AcelRx Pharmaceuticals(ACRX) - 2019 Q3 - Quarterly Report

Report Overview This section provides general information about ACELRX PHARMACEUTICALS, INC.'s 10-Q quarterly report, including company details and outstanding shares General Information This section provides general company information for ACELRX PHARMACEUTICALS, INC.'s 10-Q report, including its registration, headquarters, and outstanding common stock - Company Name: ACELRX PHARMACEUTICALS, INC.[2] - Report Type: FORM 10-Q Quarterly Report[2] - Report Period End: September 30, 2019[2] - Shares Outstanding (as of October 28, 2019): 79,573,001 shares[3] Forward-Looking Statements This section outlines the nature and inherent risks of forward-looking statements within the report, emphasizing potential discrepancies between actual and projected results Forward-Looking Statements Overview This section details the forward-looking statements in the 10-Q report, highlighting their basis in current facts and future projections, and the inherent risks and uncertainties that may cause actual results to differ - Forward-looking statements are primarily concentrated in the "Financial Information - Management's Discussion and Analysis" and "Other Information - Risk Factors" sections[5] - Factors influencing the company's ability to achieve its goals include DSUVIA's commercialization success, maintenance of regulatory approvals, market acceptance, sales and marketing capabilities, third-party manufacturing, government investigations, DSUVIA's safety profile, market competition, DZUVEO's regulatory approval and collaboration in the EU, Zalviso's NDA resubmission and approval, collaboration agreements with Grünenthal, attracting new partners, retention of key personnel, market size and growth potential, reimbursement capabilities, regulatory developments, supplier performance, competitive therapies, expense and revenue estimates, liquidity and capital resources, and intellectual property protection[5][6] - The company does not guarantee the accuracy of forward-looking statements and advises investors not to view them as assurances that the company will achieve its objectives[7] PART I. FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures Item 1. Financial Statements This section presents the company's unaudited condensed consolidated financial statements, including balance sheets, comprehensive loss, equity, and cash flow statements, along with detailed notes on financial changes and ongoing losses Condensed Consolidated Balance Sheets As of September 30, 2019, total assets decreased to $104,978 thousand, with cash and cash equivalents declining, while total liabilities increased to $133,252 thousand, driven by long-term debt and royalty-related obligations Condensed Consolidated Balance Sheets (thousand dollars) | Metric (thousand dollars) | September 30, 2019 (Unaudited) | December 31, 2018 | | :------------------------ | :----------------------------- | :---------------- | | Assets | | | | Cash and cash equivalents | 21,949 | 87,975 | | Short-term investments | 58,451 | 17,740 | | Inventories, net | 2,980 | 854 | | Total assets | 104,978 | 120,533 | | Liabilities | | | | Long-term debt (current portion) | 2,083 | 8,611 | | Long-term debt (non-current portion) | 21,924 | 3,380 | | Liability related to sale of future royalties (non-current portion) | 92,375 | 93,287 | | Total liabilities | 133,252 | 116,280 | Condensed Consolidated Statements of Comprehensive Loss For the three and nine months ended September 30, 2019, net loss increased to $12,731 thousand and $38,817 thousand respectively, driven by higher operating costs and expenses despite revenue growth Condensed Consolidated Statements of Comprehensive Loss (thousand dollars) | Metric (thousand dollars) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net product sales | 116 | — | 218 | — | | Collaboration agreement revenue | 492 | 177 | 1,596 | 802 | | Contract and other revenue | — | 200 | — | 736 | | Total revenue | 608 | 377 | 1,814 | 1,538 | | Cost of goods sold | 2,148 | 875 | 5,188 | 2,738 | | Research and development expenses | 1,058 | 3,642 | 3,598 | 10,433 | | Selling, general and administrative expenses | 10,936 | 5,188 | 32,241 | 13,117 | | Total operating costs and expenses | 14,142 | 9,705 | 41,027 | 26,288 | | Operating loss | (13,534) | (9,328) | (39,213) | (24,750) | | Net loss | (12,731) | (12,458) | (38,817) | (34,591) | | Net loss per share | (0.16) | (0.21) | (0.49) | (0.64) | Condensed Consolidated Statements of Stockholders' (Deficit) Equity As of September 30, 2019, stockholders' deficit significantly increased to $28,274 thousand from $4,253 thousand, primarily due to net losses and common stock issuances Stockholders' (Deficit) Equity (thousand dollars) | Metric (thousand dollars) | December 31, 2018 | September 30, 2019 | | :------------------------ | :---------------- | :----------------- | | Common stock | 78 | 79 | | Additional paid-in capital | 349,194 | 355,330 | | Accumulated deficit | (345,019) | (383,683) | | Total stockholders' (deficit) equity | 4,253 | (28,274) | - As of September 30, 2019, the number of shares outstanding was 79,573,001 shares[18] Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2019, net cash outflows from operating and investing activities were $37,025 thousand and $43,452 thousand respectively, leading to a significant decrease in ending cash and cash equivalents Cash Flow Activities (thousand dollars) | Cash Flow Activity (thousand dollars) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :------------------------------------ | :----------------------------- | :----------------------------- | | Net cash outflow from operating activities | (37,025) | (20,085) | | Net cash outflow from investing activities | (43,452) | 1,083 | | Net cash inflow from financing activities | 14,451 | 23,666 | | Cash and cash equivalents—beginning of period | 87,975 | 52,902 | | Cash and cash equivalents—end