Washington, D.C. 20549
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provided pursuant to Section 13(a) of the Exchange Act. ¨
Based on the last sale price on the OTCQB
Market of the Common Stock of $0.1410 on June 28, 2019 (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
$1.0 million.
As of March 30, 2020, the registrant had 21,650,294 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 or are developing three proprietary platform technologies which can be used to develop multiple products. Our
LIMITx™ Technology is being developed to minimize the risks associated with drug 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 development stage technology 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. This is accomplished by binding the active ingredient in an acid
soluble micro-particle and combining the micro-particles with a buffering (antacid) agent into a tablet. As more tablets are introduced
into the GI tract, the stomach pH is increased and the dissolution of the micro-particles is compromised. FDA draft guidance on
opioids specifically highlights the benefits of the risk mitigation of opioid overdose which we believe our LIMITx technology addresses.
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. Study 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. 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.
All opioids are labeled for respiratory
depression/death risk of overdose. According to the CDC, suicide deaths in the US increased 25% to 45,000 from 1999 to 2016 with
over half having no prior mental health symptoms. Approximately 15% of suicides are due to poisoning, which includes opioid overdosing.
The prevalence of chronic pain in suicide decedents topped 10% in 2014. Forensic data for hydrocodone deaths indicates the median
blood level at the time of death is 16 fold the maximum blood level (Cmax) for a 10mg hydrocodone dose. The physiology of opioid
induced respiratory depression has been described in animal models. The correlation between Cmax and respiratory depression and
death has not been documented although Acura has completed a small animal study demonstrating an association between opioid Cmax
and onset of acute respiratory depression which increases the probability of death.
Oxaydo Tablets (oxycodone HCl, CII), which
utilizes our Aversion Technology, is the first FDA 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 and we are receiving royalties on net sales. We are not actively developing product candidates
utilizing our Aversion Technology.
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. According to IMS Health, in 2016, sales in the immediate-release opioid product segment, where our products
are expected to compete, were approximately 194 million prescriptions, of which approximately 95% was attributable to generic products
with no known safety features.
Nexafed,
our first Impede Technology product, was launched into the United States market in December 2012 and Nexafed Sinus Pressure + Pain
product was introduced 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. On January 1, 2020, MainPointe assigned to AD Pharma, all of its
right, title and interest in the Agreement between MainPointe and Acura dated March 16, 2017. We understand MainPointe continues
to market the Nexafed products for AD Pharma. We are not actively developing product candidates utilizing our Impede Technology.
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.
We conduct research, development, laboratory,
non-commercial 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 are currently devoting our efforts to product candidates utilizing
our LIMITx Technology, which we believe will offer a significant measure of safety to those who would intentionally or
otherwise ingest excessive number of tablets.
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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 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/AD Pharma for
commercialization (and granted MainPointe and AD Pharma options to other Impede products), and we entered into an agreement with
AD Pharma that will finance Acura’s operations, provide for the completion of development of LTX-03 and grants them exclusive
commercialization rights in the United States to LTX-03. Additionally, we are seeking other licensing partners for other product
candidates utilizing our LIMITx, Aversion and Impede technologies.
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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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Misuse or Abuse of Prescription Opioid
Products and Development of Risk Mitigation 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. Those who
misuse or abuse drugs will often do so in one of the following manners:
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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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Overdose. Drug abusers may accidentally introduce excessive quantities of drugs in their systems
or combine drugs that may heighten the chance of adverse effects of drugs, Some patients may over ingest drugs accidentally or
with the express intent of suicide.
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Safe
use technology formulations incorporate physical and/or chemical barriers or functionality in the products to prevent or discourage
a user from inappropriately administering the product. The extent and manner in which any of the features of these formulations
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 safe use products typically
require one or more studies. These studies may include in vitro laboratory studies (which may include but not be limited to: syringeability
of the formulation, extractability of the active ingredient, and particle size of the crushed product) animal studies (which may
include but not be limited to: respiratory depression), and human clinical studies (which may include but not be limited to: human
abuse liability, respiratory depression studies) comparing the benefits 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, (c) dose proportionality of our formulation, and (d) other external impacts to our unique formulations.
A product candidate that does not achieve satisfactory pharmacokinetic results may require a phase III clinical efficacy 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 opioid products, if approved, to perform an epidemiology study to assess the in-market
impact on abuse of our formulation and most approved opioid products are subject to an FDA approved risk evaluation and mitigations
strategy (REMS).
Overdose Risk Mitigation - Products
and Development
Any drug may initiate severe unwanted side
effects when overdosed. For example, 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.
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. Formulation and manufacturing
process optimized for commercial scale. Certain ancillary manufacturing equipment is on order.
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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 of LTX-04 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.
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.
Non-clinical
Study APT-RDR-300
Study
APT-RDR-300 was a non-clinical study of respiratory depression in which five groups of 11 Sprague-Dawley rats were orally
administered doses of hydrocodone ranging from 100mg of drug per kg of body weight (mg/kg) up to 300 mg/kg. 8 subjects in each
group were measured for opioid induced respiratory depression (OIRD) assessing peripheral oxygen saturation (SpO2) of the blood
over a 4 hour observation period. 36 subjects were analyzed as successfully completing the dosing. The additional 3 subjects in
each group provided blood samples analyzed for hydrocodone at .5, 1, 2 and 4 hours post-dosing.
In Study APT-RDR-300 all doses above 100
mg/kg demonstrated with statistical significance (p<.05) SpO2 measured OIRD at all time points post-dosing. The 100 mg/kg dose
was not statistically significant for OIRD at any time point post-dosing. The mortality rate was correlated with higher doses.
In all animals exhibiting OIRD, OIRD was acutely evident within 30 minutes of dosing which was consistent with the Cmax of the
hydrocodone dose. Increased Cmax was generally associated with an increased prevalence of acute OIRD (SpO2 ≤70%). Approximately
50% of animals reaching this acute OIRD level resulted in death. Due to a high variability in the pharmacokinetics and pharmacodynamics
observed in the study, no further associations were possible. Acura believes the results of this study generally support the development
of opioid products with a reduction in Cmax in overdose situations.
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 have completed a manufacturing formulation
and manufacturing process optimization study for LTX-03. We are currently conducting the scale-up of the commercial manufacturing
process as to-be-marketed formulations are required for all NDA development work. We are currently awaiting delivery of certain
ancillary equipment for use in manufacturing the drug micro-particles before scale-up work can commence. 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 be entitled to 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 November 30, 2020 or FDA’s acceptance of a New Drug Application (“NDA”) for LTX-03
and reimbursement by AD 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 by November 30, 2020, AD Pharma has the option to terminate
the Agreement and take ownership of the LIMITx intellectual property. Should AD Pharma choose not to exercise this option to terminate
and the NDA for LTX-03 is subsequently accepted by the FDA, such option expires.
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. On January 1, 2020, MainPointe assigned to AD Pharma, with Acura’s consent, all of its right, title
and interest in the MainPointe Agreement between MainPointe and Acura dated March 16, 2017. We understand that MainPointe continues
to market the Nexafed products.
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.
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 formed a joint steering committee to oversee commercialization strategies and the development of product line extensions.
Zyla pays 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 pays 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 has 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 are entitled to 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. As of December 31, 2019 we are unaware of KemPharm’s use of our Aversion technology
under the KemPharm Agreement.
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 Technology Products
Our initial Impede 1.0 Technology being
used in Nexafed Sinus Pressure + Pain contains 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.
We
have developed a next generation Impede 2.0 Technology with additional inactive ingredients to improve the meth-resistance of our
technology which is currently used in Nexafed Tablets. One-pot, direct conversion meth testing performed by our CRO on the following
commercially available products resulted in:
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. MainPointe has assigned and transferred 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.
On January 1, 2020, MainPointe assigned
to AD Pharma, with Acura’s consent, all of its right, title and interest in the MainPointe Agreement between MainPointe and
Acura dated March 16, 2017.
Other Impede Technology Products
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.
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 products 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.
