Aquestive Therapeutics, Inc. 10-Q

Item 1. FINANCIAL STATEMENTS (Unaudited) AQUESTIVE THERAPEUTICS, INC. Condensed Consolidated Balance Sheets (In thousands, except share and per share amounts) (Unaudited) June 30, 2020 December 31, 2019 Assets Current assets: Cash and cash equivalents $ 25,422 $ 49,326 Trade and other receivables, net 12,891 13,130 Inventories, net 3,173 2,859 Prepaid expenses and other current assets 2,423 2,999 Total current assets 43,909 68,314 Property and equipment, net 8,457 9,726 Right-of-use assets, net 3,764 — Intangible assets, net and other assets 7,416 439 Total assets $ 63,546 $ 78,479 Liabilities and stockholders’ deficit Current liabilities: Accounts payable and accrued expenses $ 13,390 $ 17,749 Lease liabilities, current 689 — Deferred revenue, current 803 806 Total current liabilities 14,882 18,555 Loans payable, net 61,505 60,338 Lease liabilities 3,240 — Deferred revenue, net of current portion 3,867 4,348 Asset retirement obligations 1,440 1,360 Total liabilities 84,934 84,601 Contingencies (note 18) Stockholders’ deficit: Common stock, $.001 par value. Authorized 250,000,000 shares; 33,616,601 and 33,562,885 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively 34 34 Additional paid-in capital 127,916 124,318 Accumulated deficit (149,338 ) (130,474 ) Total stockholders’ deficit (21,388 ) (6,122 ) Total liabilities and stockholders’ deficit $ 63,546 $ 78,479 See accompanying notes to the condensed consolidated financial statements. 3 Table of Contents AQUESTIVE THERAPEUTICS, INC. Condensed Consolidated Statements of Operations and Comprehensive Loss (In thousands, except share and per share data amounts) (Unaudited) Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Revenues $ 21,675 $ 11,129 $ 30,440 $ 23,772 Costs and expenses: Manufacture and supply 3,539 5,420 7,198 8,926 Research and development 3,847 8,151 8,201 12,454 Selling, general and administrative 13,894 16,246 28,507 34,154 Total costs and expenses 21,280 29,817 43,906 55,534 Income/(loss) from operations 395 (18,688 ) (13,466 ) (31,762 ) Other income/(expenses): Interest expense (2,747 ) (1,937 ) (5,518 ) (3,863 ) Interest income 18 153 120 427 Net loss before income taxes (2,334 ) (20,472 ) (18,864 ) (35,198 ) Income taxes - - - - Net loss $ (2,334 ) $ (20,472 ) $ (18,864 ) $ (35,198 ) Comprehensive loss $ (2,334 ) $ (20,472 ) $ (18,864 ) $ (35,198 ) Net loss per share - basic and diluted $ (0.07 ) $ (0.82 ) $ (0.56 ) $ (1.41 ) Weighted-average number of common shares outstanding - basic and diluted 33,589,174 24,980,861 33,579,434 24,972,280 See accompanying notes to the condensed consolidated financial statements. 4 Table of Contents AQUESTIVE THERAPEUTICS, INC. Condensed Consolidated Statements of Changes in Stockholders’ Deficit (In thousands, except share amounts) (Unaudited) Additional Total Common Stock Paid-in Accumulated Stockholders’ Shares Amount Capital Deficit Equity/Deficit For the periods ended June 30, 2020: Balance at January 1, 2020 33,562,885 $ 34 $ 124,318 $ (130,474 ) $ (6,122 ) Share-based compensation 19,811 - 1,823 - 1,823 Net loss - - - (16,530 ) (16,530 ) Balance at March 31, 2020 33,582,696 34 126,141 (147,004 ) (20,829 ) Shares issued under employee stock purchase plan 14,961 - 73 - 73 Share-based compensation 18,944 - 1,702 - 1,702 Net loss - - - (2,334 ) (2,334 ) Balance at, June 30, 2020 33,616,601 $ 34 $ 127,916 $ (149,338 ) $ (21,388 ) For the periods ended June 30, 2019: Balance at January 1, 2019 24,957,309 $ 25 $ 71,431 $ (61,376 ) $ 10,080 Adoption of ASU 2014-09, ASU 2018-07 (Note 3C) - - 20 (2,852 ) (2,832 ) Share-based compensation 17,830 - 1,422 - 1,422 Net loss - - - (14,726 ) (14,726 ) Balance at March 31, 2019 24,975,139 25 72,873 (78,954 ) (6,056 ) Shares issued under employee stock purchase plan 31,393 - 132 - 132 Share-based compensation 16,128 - 1,739 - 1,739 Net loss - - - (20,472 ) (20,472 ) Balance at, June 30, 2019 25,022,660 $ 25 $ 74,744 $ (99,426 ) $ (24,657 ) See accompanying notes to the condensed consolidated financial statements. 5 Table of Contents AQUESTIVE THERAPEUTICS, INC. Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited) Six Months Ended June 30, 2020 2019 Cash flows used for operating activities: Net loss $ (18,864 ) $ (35,198 ) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 1,684 1,543 Share-based compensation 3,625 3,330 Amortization of debt issuance costs and discounts 1,167 781 All other non-cash expenses (139 ) 520 Changes in operating assets and liabilities: Trade and other receivables 354 (3,684 ) Inventories, net (314 ) 794 Prepaid expenses and other assets (6,426 ) (416 ) Accounts payable and accrued expenses (4,237 ) (1,829 ) Deferred revenue (484 ) (687 ) Net cash used for operating activities (23,634 ) (34,846 ) Cash flows used for investing activities: Capital expenditures (243 ) (486 ) Net cash used for investing activities (243 ) (486 ) Cash flows used for financing activities: Proceeds from shares issued under employee stock purchase plan 62 112 Debt repayment - (550 ) Payments for taxes on share-based compensation (89 ) (2.664 ) Net cash used for financing activities (27 ) (3,102 ) Net decrease in cash and cash equivalents (23,904 ) (38,434 ) Cash and cash equivalents: Beginning of period 49,326 60,599 End of period $ 25,422 $ 22,165 Supplemental disclosures of cash flow information: Cash payments for interest $ 4,375 $ 2,577 Net (decrease) in capital expenditures included in accounts payable and accrued expenses (99 ) (313 ) Net increase in financing costs included in accounts payable and accrued expenses - 150 See accompanying notes to the condensed consolidated financial statements. 6 Table of Contents AQUESTIVE THERAPEUTICS, INC. Notes to Condensed Consolidated Financial Statements (Unaudited, in thousands, except share and per share information) Note 1. Corporate Organization and Company Overview (A) Company Overview Aquestive Therapeutics, Inc. (“Aquestive” or the “Company”) is a pharmaceutical company focused on identifying, developing and commercializing differentiated products that address patients’ unmet medical needs and solve therapeutic problems. The Company has a commercial proprietary product pipeline focused on the treatment of diseases of the central nervous system, or CNS, and other unmet needs, and is developing orally administered complex molecules as alternatives to more invasive therapies. Aquestive is pursuing its business objectives through both in-licensing and out-licensing arrangements, as well as the commercialization of its own products. Production facilities are located in Portage, Indiana, and corporate headquarters, sales and commercialization operations and primary research laboratory facilities are based in Warren, New Jersey. The Company’s major customer and primary commercialization licensee has global operations headquartered in the United Kingdom with principal operations in the United States; other customers are principally located in the United States. Aquestive is subject to risks common to companies in similar industries and stages of development, including, but not limited to, competition from larger companies, reliance on revenue from a limited number of products and customers, adequacy of existing and availability of additional operating and growth capital as and when required, uncertainty of regulatory approval for marketing its product candidates, reliance on a single manufacturing site, new technological innovations, dependence on key personnel, reliance on third-party service providers and sole source suppliers, dependence on patent-protected proprietary technology, ongoing government regulatory compliance requirements, dependence on the clinical and commercial success of its drug candidates, and uncertainty of broad adoption of its approved products, if any, by physicians and consumers. Aquestive is also subject to risks and uncertainties associated with the COVID-19 pandemic. See Note 4. Risks and Uncertainties for further discussion related to COVID-19. (B) Equity Transaction Equity Offering of Common Stock On December 17, 2019, Aquestive received net proceeds of $37,835 after deducting underwriting discounts of $2,415 for the sale of 8,050,000 shares of common stock in a public offering. Professional fees and other costs of this offering totaled $540, in addition to the underwriting discounts. Note 2. Basis of Presentation The accompanying interim unaudited condensed consolidated financial statements were prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and with Article 10 of Regulation S-X for interim financial reporting. In compliance with those rules, certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes for the fiscal year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 11, 2020 (the “2019 Annual Report on Form 10-K”). As included herein, the condensed consolidated balance sheet at December 31, 2019 is derived from the audited consolidated financial statements as of that date. