mr. Schutte
and consolidated the loans in a single note along with the accrued interest (See Subsequent Event - Note 15).
Our debt at December 31, 2018 is summarized
below (in thousands):
Debt
|
|
Current
|
|
|
Long-term
|
|
|
Total
|
|
Loan Due December 1, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Jan. 1, 2018
|
|
$
|
2,740
|
|
|
$
|
-
|
|
|
$
|
2,740
|
|
Principal payments
|
|
|
(2,573
|
)
|
|
|
-
|
|
|
|
(2,573
|
)
|
Gain from debt extinguishment
|
|
|
(167
|
)
|
|
|
-
|
|
|
|
(167
|
)
|
Balance at Dec. 31, 2018
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related Party Loan Due January 2, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Jan. 1, 2018
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Principal borrowings
|
|
|
-
|
|
|
|
4,350
|
|
|
|
4,350
|
|
Balance at Dec. 31, 2018
|
|
$
|
-
|
|
|
$
|
4,350
|
|
|
$
|
4,350
|
|
Debt Discount, net
|
|
Current
|
|
|
Long-term
|
|
|
Total
|
|
Balance at Jan. 1, 2018
|
|
$
|
(32
|
)
|
|
$
|
-
|
|
|
$
|
(32
|
)
|
Additions
|
|
|
-
|
|
|
|
(172
|
)
|
|
|
(172
|
)
|
Amortization expense
|
|
|
28
|
|
|
|
46
|
|
|
|
74
|
|
Write-off on debt extinguishment
|
|
|
4
|
|
|
|
-
|
|
|
|
4
|
|
Balance at Dec. 31, 2018
|
|
$
|
-
|
|
|
$
|
(126
|
)
|
|
$
|
(126
|
)
|
Deferred Debt Issuance Costs, net
|
|
Current
|
|
|
Long-term
|
|
|
Total
|
|
Balance at Jan. 1, 2018
|
|
$
|
(14
|
)
|
|
$
|
-
|
|
|
$
|
(14
|
)
|
Amortization expense
|
|
|
13
|
|
|
|
-
|
|
|
|
13
|
|
Write-off on debt extinguishment
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
Balance at Dec. 31, 2018
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt, net at Dec. 31, 2018
|
|
$
|
-
|
|
|
$
|
4,224
|
|
|
$
|
4,224
|
|
Our debt interest expense for the twelve months ended December
31, 2018 and 2017 consisted of the following (in thousands):
|
|
Year Ended
December 31,
|
|
Interest expense:
|
|
2018
|
|
|
2017
|
|
Fully paid term loan – due December 1, 2018
|
|
$
|
194
|
|
|
$
|
497
|
|
Related party term loans – due January 2, 2020
|
|
|
110
|
|
|
|
-
|
|
Debt discount
|
|
|
74
|
|
|
|
66
|
|
Debt issue costs
|
|
|
13
|
|
|
|
33
|
|
Financed insurance premiums
|
|
|
4
|
|
|
|
-
|
|
Total interest expense
|
|
$
|
395
|
|
|
$
|
596
|
|
Less: imputed interest income on related party loans
|
|
|
(172
|
)
|
|
|
-
|
|
Less: interest income
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
Total interest expense, net
|
|
$
|
223
|
|
|
$
|
592
|
|
NOTE 8 – RELATED PARTY TRANSACTIONS
In July 2017, we completed a $4.0 million
private placement with Mr. Schutte (sometimes referred to as the “Investor”), consisting of 8,912,655 units (“Units”)
of the Company, at a price of $0.4488 per Unit (the “Transaction”). Each Unit consists of one share of common stock
and a warrant to purchase one fifth (0.2) of a share of common stock. The issue price of the Units was equal to 85% of the average
last sale price of our common stock for the five trading days prior to completion of the Transaction. The warrants are immediately
exercisable at a price of $0.528 per share (which equals the average last sale price of the Company’s common stock for the
five trading days prior to completion of the Transaction) and expire five years after issuance (subject to earlier expiration in
event of certain acquisitions). We have assigned a relative fair value of $495 thousand to the warrants out of the total $4.0 million
proceeds from the private placement transaction and have accounted these warrants as equity. The Transaction was completed through
a private placement to an accredited investor and was exempt from registration pursuant to Section 4(2) of the Securities Act of
1933, as amended and/or Regulation D promulgated under the Securities Act of 1933.