2
IMS Health, 2016
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 Products Using
Our Technologies
We
or our licensee may seek to include descriptions of studies that characterize the safety features of our technologies in the label
for our products in development. Zyla has committed to undertake FDA required epidemiological studies to assess the actual consequences
of abuse of Oxaydo in the market for which we share a minority portion of appropriate fees and expenses. The extent to which a
description of the 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. Further, because
the FDA closely regulates promotional materials, even if FDA initially approves labeling that includes a description of the 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.
In
April 2015, the FDA published guidance for industry on the evaluation and labeling of abuse-deterrent opioids and in June
2019, FDA issued a draft for public comment guidance on a Benefit-Risk Assessment Framework for Opioid Analgesic Drugs which may
be beneficial to use in the development and labeling of our product candidates.
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
|
10,441,657 (US)
|
|
Abuse deterrent products wherein the release of active ingredient is retarded when 3 or more doses are consumed
|
|
Sept. 2019
|
|
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
|
ZL201380062421.0 (CHN)
|
|
Abuse deterrent products wherein the release of active ingredient is retarded when excessive doses are consumed
|
|
Jul. 2018
|
|
Nov. 2033
|
2,925,304 (EUR)
|
|
Abuse deterrent products wherein the release of active ingredient is retarded when excessive doses are consumed
|
|
Sep. 2018
|
|
Nov. 2033
|
2015124694 (RUS)
|
|
Abuse deterrent products wherein the release of active ingredient is retarded when excessive doses are consumed
|
|
Nov. 2018
|
|
Nov. 2033
|
2013352162 (AUS)
|
|
Abuse deterrent products wherein the release of active ingredient is retarded when excessive doses are consumed
|
|
Dec. 2018
|
|
Nov. 2033
|
366159 (MEX)
|
|
Abuse deterrent products wherein the release of active ingredient is retarded when excessive doses are consumed
|
|
Jul. 2019
|
|
Nov. 2033
|
238713 (ISR)
|
|
Abuse deterrent products wherein the release of active ingredient is retarded when excessive doses are consumed
|
|
Jul. 2019
|
|
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
|
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
|
|
Sept. 2017
|
|
Feb. 2032
|
10,004,699 (US)
|
|
Methods and compositions for interfering with extraction or conversion of a drug susceptible to abuse
|
|
June 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, the MainPointe Agreement, and the AD Pharma 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.
Between October, 2013 and May, 2014 we
settled on an individual basis, patent infringement suits we brought against generic manufacturers Par Pharmaceuticals, Inc., Impax
Laboratories, Inc. Sandoz Inc. and Ranbaxy Inc. initiated by their seeking to market generic versions of Oxaydo. Principally, the
settlements grant to Par a royalty bearing license to use our Aversion Technology patents in an immediate-release oxycodone product
starting in January 2022, or sooner depending on other generic competition. None of such settlements impacted the validity or enforceability
of our Patents. Reference is made to the Risk Factors contained in this report under Item 1A.
On
May 20, 2016, we, Purdue Pharma L.P. and Zyla settled patent infringement actions initiated by Purdue against Oxaydo and an Intes
Parties Review initiated by us against a Purdue patent. 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. The
settlement provides that Acura will not, in the future, assert certain Acura U.S. Aversion Technology patents against selected
Purdue immediate and extended-release products. In addition, Purdue has certain rights to negotiate to exclusively distribute an
authorized generic version of certain Zyla products, including, in some circumstances, Oxaydo® and other products using Acura’s
Aversion® Technology if licensed to Zyla. Reference is made to the Risk Factors contained in this report under Item 1A.
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, KemPharm, Shionogi, Nektar Therapeutics, Signature Therapeutics, QRx Pharma, Tris
Pharma, Pisgah Labs, Teva Pharmaceuticals, Sun Pharmaceuticals, Ensysce Biopharma, Inspirion Delivery Sciences and Collegium Pharmaceuticals.
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/AD Pharma, 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) as well as the manufacturing suitability of the product. 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,
and include, among other things, demonstration of product purity, consistent manufacturing and quality and at least six months
of data supporting product expiration dating based on clinical registration batches. 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 2, 2019, for the 2020 fiscal year, the user fee for an application fee requiring clinical data, such as an NDA
is $2,942,965. 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 2020 such fee is $325,424 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:
|
·
|
the product is manufactured at FDA registered establishments and in accordance with cGMPs;
|
|
·
|
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;
|
|
·
|
the product contains only permissible active ingredients in permissible strengths and dosage forms;
|
|
·
|
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
|
|
·
|
the product container and container components meet FDA’s requirements.
|
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 be able to generate a positive return on shareholders’ investment; there is substantial doubt as to our
ability to continue as a going concern.
We had a net loss of $3.8 million, $3.8
million, and $5.7 million for the years ended December 31, 2019, 2018 and 2017, respectively. As of March 30, 2020 we had approximately
$1.2 million of cash. The Agreement with AD Pharma provides us monthly license payments of $350,000 from July 2019 through November
2020 as well as reimbursement for all outside development costs for LTX-03. However, AD Pharma has the right to terminate the Agreement
at any time for convenience and such action would substantially and adversely affect our ability to fund continuing operations.
Our future viability will depend on several factors, including:
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the receipt of monthly license payments from AD Pharma for the entire18 month period ending November
30, 2020; and
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our receipt of royalties relating to Zyla’s sale of Oxaydo, of which no assurance can be
given; and
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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, of which no assurance can
be given; and
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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, yet to be
identified and obtained, 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, of which no assurance can be given.
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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 self-supporting resulting in significant doubt as to our ability to sustain operations.
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 these and other
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 liquidity. 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 currently 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 March 30, 2020 our cash balance was approximately
$1.2 million. 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. To fund further operations, we must raise
additional financing or enter into license or collaboration agreements with third parties relating to our technologies.
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 or have other provisions, including
possibly security interests in our assets that could be onerous. 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 would materially harm our business,
financial condition, results of operations and prospects. 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, which likely will require that we continue to obtain capital infusions in the future. Our capital requirements,
which cannot be predicted with certainty, include: 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.
Our business could be adversely
affected by the effects of health epidemics, including the recent COVID-19 pandemic, in regions where third parties for which we
rely, as in CROs or CMOs, have significant research, development or manufacturing facilities, concentrations of clinical trial
sites or other business operations, causing disruption in supplies and services.
Our business could be adversely affected
by health epidemics in regions where third parties for which we rely, as in CROs or CMOs, have concentrations of clinical
trial sites or other business operations, and could cause significant disruption in the operations of third-party manufacturers
and CROs upon whom we rely. On January 30, 202 0, the World
Health Organization (“WHO”) announced a global health emergency because of a new strain of novel coronavirus originating
in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spread globally
beyond its point of origin. In March 2020, the WHO declared the COVID-19 outbreak a pandemic, which continues to spread throughout
the world. The spread of this pandemic has caused significant volatility and uncertainty in U.S. and international markets.
This could result in an economic downturn and may disrupt our business and delay our clinical programs and timelines.
Quarantines, shelter-in-place and similar
government orders, or the perception that such orders, shutdowns or other restrictions on the conduct of business operations could
occur, related to COVID-19 or other infectious diseases could impact personnel at third-party manufacturing facilities in the United
States and other countries, or the availability or cost of materials, which would disrupt our supply chain. Any manufacturing supply
interruption of materials could adversely affect our ability to conduct ongoing and future research and manufacturing activities
of LTX-03.
In addition, our clinical trials may be
affected by the COVID-19 pandemic. Clinical site initiation and patient enrollment may be delayed due to prioritization of hospital
resources toward the COVID-19 pandemic. Some patients may not be able to comply with clinical trial protocols if quarantines impede
patient movement or interrupt healthcare services. Similarly, the ability to recruit and retain patients and principal investigators
and site staff who, as healthcare providers, may have heightened exposure to COVID-19 and adversely impact our clinical trial operations.
