Item 1. Financial Statements
Item 1.
FINANCIAL STATEMENTS (Unaudited)
AQUESTIVE THERAPEUTICS, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share and per share amounts)
(Unaudited)
September 30,
2020
December 31,
2019
Assets
Current assets:
Cash and cash equivalents
$
17,064
$
49,326
Trade and other receivables, net
7,990
13,130
Inventories, net
3,242
2,859
Prepaid expenses and other current assets
3,388
2,999
Total current assets
31,684
68,314
Property and equipment, net
7,728
9,726
Right-of-use assets, net
3,609
—
Intangible assets, net and other assets
7,402
439
Total assets
$
50,423
$
78,479
Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable and accrued expenses
$
15,237
$
17,749
Lease liabilities, current
664
—
Loans payable, current
1,750
—
Deferred revenue, current
722
806
Total current liabilities
18,373
18,555
Loans payable, net
60,346
60,338
Lease liabilities
3,047
—
Deferred revenue, net of current portion
3,694
4,348
Asset retirement obligations
1,482
1,360
Total liabilities
86,942
84,601
Contingencies (note 18)
Stockholders’ deficit:
Common stock, $.001 par value. Authorized 250,000,000 shares; 33,619,796 and 33,562,885 shares issued and outstanding at September 30, 2020 and December 31, 2019,
respectively
34
34
Additional paid-in capital
129,336
124,318
Accumulated deficit
(165,889
)
(130,474
)
Total stockholders’ deficit
(36,519
)
(6,122
)
Total liabilities and stockholders’ deficit
$
50,423
$
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
September 30,
Nine Months Ended
September 30,
2020
2019
2020
2019
Revenues
$
8,260
$
12,418
$
38,700
$
36,190
Costs and expenses:
Manufacture and supply
2,978
4,643
10,176
13,569
Research and development
7,260
5,063
15,461
17,517
Selling, general and administrative
11,803
13,714
40,310
47,868
Total costs and expenses
22,041
23,420
65,947
78,954
Loss from operations
(13,781
)
(11,002
)
(27,247
)
(42,764
)
Other income/(expenses):
Interest expense
(2,778
)
(2,652
)
(8,296
)
(6,515
)
Interest income
8
138
128
565
Loss on extinguishment of debt
-
(4,896
)
-
(4,896
)
Net loss before income taxes
(16,551
)
(18,412
)
(35,415
)
(53,610
)
Income taxes
-
-
-
-
Net loss
$
(16,551
)
$
(18,412
)
$
(35,415
)
$
(53,610
)
Comprehensive loss
$
(16,551
)
$
(18,412
)
$
(35,415
)
$
(53,610
)
Net loss per share - basic and diluted
$
(0.49
)
$
(0.74
)
$
(1.05
)
$
(2.15
)
Weighted-average number of common shares outstanding - basic and diluted
33,619,379
25,031,478
33,592,846
24,992,229
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)
Common Stock
Additional
Paid-in
Accumulated
Total
Stockholders’
Shares
Amount
Capital
Deficit
Equity/Deficit
For the periods ended September 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
)
Share-based compensation
3,195
-
1,420
-
1,420
Net loss
-
-
-
(16,551
)
(16,551
)
Balance at September 30, 2020
33,619,796
$
34
$
129,336
$
(165,889
)
$
(36,519
)
For the periods ended September 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
)
Share-based compensation
20,304
-
1,810
-
1,810
Fair value of warrants issued
-
-
6,800
-
6,800
Net loss
-
-
-
(18,412
)
(18,412
)
Balance at September 30, 2019
25,042,964
$
25
$
83,354
$
(117,838
)
$
(34,459
)
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)
Nine Months Ended
September 30,
2020
2019
Cash flows used for operating activities:
Net loss
$
(35,415
)
$
(53,610
)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization
2,337
2,288
Share-based compensation
5,052
5,199
Amortization of debt issuance costs and discounts
1,758
1,338
Loss on extinguishment of debt
-
4,896
All other non-cash expenses
34
76
Changes in operating assets and liabilities:
Trade and other receivables
5,082
(3,887
)
Inventories, net
(383
)
1,317
Prepaid expenses and other assets
(7,101
)
(1,029
)
Accounts payable and accrued expenses
(2,573
)
(5,632
)
Deferred revenue
(738
)
(591
)
Net cash used for operating activities
(31,947
)
(49,635
)
Cash flows used for investing activities:
Capital expenditures
(281
)
(577
)
Net cash used for investing activities
(281
)
(577
)
Cash flows used for financing activities:
Proceeds from shares issued under employee stock purchase plan
62
112
Proceeds from issuance of long-term debt
-
70,000
Debt repayment
-
(50,000
)
Payments for loan acquisition costs
-
(3,918
)
Premium paid to retire debt
-
(2,944
)
Payments for taxes on share-based compensation
(96
)
(2,723
)
Net cash (used for)/provided by financing activities
(34
)
10,527
Net decrease in cash and cash equivalents
(32,262
)
(39,685
)
Cash and cash equivalents:
Beginning of period
49,326
60,599
End of period
$
17,064
$
20,914
Supplemental disclosures of cash flow information:
Cash payments for interest
$
6,562
$
5,153
Net decrease in capital expenditures included in accounts payable and accrued expenses
(152
)
(290
)
Net increase in offering costs included in accounts payable and accrued expenses
237
162
Warrants issued in connection with long-term debt
-
6,800
