Item 7. Management’s Discussion and Analysis
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the notes to those financial
statements appearing elsewhere in the Annual Report on Form 10-K. This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as those set forth under “Risk Factors” in Part
1 Item 1A of this Annual Report on Form 10-K, our actual results may differ materially from those anticipated in these forward-looking statements. All dollar amounts are stated in thousands.
Overview
We are a pharmaceutical company focused on developing and commercializing differentiated products which leverage our proprietary PharmFilm ® technology to meet patients’ unmet medical needs
and to solve patients’ therapeutic problems. We have five products approved by the U.S. Food and Drug Administration (FDA), both proprietary and out-licensed, as well as a late-stage proprietary product pipeline focused on the treatment of central
nervous system, or CNS, diseases and an earlier stage pipeline including treatment of anaphylaxis. Our licensees market their products in the US and in some instances outside the US. The company markets its proprietary product in the US. We believe
that our proprietary and licensed products address the characteristics of these patient populations and the shortcomings of available treatments create opportunities for the development and commercialization of meaningfully differentiated medicines.
For a summary of our product and product candidates, please refer to Item I. Business of this Form 10-K.
Business Update Regarding COVID-19
The current COVID-19 pandemic has continued to present substantial health and economic risks, uncertainties and challenges to our business, the U.S. and global
economies and financial markets. It is not currently possible to predict how long the pandemic will last or the time it will take for the economy to return to prior levels. The extent to which COVID-19 impacts our business, operations, clinical
trials, regulatory approval process, capital, financial and monetization markets, financial results and financial condition, and those of our suppliers, distributors, customers and other third parties necessary to our business including those
involved in the regulatory approval process, will depend on future developments, which are highly uncertain and cannot be predicted with certainty or clarity, including the duration and continuing severity of the outbreak, resurgence of the outbreak,
continued or additional government actions to contain COVID-19, timing or efficacy of any vaccine, and new information that will emerge concerning the short-term and long-term impact of COVID-19.
To date, we have been able to continue to manufacture and supply our products and currently do not anticipate any significant interruption in supply, although we continue to monitor this situation
closely and there is no assurance that disruptions or delay will not occur as a result of COVID-19. We are also monitoring demand for our products, which could be negatively impacted during the COVID-19 pandemic, as well as the financial condition
of our customers and licensees, one of whom delayed remittance of certain payments due the Company for development services provided but ultimately made such payments.
Our office-based colleagues have generally been working from home since March 2020. With additional protections and protocols the Company has maintained appropriate and necessary staffing levels at
both our laboratory and manufacturing sites. In Q1 2020 we suspended in-person interactions by our sales and marketing personnel and engaged remotely to support our commercialization efforts. Sales and marketing practices continue to evolve in
accordance with changing local rules and regulations with predominantly virtual interactions with healthcare providers. However, the landscape continues to change as localities reestablish and/or ease restrictions, as the case may be, with the rise
and fall of new case rates and the rollout of vaccinations.
For additional information on various uncertainties and risks caused by the COVID-19 pandemic, see Item Part I. Item IA. Risk Factors included in this report.
Financial Operations Overview
Revenues
Our revenues to date have been earned from our manufactured products made to order for licensees, including Suboxone and Zuplenz, as well as revenue from our self-developed, self-commercialized
proprietary product, Sympazan®. Revenues are also earned from our product development services provided under contracts with customers, and from the licensing of our intellectual property. These activities generate revenues in four primary
categories: manufacture and supply revenue, co-development and research fees, license and royalty revenue, and proprietary product sales, net.
Manufacture and Supply Revenue
Currently, we produce two licensed pharmaceutical products: Suboxone® and Zuplenz®. We are the exclusive manufacturer for these products. We manufacture based on receipt of purchase orders from our
licensees, and our licensees have an obligation to accept these orders once quality assurance validates the quality of the manufactured product with agreed upon technical specifications. Our licensees are responsible for all other aspects of
commercialization of these products and the Company has no role, either direct or indirect, in our customers’ commercialization activities, including those related to marketing, pricing, sales, payor access and regulatory operations.
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We expect future manufacture and supply revenue from licensed products to be based on volume demand for existing licensed products, and for manufacturing and supply rights under license and supply
agreements for existing or new agreements for successful product development collaborations.
Co-development and Research Fees
We work with our licensees to co-develop pharmaceutical products. In this regard, we earn fees through performance of specific tasks, activities, or completion of stages of development defined within
a contractual arrangement with the relevant licensee. The nature and extent of these performance obligations, broadly referred to as milestones or deliverables, are usually dependent on the scope and structure of the project as contracted, as well as
the complexity of the product and the specific regulatory approval path necessary for that product.
License and Royalty Revenue
We realize revenue from licenses of our intellectual property. For licenses that do not require further development or other ongoing activities by us, our licensee has acquired the right to use the
licensed intellectual property for self-development of their product candidate, for manufacturing, commercialization or other specified purposes, upon the effective transfer of those rights, and related revenues are generally recorded at a point in
time, subject to contingencies or constraints, if any. For licenses that may provide substantial value only in conjunction with other performance obligations to be provided by us, such as development services or the manufacture of specific products,
revenues are generally recorded over the term of the license agreement. We also earn royalties based on our licensees’ sales of products that use our intellectual property that are marketed and sold in the countries where we have patented technology
rights. Royalty revenue related to the sale of future revenue is described further in this section under Critical Accounting Policies and Use of Estimates “Royalty Revenue and Interest Expense related to Sale of Future Revenue”.