of period | 21,949 | 57,566 | - Increased cash outflow from operating activities was primarily due to net loss and an increase in inventories[21] - Cash outflow from investing activities was mainly due to purchases of investments and property and equipment, partially offset by proceeds from maturities of investments[21] - Cash inflow from financing activities primarily resulted from the issuance of long-term debt and equity financing, partially offset by repayments of long-term debt[21] Notes to Condensed Consolidated Financial Statements This section details the company's organization, key products, significant accounting policies, financial instruments, and specific financial statement items, including investments, debt, leases, and equity-related disclosures Note 1. Organization and Summary of Significant Accounting Policies This note outlines the company's focus on acute pain therapies DSUVIA and Zalviso, their commercialization status, ongoing operating losses, and key accounting policies including lease accounting, revenue recognition, and royalty monetization - The company focuses on developing and commercializing innovative therapies for acute pain in medically supervised settings, with primary products DSUVIA/DZUVEO and Zalviso[24] - DSUVIA received FDA approval in November 2018 and was commercially launched in the U.S. in the first quarter of 2019[24] - Zalviso is approved in Europe and commercialized by Grünenthal GmbH, and the company is evaluating the timing for resubmission of Zalviso's New Drug Application (NDA)[24][27] - The company has continuously generated operating losses and negative cash flows since inception and expects to continue incurring losses until DSUVIA gains market acceptance and generates significant revenue[29] - The company adopted ASU No. 2016-02, "Leases (Topic 842)," on January 1, 2019, resulting in the recognition of right-of-use assets and lease liabilities on the balance sheet[38][69][70] - Revenue recognition follows ASC Topic 606, with product sales revenue recognized when control is transferred, net of variable consideration such as distributor fees, GPO discounts, GPO administrative fees, and returns[41][43] - The liability related to the sale of future royalties (Royalty Monetization) is recognized as a liability and amortized using the effective interest method, resulting in non-cash interest income recognized in 2019 due to a downward revision of future payment estimates[60][62][64] Note 2. Investments and Fair Value Measurement This note details the company's investments, classified as available-for-sale and measured at fair value, totaling $80,400 thousand as of September 30, 2019, and discusses the fair value measurement of financial instruments, including a contingent put option liability Cash, Cash Equivalents, and Investments (thousand dollars) | Metric (thousand dollars) | Fair Value as of Sep 30, 2019 | Fair Value as of Dec 31, 2018 | | :------------------------ | :---------------------------- | :---------------------------- | | Cash and cash equivalents | 21,949 | 87,975 | | Short-term investments | 58,451 | 17,740 | | Total | 80,400 | 105,715 | - As of September 30, 2019, and December 31, 2018, there were no material unrealized losses or other-than-temporary impairments on any available-for-sale securities[75] - The company's financial instruments include Level 1 and Level 2 assets and Level 3 liabilities, with Level 3 liabilities primarily consisting of a contingent put option liability related to the Oxford loan agreement, whose fair value increased to $514 thousand as of September 30, 2019, from $121 thousand as of December 31, 2018[77][79][80] Note 3. Inventories, net As of September 30, 2019, net inventories significantly increased to $2,980 thousand, and the company recorded a $0.9 million impairment charge for DSUVIA inventory in Q3 2019 due to potential expiration Inventories by Category (thousand dollars) | Inventory Category (thousand dollars) | September 30, 2019 | December 31, 2018 | | :---------------------------------- | :----------------- | :---------------- | | Raw materials | 1,192 | 694 | | Work-in-process | 1,044 | 160 | | Finished goods | 744 | — | | Total | 2,980 | 854 | - In the third quarter of 2019, the company recorded an inventory impairment charge of approximately $0.9 million for DSUVIA inventory that may expire, which was included in cost of goods sold[82] Note 4. Revenue This note details that DSUVIA commercial sales began in Q1 2019, with total revenue of $608 thousand and $1,814 thousand for the three and nine months ended September 30, 2019, respectively, and includes $3.2 million in deferred revenue related to Zalviso manufacturing services Revenue by Source (thousand dollars) | Revenue Source (thousand dollars) | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2019 | | :-------------------------------- | :------------------------------ | :----------------------------- | | Revenue from satisfied collaboration obligations | 444 | 1,279 | | Royalty revenue | 48 | 317 | | DSUVIA net product sales | 116 | 218 | | Total revenue | 608 | 1,814 | - As of September 30, 2019, approximately $3.2 million of deferred revenue was related to discounts for future manufacturing services for Zalviso to Grünenthal, expected to be recognized through 2029[83] Note 5. Collaboration Agreement This note details the amended collaboration agreements with Grünenthal for Zalviso commercialization in Europe, including eligibility for $194.5 million in milestone payments and mid-teen royalties, with $0.5 million and $1.6 million revenue recognized for the three and nine months ended September 30, 2019 - The company entered into amended license and manufacturing supply agreements with Grünenthal, granting Grünenthal the right to commercialize Zalviso in the EU, Switzerland, Liechtenstein, Iceland, Norway, and Australia[87][88] - The company is eligible for approximately $194.5 million in additional