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 commercialized one internally-developed proprietary product to date, 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 in Portage, Indiana, and corporate headquarters, sales and commercialization operations and primary research laboratory facilities are based in Warren, New Jersey.
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, par value $0.001 per share of the
Company (“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 as of 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 and Significant Accounting Policies
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, drug development 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
The Company’s significant accounting policies are described in the audited consolidated financial statements included in the 2019 Annual Report on Form 10-K. Subsequent to the date of those
financial statements, there have been no significant changes to these policies other than those listed below.
(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, 2020 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.
8
Table of Contents
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.
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 September 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 provides for use of a forward-looking expected loss model for estimating credit losses, replacing the incurred loss model that is based on past events and current
conditions. 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 and does not expect to have a material impact 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.
In August 2020, the FASB issued ASU 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and
Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity . This Accounting Standards Update was issued to address the complexity in accounting for certain
financial instruments with characteristics of liabilities and equity. Among other provisions, the amendments in this ASU significantly change the guidance on the issuer’s accounting for convertible instruments and the guidance on the derivative
scope exception for contracts in an entity’s own equity such that fewer conversion features will require separate recognition, and fewer freestanding instruments, like warrants, will require liability treatment. More specifically, the ASU reduces the
number of models that may be used to account for convertible instruments from five to three, amends diluted EPS calculations for convertible instruments, modifies the requirements for a contract that may be settled in an entity’s own shares to be
classified in equity and requires expanded disclosures intended to increase transparency. These amendments will be effective for the Company beginning January 1, 2024, with early adoption of the amendments permitted. The Company is currently
evaluating the impact from the adoption of ASU 2020-06 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.
9
Table of Contents
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 September
30, 2020, working capital totaled $13,311, which included $17,064 of cash and cash equivalents.
As of September 30, 2020, Aquestive has experienced a history of net losses and the Company’s accumulated deficits totaled $165,889 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 (the “12.5% Notes”). 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 debt refinancing.
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 constantly evolving, 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, monetization of certain revenue streams for its out-licensed apomorphine product (KYNMOBI™), 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, additional funding requirements would be obtained through modification of the existing debt facility to extend the potential availability of the first and second re-openers, and access to appropriate financial markets for debt or equity financings, or a combination of these potential sources of funds, although management can provide no assurance that any of these
sources of funding, either individually or in combination, 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
The Company’s revenues are derived from four primary sources: manufactured products made to order for licensees, including Suboxone® and Zuplenz®, manufacture and sale of its self-developed,
self-commercialized proprietary product, Sympazan® (clobazam), intellectual property licensing arrangements, and product development services provided under contracts with customers.
Revenue Recognition and Performance Obligations
Aquestive recognizes revenue pursuant to 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, the value of contractually promised goods or services is 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, the customer’s obligation to meet its contractual payment commitments is fixed and collection of invoiced amounts is reasonably assured, thereby limiting any significant probability of a
revenue reversal.