Proprietary Product Sales, Net
We commercialized our first proprietary CNS product, Sympazan, in December 2018. We currently sell Sympazan through wholesalers for distribution through retail pharmacies. Revenues from sales of
proprietary product are recorded net of prompt payment discounts, wholesaler service fees, returns allowances, rebates and co-pay support redemptions, each of which are described in more detail below. 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
connection with 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.
Costs and Expenses
Our costs and expenses are primarily the result of the following activities: generation of manufacture and supply revenues; development of our pipeline of proprietary product candidates; and selling,
general and administrative expenses, including pre-launch and post-launch commercialization efforts, intellectual property procurement, protection, prosecution and litigation expenses, corporate management functions, medical and clinical affairs
administration; public company costs, share-based compensation expenses and interest on our corporate borrowings. We primarily record our costs and expenses in the following categories:
Manufacture and Supply Costs and Expenses
Manufacture and supply costs and expenses are primarily incurred from the manufacture of our commercialized licensed pharmaceutical products and for our self-developed, self-commercialized, approved
proprietary product, including raw materials, direct labor and overhead costs principally in our Portage, Indiana facilities. Our material costs include the costs of raw materials used in the production of our proprietary dissolving film and primary
packaging materials. Direct labor costs consist of payroll costs (including taxes and benefits) of employees engaged in production activities. Overhead costs principally consist of indirect payroll, facilities rent, utilities and depreciation for
leasehold improvements and production machinery and equipment. These costs can increase, or decrease, based on the costs of materials, purchased at market pricing, and the amount of direct labor required to produce a product, along with the
allocation of fixed overhead, which is dependent on production volume.
Our manufacture and supply costs and expenses are impacted by our customers’ supply requirements. Costs of production reflect the costs of raw materials that are purchased at market prices and
production efficiency (measured by the cost of a salable unit). These costs can increase or decrease based on the amount of direct labor and materials required to produce a product and the allocation of fixed overhead, which is dependent on the
levels of production.
We expect to continue to seek to rationalize and manage costs to reflect the declining production volumes of Suboxone. We reduced the cost of manufacturing and supply in late 2019 and continued
throughout 2020 in order to recognize the declining volume of Suboxone that began in 2019 and will continue declining in 2021. We expect our manufacture and supply costs and expenses to decrease over the next several years due to the decline in
Suboxone volumes as the generics in that market continue to take market share, modestly offset by the commercialization of our proprietary products, starting with Sympazan launched in December 2018. In addition to our proprietary products coming
online, we may add licensee products which may need additional resources to manufacture. If such growth should occur for higher volume product opportunities such as Suboxone, we would incur increased costs associated with hiring additional personnel
to support the increased manufacturing and supply costs arising from higher manufactured volumes from proprietary and licensed products.
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Research and Development Expenses
Since our inception, we have focused significant resources on our research and development activities. Research and development expenses primarily consist of:
•
employee-related expenses, including compensation, benefits, share-based compensation and travel expense;
•
external research and development expenses incurred under arrangements with third parties, such as contract research organizations, investigational sites and consultants;
•
the cost of acquiring, developing and manufacturing clinical study materials; and
•
costs associated with preclinical and clinical activities and regulatory operations.
We expect our research and development expenses to continue to be significant over the next several years as we continue to develop existing product candidates such as AQST-108-SF, AQST-305 and
others, and we identify and develop or acquire additional product candidates and technologies. We may hire or engage additional skilled colleagues or third parties to perform these activities, conduct clinical trials and ultimately seek regulatory
approvals for any product candidate that successfully completes those clinical trials.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of salaries, benefits, share-based compensation, commercialization and marketing costs and other related costs for executive, finance,
selling and operational personnel. Other significant costs include facility and related costs not otherwise included in research and development expenses such as: professional fees for patent-related and other legal expenses, consulting, tax and
accounting services; insurance; selling; market research; advisory board and key opinion leaders; depreciation; and general corporate expenses, inclusive of IT systems related costs.
A significant portion of selling, general and administrative expenses relate to the sale and marketing of our proprietary product, Sympazan. Sympazan is the precursor and compliment to the launch of
Libervant, assuming that it is approved and granted U.S. market access. We believe there is a very high degree of overlap and correlation between prescribers of Sympazan and the likely prescribers of an approved Libervant®. While Sympazan continues
to grow, we will continue to rationalize its contribution to move towards profitability while continuing to introduce epilepsy prescribers and patients to Aquestive and PharmFilm® technology in advance of the anticipated launch of Libervant, assuming
FDA approval and market access. The current commercial organization would begin the launch of Libervant, subject to its approval for U.S. market access, which cannot be assured, shortly after its approval. Until a Libervant launch is certain, we
do not plan to increase the costs of our commercial organization and expect to continue to improve the efficiency of the Sympazan commercial investments.
Our general and administrative costs include costs related to accounting, audit, legal regulatory, and tax-related services required to maintain compliance with exchange listing and SEC regulations,
director and officer insurance costs, and investor and public relations costs. We continue to incur significant costs in seeking to protect our intellectual property rights, including significant litigation costs in connection with seeking to
enforce our rights concerning third parties’ at-risk launch of generic products.
