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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 


 

FORM 10-Q

 


 

         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the quarterly period ended September 30, 2021

 

or

 

         TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the transition period from              to             

 

Commission File Number: 001-35068

 


ACELRX PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)


 

  

Delaware

41-2193603

(State or other jurisdiction of
incorporation or organization)

(IRS Employer
Identification No.)

 

25821 Industrial Boulevard, Suite 400

Hayward, CA 94545

(650) 216-3500

(Address, including zip code, and telephone number, including area code, of registrants principal executive offices)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class:

Trading symbol(s)

Name of Each Exchange on Which registered:

Common Stock, $0.001 par value

ACRX

The Nasdaq Global Market


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:

 

Large accelerated filer

Accelerated filer

    

Non-accelerated filer

Smaller reporting company

    

Emerging growth company

  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2)    Yes      No  ☒

 

As of November 10, 2021, the number of outstanding shares of the registrant’s common stock was 119,318,584.

 



 

1

 

 

 

ACELRX PHARMACEUTICALS, INC.

 

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTMEBER 30, 2021

 

TABLE OF CONTENTS

 

     

Page 

PART I. FINANCIAL INFORMATION          

5

       
 

Item 1.             

Financial Statements         

5

       
   

Condensed Consolidated Balance Sheets as of September 30, 2021 (unaudited) and December 31, 2020         

5

       
   

Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2021 and 2020 (unaudited)         

6

       
   

Condensed Consolidated Statements of Stockholders’ Deficit for the three and nine months ended September 30, 2021 and 2020 (unaudited)         

7

       
   

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020 (unaudited)         

8

       
   

Notes to Condensed Consolidated Financial Statements (unaudited)         

9

       
 

Item 2.             

Management’s Discussion and Analysis of Financial Condition and Results of Operations         

22

       
 

Item 3.             

Quantitative and Qualitative Disclosures About Market Risk         

31

       
 

Item 4.             

Controls and Procedures         

31

   

PART II. OTHER INFORMATION          

31

       
 

Item 1.             

Legal Proceedings         

31

       
 

Item 1A.         

Risk Factors         

32

       
 

Item 2.             

Unregistered Sales of Equity Securities and Use of Proceeds         

66

       
 

Item 3.             

Defaults Upon Senior Securities         

66

       
 

Item 4.             

Mine Safety Disclosures         

67

       
 

Item 5.             

Other Information         

67

       
 

Item 6.             

Exhibits         

70

 

Unless the context indicates otherwise, the terms “AcelRx,” “AcelRx Pharmaceuticals,” “we,” “us” and “our” refer to AcelRx Pharmaceuticals, Inc., and its consolidated subsidiaries. “DZUVEO” is a trademark, and “ACELRX”, “DSUVIA” and “Zalviso” are registered trademarks, all owned by AcelRx Pharmaceuticals, Inc. This report also contains trademarks and trade names that are the property of their respective owners.

 

2

 

 

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q, or Form 10-Q, contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are subject to the “safe harbor” created by that section. The forward-looking statements in this Form 10-Q are contained principally under “Part I. Financial Information - Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II. Other Information - Item 1A. Risk Factors”. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. These statements involve risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Form 10-Q, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. Many important factors affect our ability to achieve our objectives, including:

 

 

the accuracy of our estimates regarding the sufficiency of our cash resources, future revenues, expenses, capital requirements and needs for additional financing, and our ability to obtain additional financing;

 

the uncertainties and impact arising from the worldwide COVID-19 pandemic, including restrictions on the ability of our sales force to contact and communicate with target customers and resulting delays and challenges to our commercial sales of DSUVIA® (sufentanil sublingual tablet, 30 mcg);

 

our success in commercializing DSUVIA in the United States, including the marketing, sales, and distribution of the product, whether alone or with contract sales organizations and other collaborators;

 

our ability to satisfactorily comply with FDA regulations concerning the advertising and promotion of DSUVIA, including receiving a close out letter resolving the concerns raised by FDA in the warning letter delivered to us on February 11, 2021;

 

the size and growth potential of the markets for DSUVIA, and, if approved, Zalviso® (sufentanil sublingual tablet system) and our other product candidates in the United States, and our ability to serve those markets;

 

our ability to maintain regulatory approval of DSUVIA in the United States, including effective management of and compliance with the DSUVIA Risk Evaluation and Mitigation Strategies, or REMS, program;

 

acceptance of DSUVIA by physicians, patients and the healthcare community, including the acceptance of pricing and placement of DSUVIA on payers’ formularies;

 

our ability to satisfy the required conditions and otherwise complete our planned acquisition of Lowell Therapeutics, Inc., or Lowell, pursuant to the Agreement and Plan of Merger, or Merger Agreement, on a timely basis or at all;
 

the expected benefits and potential value created by the proposed Merger Agreement with Lowell for our stockholders;
 

potential legal proceedings relating to the proposed acquisition of Lowell and the outcome of any such legal proceedings;
 

our ability to achieve all or any of the anticipated benefits of the proposed acquisition of Lowell on a timely basis or at all;
 

the integration and performance of any assets or businesses we acquire;

 

our ability to develop and commercialize products and product candidates that we in-license;

 

our ability to develop sales and marketing capabilities in a timely fashion, whether alone through recruiting qualified employees, by engaging a contract sales organization, or with potential future collaborators;

 

successfully establishing and maintaining commercial manufacturing with third parties;

 

our ability to manage effectively, and the impact of any costs associated with, potential governmental investigations, inquiries, regulatory actions or lawsuits that may be, or have been, brought against us;

 

continued demonstration of an acceptable safety profile of DSUVIA;

 

effectively competing with other medications for the treatment of moderate-to-severe acute pain in medically supervised settings, including IV-opioids and any subsequently approved products;

 

our ability to manufacture and supply DZUVEO® to Laboratoire Aguettant, or Aguettant, in accordance with their forecasts and the License and Commercialization Agreement, or DZUVEO Agreement, with Aguettant;

 

the status of the DZUVEO Agreement or any other future potential collaborations, including potential milestones and revenue share payments under the DZUVEO Agreement;

 

our, or Aguettant’s, ability to maintain regulatory approval of DZUVEO in the European Union, or EU;

 

our ability to timely and efficiently close-out our relationship with Grünenthal GmbH, or Grünenthal, following the termination of our Collaboration and License Agreement and the Manufacture and Supply Agreement;

 

our ability to fulfill our obligations under the Purchase and Sale Agreement with SWK Funding, LLC, or SWK, (assignee of PDL BioPharma, Inc., or PDL) including our obligation to use commercially reasonable efforts to negotiate a replacement license agreement for Zalviso with a third party;

 

3

 

 

our ability to successfully execute the pathway towards a resubmission of the Zalviso New Drug Application, or NDA, and subsequently obtain and maintain regulatory approval of Zalviso in the United States and comply with any related restrictions, limitations, and/or warnings in the label of Zalviso, if approved;

 

the outcome of any potential FDA Advisory Committee meeting held for Zalviso;

 

our ability to successfully commercialize Zalviso, if approved in the United States;

 

the rate and degree of market acceptance of Zalviso, if approved in the United States;

 

our ability to obtain adequate government or third-party payer reimbursement;

 

our ability to attract additional collaborators with development, regulatory and commercialization expertise;

 

our ability to successfully retain our key commercial, scientific, engineering, medical or management personnel and hire new personnel as needed;

 

regulatory developments in the United States and foreign countries;

 

the performance of our third-party suppliers and manufacturers, including any supply chain impacts or work limitations resulting from shelter-in-place orders related to COVID-19;

 

the success of competing therapies that are or become available;

 

our liquidity and capital resources; and

 

our ability to obtain and maintain intellectual property protection for DSUVIA/DZUVEO and Zalviso.

 

In addition, you should refer to “Part II. Other Information - Item 1A. Risk Factors” in this Form 10-Q for a discussion of these and other important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Form 10-Q will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. Also, forward-looking statements represent our estimates and assumptions only as of the date of this Form 10-Q. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

4

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

AcelRx Pharmaceuticals, Inc.

 

Condensed Consolidated Balance Sheets

(In thousands, except share data)

 

  

September 30, 2021

(unaudited)

  

December 31, 2020(1)

 

Assets

        

Current Assets:

        

Cash and cash equivalents

 $13,271  $27,274 

Short-term investments

  35,428   15,612 

Accounts receivable, net

  153   635 

Inventories, net

  1,556   1,626 

Prepaid expenses and other current assets

  1,345   1,683 

Total current assets

  51,753   46,830 

Operating lease right-of-use assets

  4,454   3,150 

Property and equipment, net

  15,775   15,659 

Other assets

  281   656 

Total Assets

 $72,263  $66,295 

Liabilities and Stockholders Deficit

        

Current Liabilities:

        

Accounts payable

 $2,228  $2,737 

Accrued and other liabilities

  5,333   5,045 

Long-term debt, current portion

  8,780   8,735 

Operating lease liabilities, current portion

  729   1,118 

Total current liabilities

  17,070   17,635 

Long-term debt, net of current portion

  6,952   13,140 

Deferred revenue

  1,237    

Operating lease liabilities, net of current portion

  3,935   2,606 

Liability related to the sale of future royalties, net of current portion

  85,981   88,365 

Other long-term liabilities

  109   299 

Total liabilities

  115,284   122,045 

Commitments and Contingencies

          

Stockholders’ Deficit:

        

Common stock, $0.001 par value—200,000,000 shares authorized as of September 30, 2021 and December 31, 2020; 119,317,335 and 98,812,008 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively

  119   98 

Additional paid-in capital

  422,527   382,637 

Accumulated deficit

  (465,667)  (438,485)

Total stockholders’ deficit

  (43,021)  (55,750)

Total Liabilities and Stockholders’ Deficit

 $72,263  $66,295 

 

(1)

The condensed consolidated balance sheet as of December 31, 2020 has been derived from the audited financial statements as of that date included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

 

See notes to condensed consolidated financial statements.