10
Table of Contents
Revenues from the sale of products and services and from licensing arrangements and related payments are evidenced by a contract with the customer. For manufacturing and supply and proprietary
product sales, invoices are generally issued upon the transfer of control. Co-development and research revenue is typically invoiced based on the contractual payment schedule, or upon completion of the service. Licensing revenue is generally invoiced
at the inception of an agreement, with additional charges rendered as related contingencies, such as regulatory approvals or sales targets, are met. 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, as well as periodic prospective reviews.
Manufacture and supply revenue – this revenue is derived from products manufactured exclusively for specific customers according to their strictly-defined
specifications, subject only to specified quality control inspections. Accordingly, at the point in time when quality control requirements are satisfied, revenue net of related discounts is recorded.
Proprietary product sales, net – this net revenue is recognized upon delivery and transfer of control of proprietary product to the Company’s customers, at
which point the Company has no ongoing performance obligations and the customer has assumed all significant risks and rewards of ownership. These revenues are subject to payment discounts, wholesaler service fees, volume and prompt payment discounts,
rebates and other chargebacks, which are estimated and recorded at the time the revenue is recognized. 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 met by the Company, such as manufactured products or development services, revenues may be
deferred when advance payment is received and recognized over the term of the license agreement. 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.
Co-development and research fees – this revenue is recognized as contractual services or performance obligations are performed. Invoicing for contractual
services may occur in advance or arrears, may, or may not, coincide with completion of underlying performance obligations, and therefore may give rise to contract assets or contract liabilities when the value of services completed varies from amounts
that may be invoiced to the customer.
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 performance obligation. These contract assets
are reflected as a component of other receivables within Trade and other receivables and as a component of intangible and other assets within the Condensed Consolidated Balance Sheet. As of September 30, 2020, and December 31, 2019, such current and
non-current contract assets were $8,922 and $4,363, respectively, consisting primarily of minimum annual royalties due under a certain licensing agreement and 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 September 30, 2020, and December 31, 2019,
such contract liabilities were $4,416 and $5,154, respectively.
11
Table of Contents
The Company’s revenues were comprised of the following:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020
2019
2020
2019
Manufacture and supply revenue
$
5,903
$
9,155
$
20,078
$
24,739
License and royalty revenue
328
1,356
13,682
6,402
Co-development and research fees
341
1,073
870
2,862
Proprietary product sales, net
1,688
834
4,070
2,187
Total revenues
$
8,260
$
12,418
$
38,700
$
36,190
Disaggregation of Revenue
The following table provides disaggregated net revenue by geographic area:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020
2019
2020
2019
United States
$
6,567
$
11,022
$
35,496
$
33,683
Ex-United States
1,693
1,396
3,204
2,507
Total revenues
$
8,260
$
12,418
$
38,700
$
36,190
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:
September 30,
2020
December 31,
2019
Trade receivables
$
6,659
$
9,094
Contract and other receivables
1,872
4,363
Less: allowance for bad debts
(264
)
(124
)
Less: sales-related allowances
(277
)
(203
)
Trade and other receivables, net
$
7,990
$
13,130
The current portion of contract and other receivables totaled $1,872 and $4,363 as of September 30, 2020 and December 31, 2019, respectively. The current period 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:
September 30,
2020
December 31,
2019
Allowance for doubtful accounts at beginning of year
$
124
$
58
Additions charged to bad debt expense
140
66
Write-downs charged against the allowance
—
—
Allowance for doubtful accounts at end of the period
$
264
$
124
12
Table of Contents
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 redemptions. These reserves are based on
estimates of the amounts earned or to be claimed on the related sales. These amounts are treated as variable consideration, estimated and recognized as a reduction of the transaction price at the time of the sale. The Company includes these estimated
amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized for such transaction will not occur, or when the uncertainty associated with the variable consideration is resolved. The
calculation of some of these items requires management to make estimates based on sales data, historical return data, contracts and other related information that may become known in the future. The adequacy of these provisions is reviewed on a
quarterly basis.