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of the results of interim periods have been included. The accompanying financial statements reflect certain reclassifications from previously issued financial statements to conform to the current presentation. The Company has evaluated subsequent events for disclosure through the date of issuance of the accompanying unaudited condensed financial statements. Any reference in these notes to applicable guidance refers to the authoritative U.S. GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”). Note 3. Summary of Significant Accounting Policies (A) Principles of Consolidation The interim condensed consolidated financial statements presented herein include the accounts of Aquestive Therapeutics, Inc. and its wholly owned subsidiary, MonoSol Rx, Inc. Other than corporate formation activities, MonoSol Rx, Inc. has conducted no commercial, developmental or operational activities and has no customers or vendors. The results of operations and cash flows reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected in any other interim period or for the entire fiscal year. 7 Table of Contents (B) Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, including disclosure of contingent assets and contingent liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to estimates and assumptions include allowances for rebates from proprietary product sales, the allowance for sales returns, the useful lives of fixed assets, valuation of share-based compensation and contingencies. (C) Recent Accounting Pronouncements As an emerging growth company, the Company has elected to take advantage of the extended transition period afforded by the Jumpstart Our Business Startups Act for the implementation of new or revised accounting standards and, as a result, the Company will comply with new or revised accounting standards no later than the relevant dates on which adoption of such standards is required for emerging growth companies. The Company believes that the impact of recently issued accounting standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption . Recently Adopted Accounting Pronouncements: In February 2016, the Financial Accounting Standards Board issued ASU, 2016-02, Leases (Topic 842) , and issued amendments in July 2018 provided by ASU 2018-10. This ASU, as amended, requires lessees to recognize lease assets, termed “right-of-use assets” and related lease liabilities on the balance sheet that had previously been classified as operating leases under prior authoritative guidance. For income statement purposes, leases are now required to be classified as either operating or financing leases under a dual model similar to that specified by ASC 840. Operating leases continue to result in straight-line expense while financing leases result in a front-loaded expense pattern in a manner similar to recognition of capital lease expenses under ASC 840. The Company adopted and applied ASU 2016-02 on January 1, 20 20 using the modified retrospective transition provisions of ASC 842 to leases in effect as of that date of adoption, and recorded right-of-use assets totaling $4,048 and lease liabilities as adjusted for accrued lease payments, in the amount of $4,224 based on an estimated incremental borrowing rate of 16.9%, representing the present value of remaining minimum lease payments. The assets and liabilities thus recorded were primarily those related to the Company’s leased plant, laboratory and corporate administrative facilities. The Company elected to apply the ASU-specified practical expedients and accordingly did not re-assess (i) whether its contracts contained a lease under the new definition of a lease, (ii) the classification of those leases, and (iii) initial direct costs of existing leases. In addition, the Company elected not to apply the hindsight expedient in the assessment of lease renewals and resultant term of leases. The Company also elected not to recognize a right-of-use asset and lease liability for those leases with a remaining lease term of 12 months or less. The adoption of ASU 2016-02 did not require a cumulative-effect adjustment to the opening balance of the accumulated deficit at the time of adoption. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers , and subsequently issued a number of amendments to this update. The new standard, as amended in Accounting Standards Codification, or ASC 606, provides a single comprehensive model to be used in accounting for revenue arising from contracts with customers and supersedes previous revenue recognition guidance. The standard’s core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted this standard effective January 1, 2019. In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, providing guidance on the classification of certain cash receipts and payments in the statement of cash flows intended to reduce diversity in practice, including cash flows related to debt prepayment or extinguishment costs and contingent consideration that may be paid following a business combination. The Company adopted this new guidance on January 1, 2020 without material impact on its condensed consolidated financial position or results of operations. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework. The purpose of the update is to improve the effectiveness of the fair value measurement disclosures that allows for clear communication of information that is most important to the users of financial statements. There were certain required disclosures that have been removed or modified. In addition, the update added the following disclosures: (i) changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period and (ii) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The Company adopted this new guidance on January 1, 2020 without material impact on its condensed consolidated financial position or results of operations. 8 Table of Contents In November 2018, the FASB issued ASU 2018-18, C ollaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 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 for a promised good or service that is distinct within the collaborative arrangement. The guidance also precludes entities from presenting amounts related to transactions with a collaborative arrangement participant that is not a customer as revenue, unless those transactions are directly related to third-party sales. The Company adopted this new guidance on January 1, 2020 without material impact on its condensed consolidated financial position or results of operations. Recent Accounting Pronouncements Not Adopted as of June 30, 2020: In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) , amending existing guidance on the accounting for credit losses on financial instruments within its scope. The guidance introduces an expected loss model for estimating credit losses, replacing the incurred loss model. The new guidance also changes the impairment model for available-for-sale debt securities, requiring the use of an allowance to record estimated credit losses (and subsequent recoveries). The new guidance is effective for the Company beginning after December 15, 2022. The Company is currently evaluating the impact of the adoption of this guidance on its condensed consolidated financial statements. In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other Internal-Use Software (Subtopic 350-40: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract , which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The update provides guidance distinguishing between capitalizable service contract implementation costs and contract costs required to be expensed. In addition, the update requires that the term of the hosting arrangement is to include the non-cancelable period of the arrangement plus periods covered by (i) an option to extend the arrangement if the customer is reasonably certain to exercise that option; (ii) an option to terminate the arrangement if the customer is reasonably certain not to exercise the termination option and (iii) an option to extend (or not to terminate) the arrangement in which exercise of the option is in the control of the vendor. This standard will become effective for the Company beginning January 1, 2021. The amendments may be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently evaluating the impact of ASU 2018-15 on its consolidated financial statements. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes, which amends accounting for income taxes during interim periods and makes changes to certain income tax classifications. The new standard allows exceptions to the use of the incremental approach for intra-period tax allocation, when there is a loss from continuing operations and income or a gain from other items, and to the general methodology for calculating income taxes in an interim period, when a year-to-date loss exceeds the anticipated loss for the year. The standard also requires franchise or similar taxes partially based on income to be reported as income tax and the effects of enacted changes in tax laws or rates to be included in the annual effective tax rate computation from the date of enactment. The standard will be effective for the Company beginning January 1, 2022, with early adoption of the amendments permitted. The Company is currently evaluating the impact from the adoption of ASU 2019-12 on its consolidated financial statements Other pronouncements issued by the FASB or other authoritative accounting standards groups with future effective dates are either not applicable or not significant to the condensed consolidated financial statements of the Company. Note 4. Risks and Uncertainties The Company’s cash requirements for 2020 and beyond include expenses related to continuing development and clinical evaluation of its products, manufacture and supply costs, costs of regulatory filings, patent prosecution expenses and litigation expenses, expenses related to commercialization of its products, as well as costs to comply with the requirements of being a public company operating in a highly regulated industry. As of June 30, 2020, working capital (current assets minus current liabilities) totaled $29,027, which included $25,422 of cash and cash equivalents. As of June 30, 2020, Aquestive has experienced a history of net losses and the Company’s accumulated deficits totaled $149,338, which have been partially funded by profits from manufacture and supply operations, licensing revenues and certain other services, with the balance of the related funding requirements met by the Company’s equity and debt offerings including its 12.5% Senior Secured Notes due 2025. In 2019, the Company raised funding totaling $52,226, consisting of net proceeds of $13,110 from the refinancing of its debt in July 2019, $37,295 from the public offering of 8,050,000 common shares in December 2019, and $1,821 from the exercise of warrants issued in connection with the aforementioned debt refinancing. 