Investor is a principal of MainPointe,
a Kentucky limited liability company. In March 2017, we granted MainPointe an exclusive license to our Impede Technology to commercialize
our Nexafed® and Nexafed® Sinus Pressure + Pain Products in the United States and Canada for an upfront licensing fee of
$2.5 million plus approximately $309 thousand for transferred inventory and equipment. The Company will receive a 7.5% royalty
on sales of licensed products. MainPointe also has options to expand the territory and products covered for additional sums. Included
in the reported revenue for the years ended December 31, 2018 and 2017 is $24 thousand and $19 thousand, respectively of royalty
revenue from MainPointe (See Note 3).
As part of
the closing of the Transaction, the Company and Essex Woodlands Health Ventures V, L.P. (“Essex”) and Galen Partners
III, L.P. (“Galen”) amended and restated the existing Voting Agreement to provide for the Investor to join as a party
(as so amended, the “Second Amended and Restated Voting Agreement”). The Second Amended and Restated Voting Agreement
provides that our Board of Directors shall remain comprised of no more than seven members (subject to certain exceptions), (i)
one of whom is the Company’s Chief Executive Officer, (ii) three of whom are independent under Nasdaq standards, and (iii)
one of whom shall be designated by each of Essex, Galen and Investor, and the parties to such agreement would vote for such persons.
The right of each of Essex, Galen and Investor to designate one director to our Board will continue as long as he or it and their
affiliates collectively hold at least 600,000 shares of our common stock (including warrants exercisable for such shares). Immanuel
Thangaraj is the designee of Essex. Investor has not designated a director as of the date of filing of this Report. Galen
had not designated a director and lost that right in December 2017 when it disposed of its shares of common stock in the Company.
Once such shareholder no longer holds such securities, the additional forfeited seat would become a seat for an independent director
to thereafter be nominated to the Board of Directors from time to time by the then current directors and as applicable, to be elected
by the directors to fill the vacancy created by the forfeited seat or submitted to the vote of shareholders at the Company’s
next annual meeting. An independent director has not been named to fill the seat forfeited by Galen.
During the period January 1, 2019 through
June 27, 2019 we borrowed $650 thousand from Mr. Schutte. On June 28, 2019 we borrowed $726 thousand from Mr. Schutte and consolidated
the loans in a single note along with the accrued interest (See Subsequent Event - Note 15).
NOTE 9 – EMPLOYEE BENEFIT PLAN
We have a 401(k) and Profit-Sharing Plan
(the “Plan”) for our employees. Employees may elect to make a basic contribution of up to 80% of their annual earnings
subject to certain regulatory restrictions on their total contribution. The Plan provides that the Company can make discretionary
matching contributions along with a discretionary profit-sharing contribution. We did not contribute a matching contribution or
a profit sharing contribution to the Plan during the years 2018 or 2017.
NOTE 10 – COMMON STOCK PURCHASE WARRANTS
Our warrant activity during the years ended
December 31, 2018 and 2017 is shown below (in thousands except price data):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Number
|
|
|
WAvg
Exercise
Price
|
|
|
Number
|
|
|
WAvg
Exercise
Price
|
|
Outstanding, Jan. 1
|
|
|
1,842
|
|
|
$
|
0.59
|
|
|
|
60
|
|
|
$
|
2.52
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
|
|
1,782
|
|
|
|
0.53
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Modification
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, Dec. 31
|
|
|
1,842
|
|
|
$
|
0.59
|
|
|
|
1,842
|
|
|
$
|
0.59
|
|
In connection with the issuance of the
$10.0 million secured promissory notes in December 2013, we issued common stock purchase warrants (“warrants”) exercisable
for 60 thousand shares of our common stock having an exercise price of $2.52 per share (after giving effect to our one-for-five
reverse stock split) with an expiration date in December 2020. These warrants contain a cashless exercise feature (See Note 7).
As part of our July 2017 private placement
transaction with Mr. Schutte, we issued warrants to purchase 1,782,531 shares of our common stock. The warrants are immediately
exercisable at a price of $0.528 per share and expire five years after issuance (See Note 8). We have assigned a relative fair
value of $495 thousand to the warrants out of the total $4.0 million proceeds from the private placement transaction and have accounted
for these warrants as equity.
NOTE 11 – SHARE-BASED COMPENSATION
EXPENSE
Stock Option Plans
We maintain various stock option plans.