milestone payments ($28.5 million from regulatory and product development, $166.0 million from net sales targets)[87] - Grünenthal will pay mid-teen percentage (15%-25%) royalties and supply and trademark fees, with a portion of royalties payable to PDL[87] Collaboration Agreement Revenue (thousand dollars) | Period | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :----- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Revenue | 500 | 200 | 1,600 | 800 | - As of September 30, 2019, the deferred revenue balance under the amended agreements included a current portion of $0.3 million and a non-current portion of $2.9 million[90] Note 6. Long-Term Debt This note details the $25.0 million Oxford Finance LLC loan agreement entered on May 30, 2019, including its interest rate, end-of-term fee, restrictive covenants, and the $0.5 million fair value of the related contingent put option liability - On May 30, 2019, the company entered into a $25.0 million loan agreement with Oxford Finance LLC[93] - The company used approximately $8.9 million of the loan proceeds to repay a prior agreement with Hercules, recognizing a debt extinguishment loss of approximately $0.2 million as a result[91][93] - The Oxford loan agreement carries an interest rate of 30-day LIBOR plus 6.75% and includes a 5% end-of-term fee, with a maturity date of June 1, 2023[94] - The loan agreement requires the company to maintain at least $5.0 million in unrestricted cash at all times[96] - As of September 30, 2019, the estimated fair value of the contingent put option liability related to the Oxford loan agreement was $0.5 million[97] Interest Expense (thousand dollars) | Period | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2019 | | :----- | :------------------------------ | :----------------------------- | | Interest expense | 800 | 1,100 | Note 7. Leases This note details the company's adoption of ASU 2016-02 for leases on January 1, 2019, resulting in new right-of-use assets and lease liabilities, and covers sublease agreements and embedded leases, with a weighted-average remaining lease term of 4.13 years - The company adopted ASU No. 2016-02, "Leases (Topic 842)," on January 1, 2019, resulting in a $4,730 thousand increase in right-of-use assets, a $5,094 thousand increase in lease liabilities, and a $153 thousand decrease in accumulated deficit[69][70] - On January 2, 2019, the company entered into an agreement to sublease approximately 47% of its office and laboratory space, with the term extending through January 31, 2024[102] - The company's agreements with contract manufacturers contain embedded leases for cleanroom usage, which are accounted for as operating leases[104] Lease Expenses (thousand dollars) | Period | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2019 | | :----- | :------------------------------ | :----------------------------- | | Operating lease cost | 340 | 1,020 | | Sublease income | (150) | (446) | | Net lease cost | 190 | 574 | Lease Information (as of September 30, 2019) | Metric | Value | | :----- | :---- | | Weighted-average remaining lease term | 4.13 years | | Weighted-average discount rate | 11.72% | Note 8. Liability Related to Sale of Future Royalties This note details the $65.0 million royalty monetization transaction with PDL BioPharma, Inc. in September 2015, the subsequent revision of future payment estimates leading to non-cash interest income, and a liability balance of $93,063 thousand as of September 30, 2019 - In September 2015, the company entered into a royalty monetization transaction with PDL, receiving $65.0 million in total proceeds for selling 75% of Zalviso's European sales royalties and 80% of the first four commercial milestones, with a cap of $195 million[112] - In the second quarter of 2019, the company significantly revised its estimates of future payments to PDL to approximately $36 million, which is less than the $65.0 million total proceeds received, resulting in the future recognition of approximately $29 million in contingent gain[113] - This revision resulted in a reduction of net loss by $2.7 million and $5.4 million for the three and nine months ended September 30, 2019, respectively, with effective interest income rates of 4.2% and 0.5%[114] Liability Related to Sale of Future Royalties Activity (thousand dollars) | Activity (thousand dollars) | Nine Months Ended Sep 30, 2019 | | :-------------------------- | :----------------------------- | | Beginning balance | 93,679 | | Non-cash royalty revenue | (241) | | Non-cash interest (income) expense | (375) | | Ending balance | 93,063 | Note 9. Warrants This note details the issuance of warrants to purchase 176,679 shares of common stock at $2.83 per share on May 30, 2019, with an estimated fair value of $0.4 million, expiring in May 2029 - On May 30, 2019, the company issued warrants to the lender to purchase 176,679 shares of common stock at an exercise price of $2.83 per share[116] - The fair value of the warrants was estimated at $0.4 million on the issuance date and recorded as a loan discount within equity[117] - As of September 30, 2019, all warrants remained unexercised and will expire in May 2029[118] Note 10. Stock-Based Compensation This note details stock-based compensation expenses of $1,326 thousand and $3,779 thousand for the three and nine months ended September 30, 2019, respectively, and outlines the remaining shares available for grant and unexercised options/RSUs under the 2011 Equity Incentive Plan Stock-Based Compensation Expense (thousand dollars) | Expense Category (thousand dollars) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :---------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Cost of goods sold | 68 | 119 | 197 | 280 | | Research and development expenses | 242 | 769 | 699 | 1,578 | | Selling, general and administrative expenses | 1,016 | 920 | 2,883 | 2,078 | | Total | 1,326 | 1,808 | 3,779 | 3,936 | - As of September 