The following table provides a summary of activity with respect to sales related allowances and accruals for the nine months ended September 30, 2020:
Total Sales Related
Allowances and Accruals
Balance at December 31, 2019
$
1,377
Provision
3,996
Payments / credits
(3,441
)
Balance at September 30, 2020
$
1,932
Total reductions of gross product sales from sales-related allowances and accruals were $3,996 for the nine months ended September 30, 2020. Accruals for returns allowances and prompt pay discounts
are reflected as a direct reduction of trade receivables and accruals for wholesaler service fees, co-pay support redemptions 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 $277 and $1,655, respectively, as of September 30, 2020 and $203 and $1,174, respectively, as of 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 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 nine months ended
September 30, 2020, there were two customers exceeding the 10% threshold for revenue while there were three customers exceeding the 10% threshold for outstanding accounts receivable. Revenues provided by Indivior, and Sunovion Pharmaceuticals, Inc.
(“Sunovion”) represented approximately 54% and 31%, respectively of total revenue for the nine months ended September 30, 2020, and outstanding accounts receivable due from Indivior, Sunovion and AmerisourceBergen represented approximately 50%, 12%
and 11%, 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.
13
Table of Contents
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.
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. Sunovion used this intellectual property to develop its apomorphine product, KYNMOBI™, which was approved by the FDA on May 21, 2020. This approval 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 was received
as of September 30, 2020 and is included in License and royalty revenues for the nine-months ended September 30, 2020.
In consideration for the rights granted to Sunovion under the Sunovion License Agreement, the Company received aggregate payments totaling $22,000 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”) The Company is also entitled to receive certain contingent
one-time milestone payments related to product availability and regulatory approval in 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 are equal to $45,000. There can be no guarantee that any future milestones will be met or that additional milestone payments will be payable. There are minimum annual guaranteed royalty payments
under the contract. As of September 30, 2020, the Company recorded minimum royalty receivables of $8,000 in the aggregate, of which $1,000 is included in Trade and other receivables and $7,000 is included in Intangibles, net and other assets, with
the total reflected in License and royalty revenues for the nine- months ended September 30, 2020.
14
Table of Contents
Effective March 16, 2020, the Company entered into a first amendment (the “First 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 effective inception date of the first minimum annual royalty due from 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 apomorphine-based 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
apomorphine-based products.
On October 23, 2020, the Company amended the Sunovion License Agreement to clarify the parties’ agreement with respect to certain provisions in the License Agreement, specifically the date after
which Sunovion has the right to terminate the License Agreement and the rights and obligations of the parties regarding the prosecution and maintenance of the Company’s patents covered under the License Agreement. See Note 19, (A), Subsequent
Events. On November 3, 2020, the Company entered into a royalty monetization agreement (the “Monetization Agreement”) with an affiliate of Marathon Asset Management (“Marathon”) pursuant to which the Company conveyed to Marathon the right to all
royalties and other payments due to the Company under the Sunovion License Agreement. See Note 19, (B), Subsequent Events.
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 nine-month period ended September 30, 2020, in connection with the FDA’s acceptance of a 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.
15
Table of Contents
The Company granted warrants to certain holders of the 12.5% 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.
Note 8.
Inventories, Net
The components of Inventory, net is as follows:
September 30,
2020
December 31,
2019
Raw material
$
1,153
$
1,244
Packaging material
1,231
1,096
Finished goods
858
519
Total inventory, net
$
3,242
$
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
September 30,
2020
December 31,
2019
Machinery
3-15 yrs
$
21,406
$
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
2,886
2,787
Construction in progress
1,065
1,412
47,899
47,770
Less: accumulated depreciation and amortization
(40,171
)
(38,044
)
Total property and equipment, net
$
7,728
$
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 $714 and $695 for the three-month periods ended September 30, 2020 and 2019, respectively. For the
respective nine-month periods, these expenses totaled $2,127 and $2,143.
Note 10.
Right-of-Use Assets and Lease Obligations
The Company leases all realty used as its production 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 2.5 years and 6.0 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 nine-month periods ended September 30, 2020, total operating lease expenses under these leases totaled $409 and $1,228, respectively, including variable lease expenses such as
common area maintenance and operating costs totaling $89 and $255, respectively. Total payments to these lessors during the nine-month period ended September 30, 2020 were $1,255.