A summary of our stock option plans as of December 31, 2018 and 2017 and for the year then ended consisted of the following (in
thousands except exercise price):
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Number
of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding, Jan. 1
|
|
|
1,494
|
|
|
$
|
12.33
|
|
|
|
1,397
|
|
|
$
|
15.67
|
|
Granted
|
|
|
232
|
|
|
|
0.15
|
|
|
|
185
|
|
|
|
0.45
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
0.92
|
|
Forfeited
|
|
|
(3
|
)
|
|
|
0.56
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(163
|
)
|
|
|
42.75
|
|
|
|
(87
|
)
|
|
|
7.02
|
|
Outstanding, Dec. 31
|
|
|
1,560
|
|
|
$
|
7.38
|
|
|
|
1,494
|
|
|
$
|
12.33
|
|
Exercisable, Dec. 31
|
|
|
1,328
|
|
|
$
|
8.64
|
|
|
|
1,224
|
|
|
$
|
14.92
|
|
The following table summarizes information about unvested stock
options outstanding at December 31, 2018 (in thousands except price data):
|
|
Number of
Options Not
Exercisable
|
|
|
Weighted
Average Fair
Value
|
|
Outstanding at Jan. 1, 2018
|
|
|
270
|
|
|
$
|
0.46
|
|
Granted
|
|
|
232
|
|
|
|
0.10
|
|
Vested
|
|
|
(267
|
)
|
|
|
0.46
|
|
Forfeited
|
|
|
(3
|
)
|
|
|
0.41
|
|
Outstanding at Dec. 31, 2018
|
|
|
232
|
|
|
$
|
0.10
|
|
We estimate the option’s fair value
on the date of grant using the Black-Scholes option-pricing model. Black-Scholes utilizes assumptions related to expected term,
forfeitures, volatility, the risk-free interest rate, the dividend yield (which is assumed to be zero, as we have not paid any
cash dividends) and employee exercise behavior. Expected volatilities utilized in the Black-Scholes model are based on the historical
volatility of our common stock price. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the
time of grant. The expected life of the grants is derived from historical exercise activity. Historically, the majority of our
stock options have been held until their expiration date.
The assumptions used in the Black-Scholes
model to determine fair value for the 2018 and 2017 stock option grants were:
|
|
2018
|
|
|
2017
|
|
Expected dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Risk-free interest rates
|
|
|
2.8
|
%
|
|
|
1.8
|
%
|
Average expected volatility
|
|
|
76
|
%
|
|
|
88
|
%
|
Expected term (years)
|
|
|
5
|
|
|
|
5
|
|
Weighted average grant date fair value
|
|
$
|
0.10
|
|
|
$
|
0.31
|
|
There was no intrinsic value contained
in the stock option awards which vested and were outstanding at December 31, 2018. The total remaining unrecognized compensation
cost on unvested option awards outstanding at December 31, 2018 was approximately $20 thousand, and is expected to be recognized
in the Company’s operating expense in varying amounts over the next eleven months remaining in the requisite service period.
Restricted Stock Unit Award Plans
We have two Restricted Stock Unit Award
Plans for our employees and non-employee directors, a 2017 Restricted Stock Unit Award Plan (the “2017 RSU Plan”) and
a 2014 Restricted Stock Unit Award Plan (the “2014 RSU Plan”). Vesting of an RSU entitles the holder to receive a share
of our common stock on a distribution date. Our non-employee director awards allow for non-employee directors to receive payment
in cash, instead of stock, for up to 40% of each RSU award. The portion of the RSU awards subject to cash settlement are recorded
as a liability in the Company’s consolidated balance sheet as they vest and being marked-to-market each reporting period
until they are distributed. The liability was $11 thousand and $41 thousand at December 31, 2018 and 2017, respectively.
The compensation cost to be incurred on
a granted RSU without a cash settlement option is the RSU’s fair value, which is the market price of our common stock on
the date of grant, less its exercise cost. The compensation cost is amortized to expense and recorded to additional paid-in capital
over the vesting period of the RSU award.
A summary of the grants under the RSU Plans
as of December 31, 2018 and 2017, and for the year then ended consisted of the following (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Number
of RSUs
|
|
|
Number of
Vested
RSUs
|
|
|
Number of
RSUs
|
|
|
Number of
Vested
RSUs
|
|
Outstanding, Jan. 1
|
|
|
462
|
|
|
|
262
|
|
|
|
91
|
|
|
|
91
|
|
Granted
|
|
|
759
|
|
|
|
-
|
|
|
|
438
|
|
|
|
-
|
|
Distributed
|
|
|
(262
|
)
|
|
|
(262
|
)
|
|
|
(67
|
)
|
|
|
(67
|
)
|
Vested
|
|
|
-
|
|
|
|
459
|
|
|
|
-
|
|
|
|
238
|
|
Forfeited
|
|
|
(8
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, Dec. 31
|
|
|
951
|
|
|
|
459
|
|
|
|
462
|
|
|
|
262
|
|
2017
Restricted Stock Unit Award Plan
Our 2017 RSU Plan was approved by shareholders
in November 2017 and permits the grant of up to 1.5 million shares of our common stock pursuant to awards under the 2017 RSU Plan.