30, 2019, there were 2,037,468 shares available for grant under the company's 2011 Equity Incentive Plan, with 12,590,964 options and 959,704 restricted stock units unexercised[120] Note 11. Stockholders' Equity This note details the $40.0 million increase in the ATM agreement on May 9, 2019, the issuance of 500,000 shares for $1.2 million net proceeds, and the remaining $45.3 million available for issuance as of September 30, 2019 - On May 9, 2019, the company increased the aggregate offering price of common stock available for issuance under the ATM agreement by $40.0 million[121] - For the nine months ended September 30, 2019, the company sold 500,000 shares of common stock through the ATM agreement, generating net proceeds of approximately $1.2 million[121] - As of September 30, 2019, the company could still issue and sell common stock with an aggregate offering price of up to $45.3 million under the ATM agreement[121] Note 12. Net Loss per Share of Common Stock This note explains the calculation of basic and diluted net loss per share, noting that anti-dilutive common stock equivalents, totaling 13,888,760 shares as of September 30, 2019, are excluded during net loss periods - During periods of reported net loss, common stock equivalents (such as stock options and warrants) are excluded from the diluted net loss per share calculation due to their anti-dilutive effect[122] Common Stock Equivalents Excluded from Diluted Net Loss per Share (shares) | Category | September 30, 2019 | September 30, 2018 | | :------- | :----------------- | :----------------- | | RSUs, ESPP, and stock options | 13,712,081 | 12,003,600 | | Common stock warrants | 176,679 | 176,730 | | Total | 13,888,760 | 12,180,330 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an overview of the company's business, financial condition, and operating results, focusing on DSUVIA and Zalviso commercialization, ongoing losses, and detailed analysis of revenue, costs, expenses, and liquidity - The company has continuously incurred losses and generated negative operating cash flows since inception and expects to continue incurring losses[164] Cash, Cash Equivalents, and Investments (thousand dollars) | Metric (thousand dollars) | September 30, 2019 | December 31, 2018 | | :------------------------ | :----------------- | :---------------- | | Total cash, cash equivalents, and investments | 80,400 | 105,700 | - The company expects its existing capital resources to support operations through mid-fourth quarter of 2020[165] - As of September 30, 2019, the company could still issue and sell common stock with an aggregate offering price of up to $45.3 million under the ATM agreement[166] - On May 30, 2019, the company entered into a $25.0 million loan agreement with Oxford, with net proceeds of $15.9 million[167] - Future capital requirements are influenced by various factors including DSUVIA commercialization, Zalviso development, manufacturing, sales and marketing costs, regulatory approvals, milestone and royalty revenues, and intellectual property protection[177][178] - The company will need to raise additional capital through equity offerings, debt securities, asset monetization, or development and licensing agreements[179] About AcelRx Pharmaceuticals, Inc. AcelRx Pharmaceuticals, Inc. is a specialty pharmaceutical company focused on developing and commercializing DSUVIA and Zalviso for acute pain, with DSUVIA launched in the U.S. in Q1 2019 and Zalviso commercialized in Europe by Grünenthal - The company focuses on developing and commercializing DSUVIA/DZUVEO and Zalviso, both utilizing sublingual sufentanil for the treatment of moderate-to-severe acute pain[125][126] - DSUVIA received FDA approval in November 2018 and was commercially launched in the U.S. in the first quarter of 2019, with distribution restricted to certified medically supervised settings under a REMS program[126][127] - Zalviso is approved in the EU and commercialized by Grünenthal, and the company is evaluating the timing for its NDA resubmission in the U.S.[129][133][134] Financial Overview The company has consistently incurred net losses and negative operating cash flows since inception, with an accumulated deficit of $383.7 million and $80.4 million in cash, cash equivalents, and short-term investments as of September 30, 2019 - The company has continuously generated net losses and negative operating cash flows since inception and expects to continue incurring losses[135] - The company launched DSUVIA commercially in the U.S. in the first quarter of 2019[136] - The company's operating funds primarily derive from equity issuances, borrowings, Grünenthal payments, Zalviso European sales royalty monetization, Department of Defense (DoD) funding, and DSUVIA sales revenue[137] Key Financial Data (thousand dollars) | Metric (thousand dollars) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net loss | 12,700 | 12,500 | 38,800 | 34,600 | Cash and Investments (thousand dollars) | Metric (thousand dollars) | September 30, 2019 | December 31, 2018 | | :------------------------ | :----------------- | :---------------- | | Cash, cash equivalents, and short-term investments | 80,400 | 105,700 | - As of September 30, 2019, the company's accumulated deficit was $383.7 million[140] Critical Accounting Policies and Significant Judgments and Estimates This section confirms that, apart from adopting ASU 2016-02 for leases and updating the non-cash interest policy for future royalty sales, no significant changes occurred in critical accounting policies or estimates during the reporting period - During this reporting period, there were no significant changes to critical accounting policies or significant judgments and estimates, except for the adoption of ASU No. 2016-02, "Leases (Topic 842)," and the update to the policy for "Non-Cash Interest Income (Expense) Related to Sale of Future Royalties"[142] Results of Operations This section