The spread of COVID-19, which has caused
a broad impact globally, may materially affect us economically. While the potential economic impact brought by, and the duration
of, COVID-19 may be difficult to assess or predict, a widespread pandemic could result in significant disruption of global financial
markets, reducing our ability to access capital, which could in the future negatively affect our liquidity. In addition, a recession
or market correction resulting from the spread of COVID-19 could materially affect our business and the value of our common stock.
The global pandemic of COVID-19 continues
to rapidly evolve. The ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to
change. We do not yet know the full extent of potential delays or impacts on our business, our clinical trials, healthcare systems
or the global economy as a whole. However, these effects could have a material impact on our operations, and we will continue to
monitor the COVID-19 situation closely.
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 security interest in all of our 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 upon failure to meet certain timelines as defined in the License, Development and Commercialization
Agreement could result in the acceleration of payment of our loan, foreclosure on our assets, and other adverse results. With our
consent, Mr. Schutte assigned and transferred to Abuse Deterrent Pharma, LLC (“AD Pharma”) (an entity controlled by
him, 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 could result in the transfer of our business to AD Pharma without additional consideration
and the loss by our shareholders of their entire interest.
We are largely dependent on our successful development
of our LIMITx product candidates.
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, of which no assurance can be
given We expect that a substantial portion of our efforts and expenditures over the next few years, if we obtain additional funding,
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.
If
MainPointe/AD Pharma is not successful in commercializing our Nexafed Products, our revenues and business will suffer.
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 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 may have an 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 30, 2020, will allow AD Pharma the option to terminate the Agreement and take ownership
of the LIMITx intellectual property 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 option to terminate this Agreement and take ownership of the LIMITx
intellectual property. AD Pharma’s seizure of the LIMITx IP would have a material adverse impact our financial condition
and results of 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, demonstration of acceptable manufacturing, quality and product expiration standards, 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 do 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 licensees. 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 AD Pharma 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 will 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
Federal and foreign legislation
may be enacted that may seriously impact the commercial viability and acceptance of the products we have licensed and are developing.
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.
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. 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 would 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 we may require 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 Abbreviated New Drug Application (“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.
In 2012 and 2013, we received Paragraph
IV Certification Notices under 21 U.S.C. 355(j) (a Paragraph IV Notice) from 5 different generic sponsors of an ANDA for a generic
drug listing Oxaydo as the reference listed drug. We initiated patent infringement proceedings against all 5. In 2013 and 2014,
Watson Laboratories, Inc. – Florida (Watson) withdrew their Paragraph IV certification and we settled our litigation with
Par Pharmaceutical, Inc., Impax Laboratories, Inc. Sandoz Inc., and Ranbaxy, Inc. 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.
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, 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 retain the services of key
personnel or 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.
Further, many of our raw ingredients and
manufacturing equipment comes from international sources. Trade agreements and/or disagreements or other unforeseen disruptions
to international supply chains may have an adverse impact on our business.
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
may limit our ability to use our tax net operating loss carryforwards as part of an corporate restructure or reorganization.
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. As such, an entity that may seek to acquire
the Company would likely be limited in the amount of NOLs they may be able to utilize. 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 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 periods,
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 2019, our stock traded as high as
$0.63 per share and as low as $0.11 per share. The trading price of our common stock is likely to continue to exhibit 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 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 February 15, 2020, our two largest
shareholders own an aggregate of 12,651,582 shares (including 1,782,531 shares underlying warrants) (representing approximately
54.6% of our outstanding shares, including shares issuable upon exercise of these warrants but not including any other warrants,
options or convertible debt outstanding to other entities). 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
45.6% of our common stock, after giving effect to exercise of a warrant, 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. 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 had 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
with a principal amount of $6.0 million (after including accrued and unpaid interest through that date). 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% per annum with all payments of principal 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 share.
With our consent, Mr. Schutte assigned
and transferred to Abuse Deterrent Pharma, LLC (“AD Pharma”), effective June 28, 2019, all of his right, title and
interest in this Note, its associated Security Agreement and the Warrant to purchase 10 million common shares of our stock. 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 Pharma LLC and the security interest AD Pharma has in all of our assets gives
him considerable influence over our business and affairs. As a result, Mr. Schutte, as a
practical matter, is 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 he
may and cause the Company to 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 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.
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. 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. In addition, certain
institutions are prohibited or limited from trading in shares priced at less than specified levels, including the prices at which
our shares currently trade. 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
$250 million. “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 2019 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 (through a wholly owned subsidiary) located at 16235 State Road
17, Culver, Indiana. At this location 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
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 first quarter of 2020. 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, 2019.
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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61
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President, Chief Executive Officer and Director
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Peter A. Clemens
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67
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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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63
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Vice President, Pharmaceutical Sciences
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Robert A. Seiser
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56
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Vice President, Treasurer, and Corporate Controller
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James F. Emigh
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64
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Vice President of Corporate Development
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Bruce F. Wesson(1) (2)
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77
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Director
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William G. Skelly(1)(2)
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69
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Director
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Immanuel Thangaraj(2)
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49
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Director
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George K. Ross(1)
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78
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Director
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(1)
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Member of audit committee.
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(2)
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Member of compensation committee.
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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 was been quoted on the OTC Markets’
OTC Pink Tier due to our failure to comply with the filing deadlines for our 2018 Form 10K and 2019 Form 10-Qs. In March, 2020
we regained compliance with the OTCQB Market and resumed quotation on the OTXQB Market on March 20, 2020. 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:
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accept, directly or indirectly, any consulting, advisory, or other compensatory fee from us or
any of our subsidiaries; or
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be an affiliated person of us or any of our subsidiaries.
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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 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 2019, 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 2019 the Compensation Committee did not retain a compensation consulting firm, to assist in evaluating stock option
and other incentives for our directors, executive officers and other employees.
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).
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, 2019.
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, 2019, 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 “2019 named
executive officers”) whose total annual compensation for 2019 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,
|
|
|
2019
|
|
|
|
123,000
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
123,000
|
|
President and CEO
|
|
|
2018
|
|
|
|
273,000
|
|
|
|
---
|
|
|
|
21,150
|
|
|
|
4,750
|
|
|
|
---
|
|
|
|
298,900
|
|
Peter A. Clemens
|
|
|
2019
|
|
|
|
164,000
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
164,000
|
|
SVP & CFO
|
|
|
2018
|
|
|
|
220,000
|
|
|
|
---
|
|
|
|
16,920
|
|
|
|
3,800
|
|
|
|
---
|
|
|
|
240,720
|
|
Albert W. Brzeczko VP, Pharmaceutical Sciences
|
|
|
2019
|
|
|
|
180,000
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
180,000
|
|
of Acura Pharmaceutical Technologies, Inc.
|
|
|
2018
|
|
|
|
257,000
|
|
|
|
---
|
|
|
|
14,382
|
|
|
|
13,230
|
|
|
|
---
|
|
|
|
284,612
|
|
(1) The RSU Stock Award grant
date fair values are computed in accordance with FASB ASC Topic 718. 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). There were no RSU stock awards in 2019.
(2) The Stock Option grant date
fair values are computed in accordance with FASB ASC Topic 718. 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. There were no stock option awards in 2019.
(3) Salary of $123,000, $164,000
and $180,000 for Messrs. Jones, Clemens and Brzeczko, respectively, reflects impact of certain voluntary salary reductions enacted
in 2018 and unpaid leave of absences during 2019. 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 at 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. In 2019 and 2018 our cash position did not allowed us to award
bonuses under our non-equity incentive compensation plan or otherwise increase salaries as reflected in the “Non-equity Incentive
Compensation” column of the Summary Compensation Table.
Material
organizational goals for 2020 include securing a commercial manufacturer for LTX-03, completing all clinical activities
for LTX-03 and submission and acceptance by the FDA of the NDA for LTX-03 by November 30, 2020 and securing a licensing partner
for other LIMITx products in development.
Material
organizational goals for 2019 included 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.
