The following table provides a reconciliation
of cash and cash equivalents reported within the consolidated balance sheet that sum to the total of the same such amounts shown
in the consolidated statements of cash flows:
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2019 AND MARCH 31, 2018
NOTE 1 – OPERATIONS AND BASIS OF PRESENTATION
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 intended to minimize the risks and side effects associated
with overdose by retarding the release of active drug ingredients when too many tablets are accidently or purposefully ingested.
Our Aversion® Technology is intended to address methods of product tampering associated with opioid abuse by incorporating
gelling ingredients and irritants into tablets to discourage abuse by snorting and provide barriers to abuse by injection. Our
Impede® Technology is directed at minimizing the extraction and conversion of pseudoephedrine tablets into methamphetamine.
|
·
|
Our Limitx Technology is in development with immediate-release
tablets containing hydrocodone bitartrate and acetaminophen (also known as LTX-03) as the lead product candidate due to its large
market size and its known prevalence of oral excessive tablet abuse and overdose. The technology is designed to retard the release
of active opioid drug 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. US commercialization
rights to LTX-03 are licensed to Abuse Deterrent Pharmaceuticals LLC (See Note 16).
|
|
·
|
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 unaudited 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 for interim financial information, the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not contain all disclosures required by generally accepted
accounting principles. Reference should be made to the Company’s Annual Report on Form 10-K for the year ended December 31,
2018. In the opinion of the Company, all normal recurring adjustments have been made that are necessary to present fairly the results
of operations for the interim periods. Operating results for the three month period ended March 31, 2019 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2019.
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 March 31, 2019, we had cash of $95 thousand, working capital deficit of $6.0 million and an accumulated deficit of $385 million.
As of September 27, 2019 we had cash of approximately $600 thousand. We had a loss from operations of $0.7 million and a net loss
of $0.8 million for the three months ended March 31, 2019. We have suffered recurring losses
from operations and have not generated positive cash flows from operations. 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 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 (the “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 16). 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 light of AD Pharma’s right to terminate the Agreement “upon convenience”,
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.
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.
Also, the required monthly license payments
by AD Pharma cease at 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. 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, there will be substantial
doubt about the Company’s ability to continue as a going concern and 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,
recoverability of a major portion of the recorded asset amounts shown in the Company’s accompanying balance sheets is dependent
upon continued operations of the Company, which in turn is dependent upon the Company’s ability to meet its financing 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 – RECENT ACCOUNTING PRONOUNCEMENTS
New accounting standards which have
been adopted on or before March 31, 2019
Leases
In February 2016, the FASB issued ASU 2016-02,
Leases (ASC 842), 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. The classification of the
lease will affect the pattern of expense recognition in the income statement such that 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 standard
also requires disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty
of cash flows arising from leases. In July 2018, the FASB issued ASU No. 2018-10, "Codification Improvements to Topic 842,
Leases" (ASU 2018-10), which provides narrow amendments to clarify how to apply certain aspects of the new lease standard,
and ASU No. 2018-11, "Leases (Topic 842)-Targeted Improvements" (ASU 2018-11), which addressed implementation issues
related to the new lease standard. These and certain other lease-related ASUs have generally been codified in ASC 842. ASC 842
supersedes the lease accounting requirements in Accounting Standards Codification Topic 840, Leases (ASC 840).
The Company adopted ASC 842 using the modified
retrospective transition approach as of the effective date, which allows the Company to not adjust the comparative periods presented.
The Company has elected to adopt the package of transition practical expedients and, therefore, has not reassessed whether existing
or expired contracts contain a lease or the lease classification for existing or expired. The Company did not elect the practical
expedient to use hindsight for leases existing at the adoption date. Upon adoption, operating leases was to be reported on the
balance sheet as a gross-up of assets and liabilities, however the Company has elected, as an accounting policy, to not recognize
ROU assets and lease liabilities for all short-term leases that have a lease term of 12 months or less. The adoption of the ASC
842 did not have an impact on the Company’s financial statements as has no leases with term of more than 12 months.