We will continue to manage business costs to appropriately reflect the declining state of Suboxone revenue, the marketing and sales costs related to Sympazan and other external factors affecting our
business, including the continuing impact of the COVID-19 pandemic, as we continue to focus on our core business:
•
Seeking to obtain the approval and subsequent launch of Libervant, subject to approval by the FDA for U.S. market access, which cannot be assured;
•
Continuing the development of AQST-108-SF along the 505(b)(2) pathway; and
•
Growing the revenue contribution from Sympazan as a first step to position Aquestive in the epilepsy community.
Interest Expense
Interest expense consists of interest costs on our 12.5% Notes at a fixed rate of 12.5%, payable quarterly, as well as amortization of loan costs and the debt discount. Interest expense increased in
Fiscal Year 2020 as compared to Fiscal Year 2019 as the 12.5% Notes were issued in July 2019. The 12.5% Notes are discussed in Note 12, 12.5% Senior Secured Notes due 2025, to our consolidated financial statements. See Liquidity and Capital Resources
below for further detail on our 12.5% Notes.
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Royalty Revenue and Interest Expense related to Sale of Future Revenue
On November 3, 2020, we entered into a Purchase and Sale Agreement (the “Monetization Agreement”) with MAM Pangolin Royalty, LLC, an affiliate of Marathon Asset Management (“Marathon”). Under the
terms of the Monetization Agreement, we sold all of our contractual rights to receive royalties and milestone payments due under the Sunovion License Agreement related to Sunovion’s apomorphine product, KYNMOBI ® . KYNMOBI ® , an
apomorphine film therapy for the treatment of off episodes in Parkinson’s disease patients, received approval from the U.S. Food and Drug Administration (FDA) on May 21, 2020. In exchange for the sale of these rights, we received an upfront payment
of $40,000 and an additional payment of $10,000 through the achievement of the first milestone. We have received an aggregate amount of $50,000 through December 31, 2020 under the Monetization Agreement.
Under the Monetization Agreement, additional aggregate contingent payments of up to $75,000 may be due to us upon the achievement of worldwide royalty and other commercial targets within a specified
timeframe, which could result in total potential proceeds of $125,000.
We recorded the upfront proceeds of $40,000 and subsequent first milestone of $10,000, reduced by $2,909 of transaction costs, as a liability related to the sale of future revenue that will be
amortized using the effective interest method over the life of the Monetization Agreement. As future contingent payments are received, they will increase the balance of the liability related to the sale of future revenue. Although we sold all of our
rights to receive royalties and milestones, as a result of our ongoing obligations related to the generation of these royalties, we will account for these royalties as revenue. Our ongoing obligations include the maintenance and defense of the
intellectual property and to provide assistance to Marathon in executing a new license agreement for KYNMOBI ® in the event Sunovion terminates the Sunovion License Agreement in one or more jurisdictions of the licensed territory under
the Sunovion License Agreement.
During the second quarter of 2020, under the Sunovion License Agreement, the Company recognized $8,000 of royalty revenue and corresponding royalty receivable, related to the $1,000 annual minimum
guaranteed royalty that is due in each of the next eight years. In connection with the Monetization Agreement, the Company performed an assessment under ASC 860, Transfer and Servicing to determine whether
the existing receivable was transferred to Marathon and concluded that the receivable was not transferred.
As royalties are remitted to Marathon from Sunovion, the collection of the royalty receivable and balance of the liability related to the sale of future revenue will be effectively repaid over the
life of the agreement. In order to determine the amortization of the liability related to the sale of future revenue, we are required to estimate the total amount of future royalty and milestone payments to Marathon over the life of the Monetization
Agreement and contingent milestone payments from Marathon to the Company. The sum of future royalty payments less the $50,000 in proceeds received and future contingent payments will be recorded as interest expense over the life of the Monetization
Agreement. At execution, the estimate of this total interest expense resulted in an effective annual interest rate of approximately 24.9%. This estimate contains significant assumptions that impact both the amount recorded at execution and the
interest expense that will be recognized over the life of the Monetization Agreement. The Company will periodically assess the estimated royalty and milestone payments to Marathon from Sunovion and contingent milestone payments from Marathon to the
Company. To the extent the amount or timing of such payments is materially different from the original estimates, an adjustment will be recorded prospectively to increase or decrease interest expense. There are a number of factors that could
materially effect the amount and timing of royalty and milestone payments to Marathon from Sunovion, and correspondingly, the amount of interest expense recorded by the Company, most of which are not under our control. Such factors include, but are
not limited to, changing standards of care, the initiation of competing products, manufacturing or other delays, generic competition, intellectual property matters, adverse events that result in government health authority imposed restrictions on the
use of products, significant changes in foreign exchange rates as the royalties remitted to Marathon are made in U.S. dollars (USD) while a portion of the underlying sales of KYNMOBI ® will be made in currencies other than USD, and other
events or circumstances that are not currently foreseen. Changes to any of these factors could result in increases or decreases to both royalty revenue and interest expense related to the sale of future revenue.
Interest Income and other income (expense), net
Interest income and other income (expense), net consists of earnings derived from an interest-bearing account and other miscellaneous income and expense items. The interest-bearing account has no minimum amount to be maintained in the account
nor any fixed length of period for which interest is earned.
