Aquestive Therapeutics, Inc. quarterly report, Q3 FY2019

Aquestive Therapeutics, Inc. — 2019 Q3 Form 10-Q Summary

Reporting period: Three and nine months ended September 30, 2019; filed November 5, 2019. Aquestive is a specialty pharmaceutical company developing and commercializing oral-film products, including Sympazan, Libervant and other CNS-focused candidates. The company also manufactures and licenses products for Indivior and other partners.

Financial performance and position

Metric	Q3 2019	Q3 2018	9M 2019	9M 2018
Revenue	$12.4 million	$13.3 million	$36.2 million	$50.6 million
Loss from operations	$(11.0) million	$(9.2) million	$(42.8) million	$(36.6) million
Net loss	$(18.4) million	$(15.0) million	$(53.6) million	$(47.4) million
Net loss per share	$(0.74)	$(0.64)	$(2.15)	$(2.45)
Operating cash flow	Not separately reported	Not separately reported	$(49.6) million	$(10.2) million

Revenue mix: Q3 manufacturing and supply revenue was $9.2 million, license and royalty revenue was $1.4 million, co-development and research fees were $1.1 million, and proprietary product sales were $0.8 million. Nine-month amounts were $24.7 million, $6.4 million, $2.9 million and $2.2 million, respectively.
Margins: The reported manufacturing-and-supply gross contribution margin was approximately 63% in Q3 2019 versus 58% in Q3 2018, and approximately 63% for the first nine months versus 68% in the prior-year period. Operating margins were approximately negative 89% and negative 118% for Q3 and nine months, respectively.
Cash and liquidity: Cash and cash equivalents were $20.9 million at September 30, 2019, down from $60.6 million at December 31, 2018. Working capital, including cash, was $18.0 million.
Debt: The company reported $59.8 million of net loans payable, principally the $70.0 million of 12.5% Senior Secured Notes due June 2025, net of issuance costs and warrant-related discounts. Principal amortization begins September 2021. The notes are secured by substantially all company assets, including intellectual property.
Equity: Stockholders’ deficit was $34.5 million at September 30, 2019, compared with stockholders’ equity of $10.1 million at December 31, 2018.
Cash flows: Financing activities provided $10.5 million, including $70.0 million of note proceeds, offset by $50.0 million of debt repayment, a $2.9 million repayment premium and financing costs. Capital expenditures were $0.6 million.

Material changes versus prior comparable periods

Nine-month revenue declined 28%, principally from lower Suboxone and authorized-generic manufacturing volumes, lower license and royalty revenue, and lower co-development fees. Sympazan generated $2.2 million of nine-month revenue after its December 2018 launch.
Q3 revenue declined 6%; manufacturing revenue increased 2% and Sympazan contributed $0.8 million, but license and royalty revenue declined 60% due largely to suspended Indivior-related license fees and timing of milestone payments.
Nine-month selling, general and administrative expense decreased 11%, primarily because 2018 included substantially higher legacy share-based compensation. This was partly offset by increased commercialization, legal and insurance costs.
Research and development expense was essentially flat for the nine months, while Q3 expense increased 12% due mainly to clinical-trial spending, particularly for Libervant.
The company refinanced its former Perceptive debt on July 15, 2019 with the Senior Secured Notes and recorded a $4.9 million loss on extinguishment, including premiums and write-off of unamortized debt costs.
The company adopted ASC 606 on January 1, 2019 using the modified retrospective method, reducing opening accumulated deficit by $2.8 million, primarily from deferral of certain licensing and milestone revenue.

Guidance, outlook, risks and unusual items

Management expects continued significant net losses and negative operating cash flows while it funds Sympazan commercialization, Libervant development, regulatory activities and other pipeline programs. Management stated that available liquidity and anticipated funding sources are expected to cover at least the next twelve months, subject to assumptions that may not be achieved.
Libervant’s rolling NDA submission was underway, with completion expected around November 30, 2019. Exservan’s PDUFA target date was expected to be November 30, 2019. AQST-108 completed Phase 1 proof-of-concept trials in Q3, and management expected a pre-NDA meeting in late 2019 or early 2020.
Indivior represented approximately 83% of nine-month 2019 revenue and approximately 77% of gross receivables. Indivior announced an intention to cease production of the Sandoz authorized generic Suboxone product, which management expects could materially reduce future manufacturing revenue, potentially beginning in 2020.
Suboxone and its authorized generic retained approximately 75% of the U.S. oral-film opioid-dependence market as of October 2019, but at-risk generic launches and ongoing patent litigation create significant revenue uncertainty.
The company may issue up to $30.0 million of additional Senior Secured Notes, subject to conditions, lender approval and Libervant milestones. It also has an effective shelf registration for up to $150.0 million of securities and an at-the-market facility of approximately $17.1 million, but no securities had been sold under these facilities as of the filing.
The company is a defendant in state antitrust litigation related to Suboxone and is involved in multiple patent disputes. Management stated that it cannot estimate the potential loss, if any, from the antitrust proceeding.
Sunovion’s Apomorphine candidate received an FDA Complete Response Letter in early 2019 requiring additional data. Potential future milestones and royalties are uncertain and may be subject to debt-related monetization and repayment provisions.
The company was in compliance with its Senior Secured Notes covenants at September 30, 2019. The notes carry a fixed 12.5% interest rate, reducing exposure to floating-rate changes but increasing cash interest obligations.

Important facts for investors to verify

Timing and financial impact of Indivior’s planned discontinuation of the authorized generic Suboxone product.
Indivior’s continuing purchase volumes, the status of suspended license payments and the outcome of related patent litigation.
FDA decisions and timelines for Exservan and Libervant, including whether Libervant qualifies for the additional note-financing tranches.
Cash burn, debt-service requirements and the assumptions supporting management’s stated twelve-month liquidity outlook.
Availability and terms of future equity, debt or royalty monetization financing, including dilution and collateral restrictions.
Progress and potential exposure from the antitrust, patent and other legal proceedings.
Commercial uptake, reimbursement and net sales trends for Sympazan, including the adequacy of product-return, rebate and other sales-related reserves.