analyzes the company's volatile operating results, detailing changes in revenue, cost of goods sold, R&D, selling, general and administrative expenses, and other income/expense for 2019 and 2018, influenced by DSUVIA commercialization and R&D Revenue DSUVIA commercial sales began in Q1 2019, generating $0.1 million and $0.2 million in net product sales for the three and nine months ended September 30, 2019, respectively, while collaboration revenue increased and DoD contract revenue ceased Revenue by Source (thousand dollars) | Revenue Source (thousand dollars) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net product sales revenue | 100 | — | 200 | — | | Collaboration agreement revenue | 500 | 200 | 1,600 | 800 | | Contract and other revenue | — | 200 | — | 700 | - Commercial sales of DSUVIA commenced in the first quarter of 2019[144] - The increase in collaboration agreement revenue was primarily due to increased Grünenthal orders[148] - The DoD contract ended on February 28, 2019, resulting in zero contract and other revenue for the comparable 2019 period[150] Cost of Goods Sold Cost of goods sold increased by 145% and 89% for the three and nine months ended September 30, 2019, respectively, to $2,148 thousand and $5,188 thousand, driven by DSUVIA commercial sales and a $0.9 million inventory impairment charge Cost of Goods Sold (thousand dollars) | Period | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :----- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Cost of goods sold | 2,148 | 875 | 5,188 | 2,738 | | Year-over-year change | 1,273 (145%) | | 2,450 (89%) | | - In the third quarter of 2019, the company recorded an inventory impairment charge of approximately $0.9 million for DSUVIA inventory that may expire[152] - Direct manufacturing costs for DSUVIA and Zalviso were $1.4 million and $2.0 million respectively in the comparable 2019 period[152] - Indirect manufacturing costs for DSUVIA and Zalviso were $0.8 million and $3.2 million respectively in the comparable 2019 period[153] - The company expects gross margins for Zalviso product deliveries to Grünenthal to be negative for the foreseeable future[153] Research and Development Expenses Research and development expenses decreased by 71% and 66% for the three and nine months ended September 30, 2019, respectively, to $1,058 thousand and $3,598 thousand, primarily due to personnel reallocation to commercialization and project completion Research and Development Expenses (thousand dollars) | Period | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :----- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | DSUVIA | 118 | 678 | 394 | 2,163 | | Zalviso | 148 | 65 | 487 | 567 | | Indirect expenses | 792 | 2,899 | 2,717 | 7,703 | | Total | 1,058 | 3,642 | 3,598 | 10,433 | | Year-over-year change | (2,584) (-71%) | | (6,835) (-66%) | | - The decrease in R&D expenses was primarily due to the company reallocating most R&D personnel to commercialization efforts and the substantial completion of DSUVIA and Zalviso development programs[156] Selling, General and Administrative Expenses Selling, general and administrative expenses increased by 111% and 146% for the three and nine months ended September 30, 2019, respectively, to $10,936 thousand and $32,241 thousand, driven by DSUVIA commercialization and a 51-person increase in headcount Selling, General and Administrative Expenses (thousand dollars) | Period | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :----- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Expenses | 10,936 | 5,188 | 32,241 | 13,117 | | Year-over-year change | 5,748 (111%) | | 19,124 (146%) | | - The increase in expenses was primarily due to the initiation of DSUVIA commercialization, leading to higher personnel-related costs and program expenditures[158] - The company's selling, general and administrative headcount increased by 51[158] Other Income (Expense) Total other income (expense) significantly improved to $803 thousand and $399 thousand for the three and nine months ended September 30, 2019, respectively, driven by increased interest income from investments and non-cash interest income from revised royalty liability estimates Other Income (Expense) (thousand dollars) | Category (thousand dollars) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :-------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Interest expense | (828) | (529) | (1,704) | (1,758) | | Net interest and other income | 645 | 312 | 1,728 | 643 | | Non-cash interest income (expense) | 986 | (2,913) | 375 | (8,724) | | Total | 803 | (3,130) | 399 | (9,839) | - The increase in interest expense was primarily due to higher loan balances resulting from the Oxford loan agreement[159] - The increase in net interest and other income was mainly due to higher investment balances[160] - The change in non-cash interest income (expense) was due to a significant revision in the estimates for the liability related to the sale of future royalties, resulting in non-cash interest income recognized in the comparable 2019 period, with effective interest income rates of 4.2% and 0.5% respectively[161][162] Liquidity and Capital Resources The company continues to incur losses and negative operating cash flows, with $80.4 million in cash, cash equivalents, and investments as of September 30, 2019, and anticipates needing additional capital beyond mid-Q4 2020 to fund DSUVIA commercialization and Zalviso development Cash Flows For the nine months ended September 30, 2019, net cash outflows from operating and investing activities were $37.0 million and $43.5 million respectively, while financing activities generated $14.5 million in net cash inflow Cash Flow Summary (thousand dollars) | Cash Flow Activity (thousand dollars) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :------------------------------------ | :----------------------------- | :----------------------------- | | Net cash outflow from operating