As of December 31, 2018, approximately 552 thousand shares are available for award under the 2017 RSU Plan.
Information about the awards under the
2017 RSU Plan is as follows:
|
·
|
In December 2017, we awarded 200 thousand RSUs to our employees. Such RSU awards will vest 100%
after one full year of service. Distributions of the vested RSU awards to the employees will be made in three equal installments
on the first business day of each of January 2020, 2021, and 2022 or earlier upon a qualifying change of control.
|
|
·
|
In January 2018, we awarded approximately 67 thousand RSUs to each of our 4 non-employee directors
which also allow for them to receive payment in cash, instead of stock, for up to 40% of each RSU award. Such awards vest 25% at
the end of each calendar quarter in 2018. Settlement of this RSU award will occur on January 2, 2019, the first business day of
the year after vesting. The portion of the RSU awards which are subject to cash settlement are also subject to marked-to market
accounting having a liability recorded on the Company’s consolidated balance sheet with quarterly adjustments recorded to
stock compensation expense in the general and administration operating category of our income statement.
|
|
·
|
In December 2018, we awarded 488 thousand RSUs to our employees. Such RSU awards will vest 100%
after one full year of service. Distributions of the vested RSU awards to the employees will be made in three equal installments
on the first business day of each of January 2021, 2022, and 2023 or earlier upon a qualifying change of control.
|
|
·
|
In January 2019, we awarded approximately 83 thousand RSUs to each of our 4 non-employee directors
which also allow for them to receive payment in cash, instead of stock, for up to 40% of each RSU award. Such awards vest 25% at
the end of each calendar quarter in 2019. Settlement of this RSU award will occur on January 2, 2020, the first business day of
the year after vesting. The portion of the RSU awards which are subject to cash settlement will also be subject to marked-to market
accounting having a liability recorded on the Company’s consolidated balance sheet with quarterly adjustments recorded to
stock compensation expense in the general and administration operating category of our income statement.
|
Information
about the distribution of shares under the 2017 RSU Plan is as follows:
|
·
|
In January 2019, 267 thousand RSUs were distributed and settled in common stock.
|
2014
Restricted Stock Unit Award Plan
Our 2014 RSU Plan was approved by shareholders
in May 2014 and permits the grant of up to 400 thousand shares of our common stock pursuant to awards under the 2014 RSU Plan.
As of December 31, 2018, there are no longer shares available for award under the 2014 RSU Plan.
Information about the awards under the
2014 RSU Plan during 2017 and 2018 is as follows:
|
·
|
In January 2017, we awarded approximately 60 thousand RSUs to each of our 4 non-employee directors
which also allow for them to receive payment in cash, instead of stock, for up to 40% of each RSU award. Such awards vest 25% at
the end of each calendar quarter in 2017. The portion of the RSU awards which are subject to cash settlement are also subject to
marked-to market accounting and the liability recorded in the Company’s consolidated balance sheet as an estimate for such
cash settlement was $41 thousand at December 31, 2017. The RSU award was settled on January 2, 2018.
|
|
·
|
In December 2018, we awarded 4 thousand RSUs to our employees. Such RSU awards will vest 100% after
one full year of service. Distributions of the vested RSU awards to the employees will be made in three equal installments on the
first business day of each of January 2021, 2022, and 2023 or earlier upon a qualifying change of control.
|
Information
about the distribution of shares under the 2014 RSU Plan is as follows:
|
·
|
In January 2017, 1 thousand RSUs from the May 2014 award and 66 thousand RSUs from the January
2016 award were distributed. There were 1 thousand RSUs from the May 1 2014 award and 22 thousand RSUs from the January 2016 award
which remained deferred until a future distribution date, which occurred on January 1, 2018. Of the 67 thousand RSUs distributed,
49 thousand RSUs were settled in common stock and 18 thousand RSUs were settled in cash.
|
|
·
|
In January 2018, 262 thousand RSUs from the 2014 RSU Plan were distributed. Of the approximately
262 thousand RSUs distributed, 238 thousand RSUs were settled in common stock and 24 thousand RSUs were settled in cash.
|
NOTE 12 – INCOME TAXES
We account for income taxes under the liability
method. Under this method, deferred income tax assets and liabilities are determined based on differences between financial reporting
and income tax basis of assets and liabilities and are accounted for using the enacted income tax rates and laws that will be in
effect when the differences are expected to reverse.