16
Table of Contents
Maturities of the Company’s operating lease liabilities are as follows:
Remainder of 2020
$
266
2021
1,287
2022
1,295
2023
944
2024
565
2025
565
2026
424
Total lease payments
5,346
Less: imputed interest
(1,635
)
Total operating lease liabilities
$
3,711
Note 11.
Intangible Assets, Net and Other Assets
The following table provides the components of identifiable intangible assets, all of which are finite lived:
September 30,
2020
December 31,
2019
Purchased technology-based intangible
$
2,358
$
2,358
Purchased patent
509
509
2,867
2,867
Less: accumulated amortization
(2,752
)
(2,714
)
Intangible assets, net
115
153
Royalty receivable
7,000
-
Other assets, primarily security deposits
287
286
Total intangible assets, net and other assets
$
7,402
$
439
Amortization expense was $13 for each of the three-month periods ended September 30, 2020 and 2019. For the corresponding nine-month periods, these expenses totaled $38 and $39,
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:
September 30,
2020
December 31,
2019
Accounts payable
$
9,169
$
12,274
Accrued compensation
4,129
3,758
Accrued distribution expenses
1,655
1,174
Other
284
543
Total accounts payable and accrued expenses
$
15,237
$
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 the 12.5% 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 (the “Noteholders”) and U.S. Bank National Association in dual roles providing terms and governing an asset-based
loan facility.
17
Table of Contents
Upon closing of the Indenture for the 12.5% Notes (“Indenture”), the Company issued $70,000 of principal of the 12.5% 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 the 12.5% 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 (the “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 12.5% 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 the 12.5% 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 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. On November 3, 2020, this Indenture was amended and will be partially repaid from proceeds resulting from the monetization transaction. See Note 19 (C), Subsequent Events. There can be no assurance that any
additional financing will be consummated.
Proceeds from the 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 12.5% 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. The Company has recorded $1,750 as Loans Payable, Current to reflect this obligation in its Condensed Consolidated Balance Sheet at September 30, 2020. 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 12.5% 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 Initial Notes to 112.5% if payment occurs during the third year after the issuance of the Initial Notes. In the event that
redemption occurs within the two years after the issuance of the 12.5% 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 12.5% Notes at 101% of the remaining principal plus accrued interest at the election of the Lenders.
Collateral for the loan under the 12.5% 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 intellectual property 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 12.5% Notes being repurchased, plus accrued and unpaid interest,
if any, thereon, to the date of the repurchase, to the extent elected by the Noteholders, 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 Noteholders. 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 of more than $40,000 (or $50,000 if an additional tranche is
issued) can be used immediately for general corporate purposes. As of September 30, 2020, the Company complied with all of its covenants under the Indenture.
18
Table of Contents
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 12.5% Notes
were $590 and $1,758 for the three- and nine-month periods ended September 30, 2020, respectively. Comparative amortization expenses derived from deferred debt issuance costs and debt discounts related to the Perceptive Loan and the 12.5% Notes for
the three- and nine-month periods ended September 30, 2019 were $556 and $1,338, respectively. Unamortized deferred debt issuance costs and deferred debt discounts totaled $7,904 and $9,662 as of September 30, 2020 and December 31, 2019,
respectively.
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 Initial 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 Initial Notes described above expire on June 30, 2025 and entitled the holders of the Initial 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 Initial 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 Initial 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 Initial Notes during the nine-month period ended September 30, 2020.
On November 3, 2020, the Indenture was amended, and additional at-the-money warrants will be issued at the time of purchase of additional Notes. See Note 19 (C), Subsequent Events.