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 $393,000 because of our need to preserve cash). The term of the Employment Agreement is currently scheduled
to expire December 31, 2020, 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 2018 and 2019, 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, 2020, 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 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
|
·
|
acquisition by a person or group of more than 50% of our outstanding shares
|
|
·
|
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
|
|
·
|
a merger in which we are not the surviving corporation
|
|
·
|
a sale or license of substantially all of our assets
|
|
·
|
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
|
Events Affecting Stock Option Vesting
and Exercise (For Messrs. Jones and Clemens)
Event
|
Vesting
of All
Options (Options
are exercisable
upon vesting)
|
Exercisability
of Options
|
Termination due to Death
|
Options vest for one month after death; after that no additional vesting
|
Vested options immediately exercisable for one year following termination
|
Termination by Company Without Cause or by Employee for Good Reason or termination by Employee following Change of Control
|
All options fully vest.
|
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)
|
Termination due to Disability
|
No additional vesting
|
Vested options immediately exercisable for one year following termination
|
Termination by the Company for Cause or by executive other than for Good Reason
|
No additional vesting
|
Vested options immediately exercisable for 40 days following termination
|
Change of Control
|
Options fully vest for Mr. Jones and Mr. Clemens.
|
Vested options immediately exercisable
|
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 2018 and 2019 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 our option grants to employees
dated August 9, 2017 and December 11, 2018 vest 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, 2019, stock options to purchase
791,893 shares of common stock are outstanding under the 2008 Stock Option Plan and 48,000 options are non-qualified and 743,893
options are ISOs. The weighted average exercise price per share for all outstanding options under the 2008 Stock Option Plan as
of December 31, 2019 was $7.28.
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, 2019, stock options to purchase 564,356 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, 2019 was $0.47.
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, 2020 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, 2020, approximately 3,156 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, 2020 we had granted RSUs under the 2017 RSU Plan providing for our issuance of an aggregate of 1,500,000 shares
of our common stock and there are no remaining shares available for grant. At March 30, 2020, approximately 839,000 awards remain
outstanding under our 2017 RSU Plan.
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, 2020 all of the Company’s 12 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 2019, it will be generally be distributed the first business day of January 2020.
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 2019 Year End
The following table presents information
regarding outstanding restricted stock unit and stock option awards at December 31, 2019 for each of the 2019 named executive officers.
|
|
Stock Option Awards
|
|
Stock Awards
(in Form of Restricted
Stock Units)
|
|
Name
|
|
Number of Securities
Underlying Unexercised
Options (#) Exercisable
|
|
|
Number of Securities Underlying
Unexercised Options
(#) Unexercisable
|
|
|
Option
Exercise
Price ($)
|
|
|
Option
Expiration
Date
|
|
Number of Restricted
Stock Units
that have not
vested (#)
|
|
|
Market value
of shares of
units of stock
that have not
vested ($)
|
|
Robert B. Jones
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
----
|
|
|
$
|
----
|
|
|
|
|
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
|
|
|
|
---
|
|
|
$
|
0.151
|
|
|
12/11/2023
|
|
|
|
|
|
|
|
|
Peter A. Clemens
|
|
|
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
----
|
|
|
$
|
----
|
|
|
|
|
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
|
|
|
|
|
|
|
$
|
0.151
|
|
|
12/11/2023
|
|
|
|
|
|
|
|
|
Albert W. Brzeczko
|
|
|
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
---
|
|
|
$
|
----
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
34,000
|
|
|
|
---
|
|
|
$
|
0.151
|
|
|
12/11/2023
|
|
|
|
|
|
|
|
|
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, 2019:
2019 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
|
|
$
|
11,875
|
|
|
$
|
10,833
|
|
|
|
---
|
|
|
$
|
22,708
|
|
Bruce F. Wesson
|
|
$
|
10,625
|
|
|
$
|
10,833
|
|
|
|
---
|
|
|
$
|
21,458
|
|
Immanuel Thangaraj
|
|
$
|
6,833 (3)
|
|
|
$
|
10,833
|
|
|
|
---
|
|
|
$
|
17,666
|
|
George K. Ross
|
|
$
|
13,125
|
|
|
$
|
10,833
|
|
|
|
---
|
|
|
$
|
23,958
|
|
|
(1)
|
Represents the grant date fair value of restricted stock units, or RSUs with
respect to the 83,333 RSUs granted to Messrs. Skelly, Wesson, Thangaraj and Ross under our 2017 RSU Plan based on a closing common
stock price of $0.14 on January 2, 2019 less $0.01 par value.
|
In January 2019, based
on a closing common stock price of $0.1147 on December 31, 2018 less $0.01 par value, Messrs. Skelly, Wesson, Thangaraj and Ross
each realized approximately $6,980 by exchanging 66,666 RSUs at 0.01 par value per share received from their 2018 grant for 66,666
shares of common stock.
As of December 31, 2019,
Messrs. Skelly, Wesson, Thangaraj and Ross each held 83,333 fully vested RSUs and are distributable to them on January 2, 2020.
|
(2)
|
Each of Messrs. Skelly, Wesson, Thangaraj and Ross held
vested options with respect to 12,000 underlying shares as of December 31, 2019.
|
|
(3)
|
Director fees for Mr. Thangaraj are remitted to Essex Woodlands.
|
|
(4)
|
In order to conserve cash, the directors waived their fees for the first
and second quarter 2019 while reducing their fees by fifty percent beginning with the third quarter 2019.
|
Had the Directors not waived a portion
of their cash compensation they would have received the following compensation under the reduced percentage:
|
·
|
the annual retainer for each non-employee director of $15,000;
|
|
·
|
there are no separate Board meeting fees;
|
|
·
|
an additional retainer for the Chairman of the Board (unfilled at present) of $10,000;
|
|
·
|
Audit Committee members receive a retainer of $3,750 per year (with no separate per meeting fee);
|
|
·
|
Audit Committee Chairperson receives an additional annual retainer of $5,000 (in addition to the
$3,750 retainer as an Audit Committee member);
|
|
·
|
Compensation Committee members receive an annual retainer of $2,500 with no separate per meeting
fee;
|
|
·
|
Compensation Committee Chairperson receives a $2,500 annual retainer (in addition to the $2,500
retainer for Compensation Committee members); and
|
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 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 $0.1395
was not used.
|
|
·
|
For the 2020 award, the Board reevaluated the minimum stock price and it was changed to $0.91 resulting
in each director being awarded 54,790 RSUs. The Company’s closing stock price on January 2, 2020 of $0.28 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 February 15, 2020, 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 2019 exceeded $100,000
(the “2019 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 February 15, 2020, there were 21,650,294
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 February 15, 2020.
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)
|
|
|
|
45.6
|
%
|
Abuse Deterrent Pharma, LLC
333 E. Main Street, Suite 220
Louisville, KY 40202
|
|
|
47,400,000
(3)
|
|
|
|
68.6
|
%
|
Essex Woodlands Health Ventures Fund V, L.P.
21 Waterway Avenue, Suite 225
Woodlands, TX 77380
|
|
|
1,956,396
(4)
|
|
|
|
9.0
|
%
|
Robert B. Jones
|
|
|
802,122
(5)
|
|
|
|
3.6
|
%
|
William G. Skelly
|
|
|
346,867
(6)
|
|
|
|
1.6
|
%
|
Bruce F. Wesson
|
|
|
612,926
(7)
|
|
|
|
2.8
|
%
|
Peter A. Clemens
|
|
|
595,377 (8)
|
|
|
|
2.7
|
%
|
Immanuel Thangaraj
|
|
|
218,525 (9)
|
|
|
|
1.0
|
%
|
Albert W. Brzeczko
|
|
|
550,534 (10)
|
|
|
|
2.5
|
%
|
George K. Ross
|
|
|
266,381
(11)
|
|
|
|
1.2
|
%
|
All Officers and Directors as a Group (9 persons)
|
|
|
4,376,850(12)
|
|
|
|
19.3
|
%
|
* 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 February 15, 2020 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 2019 named
executive officer has been pledged as collateral security.
|
|
(2)
|
Includes warrants to purchase 1,782,531 shares held by Mr. Schutte.
|
|
(3)
|
Includes both a warrant to purchase 10,000,000 shares at $0.01 per share
and 37,500,000 shares issuable upon conversion of $6.0 million Note at $0.16 per share 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 375,900 shares subject to stock options exercisable within 60 days
of February 15, 2020. Does not include RSUs.