Results of Operations
Comparison of Years Ended December 31, 2020 and 2019
Management’s discussion and analysis of our results of operations for the year ended December 31, 2019 compared to the year ended December 31, 2018 may be found in Item 7. “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” of our Form 10-K for the year ended December 31, 2019, filed with the SEC on March 11, 2020.
The following discussion of our results of operations explains the material drivers of these results of operations.
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Revenues
The following table sets forth our revenue data for the periods indicated.
Change
2020
2019
$
%
(In thousands, except %)
Manufacture and supply revenue
$
24,881
$
38,739
$
(13,858
)
(36
%)
License and royalty revenue
14,055
6,959
7,096
102
%
Co-development and research fees
1,264
4,042
(2,778
)
(69
%)
Proprietary product sales, net
5,649
2,869
2,780
97
%
Revenues
$
45,849
$
52,609
$
(6,760
)
(13
%)
Revenues decreased 13% or $6,760 in 2020 to $45,849 compared to $52,609 in 2019. The change is attributable to decreases in manufacture and supply revenue and in co-development and research fees
partly offset increases in license and royalty revenue and proprietary product sales, net.
Manufacture and supply revenue decreased approximately 36% or $13,858 in 2020 to $24,881 as compared to $38,739 in 2019. This decrease is attributable to lower Suboxone volume in 2020 due to generic
competition.
License and royalty revenue increased 102% or $7,096 in 2020 to $14,055 compared to $6,959 in 2019. The increase was primarily due to the $8,000 of KYNMOBI ® royalties recognized upon FDA
approval which were partly offset by lower license fees in 2020. License fees in 2020 included a $4,000 milestone payment earned upon the FDA approval of KYNMOBI ® in May 2020 and $500 from our 10% share of milestones paid to KemPharm.
License fees in 2019 included $1,000 from our 10% share of milestone payments paid to KemPharm and $4,250 in license and new patent fees derived from out licensed product Suboxone. License fees are generally driven by transfer of rights, patent
performance contingencies, specific FDA or other regulatory achievements, sales levels achievements or other contingencies and milestones, and will likely fluctuate significantly from quarter-to-quarter. All further license fees due from Indivior
related to Suboxone have been suspended pending the outcome of litigation related to infringement claims against the generic products that have launched “at risk.”
Co-development and research fees decreased 69% or $2,778 in 2020 to $1,264 compared to $4,042 during the prior period 2019. The decrease was driven by the timing of the achievement of research and
development performance obligations which typically fluctuate significantly one reporting period to the next.
Proprietary product sales, net increased 97%% or $2,780 in 2020 to $5,649 compared to $2,869 during the prior period. Acceptance with the medical and patient communities has steadily continued to
improve following Sympazan’s launch in December 2018.
Expenses:
The following table sets forth our expense data for the periods indicated:
Change
2020
2019
$
%
(In thousands, except %)
Manufacture and supply
$
12,964
$
20,361
$
(7,397
)
(36
%)
Research and development
19,886
20,574
(688
)
(3
%)
Selling, general and administrative
55,892
64,342
(8,450
)
(13
%)
Interest expense
11,064
9,318
1,746
19
%
Interest expense related to the sale of future revenue
1,958
—
1,958
100
%
Interest income and other income (expense), net
(132
)
(636
)
504
(79
%)
Loss on extinguishment of debt
—
4,896
(4,896
)
(100
)%
Manufacture and supply costs and expenses decreased 36% or $7,397 to $12,964 in 2020 compared to $20,361 in 2019. The decrease primarily reflected lower volumes of Suboxone production.
Research and development expenses decreased 3% or $688 to $19,886 in 2020 as compared to $20,574 in 2019. Research and development expenses are driven by the timing of clinical trial and other
product development activities associated with the Company’s pipeline.
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Below are research and development expenses by type of cost for each period presented:
Year Ended December 31,
(In thousands)
2020
2019
Clinical Trials
$
6,435
$
8,742
Labor - R&D staff
4,857
5,177
Development and manufacturing
2,034
577
Preclinical
667
798
All Other R&D
5,893
5,280
Total
$
19,886
$
20,574
Selling, general and administrative expenses decreased 13% or $8,450 to $55,892 in 2020 as compared to $64,342 in 2019. The decrease was driven by higher Sympazan sales and marketing costs in
2019 with the product launch.
Interest expense increased 19% or $1,746 to $11,064 in 2020 compared to $9,318 in 2019. This was the result of our issuance of the 12.5% Notes in July 2019, which increased the aggregate
principal amount of our outstanding debt and an increase in the borrowing rates on our indebtedness, partially offset by the partial repayment of the 12.5% Notes in November 2020. Prior to July 15, 2019, our interest expense on our previously
outstanding term loan was subject to fluctuations based on one-month LIBOR and was approximately 12% to 12.5% during that earlier part of 2019. Our 12.5% Notes carry a 12.5% fixed interest rate per annum.
Interest expense related to the sale of future revenue was $1,958 in 2020. This amount is due to the accounting associated with the sale of future revenue related to KYNMOBI ® royalties sold to Marathon on November 3, 2020 and does not represent a monetary obligation or cash output at any time during the life of the transaction. See note 14
for details.