9 Table of Contents The characteristics described above provide indications that the Company’s ability to execute its near-term business objectives and achieve profitability over the longer term cannot be assured. Further, management views the impact of COVID-19 on the economy, its industry, its customers and suppliers and its own operations as continuing to rapidly evolve, the future effects of which continue to be highly uncertain and unpredictable. Due to current or future interruptions and possible disruptions in health services, operations of the United States Food and Drug Administration (“FDA”), freight and other transportation services, supply, manufacturing, workforce health, availability of acceptable capital, financial and asset monetization markets, and availability of essential human and business requirements, and unforeseeable financial difficulties of the Company’s customers or vendors, the severity, rapidity of the spread, and the duration of the COVID-19 pandemic may be expected to negatively affect a great number of businesses across various industries, including Aquestive. The Company may experience financial and operational adversity in such areas as pre-clinical, clinical trials, regulatory review and approval of various product candidates, customer demand for products and services, customers’ ability to pay for goods and services, supply of pharmaceutical ingredients and other raw materials from approved vendors, ongoing availability of an appropriate labor force and skilled professionals, and additional capital or other funding from capital, financial or monetization markets. Subject to and absent any material adverse effect of these and other possible COVID-19 effects, the Company expect s that its anticipated revenues from licensed and proprietary products, cash on hand , expense management initiatives, additional debt financing under our existing debt arrangement (subject to satisfaction of all conditions to and requirements for further issuances of our Senior Secured Notes) , and access to equity markets , including under its shelf registration statement, would be adequate to meet expected operating, investing, and financing needs for the next twelve months. To the extent additional funds are necessary to meet operating needs as the Company continues to execute its business strategy, management believes that additional funding requirements would be obtained through access to appropriate financial markets for a potential monetization of certain revenue streams for its out-licensed apomorphine product (KYNMOBI™) (subject to all conditions under Senior Secured Notes and acceptable market conditions, timing, structure and terms), and availability of debt or equity financings, or a combination of these potential sources of funds, although management can provide no assurance that these sources of funding will be available on reasonable terms, if at all. In addition, the Company may be required to utilize available financial resources sooner than expected. Management has based its expectation on assumptions that could change or prove to be inaccurate, either due to the impact of COVID-19 or to unrelated factors including factors arising in the capital markets, asset monetization markets, regulatory approval process, regulatory oversight and other factors. Note 5. Revenues and Trade Receivables, Net Revenue from Contracts with Customers Revenues to date have been earned from the Company’s manufactured products made to order for licensees, including Suboxone® and Zuplenz®, as well as revenue from its self-developed, self-commercialized proprietary product, Sympazan®. Revenues are also earned from its product development services provided under contracts with customers. These activities generate revenues in four primary categories: manufacturing and supply revenue, co-development and research fees, license and royalty revenue, and proprietary product sales, net. Revenue Recognition and Performance Obligations Aquestive recognizes revenue pursuant to the five-step model embodied in ASC 606, Revenue from Contracts with Customers , to reflect amounts expected to be collectible in exchange for the transfer of contractually promised goods or services to its customers, as discussed in additional detail in the Company’s 2019 Annual Report on Form 10-K Accordingly, contractually promised goods or services are assessed at contract inception to identify those that constitute distinct performance obligations. Contract revenues are allocated to those distinct performance obligations based on estimated standalone values or expected values, and these allocated revenues are recognized at the point in time, or over the period of time, that those distinct obligations are satisfied. The Company’s performance obligations consist primarily of transferring control of goods, services or intellectual property that are identified in the contracts, purchase orders or invoices. Variable, or contingent, revenues which may become due from customers, such as milestone payments due upon acceptance of a regulatory filing, regulatory approval, or sales-based milestone payments, are not recognized until contingencies are met in order to fix the customer’s obligation to meet its contractual payment commitment, thereby reducing any significant probability of a revenue reversal. Manufacture and supply revenue – includes revenue from products manufactured exclusively for specific customers according to their strictly-defined specifications. These products are not manufactured for inventory, have no alternative use and are required to pass specified quality control inspections. The Company’s single performance obligation pursuant to these arrangements is to provide manufactured product of appropriate quality. Accordingly, revenue, net of available discounts, is recognized and the Company is entitled to receive payments at the point in time when quality control requirements are satisfied. 10 Table of Contents Proprietary product sales, net - the Company’s performance obligation with respect to its proprietary product sales is satisfied at a point in time coinciding with delivery and transfer of control of the product to its customers. Revenue is recognized at this point in time given that the Company has no ongoing performance obligations, the customer has legal title and physical possession of the asset and has assumed all significant risks and rewards of ownership, and the Company has a current right to receive payment. These revenues are subject to payment discounts, wholesaler service fees, volume and prompt payment discounts, rebates and other chargebacks, which are estimated at the time the revenue is recorded and concurrently booked. Once all related variable considerations are resolved and uncertainties as to collectible amounts are eliminated, estimates are adjusted to actual allowance amounts. Provisions for these estimated amounts are reviewed and adjusted on no less than a quarterly basis. License and royalty revenues – the Company may realize revenue from functional or from symbolic licenses. For functional licenses that do not require further development or other ongoing activities by the Company, the customer is viewed as acquiring the right to use the license as, and when, transferred and revenues are generally recorded at a point in time, subject to contingencies or constraints, if any. For symbolic licenses providing substantial value only in conjunction with other performance obligations to be provided by the Company, such as manufactured products or development services, revenues are generally recorded over the term of the license agreement. Payments received in excess of amounts earned are deferred and recognized over the term of the license or as contingencies or other performance obligations are met. Royalty revenues are estimated based on the provisions of contracts with customers and recognized in the same period that the royalty-based products are sold to the Company’s strategic partners, as all royalties are directly attributable to the Company’s manufacturing activities, and are therefore recognizable at the same time the manufacturing revenue is recognizable. Co-development and research fees – this revenue is recorded over time based upon the progress of services provided in order to complete the specific performance obligation identified in the related development or feasibility services agreement. Invoicing occurs as specified in related agreements and may, or may not, coincide with completion of underlying performance obligations and therefore may give rise to contract assets when the value of services completed exceeds amounts that may be invoiced to the customer. Alternatively, in instances in which the customer has made payments in advance of completion of the underlying performance obligations, deferred revenues result that may only be recognized upon completion of those obligations. The Company does not recognize revenue associated with any milestone or performance obligation until there is not a significant probability of a revenue reversal. Revenues from the sale of products and services and the subsequent related payments are evidenced by a contract with the customer, which includes all relevant terms of sale. For manufacturing and supply and proprietary product sales, invoices are generally issued upon the transfer of control and co-development and research revenue is typically invoiced based on the contractual payment schedule, or upon completion of the service. Invoices are typically payable 30 to 60 days after the invoice date, however some payment terms may reach 75 days depending on the customer. The Company performs a review of each specific customer’s creditworthiness and ability to pay prior to acceptance as a customer. Further, the Company performs periodic reviews of its customers’ creditworthiness prospectively. Contract Assets In limited situations, certain customer contractual payment terms provide for invoicing in arrears. Accordingly, some, or all performance obligations may be completely satisfied before the customer may be invoiced under such agreements. In these situations, billing occurs after revenue recognition, which results in a contract asset supported by the estimated value of the completed portion of the obligation. These contract assets are reflected as a component of other receivables within Trade and other receivables within the Condensed Consolidated Balance Sheet. As of June 30, 2020, and December 31, 2019, such current and non-current contract assets were $8,503 and $4,363, respectively, consisting primarily of completed but unshipped products manufactured to specific order by certain licensees. Contract Liabilities In other limited situations, certain customer contractual payment terms are structured to permit invoicing in advance of delivery of a good or service. In such instances, the customer’s cash payment may be received before satisfaction of some, or any, performance obligations that are specified. In these situations, billing occurs in advance of revenue recognition, which results in contract liabilities. These contract liabilities are reflected as deferred revenue within the Condensed Consolidated Balance Sheet. As remaining performance obligations are satisfied, an appropriate portion of the deferred revenue balance is credited to earnings. As of June 30, 2020, and December 31, 2019, such contract liabilities were $4,670 and $5,154, respectively. 