|
|
(6)
|
Includes 9,000 shares subject to stock options exercisable within 60 days
of February 15, 2020. Does not include RSUs.
|
|
(7)
|
Includes 9,000 shares subject to stock options exercisable within 60 days
of February 15, 2020. Does not include RSUs.
|
|
(8)
|
Includes 234,000 shares subject to stock options exercisable within 60 days
of February 15, 2020. Does not include RSUs.
|
|
(9)
|
Includes 9,000 shares subject to stock options exercisable within 60 days
of February 15, 2020. 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 225,200 shares subject to stock options exercisable within 60 days
of February 15, 2020. Does not include RSUs.
|
|
(11)
|
Includes 9,000 shares subject to stock options exercisable within 60 days
of February 15, 2020. Does not include RSUs.
|
|
(12)
|
Includes 1,083,734 shares which Directors and executive officers have the
right to acquire within 60 days of February 15, 2020 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, 2019 relating to 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
|
|
|
1,356,251
|
|
|
$
|
4.45
|
|
|
|
34,478
|
|
Stock Option Equity Compensation Plans Not Approved by Security Holders
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Restricted Stock Unit Equity Compensation Plans Approved by Security Holders
|
|
|
1,017,333
|
|
|
$
|
0.01
|
|
|
|
---
|
|
Restricted Stock Unit Equity Compensation Plans Not Approved by Security Holders
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
TOTAL
|
|
|
2,373,584
|
|
|
$
|
2.55
|
|
|
|
34,478
|
|
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 and unpaid 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 November 30, 2020 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 is
eligible to receive stepped royalties on sales and 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 by November 30, 2020, AD Pharma has the option to terminate
the Agreement and take ownership of the LIMITx intellectual property. Should AD Pharma choose not to exercise this option to terminate
and the NDA for LTX-03 is subsequently accepted by the FDA, such option expires.
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 2019,
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 2019
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 2019 and 2018 were as follows:
|
|
2019
|
|
|
2018
|
|
Audit Fees
|
|
$
|
150,486
|
|
|
$
|
145,989
|
|
Audit-Related Fees
|
|
|
-
|
|
|
|
-
|
|
Total Audit and Audit-Related Fees
|
|
|
150,486
|
|
|
|
145,989
|
|
Tax Fees
|
|
|
39,200
|
|
|
|
39,200
|
|
All Other Fees
|
|
|
-
|
|
|
|
-
|
|
Total for BDO USA, LLP
|
|
$
|
189,686
|
|
|
$
|
185,189
|
|
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 2019 and 2018 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, 2019 and 2018
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 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 Pharma, LLC (See Note 3).
|
|
·
|
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, 2019, we had cash of $862 thousand, working capital of $104 thousand and an accumulated deficit of $388 million. We had a loss
from operations of $725 thousand and a net loss of $3.8 million for the year ended December 31, 2019. 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.
On June 28, 2019, we entered into with
Abuse Deterrent Pharma, LLC (“AD Pharma”), a License, Development and Commercialization Agreement (the “AD Pharma
Agreement”). AD Pharma has the right to terminate the AD Pharma Agreement for “convenience on 30 days prior written
notice”. Under the AD Pharma Agreement, the required monthly license payments by AD Pharma will only continue until November
2020 if AD Pharma does not exercise their right to terminate the AD Pharma Agreement. To fund further operations, 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 and the Company will be required to scale back or terminate operations and/or seek protection under
applicable bankruptcy laws. 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. Should AD Pharma exercise their right to terminate
the AD Pharma Agreement, we would need to raise additional financing or enter into license or collaboration agreements with third
parties relating to our technologies. The Company’s ability to raise additional capital may be adversely impacted by potential
worsening global economic conditions and the recent disruptions to, and volatility in, financial markets in the United States and
worldwide resulting from the ongoing COVID-19 pandemic. 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, royalty receivables
and collaboration revenue 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.
Fair Value Measurements
The Company’s financial instruments
consist primarily of cash, royalties and collaboration receivables, trade accounts payable, and debt. The carrying amounts of these
financial instruments, other than our debt, are representative of their respective fair values due to their relatively short maturities.
On June 28, 2019, we restructured the $5.0 million related party loan to borrow an additional $725 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, and reported the debt using fair value for the changes to the loan resulting in the recognizing a $2.6 million loss on debt
extinguishment. The fair value of the $6.0 million loan at December 31, 2019 has not materially changed from its valuation of fair
value of $7.4 million.
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 classified instrument. 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 closing market price of our common stock on the date of grant.
Our total 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,
|
|
|
|
2019
|
|
|
2018
|
|
Research and development expense:
|
|
|
|
|
|
|
|
|
Stock option awards
|
|
$
|
8
|
|
|
$
|
38
|
|
RSU awards
|
|
|
13
|
|
|
|
27
|
|
|
|
$
|
21
|
|
|
$
|
65
|
|
|
|
|
|
|
|
|
|
|
General and administrative expense:
|
|
|
|
|
|
|
|
|
Stock option awards
|
|
|
12
|
|
|
|
61
|
|
RSU awards
|
|
|
105
|
|
|
|
104
|
|
|
|
$
|
117
|
|
|
$
|
165
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense
|
|
$
|
138
|
|
|
$
|
230
|
|
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 2019 or 2018.
License Fee Revenue
On signing the AD Pharma Agreement in June
2019, Acura will receive a monthly license payment of $350 thousand by AD Pharma for 18 months until November 2020. The first license
payment was received July 2, 2019. If the NDA filing for LTX-03 is not accepted by the FDA by November 30, 2020, AD Pharma has
the option to terminate the AD Pharma Agreement and take ownership of the Limitx intellectual property. Should AD Pharma choose
not to exercise this option to terminate and the NDA for LTX-03 is subsequently accepted by the FDA, such option expires. AD Pharma
does have the right to terminate the AD Pharma Agreement anytime for “convenience on 30 days prior written notice”
and the license fee payments will stop. The license fee payments are non-refundable and non-creditable when made by AD Pharma and
we had no further requirements to earn the payment. The license payment amount is recognized as revenue when received (See Note
3). During 2019 we recognized $2.1 million of license fee revenue from AD Pharma.
Collaboration Revenue
Collaboration revenue is derived from reimbursement
of development expenses, such as under our agreement with AD Pharma, 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 $185 thousand of collaboration
revenue during the year 2019. We did not have collaboration revenue during the year 2018.
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 $351 thousand and $386 thousand on net sales for the years 2019 and 2018, 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 $21 thousand and $24
thousand for the years 2019 and 2018 (See Note 3).
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 balance at December 31, 2018. On June 28, 2019, we restructured the $5.0
million related party loan and reported the debt using fair value for the changes to the loan and in doing so, the unamortized
debt discount was written off as a loss on debt extinguishment. During the years ended 2019 and 2018, we recognized interest expense
from the amortization of debt issuance costs and debt discount of $66 thousand and $87 thousand, respectively.
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, 2019 and 2018.
In connection with our development and
scale-up of LTX-03 under the AD Pharma Agreement (See Note 3) we entered into obligations under non-cancelable arrangements at
December 31, 2019 aggregating $502 thousand.
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, 2019 and 2018, 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 Income (Loss) per Share
Basic net income (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 both vested Restricted Stock Units (“RSUs”) which settle in shares (See Note 12) and a stock warrant exercisable
for 10.0 million shares having an exercise price of $0.01 per share (See Note 8). 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. As the Company reported a net loss in 2019 and 2018 the effects of common stock equivalents were excluded as
the diluted net loss per share calculation would have been antidilutive. The weighted-average common share outstanding diluted
computation is not impacted during any period where the exercise price of a stock option, common stock warrant or convertible loan
is greater than the average market price of our common stock.
Customer Concentration
Under our agreement with MainPointe, we
earn royalties from MainPointe sale of the licensed product line Nexafed, and under our license agreement with Zyla, we earn royalties
from Zyla’s sale of the licensed product Oxaydo.