Interest income and other income (expense), net decreased 79% or $504 in 2020 as compared to 2019. This decrease is a result of lower interest rates and investing lower net cash balances during
2020 compared to the same period in 2019.
There was no loss on extinguishment of debt in 2020. Loss on the extinguishment of debt was $4,896 in 2019 which represented the expenses associated with early extinguishment of our loan’s
payable with Perceptive. The amount consists of $2,944 related to the prepayment premium associated with early payment of our outstanding obligations to Perceptive along with unamortized debt discount and unamortized loan acquisition costs of
$1,606 and $346, respectively.
Liquidity and Capital Resources
Sources of Liquidity
As of December 31, 2020, Aquestive has experienced a history of net losses and the Company’s accumulated deficits totaled $186,257 which have been partially funded by gross margins from sales of
commercialized licensed and proprietary products, license fees, milestone and royalty payments from our commercial partners and co-development licensees, and with the balance of the related funding requirements met by the Company’s equity and
debt offerings, including the 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 debt in July 2019, $37,295 from the public
offering of 8,050,000 shares of common stock in December 2019, and $1,821 from the exercise of warrants in connection with the debt financing. We had $31,807 in cash and cash equivalents as of December 31, 2020.
On November 3, 2020, we entered into a Purchase and Sale Agreement (the “Monetization Agreement”) with MAM Pangolin Royalty, LLC, an affiliate of Marathon Asset Management (“Marathon”). Under
the terms of the Monetization Agreement, we sold all of our contractual rights to receive royalties and milestone payments due under the Sunovion License Agreement related to Sunovion’s apomorphine product, KYNMOBI ® . KYNMOBI ® , an apomorphine film therapy for the treatment of off episodes in Parkinson’s disease patients,
received approval from the U.S. Food and Drug Administration (FDA) on May 21, 2020. In exchange for the sale of these rights, we received an upfront payment of $40,000 and an additional payment of $10,000 through the achievement of the first
milestone. We have received an aggregate amount of $50,000 through December 31, 2020 under the Monetization Agreement.
Under the Monetization Agreement, additional aggregate contingent payments of up to $75,000 may be due to us upon the achievement of worldwide royalty and other commercial targets within a
specified timeframe, which could result in total potential proceeds of $125,000.
With the upfront proceeds of the monetization, we repaid $22,500 of the 12.5% Notes, and issued $4,000 of new 12.5% Notes in lieu of paying a prepayment premium on the early repayment of the
12.5% Notes, reducing the aggregate principal balance of 12.5% Notes outstanding to $51,500. In addition, the holders of the 12.5% Notes agreed to extend to December 31, 2021 our ability to access, at our option, and additional $30,000 of 12.5%
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 our option, contingent upon FDA approval of our product candidate Libervant. A second
$20,000 senior notes re-opener represents a right, at our option, to market to current holders of our 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 we access these re-openers, we 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 our common stock at the
warrant grant date. In addition, as of the closing of this transaction, we issued to the holders of the 12.5% Notes warrants to purchase 143,000 shares of our common stock.
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The Company began utilizing its “At-The-Market” (ATM) facility in November 2020 which has generated net cash of approximately $6,055 as of December 31, 2020. This facility has approximately
$18,472 available at December 31, 2020.
Cash Flows
The following table provides information regarding our cash flows for the years ended December 31, 2020 and 2019:
(In thousands)
2020
2019
Net cash used for operating activities
$
(45,459
)
$
(60,210
)
Net cash used for investing activities
(517
)
(663
)
Net cash provided by financing activities
28,457
49,600
Net (decrease) increase in cash and cash equivalents
$
(17,519
)
$
(11,273
)
Net Cash Used for Operating Activities
Net cash used for operating activities for the year ended December 31, 2020 of $45,459 was primarily the result of our net loss of $55,783 partially offset by non-cash operating expenses
totaling $14,737 and by use of cash from changes in operating assets and liabilities of $4,413. The non-cash operating expenses of $14,737 primarily resulted from $6,581 of share-based compensation expense and $8,156 related to other non-cash
charges such as depreciation, amortization, and amortization of debt issuance costs.
Net cash used for operating activities for the year ended December 31, 2019 of $60,210 was primarily the result of our net loss of $66,246 partially offset by non-cash operating expenses totaling
$17,160 and by use of cash from changes in operating assets and liabilities of $11,124. The non-cash operating expenses of $17,160 primarily resulted from $7,071 of share-based compensation expense, the $4,896 loss on the extinguishment of debt
and $5,193 related to other non-cash charges such as depreciation, amortization and amortization of debt issuance costs.
Net Cash Used for Investing Activities
Net cash used for investing activities was $517 for the year ended December 31, 2020 compared to $663 for the year ended December 31, 2019. This decrease in net cash used for investing
activities was primarily attributable to timing of capital expenditures for plant and equipment purchases.
Net Cash Provided by Financing Activities
Net cash provided by financing activities was $28,457 for the year ended December 31, 2020 compared to $49,600 for the year ended December 31, 2019.
Net cash provided for the year ended December 31, 2020 was primarily from the net proceeds of $50,000 from the KYNMOBI ®
Monetization Agreement and net proceeds of $6,055 from sale of shares under the ATM facility partly offset by debt repayment including premium of $24,750.