 

5

 

 

 

AcelRx Pharmaceuticals, Inc.

 

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(In thousands, except share and per share data)

 

   

Three Months Ended
September 30,

   

Nine Months Ended
September 30,

 
   

2021

   

2020

   

2021

   

2020

 

Revenue:

                               

Product sales

  $ 160     $ 1,287     $ 1,003     $ 1,864  

Contract and other collaboration

    1,702       81       1,813       2,814  

Total revenue

    1,862       1,368       2,816       4,678  
                                 

Operating costs and expenses:

                               

Cost of goods sold

    439       1,851       2,519       4,732  

Research and development

    1,416       956       3,109       3,181  

Selling, general and administrative

    8,640       7,598       24,978       28,484  

Total operating costs and expenses

    10,495       10,405       30,606       36,397  

Loss from operations

    (8,633

)

    (9,037

)

    (27,790

)

    (31,719

)

Other income:

                               

Interest expense

    (538

)

    (824

)

    (1,824

)

    (2,551

)

Interest income and other income, net

    32       106       92       311  

Non-cash interest income on liability related to future sale of royalties

    764       825       2,345       2,502  

Total other income

    258       107       613       262  

Net loss before income taxes

    (8,375

)

    (8,930

)

    (27,177

)

    (31,457

)

Provision for income taxes

                (5

)

    (4

)

Net loss

  $ (8,375

)

  $ (8,930

)

  $ (27,182

)

  $ (31,461

)

Comprehensive loss

  $ (8,375

)

  $ (8,930

)

  $ (27,182

)

  $ (31,461

)

Net loss per share of common stock, basic and diluted

  $ (0.07

)

  $ (0.10

)

  $ (0.23

)

  $ (0.38

)

Shares used in computing net loss per share of common stock, basic and diluted – See Note 11

    119,224,484       87,912,505       117,222,219       82,895,664  

 

See notes to condensed consolidated financial statements.  

 

6

 

 

 

AcelRx Pharmaceuticals, Inc.

 

Condensed Consolidated Statements of Stockholders Deficit

(Unaudited)

(in thousands, except share data)

 

    Common Stock     Additional
Paid-in
Capital
    Accumulated
Deficit
    Total
Stockholders
Deficit
 
   

Shares

   

Amount

                         

Balance as of December 31, 2020

    98,812,008     $ 98     $ 382,637     $ (438,485 )   $ (55,750 )

Stock-based compensation

                1,089             1,089  

Restricted stock units vested

    404,172                          

Tax payments related to shares withheld for restricted stock units vested

                (249 )           (249 )

Net proceeds from issuance of common stock in connection with equity financings

    19,701,562       20       36,340             36,360  

Issuance of common stock upon ESPP purchase

    183,132             192             192  

Issuance of common stock upon exercise of stock options

    2,125             2             2  

Net loss

                      (8,956 )     (8,956 )

Balance as of March 31, 2021 (unaudited)

    119,102,999       118       420,011       (447,441 )     (27,312 )

Stock-based compensation

                1,172             1,172  

Restricted stock units vested

    74,438                          

Issuance of common stock upon exercise of stock options

    2,369       1       1             2  

Net loss

                      (9,851 )     (9,851 )

Balance as of June 30, 2021 (unaudited)

    119,179,806       119       421,184       (457,292 )     (35,989 )

Stock-based compensation

                1,221             1,221  

Restricted stock units vested

    7,793                          

Issuance of common stock upon exercise of stock options

    14,909             13             13  

Issuance of common stock upon ESPP purchase

    114,827             109             109  

Net loss

                      (8,375 )     (8,375 )

Balance as of September 30, 2021 (unaudited)

    119,317,335     $ 119     $ 422,527     $ (465,667 )   $ (43,021 )

 

    Common Stock     Additional
Paid-in
Capital
    Accumulated
Deficit
    Total
Stockholders
Deficit
 
   

Shares

   

Amount

                         

Balance as of December 31, 2019

    79,573,101     $ 79     $ 356,609     $ (398,106 )   $ (41,418 )

Stock-based compensation

                1,146             1,146  

Restricted stock units vested

    216,399                          

Tax payments related to shares withheld for restricted stock units vested

                (86 )           (86 )

Net proceeds from issuance of common stock in connection with equity financings

    431,800       1       783             784  

Issuance of common stock upon ESPP purchase

    194,451             218             218  

Net loss

                      (15,925 )     (15,925 )

Balance as of March 31, 2020 (unaudited)

    80,415,751       80       358,670       (414,031 )     (55,281 )

Stock-based compensation

                1,090             1,090  

Restricted stock units vested

    29,434                          

Net proceeds from issuance of common stock in connection with equity financings

    445,000             665             665  

Net loss

                      (6,606 )     (6,606 )

Balance as of June 30, 2020 (unaudited)

    80,890,185       80       360,425       (420,637 )     (60,132 )

Stock-based compensation

                1,104             1,104  

Restricted stock units vested

    7,789                          

Net proceeds from issuance of common stock in connection with equity financings

    9,433,962       10       9,941             9,951  

Issuance of common stock upon ESPP purchase

    145,677             154             154  

Net loss

                      (8,930 )     (8,930 )

Balance as of September 30, 2020 (unaudited)

    90,477,613     $ 90     $ 371,624     $ (429,567 )   $ (57,853 )

 

See notes to condensed consolidated financial statements.

 

7

 

AcelRx Pharmaceuticals, Inc.

 

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)  

 
   

Nine Months
Ended September 30,

 
   

2021

   

2020

 

Cash flows from operating activities:

               

Net loss

  $ (27,182 )   $ (31,461 )

Adjustments to reconcile net loss to net cash used in operating activities:

               

Non-cash royalty revenue related to royalty monetization

    (83 )     (181 )

Non-cash interest income on liability related to future sale of royalties

    (2,345 )     (2,502 )

Depreciation and amortization

    1,512       1,471  

Non-cash interest expense related to debt financing

    607       823  

Stock-based compensation

    3,482       3,340  

Other

    89       463  

Changes in operating assets and liabilities:

               

Accounts receivable

    482       (696 )

Inventories

    (180 )     734  

Prepaid expenses and other assets

    320       616  

Accounts payable

    281       174  

Accrued liabilities

    390       (1,238 )

Operating lease liabilities

    (559 )     (673 )

Deferred revenue

    1,188       (3,048 )

Net cash used in operating activities

    (21,998 )     (32,178 )

Cash flows from investing activities:

               

Purchase of property and equipment

    (1,799 )     (224 )

Purchase of investments

    (53,869 )     (38,817 )

Proceeds from sales and maturities of investments

    33,984       67,405  

Net cash (used in) provided by investing activities

    (21,684 )     28,364  

Cash flows from financing activities:

               

Payment of long-term debt

    (6,750 )     (2,583 )

Net proceeds from issuance of common stock in connection with equity financings

    36,360       11,400  

Net proceeds from issuance of common stock through equity plans

    318       372  

Payment of employee tax obligations related to vesting of restricted stock units

    (249 )     (86 )

Net cash provided by financing activities

    29,679       9,103  

Net (decrease) increase in cash and cash equivalents

    (14,003 )     5,289  

Cash and cash equivalents—Beginning of period

    27,274       14,684  

Cash and cash equivalents—End of period

  $ 13,271     $ 19,973  

 

See notes to condensed consolidated financial statements.  

 

8

 
 

 

AcelRx Pharmaceuticals, Inc.

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except where otherwise noted)

 

 

1. Organization and Summary of Significant Accounting Policies

 

The Company

 

AcelRx Pharmaceuticals, Inc., or the Company or AcelRx, was incorporated in Delaware on July 13, 2005 as SuRx, Inc., and in January 2006, the Company changed its name to AcelRx Pharmaceuticals, Inc. The Company’s operations are based in Hayward, California.