activities | (37,025) | (20,085) | | Net cash outflow from investing activities | (43,452) | 1,083 | | Net cash inflow from financing activities | 14,451 | 23,666 | - For the nine months of 2019, operating cash outflow was $37.0 million, primarily for DSUVIA commercialization and Zalviso development, adjusted for $5.1 million in non-cash expenses, including $3.8 million in stock-based compensation, $1.2 million in depreciation, $0.9 million in inventory impairment, and $0.4 million in non-cash interest income[171] - For the nine months of 2019, investing cash outflow was $43.5 million, primarily for purchases of $81.9 million in investments and $3.2 million in property and equipment, partially offset by $41.7 million in proceeds from maturities of investments[174] - For the nine months of 2019, financing cash inflow was $14.5 million, primarily from $24.8 million in net proceeds from the Oxford loan agreement, partially offset by repayments of $8.9 million on a prior agreement and $3.5 million in long-term debt[176] Operating Capital and Capital Expenditure Requirements The company's operating plan includes Zalviso NDA resubmission and DSUVIA launch, with future capital needs subject to significant variability from commercialization costs, regulatory outcomes, and M&A, necessitating additional funding through equity, debt, or partnerships - The company's current operating plan includes resubmitting the Zalviso NDA, supporting FDA review, and DSUVIA launch expenditures in the U.S.[177] - Future capital requirements may be significantly impacted by DSUVIA and Zalviso commercialization expenditures, manufacturing and marketing costs, regulatory approval outcomes, milestone and royalty revenues, changes in regulatory requirements, intellectual property costs, M&A activities, and potential litigation[178] - The company's existing capital resources may be insufficient to support long-term operations, requiring additional funding through equity offerings, debt securities, asset monetization, or development and licensing agreements[179] Off-Balance Sheet Arrangements As of September 30, 2019, the company had no off-balance sheet arrangements or variable interest entities - As of September 30, 2019, the company had not entered into any off-balance sheet arrangements nor did it hold any variable interest entities[180] Item 3. Quantitative and Qualitative Disclosures About Market Risk For the nine months ended September 30, 2019, there were no material changes to the company's market risk disclosures - For the nine months ended September 30, 2019, there were no material changes to the company's market risk disclosures[180] Item 4. Controls and Procedures The company's disclosure controls and procedures were deemed effective at a reasonable assurance level by management as of the reporting period end, with no material changes to internal controls reported this quarter - As of the end of this quarterly reporting period, the company's disclosure controls and procedures were effective at a reasonable assurance level[183] - There were no material changes to internal controls reported this quarter[184] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, unregistered equity sales, defaults on senior securities, mine safety disclosures, other information, and exhibits Item 1. Legal Proceedings The company is not currently involved in any material legal proceedings, though future litigation could significantly impact its business, financial condition, or cash flows - The company is not currently involved in any material legal proceedings[186] Item 1A. Risk Factors This section details the company's risks, encompassing DSUVIA/Zalviso commercialization, clinical development, financial needs, third-party reliance, operations, and intellectual property, which could materially harm its business and stock price - This report updates and supersedes the risk factors disclosed in the annual report, with material changes or new risks marked with an asterisk (*)[188] Risks Related to Commercialization of DSUVIA and Zalviso Successful DSUVIA commercialization hinges on market acceptance, pricing, reimbursement, and sales capabilities, while Zalviso's European success depends on Grünenthal and DZUVEO needs a strategic partner, all amid intense competition, opioid regulations, and potential litigation - DSUVIA's commercial success is highly dependent on marketing, sales, and distribution capabilities, maintenance of regulatory approvals, market acceptance, pricing and reimbursement, competition, REMS program compliance, and intellectual property protection[188] - Market acceptance of DSUVIA and Zalviso depends on factors such as clinical safety, efficacy, convenience, physician and patient acceptance, adverse events, labeling restrictions, REMS limitations, alternative therapies, pricing, and reimbursement[190][192] - The company needs to maintain or develop sales and marketing capabilities, or collaborate with third parties, to commercialize DSUVIA and Zalviso[193][195] - Guidelines and regulations issued by governmental agencies and non-governmental organizations, particularly concerning opioids, may reduce the use of DSUVIA and Zalviso[200][201] - Government investigations, regulatory actions, and private litigation related to opioid commercialization could adversely affect the company's business[202][204] - The company faces intense competition in seeking strategic partners, and collaboration relationships may be difficult to establish and maintain, impacting product development and commercialization[209][210] - Obtaining approval for Zalviso and DZUVEO in Europe introduces risks associated with international operations, including legal and regulatory frameworks, intellectual property protection, payer reimbursement, and political and economic instability[213] - DSUVIA and Zalviso face competition from various sources, including injectable opioids, oral opioids, non-steroidal anti-inflammatory