Net cash provided for the year ended December 31, 2019 was primarily from the proceeds derived from our equity offering in December 2019 of $37,295 and the $1,821 of proceeds from the exercise of
warrants by our noteholders. Additional proceeds were received from the issuance of the 12.5% Notes of $70,000 in excess of the cash used for the repayment of the $50,000 loan principal repaid to our prior term lender, the early payment premium
of $2,944 and $3,946 of loan acquisition costs associated with the 12.5% Notes. We also paid $2,827 for withholding taxes associated with tax reimbursements connected to certain share-based compensation incurred in 2019.
The Company does not have any off-balance sheet arrangements as of December 31, 2020 nor do we have any relationships with any unconsolidated entities or financial partnerships, such as entities
often referred to as structured finance or special purpose entities.
Funding Requirements
The Company expects that its existing cash and cash equivalents, as of December 31, 2020, together with anticipated revenues from licensed and proprietary products, ATM activity to date, and
expense management activities, will be adequate to fund our expected cash requirements for the next 12 months. In addition, the Company has potential sources of capital under its existing shelf registration statement and re-openers under its
12.5% Notes as it continues to execute its business strategy and has 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. Key factors and assumptions inherent in our planned continued operations and anticipated growth include, without limitation, those related to the following:
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•
the effects of the COVID-19 pandemic on our operations, operations of our key suppliers and third-party clinical and other service providers, our colleagues and contractors and debt equity and other capital markets;
•
continued ability of our customers to pay, in a timely manner, for presently contracted and future anticipated orders for our manufactured goods, Suboxone and Sympazan, including effects of generics and other competitive pressures as
currently envisioned;
•
continued ability of our customers to pay, in a timely manner, for presently contracted and future anticipated orders for provided co-development and feasibility services, as well as regulatory support services for recently licensed
products, such as Exservan;
•
access to debt or equity markets if, and at the time, needed for any necessary future funding;
•
FDA approval of our key new drug candidate, Libervant, for U.S. market access;
•
our ability to issue up to $30,000 in additional 12.5% Notes, which is contingent upon FDA product approval and U.S. market access for Libervant;
•
continuing review and appropriate adjustment of our cost structure consistent with our anticipated revenues and funding;
•
continued growth and market penetration of Sympazan within expected commercialization cost levels for this product, including anticipated patient and physician acceptance and our ability to obtain adequate price and payment support
from government agencies and other private medical insurers;
•
effective commercialization of within anticipated cost levels and expected ramp-up timeframes of our product candidate Libervant, if approved for U.S. market access by the FDA;
•
infrastructure and administrative costs at expected levels to support operations as an FDA and highly regulated public company;
•
a manageable level of costs for ongoing efforts to protect our intellectual property rights, including litigation costs in connection with seeking to enforce our rights concerning third parties’ “at-risk” launch of generic products;
•
continued compliance with all covenants under our 12.5% Notes; and
•
absence of significant unforeseen cash requirements.
We expect to continue to manage business costs to appropriately reflect the potential declining state of Suboxone revenue, the marketing and sales costs related Sympazan, the proceeds from the
KYNMOBI ® Monetization Agreement, and other external resources or factors affecting our business including, if available, any future potential issuances of additional
12.5% Notes under the Indenture, net proceeds or future equity financing, other future access to the capital markets or other potential available sources of liquidity, as well as the uncertainties associated with the coronavirus pandemic. In
doing so, we plan to continue to focus on the core drivers of value for our stockholders, including, more importantly continued investments in our ongoing product development and planned commercialization activities in support of Libervant and
AQST-108-SF. Until profitability is achieved, if at all, additional capital and/or other financing or funding will be required, which could be material, to further advance the development and commercialization of Libervant and AQST-108-SF, if
approved by the FDA for U.S. market access, both of which are subject to regulatory approval, and to meet our other cash requirements, including debt service. We plan to conservatively manage our pre-launch spending as both timing and level
relating to Libervant, including cost rationalization associated with marketing and selling Sympazan. In this regard, absent spending on launch activities for Libervant, we expect to spend less on commercialization in 2021 compared to 2020.
Even as such, we expect to incur losses and negative cash flows for the foreseeable future and therefore we expect to be dependent upon external financing and funding to achieve our operating plan.
The sufficiency of our short-term and longer-term liquidity is directly impacted by our level of operating revenues and our ability to achieve our operating plan for revenues, regulatory approval
in the time period planned of our late-stage proprietary products and our ability to monetize other royalty streams or other licensed rights within planned timeframes. Although we may also be entitled to further potential milestones, royalty and
other payments under our Indivior Supplemental Agreement, which are suspended and may only be reinstated if Indivior successfully adjudicates or settles the related patent infringement litigation, there can be no assurance when, or if, any such
payments may be realized. Our operating revenues have fluctuated in the past and can be expected to fluctuate in the future. We expect to incur significant operating losses and negative operating cash flows for the foreseeable future, and we have
a significant level of debt on which we have substantial ongoing debt repayment and debt service obligations have principal repayments aggregating $2,575 related to our 12.5% Notes due in the second half of 2021. A substantial portion of our
current and past revenues has been dependent upon our licensing, manufacturing and sales with one customer, Indivior, which is expected to continue while we commercialize our own proprietary products and it could take significantly longer than
planned to achieve anticipated levels of cash flows to help fund our operations and cash needs from sales of our proprietary products other than Suboxone.