11 Table of Contents The Company’s revenues were comprised of the following: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Manufacture and supply revenue $ 7,259 $ 8,915 $ 14,175 $ 15,584 License and royalty revenue 12,928 424 13,354 5,046 Co-development and research fees 266 1,019 529 1,789 Proprietary product sales, net 1,222 771 2,382 1,353 Total revenues $ 21,675 $ 11,129 $ 30,440 $ 23,772 Disaggregation of Revenue The following table provides disaggregated net revenue by geographic area: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 United States $ 21,423 $ 10,267 $ 28,929 $ 22,661 Ex-United States 252 862 1,511 1,111 Total revenues $ 21,675 $ 11,129 $ 30,440 $ 23,772 Non-United States revenues are derived primarily from products manufactured for the Australian and Malaysian markets. Trade and other receivables, net consist of the following: June 30, 2020 December 31, 2019 Trade receivables $ 11,808 $ 9,094 Contract and other receivables 1,452 4,363 Less: allowance for bad debts (64 ) (124 ) Less: sales-related allowances (305 ) (203 ) Trade and other receivables, net $ 12,891 $ 13,130 The current portion of contract and other receivables totaled $1,452 and $4,363 as of June 30, 2020 and December 31, 2019, respectively. The June 30, 2020 balance is comprised primarily of $1,000 of minimum royalty revenue due from a licensee and the remaining balance represents reimbursable costs incurred on behalf of customers for which earnings processes have been met prior to shipment of goods or full delivery of completed services. The December 31, 2019 balance represents reimbursable costs incurred on behalf of customers for which earnings processes have been met prior to shipment of goods or full delivery of completed services. Sales-related allowances for both periods presented are estimated in relation to revenues recognized for sales of Sympazan. The following table presents the changes in the allowance for bad debt: June 30, 2020 December 31, 2019 Allowance for doubtful accounts at beginning of year $ 124 $ 58 Reversals/additions charged to bad debt expense (60 ) 66 Write-downs charged against the allowance — — Allowance for doubtful accounts at end of the period $ 64 $ 124 Sales Related Allowances and Accruals Revenues from sales of products are recorded net of prompt payment discounts, wholesaler service fees, returns allowances, rebates and co-pay support programs. These reserves are based on estimates of the amounts earned or to be claimed on the related sales. These amounts are treated as variable consideration, estimated and recognized as a reduction of the transaction price at the time of the sale. The Company includes these estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized for such transaction will not occur, or when the uncertainty associated with the variable consideration is resolved. The calculation of some of these items requires management to make estimates based on sales data, historical return data, contracts and other related information that may become known in the future. The adequacy of these provisions is reviewed on a quarterly basis. 12 Table of Contents The following table provides a summary of activity with respect to sales related allowances and accruals for the six months ended June 30, 2020: Total Sales Related Allowances and Accruals Balance at December 31, 2019 $ 1,377 Provision 2,438 Payments / credits (2,111 ) Balance at June 30, 2020 $ 1,704 Total reductions of gross product sales from sales-related allowances and accruals were $2,438 for the six months ended June 30, 2020. Accruals for returns allowances and prompt pay discounts are reflected as a direct reduction to trade receivables and accruals for wholesaler fees, co-pay cards and rebates as current liabilities. The accrued balances relative to these provisions included in Trade and other receivables, net and Accounts payable and accrued expenses were $305 and $1,399, respectively, at June 30, 2020 and $203 and $1,174, respectively, at December 31, 2019. Concentration of Major Customers Customers are considered major customers when sales exceed 10% of total net sales for the period or outstanding receivable balances exceed 10% of total receivables. For the year ended at December 31, 2019, Indivior, Inc. (“Indivior”) provided 86% of the total revenues for the period, and as of that date, the Company’s outstanding receivable balance from Indivior represented approximately 80% of gross receivables. For the six months ended June 30, 2020, there were two customers exceeding the 10% thresholds. Revenues provided by Indivior and Sunovion Pharmaceuticals, Inc. (“Sunovion”) represented approximately 48% and 39%, respectively of total revenue for the six months ended June 30, 2020, and outstanding accounts receivable due from Indivior and Sunovion represented approximately 40% and 38%, respectively of gross receivables. Note 6. Material Agreements Commercial Exploitation Agreement with Indivior In August 2008, the Company entered into a Commercial Exploitation Agreement with Reckitt Benckiser Pharmaceuticals, Inc. (with subsequent amendments collectively, the “Indivior License Agreement”). Reckitt Benckiser Pharmaceuticals, Inc. was later succeeded to in interest by Indivior, Inc. Pursuant to the Indivior License Agreement, the Company agreed to manufacture and supply Indivior’s requirements for Suboxone, a sublingual film formulation, both inside and outside the United States on an exclusive basis. Under the terms of the Indivior License Agreement, the Company is required to manufacture Suboxone in accordance with current Good Manufacturing Practice standards and according to the specifications and processes set forth in the related quality agreements the Company entered into with Indivior. Additionally, the Company is required to obtain Active Pharmaceutical Ingredients (“API”) for the manufacture of Suboxone directly from Indivior. The Indivior License Agreement specifies a minimum annual threshold quantity of Suboxone that the Company is obligated to fill and requires Indivior to provide the Company with a forecast of its requirements at various specified times throughout the year. The Indivior License Agreement provides for payment by Indivior of a purchase price per unit that is subject to adjustment based on the Company’s ability to satisfy minimum product thresholds. Additionally, in the event Indivior purchases certain large quantities of Suboxone during a specified period, Indivior will be entitled to scaled rebates on its purchases. In addition to the purchase price for the Suboxone supplied, Indivior is required to make certain single digit percentage royalty payments tied to net sales value (as provided for in the Indivior License Agreement) in each of the United States and in the rest of the world subject to annual maximum amounts and limited to the life of the related United States or international patents. In 2012, Indivior exercised its right to buy out its future royalty obligations in the United States under the Indivior License Agreement. Indivior remains obligated to pay royalties for all sales outside the United States. The Indivior License Agreement contains customary contractual termination provisions, including with respect to a filing for bankruptcy or corporate dissolution, an invalidation of the intellectual property surrounding Suboxone, and commission of a material breach of the Indivior License Agreement by either party. Additionally, Indivior may terminate the Indivior License Agreement if the FDA or other applicable regulatory authority declares the Company’s manufacturing site to no longer be suitable for the manufacture of Suboxone or Suboxone is no longer suitable to be manufactured due to health or safety reasons. The initial term of the Indivior License Agreement was seven years from the commencement date. Thereafter, the Indivior License Agreement automatically renews for successive one-year periods, unless either party provides the other with written notice of its intent not to renew at least one year prior to the expiration of the initial or renewal term. 13 Table of Contents Supplemental Agreement with Indivior On September 24, 2017, the Company entered into an agreement with Indivior, or the Indivior Supplemental Agreement. Pursuant to the Indivior Supplemental Agreement, the Company conveyed to Indivior all existing and future rights in the settlement of various ongoing patent enforcement legal actions and disputes related to the Suboxone product. The Company also conveyed to Indivior the right to sublicense manufacturing and marketing capabilities to enable an Indivior licensed generic buprenorphine product to be produced and sold by parties unrelated to Indivior or Aquestive. Under the Indivior Supplemental Agreement, the Company is entitled to receive certain payments from Indivior commencing on the date of the agreement through January 1, 2023. Once paid, all payments made under the Indivior Supplemental Agreement are non-refundable. Through February 20, 2019, the at-risk launch date of the competing generic products of Dr. Reddy’s Labs and Alvogen, the Company received an aggregate of $40,750 from Indivior under the Indivior Supplemental Agreement, of which $4,250 was collected during the three months ended March 31, 2019. Further payments under the Indivior Supplemental Agreement were suspended until adjudication of related patent infringement litigation is finalized. If such litigation is successful, in addition to the amounts already received as described in the foregoing, the Company may receive up to an additional $34,250, consisting of (i) up to $33,000 in the aggregate from any combination of (a) performance or event-based milestone payments and (b) single digit percentage royalties on net revenue earned by Indivior on sales of Suboxone and (ii) an additional $1,250 that was earned through the issuance of additional process patent rights to the Company. The aggregate payments under this Indivior Supplemental Agreement are capped at $75,000. All payments made by Indivior to the Company pursuant to the Indivior Supplemental Agreement are in addition to, and not in place of, any amounts owed by Indivior to the Company pursuant to the Indivior License Agreement. Indivior’s payment obligations under the Indivior Supplemental Agreement are subject to certain factors affecting the market for Suboxone and may terminate prior to January 1, 2023 in the event certain contingencies relating to such market occur. License Agreement with Sunovion Pharmaceuticals, Inc. On April 1, 2016, the Company entered into a license agreement with Cynapsus