 

AcelRx is a specialty pharmaceutical company focused on the development and commercialization of innovative therapies for use in medically supervised settings. DSUVIA® (known as DZUVEO® in Europe) and Zalviso® are both focused on the treatment of acute pain, and each utilize sufentanil, delivered via a non-invasive route of sublingual administration, exclusively for use in medically supervised settings. On November 2, 2018, the U.S. Food and Drug Administration, or FDA, approved DSUVIA for use in adults in a certified medically supervised healthcare setting, such as hospitals, surgical centers, and emergency departments, for the management of acute pain severe enough to require an opioid analgesic and for which alternative treatments are inadequate. The commercial launch of DSUVIA in the United States occurred in the first quarter of 2019. In June 2018, the European Commission, or EC, granted marketing approval of DZUVEO for the management of acute moderate to severe pain in adults in medically monitored settings. AcelRx is further developing a distribution capability and commercial organization to continue to market and sell DSUVIA in the United States. In geographies where AcelRx decides not to commercialize products by itself, the Company may seek to out-license commercialization rights. The Company currently intends to commercialize and promote DSUVIA/DZUVEO outside the United States with one or more strategic partners, and, in July 2021, entered into a License and Commercialization Agreement with Laboratoire Aguettant, or Aguettant, for Aguettant to commercialize DZUVEO in the European Union, Norway, Iceland, Liechtenstein, Andorra, Vatican City, Monaco, Switzerland and the United Kingdom (see Out-License Agreement (DZUVEO) below). The timing of the resubmission of the Zalviso new drug application, or NDA, is in part dependent upon the finalization of the FDA’s new opioid approval guidelines and process. AcelRx intends to seek regulatory approval for Zalviso in the United States and, if successful, potentially promote Zalviso either by itself or with strategic partners. Zalviso is approved in Europe and was commercialized by Grünenthal GmbH, or Grünenthal, through May 12, 2021 (see Termination of Grünenthal Agreements below). In July 2021, the Company also entered into a separate License and Commercialization Agreement with Aguettant pursuant to which the Company obtained the exclusive right to develop and, subject to FDA approval, commercialize in the United States (i) an ephedrine pre-filled syringe containing 10 ml of a solution of 3 mg/ml ephedrine hydrochloride for injection, and (ii) a phenylephrine pre-filled syringe containing 10 ml of a solution of 50 mcg/ml phenylephrine hydrochloride for injection (see In-License Agreement below). On November 14, 2021, the Company executed a definitive merger agreement, or the Merger Agreement, to acquire Lowell Therapeutics, Inc., or Lowell, a privately held company (see Acquisition below).

 

The Company has incurred recurring operating losses and negative cash flows from operating activities since inception. As of September 30, 2021 and December 31, 2020, the Company had cash, cash equivalents and short-term investments of $48.7 million and $42.9 million, respectively. Based on the Company’s current operating plans and projections, the Company expects that its existing cash, cash equivalents and short-term investments will be sufficient to fund operations for at least one year from the date this Quarterly Report on Form 10-Q is filed with the United States Securities and Exchange Commission, or SEC. Although Zalviso was approved for sale in Europe on September 18, 2015, the Company sold the majority of the royalty rights and certain commercial sales milestones it was entitled to receive under the Amended License Agreement (defined below) with Grünenthal to PDL BioPharma, Inc., or PDL, in a transaction referred to as the Royalty Monetization. On August 31, 2020, PDL announced it sold its royalty interest for Zalviso to SWK Funding, LLC, or SWK. In consideration of the termination of the Amended License Agreement, under the Royalty Monetization, the Company must use commercially reasonable efforts to negotiate a replacement license agreement, or New Arrangement, with a third party. The Company expects to continue to incur operating losses and negative cash flows until such time as DSUVIA has gained market acceptance and generated significant revenues.

 

DSUVIA/DZUVEO

 

DSUVIA, known as DZUVEO in Europe, approved by the FDA in November 2018 and granted marketing approval by the EC in June 2018, is indicated for use in adults in a certified medically supervised healthcare setting, such as hospitals, surgical centers, and emergency departments, for the management of acute pain severe enough to require an opioid analgesic and for which alternative treatments are inadequate. DSUVIA was designed to provide rapid analgesia via a non-invasive route and to eliminate dosing errors associated with IV administration. DSUVIA is a single-strength solid dosage form administered sublingually via a single-dose applicator, or SDA, by healthcare professionals. Sufentanil is an opioid analgesic currently marketed for intravenous, or IV, and epidural anesthesia and analgesia. The sufentanil pharmacokinetic profile when delivered sublingually avoids the high peak plasma levels and short duration of action observed with IV administration.

 

9

 

DSUVIA was approved with a Risk Evaluation and Mitigation Strategy, or REMS, program which restricts distribution to certified medically supervised healthcare settings in order to prevent respiratory depression resulting from accidental exposure. DSUVIA is only distributed to facilities certified under the DSUVIA REMS program following attestation by an authorized representative to comply with appropriate dispensing and use restrictions of DSUVIA. To become certified, a healthcare setting is required to train their healthcare professionals on the proper use of DSUVIA and have the ability to manage respiratory depression. DSUVIA is not available in retail pharmacies or for outpatient use. As part of the REMS program, the Company monitors distribution and audits wholesalers’ data, evaluates proper usage within the healthcare settings and monitors for any diversion and abuse. AcelRx will de-certify healthcare settings that are non-compliant with the REMS program.

 

Zalviso

 

Zalviso delivers 15 mcg sufentanil sublingually through a non-invasive delivery route via a pre-programmed, patient-controlled analgesia, or PCA, system. Zalviso is approved in Europe and is in late-stage development in the United States. The Company had initially submitted to the FDA an NDA seeking approval for Zalviso in September 2013 but received a complete response letter, or CRL, on July 25, 2014. Subsequently, the FDA requested an additional clinical study, IAP312, designed to evaluate the effectiveness of changes made to the functionality and usability of the Zalviso device and to take into account comments from the FDA on the study protocol. In the IAP312 study, for which top-line results were announced in August 2017, Zalviso met safety, satisfaction and device usability expectations. These results will supplement the three Phase 3 trials already completed in the Zalviso NDA resubmission.

 

Termination of Grünenthal Agreements

 

On December 16, 2013, AcelRx and Grünenthal entered into a Collaboration and License Agreement, or the License Agreement, which was amended effective July 17, 2015 and September 20, 2016, or the Amended License Agreement, which granted Grünenthal rights to commercialize the Zalviso PCA system, or the Product, in the 28 European Union, or EU, member states, at the time of the agreement, plus Switzerland, Liechtenstein, Iceland, Norway and Australia (collectively, the Zalviso Territory) for human use in pain treatment within, or dispensed by, hospitals, hospices, nursing homes and other medically supervised settings, (collectively, the Field). In September 2015, the EC granted marketing approval for the marketing authorization application, or MAA, previously submitted to the EMA, for Zalviso for the management of acute moderate-to-severe post-operative pain in adult patients. On December 16, 2013, AcelRx and Grünenthal entered into a Manufacture and Supply Agreement, or the MSA, and together with the License Agreement, the Agreements. Under the MSA, the Company exclusively manufactured and supplied the Product to Grünenthal for the Field in the Zalviso Territory. On July 22, 2015, the Company and Grünenthal amended the MSA, or the Amended MSA, effective as of July 17, 2015. The Amended MSA and the Amended License Agreement are referred to as the Grünenthal Agreements.

 

On May 18, 2020, the Company received a notice from Grünenthal that it had exercised its right to terminate the Grünenthal Agreements, effective November 13, 2020. The terms of the Grünenthal Agreements were extended to May 12, 2021 to enable Grünenthal to sell down its Zalviso inventory, a right it had under the Grünenthal Agreements. The rights to market and sell Zalviso in the Zalviso Territory reverted back to the Company on May 12, 2021.

 

Out-License Agreement (DZUVEO)

 

On July 14, 2021, the Company entered into a License and Commercialization Agreement, or the DZUVEO Agreement, with Aguettant, pursuant to which Aguettant obtained the exclusive right to develop and commercialize DZUVEO in the European Union, Norway, Iceland, Liechtenstein, Andorra, Vatican City, Monaco, Switzerland and the United Kingdom, or the DZUVEO Territory, for the management of acute moderate to severe pain in adults in medically monitored settings. The Company will supply Aguettant with product.

 

The DZUVEO Agreement has an initial term of ten (10) marketing years, with the first marketing year ending on December 31 of the calendar year after the launch of DZUVEO (or December 31, 2022, if the launch occurs between January 1, 2022 and April 30, 2022). The term will automatically renew for successive five marketing year periods unless a party notifies the other party of its intention not to renew at least six (6) months prior to the expiration of the then-current term. The DZUVEO Agreement may be terminated for cause by either party based on uncured material breach by the other party, insolvency of the other party, or force majeure event. Upon early termination, all ongoing activities under the agreement and all rights and commercialization licenses and sublicenses with respect to DZUVEO will terminate. Additionally, if terminated early by either party, any accrued liability at the time of such termination will not be released.

 

10

 

The Company is entitled to receive up to €47.0 million in a combination of up-front and sales-based milestone payments, of which the Company received €2.5 million, or approximately $2.9 million, in the third quarter of 2021, for which it recognized revenue of $1.7 million in the third quarter of 2021. Aguettant will purchase product from the Company at an agreed price, or the DZUVEO Purchase Price, subject to adjustment. Aguettant will also make revenue share payments that, combined with the DZUVEO Purchase Price, range from 35% to 45% of net sales in the DZUVEO Territory.

 

Beginning in the third marketing year, the parties will establish binding annual minimums for purchase orders to be submitted by Aguettant. Aguettant has the right to grant sublicenses to its affiliates or, with the prior approval of the Company, third parties, subject to certain limitations.

 

The DZUVEO Agreement also provides Aguettant with a right of first negotiation for eighteen (18) months before the Company can enter into a collaboration regarding Zalviso in Europe.