On December 22, 2017, the Tax Cuts and
Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include,
but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017
and requiring adjustment to 2017 deferred taxes. The Company has calculated its best estimate of the impact of the Act in its 2017
year-end income tax provision in accordance with its understanding of the Act and guidance available as of that date and as a result
had no adjustment to record as an additional income tax expense in the fourth quarter of 2017, the period in which the legislation
was enacted.
On December 22, 2017, Staff Accounting
Bulletin No. 118 ("SAB 118") was issued to address the application of US GAAP in situations when a registrant does not
have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting
for certain income tax effects of the Act. In accordance with SAB 118, the Company remeasured its deferred tax assets and liabilities
and adjusted its deferred tax balances to reflect the lower enacted U.S. corporate tax rate resulted in an income tax expense of
$26.6 million which is included as a discrete item in the 2017 income tax provision. Overall, there was no impact to the tax provision
as a result of the offsetting reduction of the valuation allowance. The period for determination of accounting implications of
the 2017 Tax Act closed on December 22, 2018. The Company has completed their analysis and does not have any material true-ups
on the positions taken in the prior year tax provision.
Provision for Income Taxes
The reconciliation between our provision
for income taxes and the amounts computed by multiplying our loss before taxes by the U.S. statutory tax rate is as follows (in
thousands):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Benefit at U.S. statutory tax rate
|
|
$
|
(807
|
)
|
|
$
|
(1,978
|
)
|
State taxes (benefit), net of federal effect
|
|
|
(141
|
)
|
|
|
(203
|
)
|
State research and development tax credits
|
|
|
-
|
|
|
|
105
|
|
Federal research and development tax credits
|
|
|
(23
|
)
|
|
|
(70
|
)
|
Share-based compensation
|
|
|
22
|
|
|
|
116
|
|
Federal AMT tax credit
|
|
|
-
|
|
|
|
(135
|
)
|
Other
|
|
|
17
|
|
|
|
(3
|
)
|
Tax Cuts and Jobs Act of 2017
|
|
|
-
|
|
|
|
26,603
|
|
Change in valuation allowance
|
|
|
932
|
|
|
|
(24,570
|
)
|
(Benefit) provision for income taxes
|
|
$
|
-
|
|
|
$
|
(135
|
)
|
Deferred Tax Assets and Valuation
Allowance
Deferred tax assets reflect the tax effects
of net operating losses (“NOLs”), tax credit carryovers, and temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The most significant item
of our deferred tax assets is derived from our Federal NOLs. We have approximately $171.8 million gross Federal NOLs at December
31, 2018 (of which approximately $167.7 million was generated prior to 2018). Because we believe the ability for us to use these
NOLs generated prior to January 1, 2018 to offset any future taxable income is severely limited as prescribed under Internal Revenue
Code (“IRC”) Section 382, we had estimated and recorded an amount for the likely limitation to our deferred tax asset
in the fourth quarter of 2017, thereby reducing the aggregate estimated benefit of the Federal NOLs available to us of approximately
$1.0 million at December 31, 2017. We believe the gross Federal NOL benefit we generated prior to January 1, 2018 to offset taxable
income is less than $150 thousand annually. As prescribed under Internal Revenue Code, any unused Federal NOL benefit from the
annual limitation can be accumulated and carried forward to the subsequent year and will expire if not used in accordance with
the NOL carried forward term of 20 years or 2037, if generated before 2018 and Federal NOLs generated after 2017 can be carried
forward indefinitely. Future common stock transactions, such as the exercise of common stock purchase warrants or the conversion
of debt into common stock, may cause another qualifying event under IRC 382 which may further limit our utilization of our NOLs
(See Subsequent Event - Note 15).
The components of our deferred tax assets
are as follows (in thousands):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Estimated future value of NOLs
|
|
|
|
|
|
|
|
|
- Federal
|
|
$
|
2,174
|
|
|
$
|
1,028
|
|
- State
|
|
|
862
|
|
|
|
1,276
|
|
Research and development tax credits
|
|
|
|
|
|
|
|
|
- Federal
|
|
|
1,184
|
|
|
|
1,231
|
|
- State
|
|
|
-
|
|
|
|
-
|
|
Share-based compensation
|
|
|
71
|
|
|
|
66
|
|
Other, net
|
|
|
151
|
|
|
|
203
|
|
Total deferred taxes
|
|
|
4,442
|
|
|
|
3,804
|
|
Valuation allowance
|
|
|
(4,442
|
)
|
|
|
(3,804
|
)
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
The realization of deferred income tax
assets is dependent upon future earnings, if any, and the timing and amount of which may be uncertain. A valuation allowance is
required against deferred income tax assets if, based on the weight of available evidence, it is more likely than not that some
or all of the deferred income tax assets may not be realized. At both December 31, 2018 and 2017, all our remaining net deferred
income tax assets were offset by a valuation allowance due to uncertainties with respect to future utilization of NOL carryforwards.