Therapeutics Inc. (which was later succeeded to in interest by Sunovion Pharmaceuticals, Inc.,), referred to as the Sunovion License Agreement, pursuant to which Sunovion obtained an exclusive, worldwide license (with the right to sub-license) to certain intellectual property, including existing and future patents and patent applications, covering all oral films containing apomorphine for the treatment of off episodes in Parkinson’s disease patients. The FDA granted approval of Kynmobi on May 21, 2020, as anticipated. This approval has triggered Sunovion’s obligation to remit a payment of $4,000 (the “FDA Approval Milestone Payment”) due on the earlier of: (a) the first day of product availability at a pharmacy in the United States; or (b) within six months of the FDA approval. This amount is included in Trade and other receivables as of June 30, 2020 and in the License and royalty revenues for the three- and six-months ended June 30, 2020. In consideration for the rights granted to Sunovion under the Sunovion License Agreement, the Company received aggregate payments totaling $18,000 to date. In addition to the upfront payment of $5,000, the Company also earned an aggregate of $17,000 in connection with specified regulatory and development milestones in the United States and Europe (the “Initial Milestone Payments”), of which $13,000has been received by the Company. No payments were received under the Sunovion License Agreement during the three- and six-month period ended June 30, 2020. The Company is also entitled to receive certain contingent one-time milestone payments related to product availability and regulatory approval in the United States and Europe, certain one-time milestone payments based on the achievement of specific annual net sales thresholds of Kynmobi, and ongoing mid-single digit percentage royalty payments related to the net sales of Kynmobi (subject to reduction to low-single digit percentage royalty payments in certain circumstances), subject to certain minimum payments. The maximum aggregate milestone payments that may be paid to the Company pursuant to the Sunovion License Agreement is equal to $45,000. With the exception of the Initial Milestone Payments and the FDA Approval Milestone Payment, there can be no guarantee that any such milestones will in fact be met or that additional milestone payments will be payable. There is a minimum guaranteed royalty of $1,000 for each of the next eight years. As of June 30, 2020, the Company recorded minimum royalty receivables of $8,000 in aggregate, of which $1,000 is included in Trade and other receivables and $7,000 is included in Intangibles, net and other assets. The Company recognized $8,000 in royalty revenue which is recorded in License and royalty revenues for the three- and six- months ended June 30, 2020. 14 Table of Contents Effective March 16, 2020, the Company entered into a first amendment (the “Amendment”) to the Sunovion License Agreement. The Amendment was entered into for the primary purpose of amending the Sunovion License Agreement as follows: (i) including the United Kingdom and any other country currently in the European Union (EU) which later withdraws as a member country in the EU for purpose of determining the satisfaction of the condition triggering the obligation to pay the third milestone due under the Sunovion License Agreement, (ii) extending the date after which Sunovion has the right to terminate the Sunovion License Agreement for convenience from December 31, 2024 to March 31, 2028, (iii) modifying the date the first minimum annual royalty is due to be paid by Sunovion to the Company from January 1, 2020 to April 1, 2020, and (iv) modifying the termination provisions to reflect the Company’s waiver of the right to terminate the Sunovion License Agreement in the event that Kynmobi was not commercialized by January 1, 2020. This Sunovion License Agreement will continue until terminated by Sunovion in accordance with the termination provisions of the Amendment to the Sunovion License Agreement. The Sunovion License Agreement continues (on a country-by-country basis) until the expiration of all applicable licensed patents. Upon termination of the Sunovion License Agreement, all rights to intellectual property granted to Sunovion to develop and commercialize products will revert to the Company and Sunovion must continue to pay royalties to the Company on each sale of Sunovion's remaining inventory of products commercialized by Sunovion which include apomorphine as their API. Agreement to Terminate CLA with KemPharm In March 2012, the Company entered into an agreement with KemPharm, Inc. (“KemPharm”) to terminate a Collaboration and License Agreement entered into by the Company and KemPharm in April 2011. Under this termination arrangement, the Company has the right to participate in any and all value that KemPharm may derive from the commercialization or any other monetization of KemPharm’s KP-415 and KP-484 compounds or their derivatives. Among these monetization transactions are those related to any business combinations involving KemPharm and collaborations, royalty arrangements, or other transactions from which KemPharm may realize value from these compounds. During September 2019, the Company received $1,000 from its 10% share of milestone payments paid to KemPharm under its licensing of KP-415 and KP-484 to a third party. The Company has also received a payment of $500 under this arrangement during June 2020, which is included in License and royalty revenues for the three- and six-month periods ended June 30, 2020, in connection with the FDA’s acceptance of an New Drug Application (“NDA”) filing for KP-415. A Prescription Drug User Fee Act (PDUFA) target date for completion of FDA review has been scheduled for early March 2021. The Company’s share of remaining milestone payments associated with KP-415 approval and certain targeted labeling goals within timeframes ending in July 2021 may reach $4,800. However, there can be no guarantee that approvals, goals or any such payments will be achieved or received in the future. Note 7. Financial Instruments – Fair Value Measurements Certain assets and liabilities are reported on a recurring basis at fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable: • Level 1 — Observable quoted prices in active markets for identical assets or liabilities. • Level 2 — Observable prices that are based on inputs not quoted on active markets but corroborated by market data. • Level 3 — Unobservable inputs that are supported by little or no market activity, such as pricing models, discounted cash flow methodologies and similar techniques. The carrying amounts reported in the balance sheets for trade and other receivables, prepaid and other current assets, accounts payable and accrued expenses, and deferred revenue approximate their fair values based on the short-term maturity of these assets and liabilities. The Company granted warrants to certain holders of its Notes in connection with its debt refinancing in July 2019. These warrants were valued based primarily on Level 3 inputs and an independent third-party appraisal prepared as of the grant date consistent with generally-accepted valuation methods of the Uniform Standards of Professional Appraisal Practice, the American Society of Appraisers and the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held Company Equity Securities Issued Compensation. See Note 14 for further information on these warrants. 15 Table of Contents Note 8. Inventories, Net The components of Inventory, net is as follows: June 30, 2020 December 31, 2019 Raw material $ 1,206 $ 1,244 Packaging material 1,256 1,096 Finished goods 711 519 Total inventory, net $ 3,173 $ 2,859 The Company manufactures Suboxone exclusively to order for its major customer subject to strict quality standards and recognizes revenue upon completion of all customary quality control evaluations, which occurs prior to actual shipment. Note 9. Property and Equipment, Net Useful Lives June 30, 2020 December 31, 2019 Machinery 3-15 yrs $ 21,169 $ 21,088 Furniture and fixtures 3-15 yrs 1,209 1,150 Leasehold improvements (a) 21,333 21,333 Computer, network equipment and software 3-7 yrs 2,787 2,787 Construction in progress 1,417 1,412 47,915 47,770 Less: accumulated depreciation and amortization (39,458 ) (38,044 ) Total property and equipment, net $ 8,457 $ 9,726 (a) Leasehold improvements are amortized over the shorter of the lease term or their estimated useful lives. Total depreciation and amortization related to property and equipment was $700 and $711 for the three-month periods ended June 30, 2020 and 2019, respectively. For the respective six-month periods, these expenses totaled $1,414 and $1,447. Note 10. Right-of-Use Assets and Lease Obligations The Company leases all realty used as its p roduction and warehouse facilities, corporate headquarters, commercialization operations center and research and laboratory facilities. None of these three leases include the characteristics specified in ASC 842, Leases, that require classification as financing leases and, accordingly, these leases are accounted for as operating leases . These leases provide remaining terms between 2.8 years and 6.3 years, including renewal options expected to be exercised to extend the lease periods. Measurement of the operating lease liability reflects an estimated discount rate of 16.9% applied to minimum lease payments, including expected renewals, based on the incremental borrowing rate experienced in the Company’s latest collateralized debt refinancing. Right-of-use assets recorded upon adoption of ASC 842 totaled $4,048. For the three- and six-month periods ended June 30, 2020, total operating lease expenses under these leases totaled $377 and $819, respectively, including variable lease expenses such as common area maintenance and operating costs totaling $60 and $166, respectively. Total payments to these lessors during the six-month period ended June 30, 2020 were $633. Maturities of the Company’s operating lease liabilities are as follows: Remainder of 2020 $ 641 2021 1,287 2022 1,295 2023 944 2024 565 2025 565 2026 424 Total lease payments 5,721 Less: imputed interest (1,792 ) Total operating lease liabilities $ 3,929 16 Table of Contents Note 11. Intangible Assets, Net and Other Assets The following table provides the components of identifiable intangible assets, all of which are finite lived: June 30, 2020 December 31, 2019 Purchased technology-based intangible $ 2,358 $ 2,358 Purchased patent 509 509 2,867 2,867 Less: accumulated amortization (2,740 ) (2,714 ) Intangible assets, net 127 153 Royalty receivable 7,000 - Other assets, primarily security deposits 289 286 Total intangible assets, net and other assets $ 7,416 $ 439 Amortization expense was $12 and $13 for each of the three-month periods ended June 30, 2020 and 2019, respectively. For the corresponding six-month periods, these expenses totaled $25 and $26, respectively. During the remaining life of the purchased patent, estimated annual amortization expense is $50 for each of the years from 2020 to 2022. Royalty receivable consists of seven annual $1,000 minimum royalty payments due from Sunovion, the last of which is due in March 2028. See Note 6 above. Note 12. Accounts Payable and Accrued Expenses Accounts payable and accrued expenses consisted of the following: June 30, 2020 December 31, 2019 Accounts payable $ 8,787 $ 12,274 Accrued compensation 2,981 3,758 Accrued distribution expenses 1,399 1,174 Other 223 543 Total accounts payable and accrued expenses $ 13,390 $ 17,749 Note 13. 