In June 2019 we signed a license, development
and commercialization agreement with AD Pharma. Acura will receive a monthly license payment of $350 thousand by AD Pharma for
18 months until November 2020. The first license payment was received July 2, 2019. If the NDA filing for LTX-03 is not accepted
by the FDA by November 30, 2020, AD Pharma has the option to terminate the agreement and take ownership of the Limitx intellectual
property. Should AD Pharma choose not to exercise this option to terminate and the NDA for LTX-03 is subsequently accepted by the
FDA, such option expires. AD Pharma does have the right to terminate the agreement anytime for “convenience on 30 days prior
written notice” and the license fee payments will stop. On January 1, 2020, MainPointe assigned to AD Pharma, with Acura’s
consent, all of its right, title and interest in the MainPointe Agreement between MainPointe and Acura dated March 16, 2017.
Recent Accounting Pronouncements
New accounting standards which have
been adopted on or before December 31, 2019
Collaborative Arrangements
In November 2018, the FASB issued ASU 2018-18,
Collaborative Arrangements (ASC 808): Clarifying the Interaction between ASC 808 and ASC 606, which clarifies that certain
transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606 when the collaborative
arrangement participant is a customer in the context of a unit of account. In those situations, all the guidance in ASC 606 should
be applied, including recognition, measurement, presentation and disclosure requirements. This ASU adds unit-of-account guidance
in ASC 808 to align with the guidance in ASC 606 (that is, a distinct good or service) when an entity is assessing whether the
collaborative arrangement or a part of the arrangement is within the scope of ASC 606, and requires that in a transaction with
a collaborative arrangement participant that is not directly related to sales to third parties, presenting the transaction together
with revenue recognized under ASC 606 is precluded if the collaborative arrangement participant is not a customer. The Company
early adopted ASC 808 which was to be effective for fiscal years beginning after December 15, 2020, and interim periods within
fiscal years beginning after December 15, 2021. The Company early adopted ASC 808 during third quarter 2019. The adoption of ASC
808 did not have an impact on the Company’s financial statements.
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 during Q1 2019, 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 would 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 ASC 842 did not have
an impact on the Company’s financial statements as the Company has no leases with a term of more than 12 months.
New accounting standards which
have not yet been adopted on or before December 31, 2019
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.
Credit Losses
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (“ASU-2016-13”).
ASU 2016-13 affects loans, debt securities, trade receivables, and any other financial assets that have the contractual right to
receive cash. The ASU requires an entity to recognize expected credit losses rather than incurred losses for financial assets.
ASU 2016-13 is effective for the fiscal year beginning after December 15, 2022, including interim periods within that fiscal year.
The Company is currently evaluating the impact that the standard will have on the financial statements and related footnote disclosures.
NOTE 3 – LICENSE AND COLLABORATION
AGREEMENTS
The Company’s revenues are comprised
of amounts earned under its license and collaboration agreements and royalties. Revenue recognition occurs when a customer obtains
control of promised services in an amount that reflects the consideration the Company expects to receive in exchange for those
services based on a short-term credit arrangement.
AD Pharma Agreement covering LTX-03
On June 28, 2019 we entered into with Abuse
Deterrent Pharma, LLC (“AD Pharma”), a License, Development and Commercialization Agreement (the "AD Pharma Agreement"),
for the development and license of LTX-03 (hydrocodone bitartrate with acetaminophen) immediate-release tablets utilizing Acura’s
patented LIMITx™. Acura will receive a monthly license payment of $350 thousand by AD Pharma for 18 months until November
2020. The first license payment was received July 2, 2019. AD Pharma will pay for and reimburse Acura for all outside development
costs on LTX-03. If the NDA filing for LTX-03 is not accepted by the FDA by November 30, 2020, AD Pharma has the option to terminate
the AD Pharma Agreement and take ownership of the Limitx intellectual property. Should AD Pharma choose not to exercise this option
to terminate and the NDA for LTX-03 is subsequently accepted by the FDA, such option expires. AD Pharma does have the right to
terminate the AD Pharma Agreement anytime for “convenience on 30 days prior written notice”. AD Pharma retains commercialization
rights from which Acura will receive stepped royalties on sales and potential sales related milestones.
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. The Option Product exercise price of $500 thousand is waived if the exercise of the option occurs by
June 28, 2024 (five years from the effective date of the AD Pharma Agreement).
On June 28, 2019 Mr. John Schutte assigned
and transferred to AD Pharma his $6.0 million promissory note, the common stock purchase warrant for 10.0 million common shares,
and the security agreement granting a security interest in all of the Company’s assets. (See Note 8). Mr. Schutte is our
largest shareholder and directly owns approximately 47.5% of our common stock (after giving effect to the exercise of remaining
common stock purchase warrants he holds). Mr. Schutte controls MainPointe and is the principal investor in AD Pharma.
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, 2019 and 2018. 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 and assignment
thereof to AD Pharma
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.
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. The Option Product exercise price of $500 thousand is waived if the exercise of the option occurs by June 28, 2024 (five
years from the effective date of the AD Pharma Agreement).
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.
On January 1, 2020, MainPointe assigned
to AD Pharma, with Acura’s consent, all of its right, title and interest in the MainPointe Agreement between MainPointe and
Acura dated March 16, 2017.
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 CUSTOMERS
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 either December 31, 2019 or 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.
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 as revenue 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 as revenue
when the option is exercised and any obligations on behalf of the Company, such as to transfer know-how, has been fulfilled. The
monthly license fee under the Company’s LTX-03 license and collaboration agreement will be recorded as revenue upon the fulfillment
of the monthly development activities. The out-of-pocket development expenses under the license and collaboration agreements will
be recorded as revenue upon the performance of the service or delivery of the material during the month.
On June 28, 2019 we entered into an agreement
with AD Pharma for the development and license of LTX-03 (hydrocodone bitartrate with acetaminophen) immediate-release tablets
utilizing Acura’s patented LIMITx™ having a monthly license payment of $350 thousand from AD Pharma to us for a period
of up to 18 months until November 2020. AD Pharma will pay directly for or reimburse Acura to the extent Acura pay’s for,
all out-of-pocket development expenses. The first license payment was received July 2, 2019.
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 which have been licensed to MainPointe. On January 1, 2020, MainPointe
assigned to AD Pharma, with Acura’s consent, all of its right, title and interest in the MainPointe Agreement between MainPointe
and Acura. All of the Company’s royalty revenues are earned from these two license agreements by the licensee’s sale
of products in the United States.
Royalty revenues by licensee are summarized
below:
|
|
For the Year Ended December
31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
Zyla (Oxaydo)
|
|
$
|
351
|
|
|
$
|
386
|
|
MainPointe (Nexafed)
|
|
|
21
|
|
|
|
24
|
|
Royalty revenues
|
|
$
|
372
|
|
|
$
|
410
|
|
Contract Balance and Performance Obligations
The Company had no contract assets and
contract liability balances under the license and collaboration agreements at either December 31, 2019 or 2018. 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,
|
|
|
|
2019
|
|
|
2018
|
|
Building and improvements
|
|
$
|
1,273
|
|
|
$
|
1,273
|
|
Scientific equipment
|
|
|
597
|
|
|
|
598
|
|
Computer hardware and software
|
|
|
106
|
|
|
|
107
|
|
Machinery and equipment
|
|
|
274
|
|
|
|
275
|
|
Land and improvements
|
|
|
162
|
|
|
|
162
|
|
Other personal property
|
|
|
70
|
|
|
|
70
|
|
Office equipment
|
|
|
27
|
|
|
|
27
|
|
|
|
|
2,509
|
|
|
|
2,512
|
|
Less: accumulated depreciation
|
|
|
(1,969
|
)
|
|
|
(1,906
|
)
|
Total property, plant and equipment, net
|
|
$
|
540
|
|
|
$
|
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 $66 thousand and
$73 thousand for each of the years ended December 31, 2019 and 2018, respectively.