If in the future it is determined that additional amounts of our deferred income tax assets would likely be realized, the valuation
allowance would be reduced in the period in which such determination is made and an additional benefit from income taxes in such
period would be recognized.
Uncertainty in Income Taxes
We follow FASB’s statement regarding
accounting for uncertainty in income taxes which defined the threshold for recognizing the benefits of tax-return positions in
the consolidated financial statements as "more-likely-than-not" to be sustained by the taxing authorities. At each of
December 31, 2018 and 2017, we had no liability for income tax associated with uncertain tax positions. If in the future we establish
a contingent tax liability reserve related to uncertain tax positions, our practice will be to recognize the interest in interest
expense and the penalties in other non-operating expense.
The Company files federal and state income
tax returns and in the normal course of business the Company is subject to examination by these taxing authorities. As of December
31, 2018, the Company’s tax years of 2015, 2016 and 2017 are subject to examination by the taxing authorities. With few exceptions,
we believe the Company is no longer subject to U.S. Federal, State and local examinations by taxing authorities for years before
2015.
NOTE 13 – NET LOSS PER SHARE
A reconciliation of the numerators and
denominators of basic and diluted EPS consisted of the following (in thousands except per share data):
|
|
Year Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
EPS – basic and diluted
|
|
|
|
|
|
|
|
|
Numerator: net loss
|
|
$
|
(3,842
|
)
|
|
$
|
(5,682
|
)
|
Denominator (weighted):
|
|
|
|
|
|
|
|
|
Common shares
|
|
|
21,033
|
|
|
|
15,790
|
|
Vested RSUs
|
|
|
113
|
|
|
|
113
|
|
Basic and diluted weighted average shares outstanding
|
|
|
21,146
|
|
|
|
15,903
|
|
EPS – basic and diluted
|
|
$
|
(0.18
|
)
|
|
$
|
(0.36
|
)
|
|
|
|
|
|
|
|
|
|
Excluded securities (non-weighted):
|
|
|
|
|
|
|
|
|
Common shares issuable:
|
|
|
|
|
|
|
|
|
Stock options – vested and nonvested
|
|
|
1,560
|
|
|
|
1,494
|
|
Nonvested RSUs
|
|
|
482
|
|
|
|
200
|
|
Common stock purchase warrants
|
|
|
1,842
|
|
|
|
1,842
|
|
Total excluded common shares
|
|
|
3,884
|
|
|
|
3,536
|
|
NOTE 14 – COMMITMENTS AND CONTINGENCIES
Reglan®/Metoclopramide
Litigation
Halsey Drug Company, as predecessor to
us, was named along with numerous other companies as a defendant in cases filed in three separate state coordinated litigations
pending in Pennsylvania, New Jersey and California, respectively captioned In re: Reglan®/Metoclopramide Mass Tort Litigation,
Philadelphia County Court of Common Pleas, January Term, 2010, No. 01997; In re: Reglan Litigation, Superior Court of New Jersey,
Law Division, Atlantic County, Case No. 289, Master Docket No. ATL-L-3865-10; and Reglan/Metoclopramide Cases, Superior Court of
California, San Francisco County, Judicial Council Coordination Proceeding No. 4631, Superior Court No.: CJC-10-004631. In
addition, we were served with a similar complaint by two individual plaintiffs in Nebraska federal court, which plaintiffs voluntarily
dismissed in December 2014. In this product liability litigation against numerous pharmaceutical product manufacturers and
distributors, including Acura, plaintiffs claim injuries from their use of the Reglan brand of metoclopramide and generic metoclopramide.
None of the plaintiffs in the lawsuits
filed to date have confirmed that they ingested any of the generic metoclopramide manufactured by us. We discontinued manufacture
and distribution of generic metoclopramide more than 20 years ago. All of these lawsuits have been effectively dismissed with the
exception of less than ten pending Philadelphia cases that we expect will be finally dismissed without the need for any action
by us. We expect that the Court will finally dismiss the small number of remaining Pennsylvania-based cases against us with
prejudice by the end of the fourth quarter of 2019. Legal fees related to this matter have been covered by our insurance carrier.
