Aquestive Therapeutics, Inc. — Form 10-Q Summary
Business context and reporting period
This unaudited Form 10-Q covers the three and nine months ended September 30, 2018. Aquestive is a specialty pharmaceutical company developing and commercializing orally administered film products, primarily for central nervous system conditions. Revenue was generated principally from partnered products, including Suboxone manufacturing and related license and royalty arrangements. The company converted from MonoSol Rx, LLC to a Delaware corporation on January 1, 2018 and completed its initial public offering in July 2018.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue | $13.267 million | $27.146 million | $50.606 million | $54.723 million |
| Operating income/(loss) | $(9.204) million | $10.421 million | $(36.585) million | $7.143 million |
| Net income/(loss) | $(15.038) million | $8.451 million | $(47.432) million | $1.097 million |
| Net loss per share | $(0.64) | Not clearly provided | $(2.45) | Not clearly provided |
| Operating margin | (69.4%) | 38.4% | (72.3%) | 13.1% |
Q3 revenue declined 51%, primarily because license and royalty revenue fell $13.996 million, reflecting a $14.0 million timing difference in partner license payments. Excluding that item, revenue was broadly flat. Nine-month revenue declined 8%; manufacturing and supply revenue was approximately flat, license and royalty revenue declined 24%, and co-development and research fees increased 66%.
Q3 total costs and expenses were $22.471 million, up from $16.725 million. Selling, general and administrative expense doubled to $12.345 million as the company invested in commercialization, branding, marketing, public-company infrastructure and patent defense. Nine-month SG&A increased 206% to $53.561 million, including $27.298 million of compensation expense associated with terminating performance unit plans and issuing shares. Nine-month research and development expense increased 10% to $17.429 million.
The nine-month net loss included $28.541 million of share-based compensation and a $5.278 million increase in the fair value of the Perceptive warrant liability. The warrant was exercised in connection with the IPO and the liability was reclassified to additional paid-in capital; no warrant liability remained at September 30, 2018.
Cash flow, debt and liquidity
- Cash and cash equivalents were $63.982 million at September 30, 2018, compared with $17.379 million at December 31, 2017.
- Working capital was $56.030 million, compared with $12.813 million at year-end 2017.
- Nine-month operating cash flow was $(10.179) million, versus $13.233 million provided in the prior-year period. Investing cash flow was $(1.334) million, primarily capital expenditures.
- Financing cash flow was $58.116 million, largely reflecting $68.714 million of IPO proceeds, offset by offering costs and $5.903 million of taxes paid on share-based compensation.
- Loans payable totaled approximately $46.804 million, consisting of $2.750 million current and $44.054 million long-term debt, net of issuance costs and discounts. The debt bears interest at one-month LIBOR plus approximately 9.75%, subject to an 11.75% minimum rate, and matures December 16, 2020.
- Principal payments begin in May 2019. The loan is secured by first-priority liens on company assets and includes minimum liquidity and revenue covenants. The company reported compliance with all covenants at September 30, 2018.
- Management believes cash on hand and expected partnered-product revenue are sufficient to fund operations for at least the next twelve months, but the company has no committed additional capital and may need future equity, debt, royalty monetization or collaboration financing.
Material changes, outlook and unusual items
- The IPO and partial exercise of the over-allotment option generated total net proceeds of approximately $63.484 million. Shares began trading on Nasdaq under the symbol AQST.
- Management expects continued net losses for the next several years as it funds clinical development, commercialization and public-company expenses.
- Sympazan received FDA approval on November 1, 2018, after the reporting date, and the company expected a November 2018 commercial launch. A pre-NDA meeting for Libervant was scheduled for December 2018, and an NDA submission for AQST-117 was expected in the first quarter of 2019.
- The company expected fourth-quarter selling expenses to increase because of sales-force, market-access, logistics and wholesaler preparations for Sympazan.
- Indivior represented 95% of nine-month revenue and approximately 92% of accounts receivable at September 30, 2018, creating substantial customer concentration risk.
- Revenue from license fees, milestones and royalties may fluctuate significantly based on regulatory events, sales levels, contractual milestones and litigation-related developments.
- Suboxone patent litigation remained material. Dr. Reddy’s generic launch was enjoined by a preliminary injunction, but its appeal was pending before the Federal Circuit. Other patent appeals and proceedings involving generic manufacturers and BioDelivery Sciences also remained pending.
- The company was a defendant in state antitrust litigation relating to Suboxone and had disclosed cybersecurity risk, including a prior phishing incident. No material product-liability case remained against Aquestive after its dismissal from the disclosed action.
- The company adopted neither a new revenue recognition standard in 2018 nor other pending standards described in the filing; ASC 606 was scheduled for adoption on January 1, 2019 using the modified retrospective method, with the impact still under evaluation.
Investor verification points
- Verify the sustainability and timing of Indivior-related manufacturing, license and royalty revenue, including the remaining potential payments under the Supplemental Agreement.
- Assess the impact of Suboxone generic competition, pending patent appeals, antitrust litigation and potential changes to the preliminary injunction.
- Reconcile reported cash burn with the company’s projected cash runway, planned commercialization spending and debt principal payments beginning in May 2019.
- Evaluate the recurring versus non-recurring components of the 2018 loss, particularly the $27.298 million performance-plan compensation charge and warrant fair-value adjustment.
- Monitor execution and regulatory outcomes for Sympazan, Libervant, AQST-117 and other pipeline candidates, as well as the cost and timing of their launches.
- Review the company’s planned adoption of ASC 606 and any resulting effects on revenue timing, deferred revenue and comparability.