12.5 % Senior Secured Notes and Loans Payable 12.5% Senior Secured Notes On July 15, 2019, the Company completed a private placement of up to $100 million aggregate principal of its 12.5% Senior Secured Notes due 2025 (the “Notes”) and issued warrants for two million shares of common stock (the “Warrants”), $.001 par value per share, through the structuring agent, Morgan Stanley & Co., LLC, and entered into a purchase agreement and related agreements including a Collateral Agreement with U.S. Bank National Association, as trustee and collateral agent, and a Lien Subordination and Intercreditor Agreement for the benefit of Madryn Health Partners, other institutional noteholders and U.S. Bank National Association in dual roles providing terms and governing an asset-based loan facility. Upon closing of the Indenture for such Notes (“Indenture”), the Company issued $70,000 of the principal of the Notes (the “Initial Notes”) along with the Warrants and rights of first offer (the “First Offer Rights”) to the lenders participating in this transaction for Notes and Warrants (the “Lenders”). Issuance of the Initial Notes and Warrants provided net proceeds of $66,082. In addition to the Initial Notes, the Indenture may provide access to further loans of up to $30,000 that may become available in two tranches of Additional Notes tied to the NDA filing for and FDA U.S. marketing approval of Libervant™, an important part of the Company’s drug candidate pipeline. Subject to approval of the holder of a majority of the outstanding principal amount of the Notes in its discretion, and provided that no events of default exist, the Company may offer to the Lenders participation in a $10,000 additional offering of 12.5% senior secured notes (the “First Additional Offering”) under terms similar to the Initial Notes, on or before March 31, 2021, upon the filing of the Libervant NDA with the FDA. A second identical funding opportunity would allow the Company to obtain, on or before March 31, 2021, an additional $20,000 if the first option has been elected and funded, or, if not elected or funded, an additional $30,000 may be offered for issuance following FDA approval of Libervant for marketing in the U.S. There can be no assurance that any additional financing will be consummated. 17 Table of Contents Proceeds from issuance of the Initial Notes and Warrants were used to fully repay the Company’s $56,340 outstanding indebtedness to Perceptive Credit Opportunities Fund, LP (the “Perceptive Loan”), related early repayment fees and legal and other fees incurred to obtain the loan. The Notes provide a stated fixed rate of 12.5%, payable quarterly in arrears, with the initial quarterly principal repayment of the Initial Notes due on September 30, 2021, and the final quarterly payment due at maturity on June 30, 2025. Principal payments are scheduled to increase annually from 10% of the face amount of debt then outstanding during the first four quarters to 40% of the initial loan principal during the final four quarters. A debt maturity table is presented below: Remainder of 2020 $ - 2021 3,500 2022 10,500 2023 17,500 2024 24,500 2025 14,000 Total $ 70,000 The Company may elect, at its option, to prepay the Notes at any time at premiums that range from 101.56% of outstanding principal if prepayment occurs on or after the 5 th anniversary of the issue date of the Notes to 112.5% if payment occurs during the third year after the issuance of the Notes. In the event that redemption occurs within the two years after the issuance of the Notes, a make-whole fee is required, based on the present value of remaining interest payments using an agreed-upon discount rate linked to the then-current U.S. Treasury rate. The Indenture also includes a change of control provision under which the Company may be required to repurchase the Notes at 101% of the remaining principal plus accrued interest at the election of the Lenders. Collateral for the loan under the Notes consists of a priority lien on substantially all property and assets, including intellectual property, of the Company. This secured obligation provides payment rights that are senior to all existing and future subordinated indebtedness of the Company and provides Lenders with perfected security interests in substantially all of the Company’s assets. In the event that asset-based loans of up to $10,000 (“ABL Facility”) may be obtained, subject receivables and inventory assets will provide a second priority lien to senior secured Noteholders. The Company’s license of its IP to a third-party drug development enterprise (specifically, Sunovion’s Kynmobi product) is one of the various assets serving as collateral for the loan. The Indenture permits the Company to monetize this asset while specifying that a portion of the proceeds, up to $40,000 if the First Additional Offering has not been elected or funded, or, $50,000 if it has been elected and funded, must be applied to prepay the Initial Notes, at 112.5% of the principal amount of the Notes being repurchased, plus accrued and unpaid interest, if any, thereon, to the date of the repurchase, to the extent elected by the Note holders, assuming that such monetization, up to such $40,000 or $50,000 level, as applicable, equals or exceeds those levels and if such monetization does not equal or exceed such level, such prepayment would be pro-rated among the Note holders. To the extent that Lenders do not elect repayment of the debt at the date of the monetization, the amount not elected up to $40,000 (or $50,000 if an additional tranche is issued) will be held in a collateral account until approval of Libervant by the FDA for U.S. marketing, at which time this cash collateral is to be released to the Company. Proceeds more than $40,000 (or $50,000 if an additional tranche is issued) can be used immediately for general corporate purposes. As of June 30, 2020, the Company complied with all of its covenants under the Indenture. The Company capitalizes legal and other third-party costs incurred in connection with obtaining debt as deferred debt issuance costs and applies the unamortized portion as a reduction of the outstanding face amount of the related loan in accordance with ASU 2015-03, Interest – Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs . Similarly, the Company amortizes debt discounts, such as those represented by warrants issued to its holders, and offsets those as a direct reduction of its outstanding debt. Amortization expenses arising from deferred debt issuance costs and debt discounts related to the Notes were $583 and $1,167 for the three- and six-month periods ended June 30, 2020, respectively, while comparative amortization expenses derived from deferred debt issuance costs and debt discounts related to the Perceptive Loan for the three- and six-month periods ended June 30, 2019 were $393 and $782, respectively. Unamortized deferred debt issuance costs and deferred debt discounts totaled $8,495 and $9,662 as of June 30, 2020 and December 31, 2019, respectively. 18 Table of Contents Loans Payable - Perceptive In August 2016, the Company entered into a Loan Agreement and Guaranty with Perceptive Credit Opportunities Fund, LP (“Perceptive”) under which the total available facility of $50,000 had been borrowed as of March 2017. At closing, Perceptive received a warrant to purchase senior common equity interests representing 4.5% of the fully diluted common units of the Company on an as converted basis, which was automatically exercised in full at the time of Aquestive’s IPO. In July 2019, the Perceptive Loan was paid in full in connection with the completion of the sale of the Notes and Warrants described above. The early extinguishment of this debt resulted in a charge to third quarter 2019 earnings of an amount of $4,896, including an early retirement premium of $2,944 and the remaining balances of the unamortized loan discount and loan acquisition costs. Note 14. Warrant s Issued to 12.5% Senior Secured Noteholders The Warrants that were issued in conjunction with the Notes described above expire on June 30, 2025 and entitle the holders of the Notes to purchase two million shares of the Company’s common stock at $4.25 per share and include specified registration rights. Management estimated the fair value of the Warrants to be $6,800, assisted by an independent third-party appraiser. The fair value of these Warrants is treated as a debt discount, amortizable over the term of the Warrants, with the unamortized loan portion applied to reduce the face amount of the Notes in the Company’s balance sheet. Additionally, since the Warrants issued do not provide warrant redemption or put rights within the control of the holders that could require the Company to make a payment of cash or other assets to satisfy the obligations under the Warrants, except in the case of a “cash change in control”, the fair value attributed to the Warrants is presented in Additional-paid in capital in the accompanying Condensed Consolidated Balance Sheets. Certain holders of the Notes exercised Warrants for the purchase of 428,571 shares of common stock, and proceeds therefor totaling $1,821 were received on December 16, 2019. There were no Warrants exercised by the holders of the Notes during the six-month period ended June 30, 2020. Note 15. Net Loss Per Share Basic net income or loss per share is calculated by dividing net income or loss by the weighted-average number of common share s outstanding during the periods. Diluted net income or loss per common share is similarly computed and includes the effect of any additional dilutive potential common shares outstanding during the periods. These potential common shares are excluded from the computation of net loss per share to the extent that their effects are antidilutive, and as a result of the Company’s net losses incurred for the three- and six-month periods ended June 30, 2020 and 2019, respectively, no potentially dilutive securities have been included in the computation of diluted net loss per share for the periods presented below. Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Numerator: Net loss $ (2,334 ) $ (20,472 ) $ (18,864 ) $ (35,198 ) Denominator: Weighted-average number of common shares – basic 33,589,174 24,980,861 33,579,434 24,972,280 Loss per common share – basic and diluted $ (0.07 ) $ (0.82 ) $ (0.56 ) $ (1.41 ) The following outstanding stock options, restricted stock units and warrants are antidilutive and have been excluded from the computation of the loss per common share for the periods ended June 30: June 30, 2020 June 30, 2019 Options on common shares outstanding 3,167,192 1,983,142 Restricted stock units unvested 14,233 142,852 Warrants on common shares outstanding 1,571,429 — Total potentially antidilutive derivatives excluded from losses per share 4,752,854 2,125,994 19 Table of Contents Note 16. Share-Based Compensation The Company recognized share-based compensation in its Condensed Consolidated Statements of Operations and Comprehensive Loss during 2020 and 2019 as follows: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Manufacture and supply $ 72 $ 72 $ 135 $ 116 Research and development 183 140 365 348 Selling, general and administrative 1,510 1,598 3,125 2,866 Total share-based compensation expenses $ 1,765 $ 1,810 $ 3,625 $ 3,330 Share-based compensation from: Restricted stock units $ 309 $ 467 $ 773 $ 930 Stock options 1,445 1,323 2,841 2,380 Employee stock purchase plan 11 20 11 20 Total share-based compensation expenses $ 1,765 $ 1,810 $ 3,625 $ 3,330 Share-Based Compensation Equity Awards The following tables provide information about the Company’s restricted stock unit and stock option activity during the six-month period ended June 30, 2020: Restricted Stock Unit Awards (RSUs): Number of Units Weighted Average Grant Date Fair Value (in thousands) Unvested at December 31, 2019 74 $ 14.64 Granted — — Vested (60 ) 15.03 Forfeited — — Unvested at June 30, 2020 14 $ 13.00 Grant date fair value of shares vested during the period $ 896 Unrecognized compensation costs at June 30, 2020 $ 125 Unrecognized compensation costs related to awards of RSUs are expected to be recognized over a weighted-average period of less than two years. Stock Option Awards: Number of Options Weighted Average Exercise Price (in thousands) Outstanding at December 31, 2019 2,231 $ 10.42 Granted 966 2.60 Exercised, Forfeited, Expired (30 ) (3.89 ) — — Outstanding at June 30, 2020 3,167 $ 8.10 Vested or expected to vest at June 30, 2020 2,949 $ 8.10 Exercisable at June 30, 2020 836 $ 11.85 The fair values of stock options granted during 2020 were estimated using the Black-Scholes-Merton pricing model based on the following assumptions: Expected dividend yield None Expected volatility 100 % Expected term (years) 5.5 - 6.1 Risk-free interest rate 0.4 – 1.7 % The weighted average grant date fair value of stock options granted during 2020 was $2.04. During the six-month period ended June 30, 2020, stock options were granted with exercise prices ranging from $1.54 to $5.69, and accordingly, given the Company’s share price of $4.86 at June 30, 2020, certain shares granted during this period provided intrinsic value at that date totaling $2,646. No intrinsic value was provided by stock options granted during the six-month period ended June 30, 2019. 20 Table of Contents As of June 30, 2020, $8,174 of unrecognized compensation expense related to non-vested stock options is expected to be recognized over a weighted average period of 1.9 years from the date of grant. Employee Stock Purchase Plan The Aquestive Therapeutics, Inc. Employee Stock Purchase Plan, or ESPP, as amended and restated effective as of January 1, 2019, features two six-month offering periods per year, running from January 1 to June 30 and July 1 to December 31. Under the ESPP, employees may elect to purchase the Company’s common stock at the lower of 85% of the fair value of shares on either the first or last day of the offering period. During the six-month periods ended June 30, 2020 and 2019, respectively, 14,961 and 31,393 shares were purchased and issued through the ESPP at total discounts of $11 and $20. Note 17. Income Taxes The Company has accounted for income taxes under the asset and liability method, which requires deferred tax assets and liabilities to be recognized for the estimated future tax consequences attributable to differences between financial statement carrying amounts and respective tax bases of existing assets and liabilities, as well as net operating loss carryforwards and research and development credits. Valuation allowances are provided if it is more likely than not that some portion or all of the deferred tax asset will not be realized. The Company has considered the impact of the CARES Act in relation to the 2020 income tax provision. However, due to the full valuation allowance and no ability or intent to carryback the 2020 net operating loss, no impact is expected. The Company’s tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items. For the three months ended June 30, 2020 and 2019, the Company recorded no income tax benefit from its pretax losses of $2,334 and $20,472, respectively, and similarly for the six months ended June 30, 2020 and 2019, the Company recorded no tax benefit from its pretax loss of $18,864 and $35,198, respectively, due to realization uncertainties. The Company’s U.S. Federal statutory rate is 21%. The primary factor impacting the effective tax rate for the three- and six-month periods ended June 30, 2020 is the anticipated full year operating loss which will require full valuation allowances against any associated net deferred tax assets. Note 18. Contingencies Litigation and Contingencies From time to time, the Company has been and may again become involved in legal proceedings arising in the ordinary course of business, including product liability, intellectual property, commercial litigation, or environmental or other regulatory matters. Except as described below, Aquestive is not presently a party to any litigation or other legal proceeding that is believed to be material to its financial condition. Patent-Related Litigation Beginning in August 2013, the Company was informed of abbreviated new drug application (“ANDA”) filings in the United States by Watson Laboratories, Inc. (now Actavis Laboratories, Inc., or “Actavis”), Par Pharmaceutical, Inc. (“Par”), Alvogen Pine Brook, Inc. (“Alvogen”), Teva Pharmaceuticals USA, Inc. (“Teva”), Sandoz Inc. (“Sandoz”), and Mylan Technologies Inc. (“Mylan”), for the approval by the FDA of generic versions of Suboxone Sublingual Film in the United States. Aquestive filed patent infringement lawsuits against all six generic companies in the United States District Court for the District of Delaware (the “Delaware District Court”). After the commencement of the ANDA patent litigation against Teva, Dr. Reddy’s Laboratories (“DRL”) acquired the ANDA filings for Teva’s buprenorphine and naloxone sublingual film that are at issue in these trials. Of these, cases against three of the six generic companies have been resolved. • Mylan and Sandoz settled without a trial. Sandoz withdrew all challenges and became the distributor of the authorized generic products. • All cases against Par were resolved pursuant to a May 2018 settlement agreement between the Company, Indivior, and Par and certain of its affiliates. • Actavis was found to infringe Patent No. 8,603,514, or the ’514 patent, and cannot enter the market until the expiration of the patent in 2024, and the United States Court of Appeals for the Federal Circuit (“Federal Circuit”) affirmed that ruling on July 12, 2019. • DRL and Alvogen were found not to infringe under a different claim construction analysis, and the Federal Circuit affirmed that ruling on July 12, 2019. Teva has agreed to be bound by all DRL adjudications. 21 Table of Contents Subsequent to the above, all potential generic competitors without a settlement agreement were also sued for infringement of two additional new patents that contain new claims not adjudicated in the original Delaware District Court case against DRL and Alvogen. On July 12, 2019, the Federal Circuit affirmed the decisions from the previously decided cases. The remaining case against Actavis was dismissed in light of the infringement ruling above, which prevents Actavis from entering the market until 2024. The case(s) against the remaining defendants regarding the additional asserted patents have not been finally resolved. A Markman hearing in the cases against Dr. Reddy’s and Alvogen which is pending in the United States District Court for the District of new Jersey (the “New Jersey District Court”) was held on October 17, 2019. On November 5, 2019, District Judge McNulty of the New Jersey District Court issued a Markman opinion construing the disputed terms of the asserted patents. On January 9, 2020, the New Jersey District Court entered a stipulated order of non-infringement of one of the patents, Patent No. 9,931,305, or the ’305 patent, based on the Federal Circuit’s claim construction ruling, and the Company and Indivior preserved available rights to appeal the claim construction ruling. On November 19, 2019, Magistrate Judge Waldor of the New Jersey District Court issued an order granting DRL and Alvogen’s requests to file amended answers to add antitrust counterclaims against Aquestive and Indivior. Aquestive and Indivior appealed the Magistrate Judge’s decision to District Judge McNulty on December 4, 2019, and DRL and Alvogen opposed the appeal. The parties are awaiting further action from the New Jersey District Court on the appeal. On January 17, 2020, the Company filed a motion to dismiss DRL’s and Alvogen’s antitrust counterclaims for failure to state a claim, and DRL and Alvogen opposed the motion. The parties are awaiting further action from the New Jersey District