Based upon the current status and evaluation, we have not accrued for any potential loss related to these matters as of December
31, 2018.
Purdue Pharma Settlement
In April 2015, Purdue Pharma L.P., Purdue
Pharmaceuticals L.P. and The P.F. Laboratories, Inc. (collectively, “Purdue”) commenced a patent infringement lawsuit
against us and our Oxaydo product licensee Zyla US, Inc. and its parent Zyla Corporation in the United States District Court for
the District of Delaware alleging our Oxaydo product infringes Purdue’s U.S. Patent No. 8,389,007 (the “007 patent”).
In April 2016, Purdue commenced a second patent infringement lawsuit against us and Zyla in the United States District Court for
the District of Delaware alleging our Oxaydo product infringes Purdue’s newly issued U.S. Patent No. 9,308,171 (the “171
Patent”). The actions regarding the 007 Patent and the 171 Patent are collectively referred to as the “Actions”.
On April 6, 2016, we filed a petition for Inter Partes Review (the “IPR Review”) with the U.S. Patent and Trademark
Office (“USPTO”) seeking to invalidate Purdue’s 007 Patent.
On May 20, 2016, Purdue
on behalf of themselves and certain affiliates, Zyla Corporation, on behalf of itself and its affiliates and we, on behalf of ourselves
and our affiliates entered into a settlement agreement (the “Settlement Agreement”) to settle the Actions and the IPR
Review. Under the Settlement Agreement the parties dismissed or withdrew the Actions, requested that the USPTO terminate the IPR
Review and exchanged mutual releases. No payments were made under the Settlement Agreement.
The Settlement Agreement also provides
that Purdue will not, in the future, assert certain Purdue U.S. patents, including the 007 Patent, the 171 Patent and related technologies
(the “Purdue Patents”) against any Acura Settlement Product or Zyla Settlement Product (except generally in an action
or interference by Acura or Zyla challenging a Purdue Patent). Acura Settlement Products and Zyla Settlement Products are certain
immediate-release and extended-release products, including Oxaydo. In addition, the Settlement Agreement provides that Purdue will
not challenge, with certain exceptions, the Acura/Zyla Patents with respect to the Purdue Settlement Products (as defined below)
and that Purdue provides Acura and/or Zyla certain waivers of non-patent marketing exclusivity with respect to Purdue Settlement
Products.
The Settlement Agreement also provides
that Acura and Zyla will not, in the future, assert certain Acura and/or Zyla U.S. patents (the “Acura/Zyla Patents”),
including Acura’s Aversion® Technology patents, against any Purdue Settlement Products (except generally in an action
or interference by Purdue challenging an Acura/Zyla Patent). Purdue Settlement Products are certain immediate-release and extended-release
products. In addition, the Settlement Agreement provides that Acura and Zyla will not challenge, with certain exceptions, the Purdue
Patents with respect to the Acura Settlement Products and Zyla Settlement Products and that Acura and Zyla provide Purdue certain
waivers of non-patent marketing exclusivity with respect to the Acura Settlement Products and Zyla Settlement Products. In addition,
Purdue has certain rights to negotiate to exclusively distribute an authorized generic version of certain Zyla Settlement Products,
including, in some circumstances, Oxaydo® and other products using Acura’s Aversion® Technology if licensed to Zyla.
The Settlement Agreement specifically excludes
our patents related to our Impede® and Limitx™ technologies from the scope of the Acura/Zyla Patents under the Settlement
Agreement.
In December 2014, the Company entered into
an agreement with Purdue Pharma L.P. to settle a patent interference action regarding certain intellectual property held by Acura
(U.S. Patent No. 8,101,630). The dispute centered upon the issue of which company has priority in developing the invention. The
parties agreed to forgo protracted litigation and the uncertainties arising therefrom by entering an agreement whereby the Company
conceded Purdue Pharma’s claim of priority in exchange for certain financial consideration to us including an immediate non-refundable
payment of $500 thousand. In June 2015, the Company received an additional $250 thousand payment from Purdue Pharma relating to
the December 2014 agreement.