 

In-License Agreement

 

On July 14, 2021, the Company entered into a License and Commercialization Agreement, or the PFS Agreement, with Aguettant pursuant to which the Company obtained the exclusive right to develop and, subject to FDA approval, commercialize in the United States (i) an ephedrine pre-filled syringe containing 10 ml of a solution of 3 mg/ml ephedrine hydrochloride for injection, and (ii) a phenylephrine pre-filled syringe containing 10 ml of a solution of 50 mcg/ml phenylephrine hydrochloride for injection. Aguettant will supply the Company with the products for use in commercialization, if they are approved in the U.S.

 

The PFS Agreement has an initial term of ten (10) marketing years, with the first marketing year ending on December 31 of the calendar year after the first launch of a product (or December 31 of the same calendar year if the first launch of a product occurs between January 1 and April 30 of a calendar year). The term will automatically renew for successive five marketing year periods unless a party notifies the other party of its intention not to renew at least six (6) months prior to the expiration of the then-current term.

 

Aguettant is entitled to receive up to $24.0 million in sales-based milestone payments. The Company will purchase each product from Aguettant at an agreed price, or the PFS Purchase Price, subject to adjustment. The Company will also make revenue share payments that, combined with the PFS Purchase Price, will range from 40% to 45% of net sales in the United States.

 

The Company and Aguettant will agree on minimum sales obligations twelve (12) months prior to the launch of each product. The Company has the right to grant sublicenses to its affiliates or, with the prior approval of Aguettant, third parties, subject to certain limitations.

 

As of September 30, 2021, there have been no payments by the Company to Aguettant under the PFS Agreement.

 

Acquisition

 

On November 14, 2021, the Company and two of its direct wholly owned subsidiaries, Lowell Therapeutics, Inc., or Lowell, and the stockholder representative, entered into the Agreement and Plan of Merger, or the Merger Agreement, pursuant to which the Company will acquire Lowell in a transaction valued at approximately $32.5 million plus net cash acquired, and subject to certain other adjustments, which is expected in the fourth quarter of 2021 subject to certain closing conditions. For additional information regarding the Merger Agreement, see Note 12 “Subsequent Events” and “Part II. Other Information - Item 5. Other Information” in this Form 10-Q.

 

Principles of Consolidation

 

The Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Refer to Note 7 “Liability Related to Sale of Future Royalties” for additional information.

 

Reclassifications

 

Certain prior period amounts in the Condensed Consolidated Financial Statements have been reclassified to conform to the current period's presentation.

 

Basis of Presentation

 

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, for interim financial information and the rules and regulations of the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

 

Operating results for the three and nine months ended September 30, 2021, are not necessarily indicative of the results that may be expected for the year ending December 31, 2021 or any future period. The Condensed Consolidated Balance Sheet as of December 31, 2020, was derived from the Company’s audited financial statements as of December 31, 2020, included in the Company’s Annual Report on Form 10-K filed with the SEC. These Condensed Consolidated Financial Statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, which includes a broader discussion of the Company’s business and the risks inherent therein.

 

11

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Management evaluates its estimates on an ongoing basis including critical accounting policies. Estimates are based on historical experience and on various other market-specific and other relevant assumptions that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

 

Significant Accounting Policies

 

The Company’s significant accounting policies are detailed in its Annual Report on Form 10-K for the year ended December 31, 2020. There have been no significant changes to the Company’s significant accounting policies during the three and nine months ended September 30, 2021, from those previously disclosed in its 2020 Annual Report on Form 10-K, except to reflect that the Company applies the graded-vesting attribution method to awards with market conditions that include graded-vesting features. Additionally, the Company uses the Monte Carlo Simulation model to evaluate the derived service period and fair value of awards with market conditions, including assumptions of historical volatility and risk-free interest rate commensurate with the vesting term.

 

Recently Issued Accounting Pronouncements

 

In June 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2016-13,Financial Instruments Credit Losses: Measurement of Credit Losses on Financial Instruments,” or ASU 2016-13. ASU 2016-13 replaces the incurred loss impairment model in current GAAP with a model that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. ASU 2016-13 is effective for the Company beginning January 1, 2023, with early adoption allowed beginning January 1, 2020. In May 2019, the FASB issued ASU 2019-05,Financial Instruments Credit Losses,” or ASU 2019-05, to allow entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. The new effective dates and transition align with those of ASU 2016-13. Management is currently assessing the date of adoption and the impact ASU 2016-13 and ASU 2019-05 will have on the Company, but it does not anticipate adoption of these new standards to have a material impact on the Company’s financial position, results of operations or cash flows.

 

In March 2020, the FASB issued ASU 2020-04,Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The amendments provide optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company is currently evaluating its contracts and the optional expedients provided by the new standard, but it does not anticipate its adoption to have a material impact on the Company’s financial position, results of operations or cash flows.

 

 

2. Investments and Fair Value Measurement

 

Investments

 

The Company classifies its marketable securities as available-for-sale and records its investments at fair value. Available-for-sale securities are carried at estimated fair value based on quoted market prices or observable market inputs of almost identical assets, with the unrealized holding gains and losses included in accumulated other comprehensive income (loss). Marketable securities which have maturities beyond one year as of the end of the reporting period are classified as non-current.

 

12

 

The table below summarizes the Company’s cash, cash equivalents and short-term investments (in thousands):

 

  

As of September 30, 2021

 
  

Amortized Cost

  

Gross Unrealized
Gains

  

Gross Unrealized
Losses

  

Fair
Value

 

Cash and cash equivalents:

                

Cash

 $2,984  $  $  $2,984 

Money market funds

  10,287         10,287 

Total cash and cash equivalents

  13,271         13,271 
                 

Short-term investments:

                

Commercial paper

  25,913         25,913 

Corporate debt securities

  9,515         9,515 

Total short-term investments

  35,428         35,428 

Total cash, cash equivalents and short-term investments

 $48,699  $  $  $48,699 

 

  

As of December 31, 2020

 
  

Amortized Cost

  

Gross Unrealized
Gains

  

Gross Unrealized
Losses

  

Fair
Value

 

Cash and cash equivalents:

                

Cash

 $5,181  $  $  $5,181 

Money market funds

  3,996         3,996 

Commercial paper

  18,097         18,097 

Total cash and cash equivalents

  27,274         27,274 
                 

Short-term investments:

                

U.S. government agency securities

  5,818         5,818 

Commercial paper

  9,794         9,794 

Total short-term investments

  15,612         15,612 

Total cash, cash equivalents and short-term investments

 $42,886  $  $  $42,886 

 

There were no other-than-temporary impairments for these securities at September 30, 2021 or December 31, 2020. No gross realized gains or losses were recognized on the available-for-sale securities and, accordingly, there were no amounts reclassified out of accumulated other comprehensive income (loss) to earnings during the three and nine months ended September 30, 2021 and 2020.

 

As of September 30, 2021, and December 31, 2020, the contractual maturity of all investments held was less than one year.

 

Fair Value Measurement

 

The Company’s financial instruments consist of Level I and II assets and Level III liabilities. Money market funds and U.S. treasury securities are highly liquid investments and are actively traded. The pricing information on these investment instruments are readily available and can be independently validated as of the measurement date. This approach results in the classification of these securities as Level 1 of the fair value hierarchy. For Level II instruments, the Company estimates fair value by utilizing third party pricing services in developing fair value measurements where fair value is based on valuation methodologies such as models using observable market inputs, including benchmark yields, reported trades, broker/dealer quotes, bids, offers and other reference data. Such Level II instruments typically include U.S. government agency securities, corporate debt securities and commercial paper. As of September 30, 2021, and December 31, 2020, the Company held, in addition to Level II assets, a contingent put option associated with the Loan Agreement with Oxford. See Note 5 “Long-Term Debt” for further description. The Company’s estimate of fair value of the contingent put option liability was determined using a risk-neutral valuation model, wherein the fair value of the underlying debt facility is estimated both with and without the presence of the default provisions, holding all other assumptions constant. The resulting difference between the two estimated fair values is the estimated fair value of the default provisions, or the contingent put option, which is included under other long-term liabilities on the Condensed Consolidated Balance Sheets. Changes to the estimated fair value of this liability is recorded in interest income and other income (expense), net in the Condensed Consolidated Statements of Comprehensive Loss. The fair value of the underlying debt facility is estimated by calculating the expected cash flows in consideration of an estimated probability of default and expected recovery rate in default and discounting such cash flows back to the reporting date using a risk-free rate.