drugs, and transmucosal fentanyl products[214] - Failure to obtain formulary approval from hospitals or other healthcare institutions, or inadequate reimbursement, could limit product sales and profitability[216][217][219] - The FDA and other regulatory agencies strictly enforce laws and regulations prohibiting off-label promotion, and violations could lead to significant liabilities[224] - The company relies on a limited number of pharmaceutical wholesalers to distribute DSUVIA and Zalviso, and non-compliance with REMS requirements by wholesalers or disruption of relationships could adversely affect sales[226] Risks Related to Clinical Development and Regulatory Approval This section outlines risks in clinical development and regulatory approval, including increased commercialization costs from opioid legislation, potential impacts on Zalviso's resubmission from new FDA frameworks, complexities of drug/device combination product approval, and market limitations due to REMS programs and failure to secure international approvals - Existing and future legislation, particularly regulatory changes targeting opioids, may increase the difficulty and cost of product commercialization and affect pricing[228][239] - The FDA's new benefit/risk framework for novel opioid analgesic products may require new products to demonstrate benefits superior to existing ones, potentially impacting Zalviso's resubmission[228][239] - As a drug/device combination product, Zalviso's approval process may face regulatory uncertainties, additional study requirements, and delays[244][267] - Clinical trial delays are common and can lead to increased costs and jeopardize or delay regulatory approval and product sales[259][261] - Zalviso or DSUVIA may cause adverse events, which could delay or prevent regulatory approval, or limit the scope of approved labeling and market acceptance[263][265] - Both DSUVIA and Zalviso (if approved) require REMS programs, which could significantly increase commercialization costs and restrict product distribution and use[283] - Failure to obtain additional regulatory approvals outside the U.S. will limit the product's market potential, as different countries have varying regulatory requirements and approval processes[277][280] Risks Related to Our Financial Condition and Need for Additional Capital The company faces ongoing significant losses and requires additional capital for DSUVIA commercialization and Zalviso development, with profitability dependent on successful product launches and partnerships, while also navigating manufacturing cost challenges, debt repayment risks, and potential audit risks for DoD contracts - The company has continuously incurred significant losses since inception, with an accumulated deficit of $383.7 million as of September 30, 2019, and expects to continue incurring losses in the future[284][285] - The company has not yet achieved significant product revenue, and its profitability depends on the successful commercialization of DSUVIA and the development and commercialization of Zalviso[286] - The company is highly dependent on its commercial partner Grünenthal for the successful commercialization of Zalviso in Europe, and has already sold a significant portion of royalties and milestones to PDL[289][292] - DZUVEO's commercialization in Europe awaits a strategic partner, and failure to secure an agreement could result in no revenue generation[294][295] - The company may be unable to achieve cost reductions in manufacturing Zalviso to accommodate declining transfer prices under the amended agreements, thereby impacting gross margins[298][299] - The company has limited experience commercializing DSUVIA, making it difficult to accurately predict future performance[300] - The company requires additional capital to support the full commercialization of DSUVIA and the development of Zalviso, potentially through equity or debt financing, which could lead to dilution of existing shareholders or business restrictions[301][302][305][306] - The company may be unable to repay existing debt, leading to default, and restrictive covenants in loan agreements may limit company operations[307][309][310] - Costs under the Department of Defense contract may be subject to audit, and any deficiencies could jeopardize past funding and require repayment[311][312] Risks Related to Our Reliance on Third Parties The company's reliance on third-party manufacturers for DSUVIA and Zalviso supply, limited API sources, specialized manufacturing, and CROs for clinical trials exposes it to significant risks including quality issues, supply chain disruptions, increased costs, and potential business harm - The company relies on third-party manufacturers for commercial and clinical supply of DSUVIA and Zalviso, facing risks such as failure to meet product specifications, insufficient capacity, quality issues, compliance risks, and supply chain disruptions[315][316] - The company has limited sources for sufentanil active pharmaceutical ingredient (API), with currently only one qualified supplier, and any supply disruption could delay commercialization[318][319] - The manufacturing of sufentanil sublingual tablets requires specialized equipment and expertise, and any equipment failure or production issues could lead to interruptions in clinical or commercial supply, increasing costs or causing delays[321][322] - The company relies on third-party contract research organizations (CROs) for clinical trials, and their underperformance, failure to comply with regulations, or data quality issues could lead to clinical trial delays or termination, harming the company's business[331][333][334] Risks Related to Our Business Operations and Industry The company faces risks from DEA regulation of sufentanil products, healthcare compliance laws, Zalviso's ISO and European legal compliance, Brexit's impact, IT system disruptions, business interruptions, talent retention, product