NOTE 6 – ACCRUED EXPENSES
Accrued expenses are summarized as follows (in thousands):
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cost sharing expenses under license agreements
|
|
$
|
363
|
|
|
$
|
237
|
|
Other fees and services
|
|
|
15
|
|
|
|
36
|
|
Payroll, payroll taxes and benefits
|
|
|
13
|
|
|
|
6
|
|
Professional services
|
|
|
151
|
|
|
|
132
|
|
Financed premiums on insurance policies
|
|
|
-
|
|
|
|
102
|
|
Clinical, non-clinical and regulatory services
|
|
|
20
|
|
|
|
63
|
|
Property taxes
|
|
|
9
|
|
|
|
7
|
|
Franchise taxes
|
|
|
14
|
|
|
|
13
|
|
Total
|
|
$
|
585
|
|
|
$
|
596
|
|
NOTE 7 – 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”). 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 borrowed $1.8 million
from Mr. Schutte and used loan proceeds to negotiate, settle and pay-off in full the Oxford Loan for $1.5 million. We recognized
a net gain from debt settlement of $296 thousand on principal and interest which has been reflected in our statement of operations
as non-operating income. All security interests of Oxford with respect to the Oxford Term Loan have been released.
Related Party Convertible Loan
At December 31, 2018, we had borrowed an
aggregate of $4.350 million from Mr. Schutte, a related-party. From January 1, 2019 and through June 27, 2019, we borrowed additional
amounts from Mr. Schutte for $650 thousand and issued various promissory notes to him with the same terms and conditions from the
previous loans (the Schutte Notes). The Schutte Notes bear interest at prime plus 2.0%, and were to mature on January 2, 2020,
at which time all principal and interest was to be 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 believed the Schutte Notes’ rate of interest was below current market rates for us, we imputed 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 was $126 thousand and the accrued interest balance was $110
thousand. We recorded a $13 thousand benefit to interest income during 2019 from the $650 thousand borrowings from Mr. Schutte.
At June 27, 2019, the unamortized debt discount balance was $73 thousand and the accrued interest balance was $275 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 could 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 was 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.
On June 27, 2019 the aggregate amount of
the loans made to the Company by Mr. Schutte aggregated $5.0 million. On June 28, 2019 we restructured the $5.0 million loan to
borrow an additional $725 thousand from Mr. Schutte, which was received on July 2, 2019, 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 principal and interest conversion rights into 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, which includes our intellectual property. The principal amount of the loan
is convertible into 37.5 million shares of our common stock. The loan restructuring was accounted for as debt extinguishment. We
obtained a valuation of fair value on the modified loan and warrant and the method of accounting for the loan changes resulted
in a $2.6 million loss on debt extinguishment. Of the loss on debt extinguishment, $1.145 million was allocated to the warrant,
$1.382 million was related to the premium on the convertible loan, and $73 thousand was assignable to write-off of the original
loan’s remaining unamortized debt discount. 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.
The events of default under the $6.0 million
note are limited to bankruptcy defaults, failure to pay interest and principal when due on July 1, 2023 or upon failure to meet
certain timelines as defined in the agreement. The $6.0 million note may be prepaid at any time in whole or in part but only with
the consent of the noteholder.
Our debt interest expense for the twelve months ended December
31, 2019 and 2018 consisted of the following (in thousands):
|
|
Year Ended
December 31,
|
|
Interest expense:
|
|
2019
|
|
|
2018
|
|
Fully paid term loan
|
|
$
|
-
|
|
|
$
|
194
|
|
Related party term loans
|
|
|
392
|
|
|
|
110
|
|
Debt discount
|
|
|
66
|
|
|
|
74
|
|
Debt issue costs
|
|
|
-
|
|
|
|
13
|
|
Financed insurance premiums
|
|
|
4
|
|
|
|
4
|
|
Total interest expense
|
|
$
|
462
|
|
|
$
|
395
|
|
Less: imputed interest income on related party loans
|
|
|
(13
|
)
|
|
|
(172
|
)
|
|
|
|
|
|
|
|
|
|
Total interest expense, net
|
|
$
|
449
|
|
|
$
|
223
|
|
NOTE 8 – RELATED PARTY TRANSACTIONS
Private Placement with Mr. John Schutte
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 for 1,782,532 common shares 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.
MainPointe Pharmaceuticals LLC
Investor is a principal of MainPointe Pharmaceuticals
LLC, a Kentucky limited liability company (“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 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 years ended 2019 and 2018 is $21 thousand
and $24 thousand, respectively, of royalty revenue from MainPointe (See Note 3). On January 1, 2020, MainPointe assigned to AD
Pharma, with Acura’s consent, all of its right, title and interest in the MainPointe Agreement between MainPointe and Acura.
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.
Loans with Mr. John Schutte
During the period January 1, 2019 through
June 27, 2019 we borrowed an aggregate of $650 thousand from Mr. John Schutte. On June 28, 2019 we borrowed an additional $725
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
of principal and interest into 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, which
includes our intellectual property. The principal amount of the note is convertible into 37.5 million shares of our common stock.
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.
AD Pharma Agreement covering LTX-03
On June 28, 2019, we entered into a License,
Development and Commercialization Agreement (the "AD Pharma 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 AD Pharma 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 thousand 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 AD Pharma Agreement
at any time. Additionally, if the NDA for LTX-03 is not accepted by the FDA by November 30, 2020, AD Pharma has the option to terminate
the AD Pharma Agreement and take ownership of the intellectual property. Should AD Pharma choose not to exercise this option to
terminate and the NDA for LTX-03 is subsequently accepted by the FDA, such option expires.
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. On January 1, 2020, MainPointe
assigned to AD Pharma, with Acura’s consent, all of its right, title and interest in the MainPointe Agreement between MainPointe
and Acura dated March 16, 2017.
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 2019 or 2018.
NOTE 10 – COMMON STOCK PURCHASE WARRANTS
Our warrant activity during the years ended
December 31, 2019 and 2018 is shown below (in thousands except price data):
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Number
|
|
|
WAvg
Exercise
Price
|
|
|
Number
|
|
|
WAvg
Exercise
Price
|
|
Outstanding, Jan. 1
|
|
|
1,842
|
|
|
$
|
0.59
|
|
|
|
1,842
|
|
|
$
|
0.59
|
|
Issued
|
|
|
10,000
|
|
|
|
0.01
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Modification
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, Dec. 31
|
|
|
11,842
|
|
|
$
|
0.10
|
|
|
|
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.
On June 28, 2019 as part of the changes
made to the loan agreements we had with Mr. Schutte, each having an original due date of January 2, 2020, we issued to him a warrant
to purchase 10.0 million shares of our common stock exercisable at a price of $0.01 per share and expire five years after issuance.
We obtained a valuation of fair value on the warrant and $1.145 million was allocated to the warrant and accounted for as equity.
(see Note 7 and Note 8). The warrant was assigned and transferred by Mr. Schutte to AD Pharma on June 28, 2019.