Court on the motion to dismiss. On June 3, 2020, the court issued an order setting a schedule for ongoing fact discovery, expert discovery, and dispositive motions. The schedule currently sets the close of fact discovery for October 20, 2020, with expert discovery continuing through the end of April 2021. The schedule also sets the deadline for filing dispositive motions for May 18, 2021. No trial date has been set in those cases. Management is not able to determine or predict the ultimate outcome of this proceeding or provide a reasonable estimate, or range of estimates, of the possible outcome or loss, if any, in this matter. On February 19, 2019, the Federal Circuit issued its mandate reversing the New Jersey District Court’s preliminary injunction against Dr. Reddy’s. Following issuance of the mandate, the New Jersey District Court vacated preliminary injunctions against both Dr. Reddy’s and Alvogen. Dr. Reddy’s, Alvogen, and Mylan all launched generic versions of Suboxone Sublingual Film, and the launches by Dr. Reddy’s and Alvogen are “at risk” because the products are the subject of the ongoing patent infringement litigations. On March 22, 2019, Aquestive and Indivior brought suit against Aveva Drug Delivery Systems, Inc., Apotex Corp., and Apotex Inc.in the United States District Court for the Southern District of Florida (the “Southern District of Florida Court”) for infringement of the Company’s U. S. Patent Nos. 8,017,150, 9,687,454, the ’514 patent and ’305 patent, seeking an injunction and potential monetary damages. Following a negotiated settlement between all parties, on December 3, 2019, the parties submitted a Notice of Settlement and a Joint Motion to Approve Consent Judgment. The Southern District of Florida Court entered an order dismissing the suit on December 18, 2019. The Company is also seeking to enforce its patent rights in multiple cases against BioDelivery Sciences International, Inc. (“BDSI”). Three cases are currently pending but stayed in the U.S. District Court for the Eastern District of North Carolina (the “Eastern District of North Carolina Court”): • The first, a declaratory judgment action brought by BDSI against Indivior and Aquestive, seeks declarations of invalidity and non-infringement of U.S. Patents Nos. 7,897,080, 8,652,378 and 8,475,832. This case is stayed. • The second was filed by Aquestive and Indivior related to BDSI’s infringing Bunavail product, and alleges infringement of Aquestive’s patent, U.S. Patent No. 8,765,167, or the ’167 patent, and seeks an injunction and potential monetary damages. Shortly after the case was filed, BDSI filed four (4) IPR’s challenging the asserted ’167 patent. On March 24, 2016, the United States Patent Trial and Appeal Board (“PTAB”), issued a final written decision finding that all claims of the ’167 patent were valid. The case was stayed in May 2016 pending the final determination of the appeals on those decisions. Following the PTAB’s February 7, 2019 decisions on remand denying institution, Aquestive and Indivior submitted a notice to the Court on February 15, 2019 notifying the Court that the stay should be lifted as a result of the PTAB’s decisions. The parties in this matter are awaiting further action from the Court. 22 Table of Contents • On January 13, 2017, the Company also sued BDSI asserting infringement of the ’167 patent by BDSI’s Belbuca product and seeking an injunction and potential monetary damages. On August 7, 2019, the Eastern District of North Carolina Court granted BDSI’s motion to dismiss the Complaint without prejudice and denied BDSI’s motion to stay as moot. On November 11, 2019, Aquestive filed a new Complaint against BDSI in the Eastern District of North Carolina Court. On November 27, 2019, BDSI filed a motion to stay the case pending BDSI’s appeal of the PTAB’s remand decisions, and the Company opposed this motion. The Eastern District of North Carolina Court denied BDSI’s motion to stay on April 1, 2020. BDSI’s appeal of the PTAB’s remand decisions to the United States Court of Appeals for the Federal Circuit was docketed on March 13, 2019, and on March 20, 2019, and a motion was made to dismiss this appeal for lack of jurisdiction. On August 29, 2019, the Federal Circuit granted the motion to dismiss BDSI’s appeal. On September 30, 2019, BDSI filed a petition for rehearing in the Federal Circuit en banc , which the Company opposed. The Federal Circuit denied BDSI’s petition for rehearing en banc on January 13, 2020. On June 11, 2020, BDSI filed a petition for writ of certiorari at the Supreme Court of the United States. The petition is scheduled for consideration at the Court’s September 29, 2020 conference, at which time the Court will decide whether to accept BDSI’s petition for review of the Federal Circuit’s dismissal of BDSI’s appeal. After the Federal Circuit denied BDSI’s petition, on January 13, 2020, BDSI filed with the Eastern District of North Carolina Court a motion to dismiss the Complaint, and Aquestive opposed on February 2, 2020. The Eastern District of North Carolina Court denied BDSI’s motion to dismiss and its motion to stay on April 1, 2020. On April 16, 2020, BDSI filed an Answer to the Complaint, including counterclaims for non-infringement, invalidity, and unenforceability of the ’167 patent. On May 7, 2020, Aquestive filed a motion to dismiss BDSI’s unenforceability counterclaim and a motion to strike BDSI’s corresponding affirmative defenses for failure to state a claim for inequitable conduct under the heightened pleading standard applicable to such claims and defenses. Rather than oppose Aquestive’s Motion to Dismiss, on May 28, 2020, BDSI amended its counterclaims and filed an Answer and Amended Counterclaims, which included additional allegations in support of BDSI’s unenforceability counterclaim. On June 25, 2020, Aquestive filed a Motion to Dismiss BDSI’s Amended Counterclaim for unenforceability and a Motion to Strike BDSI’s corresponding affirmative defense of unenforceability again for failure to state a claim under the applicable heightened pleading standard. BDSI’s filed its opposition to Aquestive’s Motion to Dismiss and Strike on July 16, 2020. Aquestive filed its Reply to BDSI’s Opposition on July 30, 2020. Antitrust Litigation On September 22, 2016, forty-one states and the District of Columbia, or the States, brought suit against Indivior and the Company in the U.S. District Court for the Eastern District of Pennsylvania, alleging violations of federal and state antitrust statutes and state unfair trade and consumer protection laws relating to Indivior’s launch of Suboxone Sublingual Film in 2010 and seeking an injunction, civil penalties, and disgorgement. After filing the suit, the case was consolidated for pre-trial purposes with the In re Suboxone (Buprenorphine Hydrochloride and Naloxone) Antitrust Litigation , MDL No. 2445, or the Suboxone MDL, a multidistrict litigation relating to putative class actions on behalf of various private plaintiffs against Indivior relating to its launch of Suboxone Sublingual Film. While Aquestive was not named as a defendant in the original Suboxone MDL cases, the action brought by the States alleges that the Company participated in an antitrust conspiracy with Indivior in connection with Indivior’s launch of Suboxone Sublingual Film and engaged in related conduct in violation of federal and state antitrust law. Aquestive moved to dismiss the States’ conspiracy claims, but by order dated October 30, 2017, the Court denied the motion to dismiss. An answer was filed denying the States’ claims on November 20, 2017. The fact discovery period closed July 27, 2018, but the parties agreed to conduct certain fact depositions in August 2018. The expert discovery phase closed May 30, 2019, but additional reports and depositions were conducted through August 1, 2019. Daubert briefing is ongoing. The remainder of the case schedule, including summary judgment briefing, is stayed pending resolution of Indivior’s appeal of the District Court’s class certification ruling in a co-pending multi-district litigation to which the Company is not a party. On July 28, 2020, the U.S. Court of Appeals for the Third Circuit issued its opinion affirming the District Court’s order certifying the class. This ruling may result in a resumption of the pre-trial proceedings in this case. Management is not able to determine or predict the ultimate outcome of this proceeding or provide a reasonable estimate, or range of estimates, of the possible outcome or loss, if any, in this matter. California Complaint On December 5, 2019, Neurelis Inc. (“Neurelis”) filed a complaint against Aquestive in the Superior Court of California, County of San Diego alleging Unfair Competition, Defamation, and Malicious Prosecution related to the Company’s pursuit of FDA approval for Libervant™. Neurelis filed a First Amended Complaint on December 9, 2019, alleging the same three causes of action. The Company filed a Motion to Strike Neurelis’s Complaint under California’s anti-SLAPP (“strategic lawsuit against public participation”) statute on Friday, January 31, 2020, which Neurelis is expected to oppose. Neurelis filed a motion for leave to file a Supplemental Complaint on February 5, 2020, which will be opposed. On February 5, 2020, Neurelis filed a Motion for Leave to File a Supplemental Complaint (“Motion”). On June 5, 2020, Neurelis filed a Motion for Limited Discovery related to Aquestive’s anti-SLAPP motion. 23 Table of Contents The court previously scheduled a hearing on both Aquestive’s anti-SLAPP Motion and on Neurelis’s Motion for April 24, 2020. However, on April 3, 2020, in response to the COVID-19 pandemic, the court issued an order continuing all hearings scheduled through April 30, 2020. The court ultimately held a telephonic status conference on June 25, 2020 to determine a schedule for hearing the pending motions. During that status conference, the court set Aquestive’s anti-SLAPP motion for hearing on July 24, 2020. The court also declined Neurelis’s request to hear its Motion and its Motion for Limited Discovery. Neurelis filed its response to Aquestive’s anti-SLAPP Motion on July 13, 2020, and we filed our reply on July 17, 2020. The parties are awaiting further action from the court regarding a new hearing date. Management is not able to determine or predict the ultimate outcome of this proceeding or provide a reasonable estimate, or range of estimates, of the possible outcome or loss, if any, in this matter.