NOTE 3 – LICENSE AND COLLABORATION
AGREEMENTS
The Company’s revenues are comprised
of amounts earned under its license and collaboration agreements, royalties, and until March 2017 did previously include the Nexafed
products’ net product sales. Revenue recognition occurs when a customer obtains control of promised goods or services in
an amount that reflects the consideration the Company expects to receive in exchange for those goods or services based on a short-term
credit arrangement.
Zyla Agreement covering Oxaydo
In April 2014, we terminated an agreement
with Pfizer and 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 agreement was terminated. We have recorded annual amortization expense of $208 thousand
for each of the years 2018 and 2017. Annual amortization of the patent for the years 2019 through 2021 is expected to approximate
$208 thousand each year and $52 thousand be quarter.
In January 2015, we and Zyla US, Inc. and
Zyla Ltd., each a subsidiary of Zyla Corporation, or collectively 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 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 receiving 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 commence 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.
NOTE 4 – REVENUE FROM CONTRACTS WITH CUSTOMER
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
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 Stockholders’ 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
March 31, 2019.
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.
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 licenses for currently
marketed products containing its technologies; the Nexafed products containing the Impede Technology to MainPointe and Oxaydo containing
the Aversion Technology to Zyla. All of the Company’s royalty revenues are earned from these two licenses and from the licensee’s
sale of products in the U.S.
Royalty revenues by licensee are summarized
below:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Zyla
|
|
$
|
55
|
|
|
$
|
190
|
|
MainPointe
|
|
|
12
|
|
|
|
8
|
|
Royalty revenues
|
|
$
|
67
|
|
|
$
|
198
|
|
Contract Balance and Performance Obligations
The Company’s reported contract assets
and contract liability balances under the license and collaboration agreements at either March 31, 2019 or December 31, 2018 was
$0.00. Contract assets may be reported in future periods under prepaid expenses or other current assets on the balance sheet. Contract
liabilities may be reported in future periods consisting of deferred revenue as presented on the balance sheet.
NOTE 5 - 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 CROs based
on agreed upon terms and may include payments in advance of a study starting date. Payments in advance will be reflected in the
financial statements as prepaid expenses. We review and charge to expense the amounts for 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 to us. The accrued CRO costs are subject to revisions by us as the study progresses towards completion. Revisions are charged
to expense in the period in which the facts that give rise to the revision become known to us. We did not have any remaining obligations
under cancelable arrangements, nor did we have any prepaid CRO costs or prepaid clinical trial study expenses at March 31, 2019
or December 31, 2018.
NOTE 6 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at March 31, 2019 and December
31, 2018 are summarized as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
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
|
|
Total
|
|
|
2,512
|
|
|
|
2,512
|
|
Less: accumulated depreciation
|
|
|
(1,923
|
)
|
|
|
(1,906
|
)
|
Net property, plant and equipment
|
|
$
|
589
|
|
|
$
|
606
|
|
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 $17 thousand and $20 thousand for the three month period ended March 31, 2019 and 2018, respectively.
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 7 - ACCRUED EXPENSES
Accrued expenses at March 31, 2019 and December 31, 2018 are
summarized as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Cost sharing expenses under license agreement
|
|
$
|
269
|
|
|
$
|
237
|
|
Other fees and services
|
|
|
26
|
|
|
|
36
|
|
Payroll, payroll taxes and benefits
|
|
|
22
|
|
|
|
6
|
|
Professional services
|
|
|
178
|
|
|
|
132
|
|
Financed premiums on insurance policies
|
|
|
29
|
|
|
|
102
|
|
Clinical, non-clinical and regulatory services
|
|
|
44
|
|
|
|
63
|
|
Property taxes
|
|
|
9
|
|
|
|
7
|
|
Franchise taxes
|
|
|
17
|
|
|
|
13
|
|
Total
|
|
$
|
594
|
|
|
$
|
596
|
|
NOTE 8 – DEBT
Fully Paid Loan
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 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 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 are amortizing it to interest expense over the term of the loan using the loan’s
effective interest rate. The Warrants are 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 are amortizing 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 gain of $296 thousand.