 

13

 

The following table sets forth the fair value of the Company’s financial assets and liabilities by level within the fair value hierarchy (in thousands):

 

  

As of September 30, 2021

 
  

Fair Value

  

Level I

  

Level II

  

Level III

 

Assets

                

Money market funds

 $10,287  $10,287  $  $ 

Commercial paper

  25,913      25,913    

Corporate debt securities

  9,515      9,515    

Total assets measured at fair value

 $45,715  $10,287  $35,428  $ 

Liabilities

                

Contingent put option liability

 $109  $  $  $109 

Total liabilities measured at fair value

 $109  $  $  $109 

 

  

As of December 31, 2020

 
  

Fair Value

  

Level I

  

Level II

  

Level III

 

Assets

                

Money market funds

 $3,996  $3,996  $  $ 

U.S. government agency securities

  5,818      5,818    

Commercial paper

  27,891      27,891    

Total assets measured at fair value

 $37,705  $3,996  $33,709  $ 

Liabilities

                

Contingent put option liability

 $246  $  $  $246 

Total liabilities measured at fair value

 $246  $  $  $246 

 

The following tables set forth a summary of the changes in the fair value of the Company’s Level III financial liabilities for the three and nine months ended September 30, 2021 and 2020 (in thousands):

 

  

Three Months
Ended
September 30,
2021

  

Nine Months
Ended
September 30,
2021

 

Fair value—beginning of period

 $128  $246 

Change in fair value of contingent put option associated with the Loan Agreement

  (19

)

  (137

)

Fair value—end of period

 $109  $109 

 

  

Three Months
Ended
September 30,
2020

  

Nine Months
Ended
September 30,
2020

 

Fair value—beginning of period

 $591  $437 

Change in fair value of contingent put option associated with the Loan Agreement

  (85

)

  69 

Fair value—end of period

 $506  $506 

 

 

3. Inventories, net

 

Inventories consist of raw materials, work in process and finished goods and are stated at the lower of cost or net realizable value and consist of the following (in thousands):

 

   

Balance as of

 
   

September 30, 2021

   

December 31, 2020

 

Raw materials

  $ 579     $ 257  

Work-in-process

    68       30  

Finished goods

    909       1,339  

Total

  $ 1,556     $ 1,626  

 

14

 

The Company recorded inventory impairment charges of $0.1 and $0.2 million for the three and nine months ended September 30, 2021, respectively, primarily related to DSUVIA and Zalviso component parts inventory. For the three and nine months ended September 30, 2020, the Company recorded inventory impairment charges of $0.2 million and $0.6 million, respectively. In the nine months ended September 30, 2020, $0.3 million of these charges related to the termination of the Grünenthal Agreements, while $0.3 million related to DSUVIA inventory, primarily inventory that may expire before being sold.

 

 

4. Revenue from Contracts with Customers

 

The following table summarizes revenue from contracts with customers for the three and nine months ended September 30, 2021 and 2020 into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors (in thousands):

 

  

Three months ended
September 30, 2021

  

Nine months ended
September 30, 2021

 

Product sales:

        

DSUVIA

 $160  $733 

Zalviso

     270 

Total product sales

  160   1,003 

Contract and collaboration revenue:

        

License revenue

  1,696   1,696 

Non-cash royalty revenue related to Royalty Monetization (Note 7)

     83 

Royalty revenue

     28 

Other revenue

  6   6 

Total revenues from contract and other collaboration

  1,702   1,813 

Total revenue

 $1,862  $2,816 

 

  

Three months ended
September 30, 2020

  

Nine months ended
September 30, 2020

 

Product sales:

        

DSUVIA

 $935  $1,092 

Zalviso

  352   772 

Total product sales

  1,287   1,864 

Contract and collaboration revenue:

        

Non-cash royalty revenue related to Royalty Monetization (Note 7)

  60   181 

Royalty revenue

  21   61 

Other revenue

     2,572 

Total revenues from contract and other collaboration

  81   2,814 

Total revenue

 $1,368  $4,678 

 

For additional details on the Company’s accounting policy regarding revenue recognition, refer to Note 1 “Organization and Summary of Significant Accounting Policies - Revenue from Contracts with Customers” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

 

Product Sales

 

The Company’s commercial launch of DSUVIA in the United States occurred in the first quarter of 2019. Zalviso was sold in Europe by the Company’s collaboration partner, Grünenthal, through May 12, 2021. DZUVEO sales in Europe by the Company’s new partner, Aguettant, have not commenced as of September 30, 2021.

 

15

 

Contract and Other Collaboration

 

Contract and other collaboration revenue includes revenue under the Grünenthal Agreements related to research and development services, non-cash royalty revenue related to the Royalty Monetization and royalty revenue for sales of Zalviso in Europe.

 

The Company concluded that Aguettant is a customer and therefore revenue recognition for the DZUVEO Agreement in Europe should be accounted for in accordance with  FASB Accounting Standards Codification, or ASC, Topic 606,Revenue from Contracts with Customers”, because the Company granted to Aguettant licenses and will provide the supply of product, as defined below, all of which are outputs of the Company’s ongoing activities, in exchange for consideration.

 

The Company identified the following promises under the DZUVEO Agreement at inception, namely: (a) granting of the licenses, (b) manufacturing services inclusive of quality control testing and stability testing which are options in the initial arrangement, and (c) a material right associated with the discounted price for future optional orders of DZUVEO commercial product supply.

 

The licenses are considered to be functional intellectual property. The Company determined that the licenses are capable of being distinct because Aguettant can benefit from the license on its own by commercializing the underlying product using its own resources. The Company manufacturing services are not highly specialized in nature and can be performed by third party contract manufacturing organizations. There are no binding commitments for manufacturing purchase orders at inception of the arrangement. Therefore, the manufacturing services are considered to be an option and not a performance obligation in the initial arrangement. However, the Company has determined that the discounted price per unit on future optional product orders constitutes a material right and is a performance obligation. The right to purchase at a discount is capable of being used by the customer on a standalone basis, because this relates to future product purchases and occur after the licenses’ performance obligations are transferred.

 

The Company evaluated if there is an interdependence between the performance obligations and determined that the licenses are a combined solution and the predominant performance obligation. The material right is separately identifiable in the context of the contract and is not modified by, and does not modify, the license performance obligation and is not highly interdependent or interrelated with the material right performance obligations in the contract.

 

The transaction price at the inception of the DZUVEO Agreement consisted of the upfront fee of €2.5 million, or approximately $2.9 million. The variable consideration related to product supply and reimbursables has been constrained as of September 30, 2021 as there has been no forecast provided by Aguettant. The Company will re-evaluate the transaction price each reporting period and as uncertain events are resolved or other changes in circumstances occur.

 

The Company determined that the $52.2 million sales-based milestone payments and revenue share payments were probable of significant revenue reversal, as their achievement was highly dependent on factors outside the Company’s control. As a result, these payments were fully constrained and were not included in the transaction price. Any variable consideration related to sales-based milestones (including royalties) will be recognized when the related sales occur, as they were determined to relate predominantly to the licenses granted to Aguettant and the optional manufacturing services provided by the Company.

 

The transaction price is allocated to the performance obligations based on relative standalone selling price which were determined for the licenses using the adjusted market approach, and for the manufacturing services and the material right associated with discounted DZUVEO product supply using the cost-plus reasonable margin approach. Variable consideration is allocated to the specific performance obligations to which it relates.

 

For revenue recognition purposes, the Company determined that the duration of the contract began on the effective date in July 2021 and ends after an initial term of 10 marketing years, unless it automatically renews for a successive five marketing years. The Company also analyzed the impact if Aguettant terminated the agreement prior to the end of the term and determined, considering both quantitative and qualitative factors, that there were substantive non-monetary penalties to Aguettant for doing so.

 

Revenue for the granting of the licenses was recognized on the effective date of the DZUVEO Agreement at the point in time that the licenses are effective. The manufacturing services inclusive of quality control testing and stability testing will be recognized at a point in time when, or as, the Company transfers the associated promised goods and services to Aguettant. The material right for the discounted price per unit on future optional orders will be recognized over time with the measure of progress being straight-line over the period in which the Company stands ready to provide the discounted price per unit on the manufacturing services.

 

For the three months ended September 30, 2021, the Company recorded $1.7 million in Contract and other collaboration revenue as a result of satisfying its licenses performance obligation by transferring the license rights to Aguettant. A contract liability of $1.2 million was recorded on the Condensed Consolidated Balance Sheets as deferred revenue as of September 30, 2021, for the portion of the upfront fee received under the DZUVEO Agreement allocated to the material right for discounted price on future optional product supply which has not yet been satisfied. The material right contract liability will be recognized over the period the discount on future product supply is made available. There was no contract asset as of September 30, 2021 associated with the DZUVEO Agreement.

 

As of September 30, 2021, deferred contract acquisition costs were negligible and deferred contract acquisition costs amortized during the three and nine months ended September 30, 2021 were $0.3 million.

 

16

 

Contract Liabilities

 

The following table presents changes in the Company’s contract liabilities for the nine months ended September 30, 2021 (in thousands):

 

  

Balance at Beginning

of the Period

  

Additions

  

Deductions

  

Balance at

the end

of the Period

 

Contract liabilities:

                

Deferred revenue – DZUVEO Agreement

 $  $1,237  $  $1,237 

Deferred revenue – Grünenthal Agreements

  49      (49)   

Deferred revenue

 $49  $1,237  $(49) $1,237 

 

For the three and nine months ended September 30, 2021 and 2020, the Company recognized the following revenue from performance obligations satisfied or eliminated related to its contract liabilities (in thousands):

 

  

Three Months Ended
September 30,

  

Nine Months Ended
September 30,

 
  

2021

  

2020

  

2021

  

2020

 

Amounts included in contract liabilities at the beginning of the period:

                

Performance obligations satisfied

 $  $147  $49  $380 

Performance obligations eliminated upon termination

           2,572 

New activities in the period from performance obligations satisfied:

                

Performance obligations satisfied at a point in time

  1,696   205   1,917   392 

Total revenue from performance obligations satisfied or eliminated

 $1,696  $352  $1,966  $3,344 

 

 

5. Long-Term Debt

 

Loan Agreement with Oxford

 

On May 30, 2019, the Company entered into the Loan Agreement with Oxford Finance LLC, or Oxford, as the Lender. Under the Loan Agreement, the Lender made a term loan to the Company in an aggregate principal amount of $25.0 million, or the Loan, which was funded on May 30, 2019.