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To the extent that we raise additional funds by issuance of equity securities, our stockholders would experience further dilution and the terms of these securities could include liquidation or
other preferences (if and to the extent permitted under the Indenture) that would adversely affect our stockholders’ rights. Our ability to secure additional equity financing could be significantly impacted by numerous factors including our
operating performance and prospects, positive or negative developments in the regulatory approval process for our proprietary products, timely achievement of regulatory approval of our late-stage proprietary products, our existing level of debt
which is secured by substantially all of our assets, restriction under the Indenture, and general market conditions, and there can be no assurance that we will continue to be successful in raising capital or that any such needed financing will be
available, available on favorable or acceptable terms or at the times, or in the amounts needed. Additionally, while the potential economic impact brought on by and the duration of the coronavirus pandemic is difficult to assess or predict, the
significant impact of the coronavirus pandemic on the global financial markets, and on our own stock trading price, may reduce our ability to access additional capital, which would negatively impact our short-term and longer-term liquidity.
If adequate funds are not available for our short-term or longer-term liquidity needs and cash requirements as and when needed, we may be required to reduce staff, further delay, significantly
scale back, or even discontinue some or all of our current or planned research and development programs and clinical and other product development activities, or reduce our planned commercialization efforts and otherwise significantly reduce our
other spend and adjust our operating plan, and we would need to seek to take other steps intended to improve our liquidity. We also may be required to evaluate additional licensing opportunities, if any become available, of our proprietary
product candidate programs that we currently plan to self-commercialize or explore other potential liquidity opportunities or other alternatives or options or strategic alternatives, although we cannot assure that any of these actions would be
available or available on reasonable terms.
See also Part I, Item II, Risk Factors concerning the significant risks and uncertainties concerning the Company’s business, operations, financial results and capital resources associated with
the impact of the global coronavirus pandemic.
Contractual Obligations and Commitments
We have entered into various contractual agreements under which we have long term obligations. For more information regarding our commitments, see Part II, Item 8. Financial Statements and Supplementary Data, Note
20. Contingencies.
For more information regarding our future lease payments, see “Part II, Item 8. Financial Statements and Supplementary Data, Note 9. Right of Use Assets and Lease Liabilities” for our minimum
lease payments schedule. The expected timing of our leases may be different if future years, depending on our decision to extend lease terms and/or enter into leases in preceding years.
For more information on our repayments of our 12.5% Notes, see Part II, Item 8. Financial Statements and Supplementary Data, Note 12. 12.5% Senior Secured Notes.
Critical Accounting Policies and Use of Estimates
We have based our Management’s Discussion and Analysis of our financial condition and results of operations on our Consolidated Financial Statements, which have been prepared in accordance with
generally accepted accounting principles, or GAAP, in the U.S. The preparation of the Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities at the date of the
financial statements as well as the revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments including those related to revenue recognition, inventory costs, liabilities and accruals,
clinical trial expenses, share-based compensation and the valuation of deferred tax assets. We base our estimates on historical experience when available and on various other assumptions that we believe are reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
While significant accounting policies are more fully described in Note 3, Summary of Significant Accounting Policies, of the Notes to our Consolidated Financial Statements included in this
filing, we believe that the following accounting policies are those that are most critical to the significant judgements and estimates used in the preparation of our Consolidated Financial Statements.
Revenue Recognition
The Company’s revenues include (i) sales of manufactured products pursuant to contracts with commercialization licensees, (ii) sales of its proprietary clobazam-based Sympazan oral film product
(iii) license and royalty revenues and (iv) co-development and research fees generally in the form of milestone payments. See Part II Item 8. Financial Statements and Supplementary Data, Note 5 Revenues and Trade Receivables, Net for further
details. Having adopted ASC 606, Revenue from Contracts with Customers, effective on January 1, 2019 and applying the modified retrospective method which resulted in an adjustment totaling $2,832 to the
Company’s accumulated deficit, the Company recognizes revenue to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods
or services. To achieve this core principle, a five-step model is applied that includes (1) identifying the contract with a customer, (2) identifying the performance obligation in the contract, (3) determining the transaction price, (4)
allocating the transaction price to the performance obligations, and (5) recognizing when, or as, an entity satisfies a performance obligation.
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Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in the current revenue recognition standard. A contract’s
transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. At contract inception, we assess the goods promised in our contracts with customers and
identify a performance obligation for each promise to transfer to the customer a distinct good. When identifying our performance obligations, we consider all goods or services promised in a contract regardless of whether explicitly stated in the
contract or implied by customary business practice. Our performance obligations consist mainly of transferring of goods and services identified in the contracts, purchase orders or invoices.
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 when product is shipped and title passes to the customer, typically at time of delivery.