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, 2019 and 2018 and for the year then ended consisted of the following (in
thousands except exercise price):
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Number
of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding, Jan. 1
|
|
|
1,560
|
|
|
$
|
7.38
|
|
|
|
1,494
|
|
|
$
|
12.33
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
232
|
|
|
|
0.15
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(34
|
)
|
|
|
4.09
|
|
|
|
(3
|
)
|
|
|
0.56
|
|
Expired
|
|
|
(170
|
)
|
|
|
30.83
|
|
|
|
(163
|
)
|
|
|
42.75
|
|
Outstanding, Dec. 31
|
|
|
1,356
|
|
|
$
|
4.45
|
|
|
|
1,560
|
|
|
$
|
7.38
|
|
Exercisable, Dec. 31
|
|
|
1,356
|
|
|
$
|
4.45
|
|
|
|
1,328
|
|
|
$
|
8.64
|
|
The following table summarizes information about unvested stock
options outstanding at December 31, 2019 (in thousands except price data):
|
|
Number
of
Options Not
Exercisable
|
|
|
Weighted
Average Fair
Value
|
|
Outstanding at Jan. 1, 2019
|
|
|
232
|
|
|
$
|
0.10
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(223
|
)
|
|
|
0.10
|
|
Forfeited
|
|
|
(9
|
)
|
|
|
0.10
|
|
Outstanding at Dec. 31, 2019
|
|
|
-
|
|
|
$
|
-
|
|
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 stock option grants were:
Expected dividend yield
|
|
|
0.0
|
%
|
Risk-free interest rates
|
|
|
2.8
|
%
|
Average expected volatility
|
|
|
76
|
%
|
Expected term (years)
|
|
|
5
|
|
Weighted average grant date fair value
|
|
$
|
0.10
|
|
There was no intrinsic value contained
in the stock option awards which vested and were outstanding at December 31, 2019. The total remaining unrecognized compensation
cost on unvested option awards outstanding at December 31, 2019 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 $29 thousand and $11 thousand at December 31, 2019 and 2018, 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, 2019 and 2018, and for the year then ended consisted of the following (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Number of RSUs
|
|
|
Number of
Vested RSUs
|
|
|
Number of
RSUs
|
|
|
Number of
Vested RSUs
|
|
Outstanding, Jan. 1
|
|
|
951
|
|
|
|
459
|
|
|
|
462
|
|
|
|
262
|
|
Granted
|
|
|
333
|
|
|
|
-
|
|
|
|
759
|
|
|
|
-
|
|
Distributed
|
|
|
(267
|
)
|
|
|
(267
|
)
|
|
|
(262
|
)
|
|
|
(262
|
)
|
Vested
|
|
|
-
|
|
|
|
825
|
|
|
|
-
|
|
|
|
459
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
(8
|
)
|
|
|
-
|
|
Outstanding, Dec. 31
|
|
|
1,017
|
|
|
|
1,017
|
|
|
|
951
|
|
|
|
459
|
|
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, 2019, approximately 219 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 four 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 four 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 occurred on January 2, 2020, the first business day of the
year after vesting. The portion of the RSU awards which were subject to cash settlement was also subject to marked-to market accounting
having a liability recorded on the Company’s consolidated balance sheet with quarterly adjustments which were recorded to
stock compensation expense in the general and administration operating category of our income statement.
|
|
·
|
In January 2020, we awarded approximately 55 thousand RSUs to each of our four 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 2020. Settlement of this RSU award will occur on January 4, 2021, 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 to our non-employee directors from their January
2018 award and settled in common stock.
|
|
·
|
In January 2020, 333 thousand RSUs were distributed to our non-employee directors from their January
2019 award with 296 thousand RSUs settled in common stock, 4 thousand RSUs used to settle the purchase price and 33 thousand RSUs
settled in cash.
|
|
·
|
In January 2020, 61 thousand RSUs were distributed to our employee representing one third of their
2017 award with 51 thousand RSUs settled in common stock and 10 thousand RSUs used to settle the purchase price and employee withholding
taxes.
|
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, 2019, there are no longer shares available for award under the 2014 RSU Plan.
Information about the awards under the
2014 RSU Plan during 2018 and 2019 is as follows:
|
·
|
In January 2017, we awarded approximately 60 thousand RSUs to each of our four 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 was included as a discrete item in the 2017 income tax provision. Overall, there was no impact to the 2017
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 did not have any material true-ups
on the positions taken in the 2017 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,
|
|
|
|
2019
|
|
|
2018
|
|
Benefit at U.S. statutory tax rate
|
|
$
|
(792
|
)
|
|
$
|
(807
|
)
|
State taxes (benefit), net of federal effect
|
|
|
(138
|
)
|
|
|
(141
|
)
|
State research and development tax credits
|
|
|
(2
|
)
|
|
|
-
|
|
Federal research and development tax credits
|
|
|
(23
|
)
|
|
|
(23
|
)
|
Share-based compensation
|
|
|
4
|
|
|
|
22
|
|
Other
|
|
|
-
|
|
|
|
17
|
|
Change in valuation allowance
|
|
|
951
|
|
|
|
932
|
|
(Benefit) provision for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
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 $167.8 million gross Federal NOLs at December
31, 2019 (of which approximately $160.2 million was generated prior to January 1, 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.
The components of our deferred tax assets
are as follows (in thousands):
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Estimated future value of NOLs
|
|
|
|
|
|
|
|
|
- Federal
|
|
$
|
2,622
|
|
|
$
|
2,174
|
|
- State
|
|
|
869
|
|
|
|
862
|
|
Research and development tax credits
|
|
|
|
|
|
|
|
|
- Federal
|
|
|
1,207
|
|
|
|
1,184
|
|
- State
|
|
|
8
|
|
|
|
-
|
|
Share-based compensation
|
|
|
72
|
|
|
|
71
|
|
Other, net
|
|
|
177
|
|
|
|
151
|
|
Total deferred taxes
|
|
|
4,955
|
|
|
|
4,442
|
|
Valuation allowance
|
|
|
(4,955
|
)
|
|
|
(4,442
|
)
|
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, 2019 and 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.
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, 2019 and 2018, 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, 2019, the Company’s tax years of 2016, 2017 and 2018 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
2016.
NOTE 13 – NET (LOSS) INCOME
PER SHARE
A reconciliation of the numerators and
denominators of basic and diluted earnings (loss) per share (“EPS”) consisted of the following (in thousands except
per share data):
|
|
Year Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Earnings (loss) per share – basic and diluted
|
|
|
|
|
|
|
|
|
Numerator: net loss
|
|
$
|
(3,774
|
)
|
|
$
|
(3,842
|
)
|
Denominator (weighted):
|
|
|
|
|
|
|
|
|
Common shares
|
|
|
21,300
|
|
|
|
21,033
|
|
RSUs - vested
|
|
|
296
|
|
|
|
113
|
|
Common stock purchase warrant
|
|
|
5,124
|
|
|
|
-
|
|
Basic and diluted weighted average shares outstanding
|
|
|
26,720
|
|
|
|
21,146
|
|
Earnings (loss) per share – basic and diluted
|
|
$
|
(0.14
|
)
|
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
Excluded securities (non-weighted):
|
|
|
|
|
|
|
|
|
Common shares issuable:
|
|
|
|
|
|
|
|
|
RSUs – vested and nonvested
|
|
|
-
|
|
|
|
482
|
|
Stock options – vested and nonvested
|
|
|
1,356
|
|
|
|
1,560
|
|
Common stock purchase warrants
|
|
|
1,842
|
|
|
|
1,842
|
|
Convertible loan
|
|
|
37,500
|
|
|
|
-
|
|
Total excluded common shares
|
|
|
40,698
|
|
|
|
3,884
|
|
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 first quarter of 2020. 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, 2019.
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 EVENTS
On January 30, 2020, the World Health Organization
(“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the
“COVID-19 outbreak”) and the risks to the international community as the virus spreads globally beyond its point of
origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic (“coronavirus pandemic”), based on the
rapid increase in exposure globally. The coronavirus pandemic is affecting the United States and global economies. If the outbreak
continues to spread, it may affect the Company’s operations and those of third parties on which the Company relies, including
causing disruptions in the supply of the Company’s product candidates and the conduct of current and planned preclinical
and clinical studies and contract manufacturing operations. We may need to limit operations or implement limitations, and may experience
limitations in employee resources. There are risks that it may be more difficult to contain if the outbreak reaches a larger population
or broader geography, in which case the risks described herein could be elevated significantly. The extent to which the coronavirus
impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information
which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among
others. Additionally, while the potential economic impact brought by, and the duration of, the coronavirus pandemic is difficult
to assess or predict, the impact of the coronavirus on the global financial markets may reduce the Company’s ability to access
capital, which could negatively impact the Company’s short-term and long-term liquidity and the Company’s ability to
complete its preclinical studies on a timely basis, or at all. The ultimate impact of coronavirus is highly uncertain and subject
to change. The Company does not yet know the full extent of potential delays or impacts on its business, financing ,
preclinical and clinical trial activities contract manufacturing operations or the global economy as a whole. However, these
effects could have a material, adverse impact on the Company’s liquidity, capital resources, operations and business and
those of the third parties on which we rely.