 

In connection with the Loan Agreement, on May 30, 2019, the Company issued warrants to the Lender and its affiliates, or the Warrants, which are exercisable for an aggregate of 176,679 shares of the Company’s common stock with a per share exercise price of $2.83. The Warrants have been classified within stockholders’ deficit and accounted for as a discount to the loan by allocating the gross proceeds on a relative fair value basis.

 

As of September 30, 2021 and December 31, 2020, the accrued balance due under the Loan Agreement with Oxford was $15.3 million and $21.0 million, respectively. Interest expense related to the Loan Agreement was $0.5 million, $0.1 million of which represented amortization of the debt discount, and $1.7 million, $0.5 million of which represented amortization of the debt discount for the three and nine months ended September 30, 2021, respectively, and was $0.7 million, $0.2 million of which represented amortization of the debt discount, and $2.4 million, $0.7 million of which represented amortization of the debt discount, for the three and nine months ended September 30, 2020, respectively.

 

Non-Interest Bearing Payments for the Construction of Leasehold Improvements

 

In August 2019, the Company entered into a Site Readiness Agreement, or SRA, with Catalent Pharma Solutions, LLC, or Catalent, in contemplation of entering into a commercial supply agreement for its product DSUVIA at a future date. Under the SRA, the Company is building out a suite within Catalent’s production facility in Kansas City. If additional equipment and facility modifications are required to meet the Company’s product needs, the Company may be required to contribute to the cost of such additional equipment and facility modifications. The Company has determined that it is the owner of the leasehold improvements related to the build-out which will be paid for in four installments of $0.5 million through July 2022. As of September 30, 2021 and December 31, 2020, the accrued balance under the SRA was $0.4 million and $0.8 million, respectively, and $1.7 million of these leasehold improvements had been capitalized. The effective interest rate at September 30, 2021 and December 31, 2020 was 14.35%. The leasehold improvements are recorded as property and equipment, net, in the Condensed Consolidated Balance Sheets.

 

17

 

 

 

6. Leases

 

Office Leases

 

The Company leased office and laboratory space for its former corporate headquarters, located at 301351 Galveston Drive, Redwood City, California, and entered into an agreement to sublease approximately 12,106 square feet of this office and laboratory space.

 

On March 26, 2021, the Company entered into a Lease Termination Agreement with its landlord and a Sublease Termination Agreement with its sublessee, to terminate the lease and sublease agreements at its former corporate headquarters. The termination of both the lease and sublease was effective on April 30, 2021. As of the date of the Lease Termination Agreement, the Company remeasured its lease liability and recorded a gain of $0.5 million upon derecognition of the lease liability and right of use asset for the master lease, which was included in operating expenses for the nine months ended September 30, 2021. In connection with the Sublease Termination, the remaining deferred costs of $0.3 million were fully amortized through April 30, 2021, the effective date of the Sublease Termination, and included in operating expenses for the nine months ended September 30, 2021.

 

On March 26, 2021, the Company entered into a Sublease Agreement to sublet space for its new corporate headquarters, located at 25821 Industrial Boulevard, Hayward, California. The Sublease Agreement commencement date was April 1, 2021. The Sublease Agreement is for a period of two years and three months with monthly rental payments of $17,000, including one month of abated rent. On the lease commencement date, the Company recognized an operating lease right-of-use asset in the amount of $0.4 million.

 

Contract Manufacturing Leases

 

On April 21, 2021, the Company entered into a Commercial Supply Agreement, or the CSA, with Catalent Pharma Solutions, LLC, or Catalent, effective March 31, 2021, under which Catalent provides certain services to the Company in connection with the processing and packaging of a packaged single dose applicator containing the sublingual tablet 30 mcg sufentanil dosage form contained in the pharmaceutical product, DSUVIA (sufentanil), intended for commercialization.

 

The term of the CSA is for a period of five years from the first date upon which the FDA approves Catalent as a manufacturer of DSUVIA in the United States, or the Commencement Date. The term shall automatically be extended for successive two-year periods, unless and until one party gives the other party at least 24 months’ prior written notice of its desire to terminate as of the end of the then-current term.

 

The Company will pay Catalent an annual fee of $1.0 million beginning January 1, 2022. Pursuant to the CSA, the Company will purchase each 10-pack carton of DSUVIA from Catalent at an agreed price through December 31, 2022, and pay other fees set forth in the CSA. All pricing and fees, with the exception of raw materials, may be adjusted on an annual basis, effective on January 1 of each calendar year, beginning with January 1, 2023, subject to certain limitations. Price increases for raw materials will be passed through to the Company.

 

The Company has determined that the fixed fees in the CSA are in-substance lease payments. The Company concluded that this agreement contains an embedded lease as the clean rooms have been built specifically for production of the Company’s product and their use is effectively controlled by the Company as it has sole use over the space during the term of the agreement. The Company accounts for the agreement as an operating lease and has evaluated the non-cancelable lease term to be through the binding commitment date of May 15, 2027.

 

In addition, the Company has entered into an agreement for commercial supply manufacturing services related to the Company’s Zalviso drug product with a contract manufacturing organization, which it accounts for as an operating lease.

 

The components of lease expense are presented in the following table (in thousands):

 

   

Three Months Ended
September 30,

   

Nine Months Ended
September 30,

 
   

2021

   

2020

   

2021

   

2020

 

Operating lease costs

  $ 343     $ 305     $ 1,123     $ 914  

Gain on derecognition of operating lease

                (522

)

     

Sublease income

          (150

)

    (199

)

    (449

)

Loss on termination of sublease

                331        

Net lease costs

  $ 343     $ 155     $ 733     $ 465  

 

18

 

The weighted average remaining lease term and discount rate related to the operating leases are presented in the following table:

 

   

September 30, 2021

 

Weighted-average remaining term – operating lease (years)

    5.21  

Weighted-average discount rate – operating lease

    12.80 %

 

Future minimum lease payments as of September 30, 2021 are presented in the following table (in thousands):

 

Year:

       

2021 (remaining three months)

  $ 237  

2022

    1,483  

2023

    1,194  

2024

    1,040  

2025

    1,040  

2026

    1,040  

Thereafter

    415  

Total future minimum lease payments

    6,449  

Less imputed interest

    (1,785 )

Total

  $ 4,664  

 

Reported as:

 

Operating lease liabilities

  $ 4,664  

Operating lease liabilities, current portion

    (729 )

Operating lease liabilities, net of current portion

  $ 3,935  

 

 

7. Liability Related to Sale of Future Royalties

 

On September 18, 2015, the Company entered into the Royalty Monetization with PDL for which it received gross proceeds of $65.0 million. Under the Royalty Monetization, PDL was to receive 75% of the European royalties under the Amended License Agreement with Grünenthal, as well as 80% of the first four commercial milestones worth $35.6 million (or 80% of $44.5 million), up to a capped amount of $195.0 million over the life of the arrangement.

 

The Company periodically assesses the expected royalty and milestone payments using a combination of historical results, internal projections and forecasts from external sources. To the extent such payments are greater or less than the Company’s initial estimates or the timing of such payments is materially different than its original estimates, the Company will prospectively adjust the amortization of the liability and the effective interest rate. During the three months ended June 30, 2020, Grünenthal notified the Company that it was terminating the Amended License Agreement, effective November 13, 2020. The terms of the Grünenthal Agreements were extended to May 12, 2021 to enable Grünenthal to sell down its Zalviso inventory. The rights to market and sell Zalviso in the Zalviso Territory reverted back to the Company on May 12, 2021. There is a continuing obligation on the Company’s part, through the term of the Royalty Monetization with SWK (assignee of PDL), to use commercially reasonable efforts to negotiate a replacement license agreement, or New Arrangement. If the Company is unable to find a New Arrangement, a contingent gain of up to approximately $64 million may be recognized when it is realized upon expiration of the liability at the end of the Royalty Monetization term. Due to the significant judgments and factors related to the estimates of future payments under the Royalty Monetization, there are significant uncertainties surrounding the amount and timing of future payments and the probability of realization of the estimated contingent gain.

 

The effective interest rate over the life of the liability will be 0% as the Company records interest income over the remaining term of the arrangement as an offset to the interest expense that was recognized in prior periods. The effective interest income rate for each of the three and nine months ended September 30, 2021 and 2020, was approximately 3.5% and 3.6%, respectively.