At the time of sale, estimates for various revenue allowances are recorded based on historical trends and judgmental estimates . For sales of Sympazan, returns allowances and prompt pay discounts are
estimated based on contract terms and historical return rates, if available, and these estimates are recorded as a reduction of receivables. Similarly determined estimates are recorded relating to wholesaler service fees, co-pay support
redemptions, Medicare, Medicaid and other rebates, and these estimates are reflected as a component of accrued liabilities. Once all related variable considerations are resolved and uncertainties as to collectable 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 Revenue – license revenues are determined based on an assessment of whether the license is distinct from any other performance
obligations that may be included in the underlying licensing arrangement. If the customer is able to benefit from the license without provision of any other performance obligations by the Company and the license is thereby viewed as a distinct or
functional license, the Company then determines whether the customer has acquired a right to use the license or a right to access the license. 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. For symbolic licenses providing substantial value
only in conjunction with other performance obligations to be provided by the Company, revenues are generally recorded over the term of the license agreement. Such other obligations provided by the Company generally include manufactured products,
additional development services or other deliverables that are contracted to be provided during the license term. Payments received in excess of amounts ratably or otherwise earned are deferred and recognized over the term of the license or as
contingencies or other performance obligations are met.
Royalty revenue is estimated and recognized when sales under supply agreements with commercial licensees are recorded, absent any contractual constraints or collectability uncertainties.
Royalties based on sales of Suboxone and Zuplenz have been recorded in this manner.
Co-development and Research Fees – co-development and research fees are earned through performance of specific tasks, activities or completion of stages
of development defined within a contractual development or feasibility study agreement with a customer. The nature of these performance obligations, broadly referred to as milestones or deliverables, are usually dependent on the scope and
structure of the project as contracted, as well as the complexity of the product and the specific regulatory approval path necessary for that product. Accordingly, the duration of the Company’s research and development projects may range from
several months to approximately three years. Although each contractual arrangement is unique, common milestones included in these arrangements include those for the performance of efficacy and other tests, reports of findings, formulation of
initial prototypes, production of stability clinical and/or scale-up batches, and stability testing of those batches. Additional milestones may be established and linked to clinical results of the product submission and/or approval of the product
by the FDA and the commercial launch of the product.
Revenue recognition arising from milestone payments is dependent upon the facts and circumstances surrounding the milestone payments. Milestone payments based on a non-sales metric such as a
development-based milestone ( e.g. , an NDA filing or obtaining regulatory approval) represent variable consideration and are included in the transaction price subject to any constraints. If the milestone
payments relate to future development, the timing of recognition depends upon historical experience and the significance a third party has on the outcome. For milestone payments to be received upon the achievement of a sales threshold, the
revenue from the milestone payments is recognized at the later of when the actual sales are incurred or the performance obligation to which the sales relate to has been satisfied.
Contract Assets - in certain situations, 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 within the Consolidated Balance Sheet.
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Contract Liabilities - in certain situations, 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 Consolidated Balance Sheet. As remaining performance obligations are satisfied, an appropriate portion of the deferred revenue balance is credited to
earnings.
Liability related to sale of future revenue, royalty revenue, and interest expense
The Company treated the sale of future revenue related to KYNMOBI ® as debt financing in accordance with ASC 470
Debt, amortized under the effective interest rate method over the estimated life of the related expected royalty stream. The liability related to the sale of future revenue has been initially recorded at its proceeds, net of deferred cost. The
liability related to the sale of future revenue and the related interest expense are based on our current estimates of future royalties expected to be paid over the life of the arrangement. The Company will periodically assess the expected
royalty payments using a combination of internal projections and forecasts from external resources. To the extent our future estimates of royalty payments are greater or less than previous estimates or the interest timing of such payments is
materially different than its previous estimates, the Company will prospectively recognize related interest expense. Royalty revenue related to the sale of future revenue is reflected in license fees and royalties, and amortization of debt is
reflected as interest expense related to the sale of future revenue in the Consolidated Statement of Operations and Comprehensive Loss. For further discussion of the sale of the future revenue, refer to Part II Item 8. Financial Statements and
Supplementary Data, Note 14, Sale of Future Revenue .
Warrants
We have issued warrants to purchase up to 2,143,000 shares of our common stock (the “Warrants”): warrants to purchase up to 2,000,000 shares of our common stock, with an exercise price of $4.25
per share (the “Initial Warrants”), and warrants to purchase up to 143,000 shares of our common stock, with an exercise price of $5.55 per share (the “Additional Warrants”). The Warrants expire on June 30, 2025 and included specified registration
rights. Management estimated the fair value of the Initial Warrants to be $6,800, and the Additional Warrants to be $735 assisted by an independent third-party appraiser. Additional Warrants were issued as part of the partial repayment of the
Initial Notes which also expire on June 30, 2025 and entitle the holders thereof to purchase 143,000 of the Company’s common stock at $5.55 and include specified registration rights. The fair value of these Warrants is treated as a debt discount,
amortizable over the term of the Warrants, with the unamortized portion applied to reduce the face amount of the 12.5% 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 these
Warrants was presented in additional-paid in capital in the accompanying Consolidated Balance Sheets.
Recent Accounting Pronouncements
Refer to Part II Item 8. Financial Statements and Supplementary Data, Note 3 “Summary of Significant Accounting Policies” in the accompanying Notes to our Consolidated Financial Statements for a
discussion of recent accounting pronouncements.
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Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Item 7A is not applicable to us as a smaller reporting company and has been omitted.
Item 8.
Financial Statements and Supplementary Data
Our financial statements, together with the report of our independent registered public accounting firm, appear in this Annual Report on Form 10-K beginning on page F-1.
Item 9.
Change in and Disagreements with Accountants on Accounting and Financial Disclosure
None.