Aquestive Therapeutics, Inc. quarterly report, Q2 FY2020

Aquestive Therapeutics, Inc. — 2020 Q2 Form 10-Q Summary

Reporting period: Quarterly and six-month periods ended June 30, 2020, compared with the corresponding 2019 periods. Aquestive is a pharmaceutical company developing and commercializing oral-film products, including Sympazan, Libervant, AQST-108 and licensed products. The company remains an emerging growth company and smaller reporting company.

Financial performance and position

Metric	Three months ended June 30	Six months ended June 30
Revenue	$21.675 million vs. $11.129 million	$30.440 million vs. $23.772 million
Income/(loss) from operations	$0.395 million vs. $(18.688) million	$(13.466) million vs. $(31.762) million
Net loss	$(2.334) million vs. $(20.472) million	$(18.864) million vs. $(35.198) million
Net loss per share	$(0.07) vs. $(0.82)	$(0.56) vs. $(1.41)
Operating cash flow	Not separately provided	$(23.634) million vs. $(34.846) million

Second-quarter revenue increased 95%, while six-month revenue increased 28%. The quarterly operating result was positive, but the company remained loss-making after interest expense.
Manufacture and supply revenue declined 19% in the quarter and 9% year to date, primarily from lower Suboxone volumes. Manufacture and supply costs declined 35% and 19%, respectively.
License and royalty revenue increased to $12.928 million in the quarter and $13.354 million year to date, including $4.000 million related to Kynmobi FDA approval and $8.000 million of Kynmobi royalty revenue recognized in the six-month period.
Proprietary product sales, principally Sympazan, increased 59% in the quarter and 76% year to date, to $1.222 million and $2.382 million, respectively.
Research and development expense declined 53% in the quarter and 34% year to date. Selling, general and administrative expense declined 14% and 17%, respectively.
Interest expense increased 42% in the quarter and 43% year to date because of the higher debt balance and related amortization costs following the July 2019 refinancing.
Calculated net margins were approximately negative 10.8% for the quarter and negative 62.0% year to date. Calculated operating margins were approximately 1.8% and negative 44.2%, respectively. These margins include significant license and milestone revenue and are not necessarily representative of recurring product economics.

Liquidity, debt and balance sheet

Cash and cash equivalents were $25.422 million at June 30, 2020, down from $49.326 million at December 31, 2019. Working capital was $29.027 million.
Total liabilities were $84.934 million, including $61.505 million of net loans payable and $3.929 million of lease liabilities. Stockholders’ deficit was $21.388 million, compared with $6.122 million at year-end 2019.
The company has $70.000 million principal amount of 12.5% Senior Secured Notes due June 2025, secured by substantially all company assets. Principal amortization begins in September 2021. The notes permit up to $30.000 million of additional borrowing subject to Libervant-related milestones, lender consent and other conditions.
Six-month cash use was $23.904 million, consisting of $23.634 million used in operations, $0.243 million used in investing activities and $0.027 million used in financing activities.
The company repaid a $4.800 million Paycheck Protection Program loan in full on May 4, 2020.
Management stated that cash on hand, anticipated product and license revenue, expense management, potential Kynmobi royalty monetization, potential additional secured debt and possible equity-market access are expected to fund requirements for the next twelve months. No committed source of additional capital exists, and management cautioned that funding may not be available on acceptable terms or at all.

Material changes and business developments

FDA approved Sunovion’s Kynmobi on May 21, 2020. The approval generated a $4.000 million milestone and supported recognition of $8.000 million in royalty revenue. Aquestive recorded $8.000 million of minimum royalty receivables, including a $7.000 million long-term balance.
Libervant’s NDA remained under FDA review with a September 27, 2020 PDUFA goal date. Approval depends in part on demonstrating “clinical superiority” or a major contribution to patient care relative to competing rescue therapies, including a nasal spray product with seven-year orphan drug exclusivity.
AQST-108’s IND was submitted on June 26, 2020 and was accepted by the FDA on July 23, 2020, after the reporting date. The company expected to begin pharmacokinetic trials in the third quarter of 2020, subject to COVID-19-related delays.
Suboxone remained the largest manufacturing-related revenue source, but generic competition continued to reduce volumes and market share. Indivior represented approximately 48% of six-month revenue, while Sunovion represented approximately 39%.
The company adopted the new lease accounting standard on January 1, 2020, recognizing right-of-use assets and lease liabilities. The adoption did not require a cumulative-effect adjustment to accumulated deficit.

Outlook, risks and unusual items

Management expects continued net losses and negative cash flows for the foreseeable future while it funds Libervant, AQST-108, Sympazan commercialization and other pipeline programs.
COVID-19 could disrupt clinical trials, regulatory reviews, manufacturing, supply chains, workforce availability, customer demand, collections and access to debt, equity and royalty-monetization markets. The company reported no significant manufacturing interruption through the filing date but could not assure that disruptions would not occur.
Kynmobi royalty monetization is subject to market conditions and restrictions under the secured notes. Noteholders may elect to have certain proceeds used to repurchase notes at 112.5% of principal plus accrued interest, and some proceeds may be required to remain in a collateral account until Libervant approval.
Further Indivior Supplemental Agreement payments remain suspended pending patent litigation outcomes. Up to an additional $34.250 million could be payable if specified litigation and contractual conditions are satisfied, but timing and receipt are uncertain.
Material litigation includes Suboxone patent litigation and antitrust proceedings involving Indivior, patent litigation involving BioDelivery Sciences, and a California complaint by Neurelis concerning Libervant. Management could not estimate potential losses for these matters.
Revenue is concentrated among a limited number of customers, and the company relies substantially on Indivior, a single manufacturing site, third-party suppliers and patent-protected products.

Important facts for investors to verify

Whether Libervant received FDA approval by the September 27, 2020 PDUFA date and whether orphan-drug exclusivity affected market access.
The timing and commercial performance of Kynmobi, including royalty collections and any royalty-stream monetization.
The pace of Suboxone volume and market-share erosion and its effect on manufacturing revenue and cash generation.
Sympazan prescription growth, reimbursement, commercialization costs and progress toward positive product economics.
Cash burn, availability of additional financing, compliance with secured-note covenants and the approaching principal amortization beginning in September 2021.
COVID-19 effects on clinical development, regulatory timelines, manufacturing, customers, collections and capital-market access.
Developments and potential exposure in the pending Suboxone, antitrust, BDSI and Neurelis proceedings.