Related Party Loans
We have borrowed an aggregate of
$4.75 million as of March 31, 2019 (and additional amounts aggregating $250 thousand during the period April 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, 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. 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 $181 thousand as of March 31, 2019. We recorded these benefits to interest income in the
period we received the loan, 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 March 31, 2019, the unamortized debt
discount balance is $103 thousand and the accrued interest balance is $190 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 $4.750 million loan outstanding
from Mr. Schutte as of March 31, 2019 is a borrowing of $1.8 million completed on October 5, 2018 where we used $1.5 million of
these loan proceeds 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.
On June 29, 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 16).
Our debt at March 31, 2019 is summarized
below (in thousands):
Debt to Related Party
|
|
Current
|
|
|
Long-term
|
|
|
Total
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Jan. 1, 2019
|
|
$
|
-
|
|
|
$
|
4,350
|
|
|
$
|
4,350
|
|
Classification
|
|
|
4,350
|
|
|
|
(4,350
|
)
|
|
|
-
|
|
Principal borrowings
|
|
|
400
|
|
|
|
-
|
|
|
|
400
|
|
Balance at Mar. 31, 2019
|
|
$
|
4,750
|
|
|
$
|
-
|
|
|
$
|
4,750
|
|
Debt Discount, net
|
|
|
Current
|
|
|
|
Long-term
|
|
|
|
Total
|
|
Balance at Jan. 1, 2019
|
|
$
|
-
|
|
|
$
|
(126
|
)
|
|
$
|
(126
|
)
|
Classification
|
|
|
(126
|
)
|
|
|
126
|
|
|
|
-
|
|
Additions
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
(9
|
)
|
Amortization expense
|
|
|
32
|
|
|
|
-
|
|
|
|
32
|
|
Balance at Mar. 31, 2019
|
|
$
|
(103
|
)
|
|
$
|
-
|
|
|
$
|
(103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt to Related Party, net at Mar 31, 2019
|
|
$
|
4,647
|
|
|
$
|
-
|
|
|
$
|
4,647
|
|
Our debt interest expense for the three months ended March 31,
2019 and 2018 consisted of the following:
|
|
Three Months Ended
March 31,
|
|
Interest expense:
|
|
2019
|
|
|
2018
|
|
Fully paid term loan
|
|
$
|
-
|
|
|
$
|
82
|
|
Related party term loans
|
|
|
80
|
|
|
|
-
|
|
Debt discount
|
|
|
32
|
|
|
|
12
|
|
Debt issue costs
|
|
|
-
|
|
|
|
5
|
|
Financed insurance premiums
|
|
|
2
|
|
|
|
-
|
|
Total interest expense
|
|
$
|
114
|
|
|
$
|
99
|
|
Less: imputed interest income on related party loans
|
|
|
(9
|
)
|
|
|
-
|
|
Total interest expense, net
|
|
$
|
105
|
|
|
$
|
99
|
|
NOTE 9 – 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 is receiving 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 royalty revenue for the three months ended 2019 and 2018 is $12 thousand and $8 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 including such parties 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 April 1, 2019 through
June 27, 2019 we borrowed an aggregate of $250 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 16.)
NOTE 10 - COMMON STOCK WARRANTS
Our warrant activity for the three months
ended March 31, 2019 and 2018 consisted of the following (in thousands except price data):
|
|
Three Months Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Number
|
|
|
WAvg
Exercise
Price
|
|
|
Number
|
|
|
WAvg
Exercise
Price
|
|
Outstanding, Jan. 1
|
|
|
1,842
|
|
|
$
|
0.59
|
|
|
|
1,842
|
|
|
$
|
0.59
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Modification
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, Mar. 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 8).
As part of our July 2017 private placement
transaction with John 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 9). 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.
NOTE 11 – FAIR VALUE MEASUREMENTS
The Company’s financial instruments
consist primarily of cash and cash equivalents, receivables from trade, royalties and collaboration, trade accounts payable, and
our long-term debt. The carrying amounts of these financial instruments, other than our long-term debt, are representative of their
respective fair values due to their relatively short maturities.