liability claims, and employee misconduct - The company's sufentanil products, as Schedule II controlled substances, are strictly regulated by the DEA, and failure to obtain required quotas or comply with regulations could adversely affect the business[336][337] - The company's relationships with clinical investigators, healthcare professionals, commercial partners, and payers are subject to healthcare laws such as anti-kickback, fraud, and abuse, and violations could lead to significant fines and business disruptions[338][341] - To supply Zalviso devices to Grünenthal, the company must maintain a quality system compliant with ISO standards and applicable European laws and directives, and failure to maintain compliance will prevent its sales in the EU and EEA[342][343] - Brexit could negatively affect global economic conditions, financial markets, and the company's business, including regulatory framework uncertainties[344][345][347] - Information technology system disruptions or data security incidents could lead to sensitive information breaches, business operational interruptions, and significant financial, legal, regulatory, business, and reputational harm[348][350][351] - Business interruptions (e.g., natural disasters) could delay product development and disrupt sales, and the company may not have adequate insurance to cover losses[352][353] - The company's future success depends on retaining key executives and attracting and retaining qualified personnel, as talent loss could hinder R&D and commercialization goals[353] - The company faces potential product liability claims, and successful claims could result in substantial liabilities and costs, with existing insurance potentially insufficient to cover them[354][355] - Misconduct by employees, contractors, partners, and suppliers (including non-compliance with regulatory standards and insider trading) could lead to fraud allegations, government investigations and significant penalties[357][358][359] Risks Related to Our Intellectual Property The company's reliance on patents and trade secrets for proprietary technology faces risks from unsuccessful defense, costly litigation, third-party infringement claims, and inadequate global enforcement, all of which could adversely impact its business - The company relies on patents, trade secrets, confidentiality agreements, and restrictive covenants to protect its proprietary technology[361] - As of September 30, 2019, the company held 74 granted patents globally, covering sufentanil sublingual tablets, drug delivery devices, and other platform technologies, with expected protection through 2027-2031[361] - The regulatory exclusivity period for sufentanil in the U.S. is only three years, and the company may face litigation based on patents listed in the FDA Orange Book[362] - Failure to successfully defend existing patents or obtain new ones, along with the cost and time-consuming nature of patent litigation, could adversely affect the company's business[364][367] - The company may face third-party infringement claims and could be required to pay damages, obtain licenses, or develop alternative technologies[368][372] - Failure to adequately protect trade secrets could allow competitors to exploit the company's proprietary information, harming its competitive advantage[380] - The company may be unable to enforce its intellectual property globally, as some foreign laws offer less protection for intellectual property than U.S. laws[384] - Failure to register trademarks in all potential markets could adversely affect the company's business[386] Risks Related to Ownership of Our Common Stock The company's common stock price is highly volatile, influenced by commercialization failures, funding, regulatory decisions, and litigation, with risks of dilution from future equity issuances, limited use of tax attributes, no dividends, and anti-takeover provisions - The market price of the company's common stock may be highly volatile, influenced by various factors including product commercialization failures, insufficient funding, regulatory decisions, competition, financial forecasts, industry perception, and litigation[387][388] - Sales or anticipated sales of substantial amounts of stock by existing shareholders could lead to a decline in the company's stock price[390][391] - Future issuances of additional equity securities (including through ATM agreements and equity incentive plans) could result in dilution for existing shareholders and may lead to a decline in stock price[392][393][395] - The company's involvement in securities-related class action lawsuits could divert resources and management attention, harming the business[396][398] - The company's ability to utilize net operating loss carryforwards and certain other tax attributes may be limited, potentially leading to increased future tax liabilities[399] - The company does not intend to pay dividends on its common stock, so any returns will be limited to stock value[400] - Provisions in the company's certificate of incorporation and Delaware law may make it more difficult or costly for a third party to acquire the company, even if such an acquisition might be beneficial to shareholders[401][402][405] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds during this reporting period - There were no unregistered sales of equity securities or use of proceeds during this reporting period[406] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during this reporting period - There were no defaults upon senior securities during this reporting period[406] Item 4. Mine Safety Disclosures Not applicable - Not applicable[406] Item 5. Other Information There was no other information during this reporting period - There was no other information during this reporting period[406] Item 6. Exhibits This section lists the exhibits filed with the 10-Q report, including the company's certificate of incorporation, certificatio