 

19

 

The following table shows the activity within the liability account for the nine months ended and the period from inception on September 18, 2015 to September 30, 2021 (in thousands):

 

  

Nine months ended
September 30, 2021

  

Period from
inception to
September 30, 2021

 

Liability related to sale of future royalties — beginning balance

 $88,471  $ 

Proceeds from sale of future royalties

     61,184 

Non-cash royalty revenue

  (145

)

  (1,083

)

Non-cash interest (income) expense recognized

  (2,345

)

  25,880 

Liability related to sale of future royalties as of September 30, 2021

 $85,981  $85,981 

 

As royalties are remitted to SWK from ARPI LLC, as described in Note 1 “Organization and Summary of Significant Accounting Policies - Non-Cash Interest Income (Expense) on Liability Related to Sale of Future Royalties” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, the balance of the liability will be effectively repaid over the life of the agreement. The Company will record non-cash royalty revenues and non-cash interest (income) expense within its Condensed Consolidated Statements of Comprehensive Loss over the term of the Royalty Monetization. The liability related to the sale of future royalties, current portion, is recorded as accrued liabilities in the Company’s Condensed Consolidated Balance Sheets.

 

 

8. Legal Proceedings

 

On June 8, 2021, a securities class action complaint was filed in the U.S. District Court for the Northern District of California against the Company and two of its officers. The plaintiff is a purported stockholder of the Company. The complaint alleges that defendants violated Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5 by making false and misleading statements and omissions of material fact about the Company’s disclosure controls and procedures with respect to its marketing of DSUVIA. The complaint seeks unspecified damages, interest, attorneys’ fees, and other costs. Motions for appointment of lead plaintiff under the Private Securities Litigation Reform Act were filed on August 9, 2021 and a hearing on the motions has been noticed for December 16, 2021.

 

On July 6, 2021, a purported shareholder derivative complaint was filed in the U.S. District Court for the Northern District of California. The complaint names ten of the Company’s officers and directors and asserts state and federal claims based on the same alleged misstatements as the shareholder class action complaint. On September 30, 2021 and October 26, 2021, two additional purported shareholder derivative complaints were filed in the U.S. District Court for the Northern District of California. The complaints name nine of the Company’s officers and directors and also assert state and federal claims based on the same alleged misstatements as the shareholder class action complaint. All three complaints seek unspecified damages, attorneys’ fees, and other costs. The plaintiffs in the first two derivative actions have agreed to consolidate the cases and stay the action pending the outcome of any motion to dismiss the securities class actions. The Company and individual defendants have not yet been served in the third derivative action. Please see “Item 1A. Risk FactorsRisks of a General NatureLitigation may substantially increase our costs and harm our business.

 

The Company believes that these lawsuits are without merit and intends to vigorously defend against them. Given the uncertainty of litigation, the preliminary stage of the cases, and the legal standards that must be met for, among other things, class certification and success on the merits, the Company cannot estimate the reasonably possible loss or range of loss that may result from these actions.

 

 

9. Stockholders Equity

 

Common Stock

 

Underwritten Public Offering

 

On January 22, 2021, the Company completed an underwritten public offering in which the Company issued and sold 14,500,000 shares of its common stock to the underwriter at a price of $1.7625 per share. On January 27, 2021, the underwriters exercised their option in full and purchased an additional 2,175,000 shares at a price of $1.7625 per share. The total net proceeds from this offering of an aggregate 16,675,000 shares were approximately $28.9 million.

 

ATM Agreement 

 

The Company has entered into a Controlled Equity OfferingSM Sales Agreement, or the ATM Agreement, with Cantor Fitzgerald & Co., or Cantor, as agent, pursuant to which the Company may offer and sell, from time to time through Cantor, shares of the Company’s common stock having an aggregate offering price of up to $80.0 million.

 

There were no shares of common stock sold pursuant to the ATM Agreement during the three months ended September 30, 2021. During the nine months ended September 30, 2021, the Company issued and sold approximately 3.0 million shares of common stock pursuant to the ATM Agreement, and received net proceeds of approximately $7.5 million, after deducting fees and expenses. There were no shares of common stock sold pursuant to the ATM Agreement during the three months ended September 30, 2020. During the nine months ended September 30, 2020, the Company issued and sold 876,800 shares of common stock pursuant to the ATM Agreement, respectively, for which the Company received net proceeds of approximately $1.5 million. As of September 30, 2021, the Company may offer and sell shares of the Company’s common stock having an aggregate offering price of up to $36.1 million under the ATM Agreement.

 

20

Amended Stock Plan

 

Amended 2020 Plan

 

On June 17, 2021, at the 2021 Annual Meeting of Stockholders of the Company, upon the recommendation of the Company’s Board of Directors, the Company’s stockholders approved an amendment and restatement of the Company’s 2020 Equity Incentive Plan, or 2020 Plan, or as amended and restated, the Amended 2020 Plan, to increase the number of authorized shares reserved for issuance thereunder by 4,300,000 shares, subject to adjustment for certain changes in the Company’s capitalization. The aggregate number of shares of the Company’s common stock that may be issued under the Amended 2020 Plan will not exceed the sum of: (i) 4,300,000 shares approved in connection with the adoption of the Amended 2020 Plan, (ii) 5,500,000 shares approved in connection with the original adoption of the 2020 Plan, and (iii) certain shares subject to outstanding awards granted under the 2011 Equity Incentive Plan that may become available for issuance under the 2020 Plan and Amended 2020 Plan, as such shares become available from time to time.

 

10. Stock-Based Compensation

 

The Company recorded total stock-based compensation expense for stock options, stock awards and awards made under the Amended 2011 ESPP as follows (in thousands):

 

   

Three Months Ended
September 30,

   

Nine Months Ended
September 30,

 
   

2021

   

2020

   

2021

   

2020

 

Cost of goods sold

  $ 24     $ 25     $ 67     $ 98  

Research and development

    216       188       597       572  

Selling, general and administrative

    981       891       2,818       2,670  

Total

  $ 1,221     $ 1,104     $ 3,482     $ 3,340  

 

As of September 30, 2021, there were, in the aggregate, 12,170,713 shares available for grant, 14,376,874 options outstanding and 1,828,448 restricted stock units outstanding under the Company’s equity incentive plans.

 

11. Net Loss per Share of Common Stock

 

The Company’s basic net loss per share of common stock is calculated by dividing the net loss by the weighted average number of shares of common stock outstanding for the period. The diluted net loss per share of common stock is computed by giving effect to all potential common stock equivalents outstanding for the period determined using the treasury stock method. For purposes of this calculation, options to purchase common stock, RSUs, and warrants to purchase common stock were considered to be common stock equivalents. In periods with a reported net loss, common stock equivalents are excluded from the calculation of diluted net loss per share of common stock as their effect is antidilutive.

 

The following outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share of common stock for the periods presented because including them would have been antidilutive:  

 

   

September 30,

 
   

2021

   

2020

 

ESPP, RSUs and stock options to purchase common stock

    16,475,322       14,669,512  

Common stock warrants

    176,679       176,679  
 

12. Subsequent Events

 

Acquisition

 

On November 14, 2021, the Company and two of its direct wholly owned subsidiaries, AcelRx Intermediate Sub, Inc., or Merger Sub 1, and AcelRx Consolidation Sub, LLC, or Merger Sub 2, Lowell, and the stockholder representative, entered into the Merger Agreement, pursuant to which, among other things, (a) Merger Sub 1 will merge with and into Lowell and Lowell will continue as the initial surviving company and the Company’s direct wholly owned subsidiary, or the First Merger, and (b) the initial surviving company will merge with and into Merger Sub 2 and Merger Sub 2 will continue as the surviving company and the Company’s direct wholly owned subsidiary, or the Second Merger and, together with the First Mergers, the Mergers.

 

Pursuant to the Merger Agreement, the Company will acquire Lowell in a transaction valued at approximately $32.5 million plus net cash acquired, and subject to certain other adjustments. The transaction value includes approximately $26.0 million of contingent consideration payable upon the achievement of regulatory and sales-based milestones. If the acquisition of Lowell is completed, an amount of shares of AcelRx common stock valued at approximately $6.5 million will be issued to Lowell securityholders at the closing, subject to the condition to closing that Lowell has at least $3.5 million in cash at the closing and assuming certain stockholders of Lowell elect to receive merger consideration up to $3.5 million payable in cash. If those stockholders do not elect to receive cash, the amount of shares of common stock issued by the Company will be greater. The merger consideration is payable upon the closing of the First Merger in shares of AcelRx’s common stock, and, at the option of certain Lowell stockholders, in cash to such stockholder. The Merger Agreement has been approved by the board of directors of the Company and Lowell. The closing of the Mergers is expected in the fourth quarter of 2021, subject to certain closing conditions. For additional information regarding the Merger Agreement, see “Part II. Other Information - Item 5. Other Information” in this Form 10-Q.

 

21

 
 
 

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis should be read in conjunction with the unaudited financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, or Form 10-Q, and with the audited Consolidated Financial Statements and related notes thereto included as part of our Annual Report on Form 10-K for the year ended December 31, 2020, or Annual Report.

 

About AcelRx Pharmaceuticals, Inc.

 

We are a specialty pharmaceutical company focused on the development and commercialization of innovative therapies for use in medically supervised settings.

 

Our Portfolio

 

The following table summarizes our portfolio of products and product candidates.

 

Product/Product

Candidate

 

Description

 

Target Use

 

Status

DSUVIA® 

 

Sufentanil sublingual tablet, 30 mcg

 

Moderate-to-severe acute pain in a medically supervised setting, administered by a healthcare professional

 

Received U.S. Food and Drug Administration, or FDA, approval in November 2018; commercial launch began first quarter of 2019.