NOTE 12 - SHARE-BASED COMPENSATION EXPENSE
Share-based Compensation
We have four share-based compensation plans
covering stock options and RSUs for our employees and directors.
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):
|
|
Three Months Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Research and development expense:
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
2
|
|
|
$
|
13
|
|
Restricted stock units
|
|
|
4
|
|
|
|
7
|
|
Subtotal
|
|
$
|
6
|
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
General and administrative expense:
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
3
|
|
|
|
34
|
|
Restricted stock units
|
|
|
26
|
|
|
|
22
|
|
Subtotal
|
|
$
|
29
|
|
|
$
|
56
|
|
Total
|
|
$
|
35
|
|
|
$
|
76
|
|
Stock Option Award Plans
We maintain various stock option plans.
A summary of our stock option plan activity during the three month periods ending March 31, 2019 and 2018 is shown below:
|
|
Three Months Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Number
of
Options
(000’s)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number of
Options
(000’s)
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding, Jan. 1
|
|
|
1,560
|
|
|
$
|
7.38
|
|
|
|
1,494
|
|
|
$
|
12.33
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited or expired
|
|
|
(32
|
)
|
|
|
(28.06
|
)
|
|
|
(12
|
)
|
|
|
(32.50
|
)
|
Outstanding, Mar. 31
|
|
|
1,528
|
|
|
$
|
6.88
|
|
|
|
1,482
|
|
|
$
|
12.17
|
|
Options exercisable
|
|
|
1,296
|
|
|
$
|
8.09
|
|
|
|
1,235
|
|
|
$
|
14.49
|
|
The following table summarizes information about nonvested stock
options outstanding at March 31, 2019 (in thousands except price data):
|
|
|
Number
of
Options Not
Exercisable
|
|
|
|
Weighted
Average
Fair Value
|
|
Outstanding, Jan. 1, 2019
|
|
|
232
|
|
|
$
|
0.10
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Outstanding, Mar. 31, 2019
|
|
|
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.
The intrinsic value of the option awards
which were vested and outstanding at each of March 31, 2019 and 2018 was $0 thousand. The total remaining unrecognized compensation
cost on unvested option awards outstanding at March 31, 2019 was $15 thousand, and is expected to be recognized in operating expense
in varying amounts over the 8 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”). The 2017 RSU Plan was approved by our 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.
The 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 March 31, 2019 there are approximately 219 thousand shares available for award
under the 2017 RSU Plan and there are no remaining shares available for award under the 2014 RSU Plan.
Vesting of an RSU entitles the holder to
receive a share of our common stock on a distribution date. The RSU awards to our non-employee directors allow for them to receive
payment in cash upon the RSU award’s distribution, instead of an exchange into our common stock, for up to 40% of each RSU
award. The portion of the RSU award subject to cash settlement is recorded as a liability in the Company’s balance sheet
and to either general and administrative expense or research and development expense while being marked-to-market each reporting
period until the award is distributed. The liability was $6 thousand and $11 thousand at March 31, 2019 and December 31, 2018,
respectively.
The compensation cost to be incurred by
the Company on a granted RSU award 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 over the vesting period of the
RSU award to either general and administrative expense or research and development expense and recorded as additional paid-in capital.
A summary of the grants under the RSU Plans
as of March 31, 2019 and 2018, and for the three month period then ended consisted of the following (in thousands):
|
|
Three Months Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
Number of
RSUs
|
|
|
Number of
Vested
RSUs
|
|
|
Number of
RSUs
|
|
|
Number of
Vested
RSUs
|
|
Outstanding, Jan. 1
|
|
|
951
|
|
|
|
459
|
|
|
|
462
|
|
|
|
262
|
|
Granted
|
|
|
333
|
|
|
|
-
|
|
|
|
267
|
|
|
|
-
|
|
Distributed
|
|
|
(267
|
)
|
|
|
(267
|
)
|
|
|
(262
|
)
|
|
|
(262
|
)
|
Vested
|
|
|
-
|
|
|
|
83
|
|
|
|
-
|
|
|
|
66
|
|
Forfeited or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, Mar. 31
|
|
|
1,017
|
|
|
|
275
|
|
|
|
467
|
|
|
|
66
|
|
Information about the award activity under
the RSU Plans is as follows:
|
·
|
In December 2017, we awarded 200 thousand RSUs to employees and such
RSU awards were fully vested on December 31, 2018. Distribution of these awards and the exchange into common stock will occur in
one third amounts on each of January 1, 2020, 2021 and 2022. The employees have the option to pay the par value of the common stock
and settle payroll withholding taxes in shares of common stock they would otherwise be receiving resulting in a net share settlement.
