Aquestive Therapeutics, Inc. — Form 10-Q Summary
Business Context and Reporting Period
This unaudited Form 10-Q covers the quarter and six months ended June 30, 2018. Aquestive, formerly MonoSol Rx, is a specialty pharmaceutical company developing and commercializing orally administered film products, primarily for central nervous system indications. Revenue was generated mainly from partnered products, including Suboxone and Zuplenz, through manufacturing, licensing, royalty, and co-development arrangements. The company converted from an LLC to a Delaware corporation on January 1, 2018 and completed its initial public offering after quarter-end.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2018 | Three Months Ended June 30, 2017 | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 |
|---|---|---|---|---|
| Revenue | $13.9 million | $11.1 million | $37.3 million | $27.6 million |
| Net loss | $36.5 million | $5.9 million | $32.4 million | $7.4 million |
| Loss per share | $1.90 | Not clearly provided for the comparable quarter in the filing table | $1.89 | Not clearly provided for the comparable six-month period in the filing table |
| Operating loss | $32.7 million | $4.1 million | $27.4 million | $3.3 million |
| Operating cash flow | Not separately provided | Not separately provided | $1.3 million | $(2.4) million |
| Cash and equivalents | $10.6 million at June 30, 2018 | $17.4 million at December 31, 2017 | ||
| Total debt | $46.4 million, including $1.1 million current debt | Loan payable, net, was $45.3 million |
Revenue increased 25% in the quarter and 35% for the six-month period. Manufacturing and supply revenue was $8.7 million for the quarter and $20.2 million for the six months. License and royalty revenue was $4.5 million for the quarter and $14.0 million for the six months. Co-development and research fees were $0.7 million and $3.1 million, respectively.
Manufacturing gross margin, calculated using reported revenue less manufacture and supply expense, was approximately 64% for the quarter and 72% for the six months. Overall operating margin was approximately negative 235% for the quarter and negative 73% for the six months; net margin was approximately negative 262% and negative 87%, respectively. These margins were significantly affected by a $27.3 million noncash share-based compensation charge associated with terminating the performance unit plans and issuing 4.9 million non-voting shares.
Working capital declined to $3.2 million at June 30, 2018 from $12.8 million at December 31, 2017. Total liabilities were $78.8 million, compared with total assets of $39.8 million, resulting in a shareholders’ deficit of $38.9 million. The company was in compliance with its debt covenants, including a $4.0 million minimum cash requirement, at June 30, 2018.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased by $2.8 million, primarily because license and royalty revenue rose by $4.3 million, partially offset by a $1.7 million decline in manufacturing and supply revenue.
- Six-month revenue increased by $9.8 million, led by an $8.6 million increase in license and royalty revenue and a $1.4 million increase in co-development and research fees.
- Quarterly net loss increased by $30.6 million and six-month net loss increased by $25.0 million, primarily due to the share-based compensation charge, higher research and development spending, commercialization investments, and increased general and administrative costs.
- Research and development expense increased 67% for the quarter and 27% for the six months, reflecting development activity for Libervant, Sympazan, AQST-117, and other candidates.
- Cash declined by $6.7 million during the first six months of 2018. Operating activities provided $1.3 million, investing activities used $0.9 million, and financing activities used $7.2 million, including IPO-related costs and share-compensation withholding taxes.
- The Perceptive warrant liability increased from $7.7 million to $8.8 million due to fair-value changes. The warrants were automatically exercised into 863,400 common shares in connection with the IPO after quarter-end.
Guidance, Outlook, Risks, and Unusual Items
- Management expected to submit an NDA for Libervant in 2018 and an NDA for AQST-117 in the first quarter of 2019. It also expected additional human trials for AQST-108 in late 2018 or early 2019 and proof-of-concept trials for AQST-305.
- Sympazan received tentative FDA approval around its August 31, 2018 PDUFA date; final approval was subject to expiration of ONFI orphan-drug exclusivity, expected in October 2018. Commercial launch preparations were expected to increase selling expenses during the second half of 2018.
- On July 27, 2018, the company completed an IPO of 4.5 million shares at $15.00 per share. On August 15, 2018, underwriters purchased an additional 425,727 shares. Total net proceeds were approximately $63.5 million.
- Management stated that cash, expected partnered-product revenue, and IPO proceeds were sufficient to fund operations for at least the next twelve months, but acknowledged that additional capital may be required for longer-term development and commercialization.
- Revenue and receivables were highly concentrated with Indivior: Indivior represented 97% of six-month revenue and approximately 94% of accounts receivable at June 30, 2018.
- Suboxone patent litigation remained material. Dr. Reddy’s launched a generic product after FDA approval, but a preliminary injunction barred further launch pending litigation and appeal. Generic competition could materially reduce revenue and royalties.
- The company was subject to ongoing patent, antitrust, and other litigation. A states’ antitrust action remained in discovery, and several patent disputes were pending before courts or the Federal Circuit.
- The Perceptive loan bears interest at a minimum rate of 11.75%, is secured by company assets, and matures December 16, 2020 following the IPO-related amendment. A 1% increase in applicable LIBOR above 2% would increase annual interest expense by approximately $0.5 million.
Investor Verification Priorities
- Verify the sustainability and timing of license, royalty, and milestone revenue, particularly the non-recurring or milestone-driven amounts under the Indivior agreements.
- Assess the company’s dependence on Indivior and the potential effect of generic Suboxone launches, patent litigation outcomes, and royalty-contingency provisions.
- Reconcile the reported net loss and cash flow after adjusting for the $27.3 million share-based compensation charge and related $5.6 million cash tax payments.
- Confirm the actual post-IPO cash balance, debt repayment requirements, covenant compliance, and expected cash burn as commercialization spending increases.
- Track FDA approval and launch milestones for Sympazan, Libervant, and AQST-117, together with the related clinical, regulatory, manufacturing, and commercialization costs.
- Review the potential financial exposure from the pending antitrust and patent proceedings, as the filing does not provide a clear quantified loss estimate.