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 nine-month periods ended September 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
September 30,
Nine Months Ended
September 30,
2020
2019
2020
2019
Numerator:
Net loss
$
(16,551
)
$
(18,412
)
$
(35,415
)
$
(53,610
)
Denominator:
Weighted-average number of common shares – basic
33,619,379
25,031,478
33,592,846
24,992,229
Loss per common share – basic and diluted
$
(0.49
)
$
(0.74
)
$
(1.05
)
$
(2.15
)
19
Table of Contents
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 September 30:
September 30,
2020
September 30,
2019
Options on common shares outstanding
3,075,942
2,256,092
Restricted stock units unvested
13,489
107,144
Warrants on common shares outstanding
1,571,429
—
Total potentially antidilutive derivatives excluded from losses per share
4,660,860
2,363,236
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
September 30,
Nine Months Ended
September 30,
2020
2019
2020
2019
Manufacture and supply
$
73
$
60
$
208
$
176
Research and development
178
188
543
536
Selling, general and administrative
1,176
1,622
4,301
4,480
Total share-based compensation expenses
$
1,427
$
1,870
$
5,052
$
5,200
Share-based compensation from:
Restricted stock units
$
16
$
473
$
789
$
1,403
Stock options
1,411
1,397
4,252
3,777
Employee stock purchase plan
-
—
11
20
Total share-based compensation expenses
$
1,427
$
1,870
$
5,052
$
5,200
Share-Based Compensation Equity Awards
The following tables provide information about the Company’s restricted stock unit and stock option activity during the nine-month period ended September 30, 2020:
Restricted Stock Unit Awards (RSUs):
Number of
Units
Weighted
Average
Grant Date Fair
Value
(in thousands)
Unvested as of December 31, 2019
74
$
14.64
Granted
4
7.54
Vested
(64
)
14.88
Forfeited
—
—
Unvested as of September 30, 2020
14
$
11.38
Grant date fair value of shares vested during the period
$
958
Unrecognized compensation costs as of September 30, 2020
$
140
Unrecognized compensation costs related to awards of RSUs are expected to be recognized over a weighted-average period of less than two years.
20
Table of Contents
Stock Option Awards:
Number of
Options
Weighted Average
Exercise Price
(in thousands)
Outstanding as of December 31, 2019
2,231
$
10.42
Granted
981
2.68
Exercised, Forfeited, Expired
(136
)
(4.39
)
Outstanding as of September 30, 2020
3,076
$
8.22
Vested or expected to vest as of September 30, 2020
2,866
$
8.22
Exercisable as of September 30, 2020
1,014
$
11.87
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 $2.10 During the nine-month period ended September 30, 2020, stock options were granted with
exercise prices ranging from $1.54 to $7.86, and accordingly, given the Company’s share price of $4.86 at September 30, 2020, certain shares granted during this period provided intrinsic value at that date totaling $2,474. No intrinsic value was
provided by stock options granted during the nine-month period ended September 30, 2019.
As of September 30, 2020, $6,554 of unrecognized compensation expense related to non-vested stock options is expected to be recognized over a weighted average period of 1.8 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
nine-month periods ended September 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 September 30, 2020 and 2019,
the Company recorded no income tax benefit from its pretax losses of $16,551 and $18,412, respectively, and similarly for the nine months ended September 30, 2020 and 2019, the Company recorded no tax benefit from its pretax loss of $35,415 and
$53,610, 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 nine-month periods ended September 30, 2020 is the anticipated full year
operating loss which will require full valuation allowances against any associated net deferred tax assets.
21
Table of Contents
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 among 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.
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. 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. On August 24, 2020, Judge McNulty issued an Opinion and Order denying both the appeal of the Magistrate’s decision and Aquestive’s 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.
22
Table of Contents
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.
•
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. At the
request of the Supreme Court, Aquestive filed an opposition to BDSI’s petition on August 17, 2020, and BDSI filed a reply on August 27, 2010. On October 5, 2020, the Supreme Court issued an order denying BDSI’s petition. 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. The parties are awaiting
further action from the court on Aquestive’s motion.
23
Table of Contents
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. 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. On August 27, 2020, the district court issued a scheduling order, setting the deadline for filing remaining Daubert challenges and summary judgment. Under the scheduling order, the remaining Daubert motions were filed on September 28, 2020, and oppositions are due on October 19, 2020. The court
will set oral argument on the motions, but the date for oral argument is not yet known. Summary judgment motions are due January 11, 2021, and responses to summary judgment motions are due February 11, 2021. No trial date has yet been set.