|
|
·
|
In January 2017, we awarded approximately 60 thousand RSUs to each
of our non-employee directors. Such awards vested 25% at the end of each calendar quarter during 2017. In January 2018, these awards
were distributed and they were exchanged into 214 thousand shares of our common stock while 24 thousand RSUs were settled in cash.
There were also 24 thousand RSUs exchanged into common stock from prior year awards.
|
|
·
|
In January 2018, we awarded approximately 67 thousand RSUs to each
of our non-employee directors. Such awards vested 25% at the end of each calendar quarter during 2018. In January 2019, these awards
were distributed and they were exchanged into 267 shares of our common stock.
|
|
·
|
In December 2018, we awarded 492 thousand RSUs to employees and such
RSU awards will vested in full on December 31, 2019. Distribution of these awards and the exchange into common stock will occur
in one third amounts on each of January 1, 2021, 2022 and 2023. The employees have the option to pay the par value of the common
stock and settle payroll withholding taxes in shares of common stock they would otherwise be receiving resulting in a net share
settlement.
|
|
·
|
In January 2019, we awarded approximately 83 thousand RSUs to each
of our non-employee directors. Such awards vest 25% at the end of each calendar quarter during 2019. These awards will be distributed
and exchanged into common stock will occur in one third amounts on each of January 2020 and up to 40% of the award can be settled
in cash.
|
NOTE 13 – 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.
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 were 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
16).
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 both March 31, 2019 and December 31, 2018, 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.
NOTE 14 – NET LOSS PER SHARE
Basic EPS 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 EPS 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 stock warrants, assuming the exercise of all in-the-money stock options
and warrants. Common stock equivalents are excluded from the computation where their inclusion would be anti-dilutive. No such
adjustments were made for 2019 or 2018 as the Company reported a net loss for the three month periods, and including the effects
of the common stock equivalents in the diluted EPS calculations would have been antidilutive. The weighted-average common shares
outstanding diluted computation is not impacted during any period where the exercise price of a stock option or common stock warrant
is greater than the average market price.
A reconciliation of the numerators and
denominators of basic and diluted EPS consisted of the following:
|
|
Three months Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
(in thousands except per share data)
|
|
EPS – basic and diluted
|
|
|
|
|
|
|
|
|
Numerator: net loss
|
|
$
|
(788
|
)
|
|
$
|
(1,494
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Common shares
|
|
|
21,300
|
|
|
|
21,033
|
|
RSUs – vested
|
|
|
193
|
|
|
|
1
|
|
Basic weighted average shares outstanding
|
|
|
21,493
|
|
|
|
21,034
|
|
EPS – basic and diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluded securities:
|
|
|
|
|
|
|
|
|
Common stock issuable:
|
|
|
|
|
|
|
|
|
RSUs – nonvested
|
|
|
742
|
|
|
|
401
|
|
Stock options – vested and nonvested
|
|
|
1,528
|
|
|
|
1,482
|
|
Common stock warrants
|
|
|
1,842
|
|
|
|
1,842
|
|
Total excluded potentially dilutive shares
|
|
|
4,112
|
|
|
|
3,725
|
|
NOTE 15 – 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 March 31,
2019.
NOTE 16 – SUBSEQUENT EVENTS
Related Party Transaction – Loans
From April 1, 2019 and through June 27,
2019, we borrowed an aggregate of $250 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 proceeds of the loan.
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 and September 2019.