Zyla Agreement covering Oxaydo
On January 7, 2015, we and Zyla entered
into a Collaboration and License Agreement (the “Zyla Agreement”) to commercialize Aversion Oxycodone (formerly known
as Oxecta®) under our tradename Oxaydo. Oxaydo is approved by the FDA for marketing in the United States in 5 mg and 7.5 mg
strengths. Under the terms of the Zyla Agreement, we transferred the approved New Drug Application, or NDA, for Oxaydo to Zyla
and Zyla is granted an exclusive license under our intellectual property rights for development and commercialization of Oxaydo
worldwide (the “Territory”) in all strengths, subject to our right to co-promote Oxaydo in the United States. Eaglet
launched Oxaydo in the United States late in the third quarter of 2015.
In accordance with
the Zyla Agreement, we and Zyla have formed a joint steering committee to coordinate commercialization strategies and the development
of product line extensions. Zyla is responsible for the fees and expenses relating to the Oxaydo NDA and product line extensions
of Oxaydo, provided that Zyla will pay a substantial majority of the expenses and we will pay for the remaining fees and expenses
relating to (i) annual NDA PDUFA product fees, (ii) expenses of a post-marketing study for Oxaydo when required by the FDA and
conducted by Zyla and (iii) expenses of clinical studies for product line extensions (additional strengths) of Oxaydo for the
United States. Zyla will bear all of the expenses of development and regulatory approval of Oxaydo for sale outside the United
States. Zyla is responsible for all manufacturing and commercialization activities in the Territory for Oxaydo. Subject to certain
exceptions, Zyla will have final decision making authority with respect to all development and commercialization activities for
Oxaydo, including pricing, subject to our co-promotion right. Zyla may develop Oxaydo for other countries and in additional strengths,
in its discretion. At December 31, 2018 we have accrued approximately $237 thousand for potential cost sharing reimbursable expenses
under the Zyla Agreement.
Facility Lease
The Company leases administrative office
space in Palatine, Illinois on a month to month basis at the rate of approximately $2 thousand per month.
NOTE 15 – SUBSEQUENT EVENT
Related Party Transaction - Debt
From January 1, 2019 and through June 27,
2019, we borrowed an aggregate of $650 thousand from Mr. Schutte and issued various promissory notes to him with the same terms
and conditions from the previous loans. On June 28, 2019 the aggregate principal of the promissory notes was $5.0 million and the
accrued interest was $274 thousand. On June 28, 2019 we borrowed $726 thousand from Mr. Schutte, bringing the aggregate principal
of the loans and accrued interest to $6.0 million, and consolidated the loans into a single promissory note with a fixed interest
rate of 7.5%, maturity date of July 1, 2023, granted conversion rights into 37.5 million shares of our common stock at a price
of $0.16 per share, issued a warrant for 10.0 million common shares having an exercise price of $0.01 per share, and granted a
security interest in all of the Company’s assets. The $6.0 million promissory note, the common stock purchase warrant and
the security agreement were all assigned and transferred by Mr. Schutte to AD Pharma on June 28, 2019. On July 2, 2019 we received
the $726 thousand loan proceeds.
Related Party Transaction –
License, Development and Commercialization Agreement with Abuse Deterrent Pharma, LLC
On June 28, 2019, we entered into a License,
Development and Commercialization Agreement (the "Agreement") with Abuse Deterrent Pharma, LLC (“AD Pharma”),
a special purpose company representing a consortium of investors that will finance Acura’s operations and completion of development
of LTX-03 (hydrocodone bitartrate with acetaminophen) immediate-release tablets utilizing Acura’s patented LIMITx™
technology which addresses the consequences of excess oral administration of opioid tablets, the most prevalent route of opioid
overdose and abuse. The Agreement grants AD Pharma exclusive commercialization rights in the United States to LTX-03. Financial
arrangements include:
|
·
|
Monthly license payments to Acura by AD Pharma of $350,000 up to the earlier of 18 months or FDA’s
acceptance of a New Drug Application (“NDA”) for LTX-03;
|
|
·
|
Reimbursement by AP Pharma of Acura’s LTX-03 outside development expenses;
|
|
·
|
Upon commercialization of LTX-03, Acura receives stepped royalties on sales and is eligible for
certain sales related milestones; and
|
|
·
|
Acura authorizes MainPointe to assign to AD Pharma the option and the right to add, as an Option
Product to the Nexafed® Agreement, a Nexafed® 12-hour dosage (an extended-release pseudoephedrine hydrochloride product
utilizing the IMPEDE® Technology in 120mg dosage strength).
|
AD Pharma may terminate the Agreement at any time.
Additionally, if the NDA for LTX-03 is not accepted by the FDA within 18 months, AD Pharma may terminate the Agreement and take
ownership of the intellectual property. On July 2, 2019, we received the first monthly license payment of $350 thousand and have
received subsequent monthly license payments in August 2019 and September 2019.