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.
Humana and Centene Actions
On September 18, 2020, Humana, Inc., a health insurance payer, filed a suit against Aquestive and Indivior in the Eastern District of Pennsylvania relating to Suboxone. The
Humana action, which alleges facts similar to those at issue in the Antitrust Case and the Suboxone MDL described above, was assigned to the same judge that is presiding over those actions. Humana’s Complaint alleges five causes of action against
Aquestive, including conspiracy to violate the RICO Act, fraud under state law, unfair and deceptive trade practices under state law, insurance fraud, and unjust enrichment. On September 21, 2020, Centene Corporation and other related insurance
payers filed a similar suit against Aquestive and Indivior in the Eastern District of Missouri. The counsel representing Humana is also representing Centene. On September 21, 2020, the Centene action was provisionally transferred to the Eastern
District of Pennsylvania by the United States Judicial Panel on Multidistrict Litigation. No other proceedings have occurred and the schedule is not yet known. Management is not able to determine or predict the ultimate outcome of this proceeding
or provide a reasonable estimate, or range of estimate, 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.
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 court held a telephonic hearing on Aquestive’s anti-SLAPP motion on July 24, 2020. On August 6, 2020, the Court issued an order granting in part and
denying in part Aquestive’s anti-SLAPP motion. Aquestive filed a notice of appeal to the California Court of Appeal on September 1, 2020, and Neurelis filed a notice of cross-appeal on October 5, 2020. 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.
24
Table of Contents
Note 19.
Subsequent Events
(A) Amendment to License Agreement with Sunovion Pharmaceuticals Inc.
Effective as of October 23, 2020, the Company entered into a Second Amendment to the Sunovion License Agreement whereby the parties to the Sunovion License Agreement agreed to
clarify the continued rights and obligations of the parties with respect to the prosecution and maintenance of the Company’s patents covered under the Agreement and that, on and after March 31, 2028, in respect of any jurisdiction or jurisdictions
covered under the License Agreement, Sunovion may terminate its rights with respect to the Licensed Patents under the License Agreement upon 180 days prior written notice to the Company.
(B) Monetization of Certain Rights under the Sunovion License Agreement
On November 3, 2020, the Company entered into the Monetization Agreement that will result in proceeds to the Company of up to $125,000 in exchange for which the
Company conveyed to Marathon the right to all royalties and other payments due to the Company under the Sunovion License Agreement (See Note 6). Under the terms of the Monetization Agreement, Aquestive will receive a $40,000 cash payment within 12
business days of signing and is eligible to receive up to $85,000 of contingent payments at various points, beginning as early as the fourth quarter of 2020, based on the achievement of worldwide royalty targets and certain other commercial
milestones.
(C) Amendment and Partial Repayment of the 12.5% Notes
With the proceeds paid to the Company at closing under the Monetization Agreement, the Company will repay $22,500 of the 12.5% Notes, and issue $4,000 of new
senior notes in lieu of paying a prepayment premium on the early repayment of the 12.5% Notes, reducing the balance of senior notes outstanding to $51,500 in the aggregate. In addition, the holders of the 12.5% Notes have extended to December 31,
2021 the Company’s ability to access, at the Company’s option, $30,000 of senior notes re-openers under the Indenture. The first $10,000 senior notes re-opener represents a commitment of such amount by current holders of 12.5% Notes, at the option
of the Company, contingent upon FDA approval of the Company’s product candidate Libervant (diazepam) Buccal Film for the management of seizure clusters . A second $20,000 senior notes re-opener represents a
right, at the Company’s option, to market to current holders of the Company’s 12.5% Notes, and/or other lenders, additional senior notes up to such amount, contingent upon FDA approval of Libervant for U.S. market access. If and to the extent that
the Company accesses these re-openers, the Company will grant warrants to purchase up to 714,000 shares of common stock, with the strike price calculated based on the 30-day volume weighted average closing price of the Company’s common stock at the
warrant grant date. In addition, as of the closing of this transaction, the Company will issue to the holders of the 12.5% Notes warrants to purchase 143,000 shares of the Company’s common stock.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.