             

DZUVEO® 

 

Sufentanil sublingual tablet, 30 mcg

 

Moderate-to-severe acute pain in a medically monitored setting, administered by a healthcare professional

 

Granted European Commission, or EC, marketing approval in June 2018. Sunset date extended to December 31, 2022 by EC. To be commercialized in Europe by Laboratoire Aguettant, or Aguettant.

             

Zalviso®

 

Sufentanil sublingual tablet system, 15 mcg

 

Moderate-to-severe acute pain in the hospital setting, administered by the patient as needed

 

In the U.S., positive results from Phase 3 trial, IAP312, announced in August 2017. Currently evaluating the timing of the resubmission of the New Drug Application, or NDA, which is in part dependent on the finalization of the FDA’s new opioid approval guidelines and process.       

  

Approved in the European Union, where it was marketed commercially by Grünenthal GmbH, or Grünenthal, through May 12, 2021.

             

Ephedrine

 

Ephedrine pre-filled syringe, containing 10 ml of a solution of 3 mg/ml ephedrine hydrochloride for injection

 

Clinically important hypotension occurring in the setting of anesthesia

 

Product candidate licensed from Laboratoire Aguettant, or Aguettant, preparing a New Drug Application, or NDA, for submission to FDA.

 

Approved in the European Union, owned and marketed by Aguettant.

             

Phenylephrine

 

Phenylephrine pre-filled syringe containing 10 ml of a solution of 50 mcg/ml phenylephrine hydrochloride for injection

 

Clinically important hypotension resulting primarily from vasodilation in the setting of anesthesia.

 

Product candidate licensed from Aguettant, preparing NDA for submission to FDA.

 

Approved in the European Union, marketed by Aguettant.

             

ARX-02

 

Higher Strength Sufentanil Sublingual Tablet

 

Cancer breakthrough pain in opioid-tolerant patients

 

Phase 2 clinical trial and End of Phase 2 meeting completed. Investigational New Drug, or IND, application was inactivated.

 

Future development contingent upon identification of corporate partnership resources.

             

ARX-03

 

Combination Sufentanil/Triazolam Sublingual Tablet

 

Mild sedation and pain relief during painful procedures in a physician’s office

 

Phase 2 clinical trial and End of Phase 2 meeting completed. IND application was inactivated.

 

Future development contingent upon identification of corporate partnership resources.

 

22

 

Acquisition

 

On November 14, 2021, we and two of our direct wholly owned subsidiaries, AcelRx Intermediate Sub, Inc., or Merger Sub 1, and AcelRx Consolidation Sub, LLC, or Merger Sub 2, Lowell Therapeutics, Inc., or Lowell, and the stockholder representative, entered into the Agreement and Plan of Merger, or the Merger Agreement, pursuant to which, (a) Merger Sub 1 will merge with and into Lowell and Lowell will continue as the initial surviving company and our direct wholly owned subsidiary, or the First Merger, and (b) the initial surviving company will merge with and into Merger Sub 2 and Merger Sub 2 will continue as the surviving company and our direct wholly owned subsidiary, or the Second Merger and, together with the First Merger, the Mergers.

 

Pursuant to the Merger Agreement, we will acquire Lowell in a transaction valued at approximately $32.5 million plus net cash acquired, and subject to certain other adjustments. The transaction value includes approximately $26.0 million of contingent consideration payable upon the achievement of regulatory and sales-based milestones. If the acquisition of Lowell is completed, an amount of shares of AcelRx common stock valued at approximately $6.5 million will be issued to Lowell securityholders at the closing, subject to the condition to closing that Lowell has at least $3.5 million in cash at the closing and assuming certain stockholders of Lowell elect to receive merger consideration up to $3.5 million payable in cash. If those stockholders do not elect to receive cash, the amount of shares of common stock issued by AcelRx will be greater. The merger consideration is payable upon the closing of the First Merger in shares of AcelRx’s common stock, and, at the option of certain Lowell stockholders, in cash to such stockholder. The Merger Agreement has been approved by the board of directors of AcelRx and Lowell. The closing of the Mergers is expected in the fourth quarter of 2021, subject to certain closing conditions. For additional information regarding the Merger Agreement, see “Part II. Other Information - Item 5. Other Information” in this Form 10-Q.

 

Out-License Agreement (DZUVEO)

 

On July 14, 2021, we entered into a License and Commercialization Agreement, or the DZUVEO Agreement, with Aguettant pursuant to which Aguettant obtained the exclusive right to develop and commercialize DZUVEO in the European Union, Norway, Iceland, Liechtenstein, Andorra, Vatican City, Monaco, Switzerland and the United Kingdom, or the DZUVEO Territory, for the management of acute moderate to severe pain in adults in medically monitored settings. We will supply Aguettant with primary packaged product and Aguettant will then complete secondary packaging of the finished product. We are entitled to receive up to €47.0 million in a combination of up-front and sales-based milestone payments, of which we received €2.5 million, or approximately $2.9 million, in the third quarter of 2021. Refer to Note 1 “Organization and Summary of Significant Accounting Policies” in the accompanying notes to the Condensed Consolidated Financial Statements for additional information.

 

In-License Agreement

 

On July 14, 2021, we entered into a License and Commercialization Agreement, or the PFS Agreement, with Aguettant pursuant to which we obtained the exclusive right to develop and, subject to FDA approval, commercialize in the United States (i) an ephedrine pre-filled syringe containing 10 ml of a solution of 3 mg/ml ephedrine hydrochloride for injection, and (ii) a phenylephrine pre-filled syringe containing 10 ml of a solution of 50 mcg/ml phenylephrine hydrochloride for injection. Aguettant will supply the Company with the products for use in commercialization, if they are approved in the U.S. Aguettant is entitled to receive up to $24 million in sales-based milestone payments. Refer to Note 1 “Organization and Summary of Significant Accounting Policies” in the accompanying notes to the Condensed Consolidated Financial Statements for additional information.

 

General Trends and Outlook

 

COVID-19-related

 

Government-mandated orders and related safety policies on account of the COVID-19 pandemic continue to prevent us from operating our business in the normal course. Beginning in early 2020, state and local officials issued orders in response to the pandemic which included, among other things, requirements for residents to shelter in place and for non-essential businesses to cease activities at facilities within certain cities, counties, and states. State and local officials have taken different approaches to these orders, and some have not issued any such orders. Once issued, the orders have been relaxed and then tightened, depending on the rate of COVID-19 cases. As a result of these orders, we implemented a work from home policy for our California-based employees and we continue to adhere to the various and diverse orders issued by government officials in the jurisdictions in which we operate. In addition, some hospitals, ambulatory surgery centers and other healthcare facilities have barred visitors that are not caregivers or mission-critical and otherwise restricted access to such facilities. As a result, the educational and promotional efforts of our commercial and medical affairs personnel have been substantially reduced, and in some cases, stopped. Cancellation or delays of formulary committee meetings and delays of elective surgeries have also affected the pace of formulary approvals and, consequently, the rate of adoption and use of DSUVIA. We expect our near-term sales volumes to continue to be adversely impacted as long as access to healthcare facilities by our commercial and medical affairs personnel continues to be limited, especially in light of the rise in COVID-19 cases associated with the Delta variant. We will continue to evaluate the impact on our revenues and related metrics and operating expenses during this period and assess the need to adjust our expenses and expectations.

 

23

 

As a result of COVID-19 and related international travel restrictions, the timing for testing and acceptance of our DSUVIA fully automated packaging line, and subsequent FDA approval, has been delayed. Based on our best estimate, now that the line has been installed, we expect FDA approval in 2022.

 

We will continue to engage with various elements of our supply chain and distribution channel, including our customers, contract manufacturers, and logistics and transportation providers, to meet demand for products and to remain informed of any challenges within our supply chain. We continue to monitor demand and intend to adapt our plans as needed to continue to drive our business and meet our obligations during the evolving COVID-19 pandemic. However, if the COVID-19 pandemic continues and persists for an extended period of time, we may face disruptions to our supply chain and operations, and associated delays in the manufacturing and supply of our products. Such supply disruptions may adversely impact our ability to generate sales of and revenues from our products and our business, financial condition, results of operations and growth prospects could be adversely affected.

 

As the global pandemic of COVID-19 continues to rapidly evolve, it could result in a significant long-term disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity. The extent to which the COVID-19 pandemic impacts our business, our ability to generate sales of and revenues from our approved products, and our future clinical development and regulatory efforts will depend on future developments that are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions, quarantines and social distancing requirements in the United States and other countries, business closures or business disruptions and the effectiveness of actions taken in the United States and other countries to contain and treat the virus.

 

Financial Overview

 

We have incurred net losses and generated negative cash flows from operations since inception and expect to incur losses in the future as we continue commercialization activities to support the U.S. launch of DSUVIA, support European sales of DZUVEO by Aguettant, and of Zalviso by any replacement partner, and fund any future research and development activities needed to support the FDA regulatory review of our product candidates. As a result, we expect to continue to incur operating losses and negative cash flows until such time as DSUVIA has gained market acceptance and generated significant revenues.

 

We will incur capital expenditures related to our fully automated packaging line for DSUVIA, which has now been installed, and for which we expect FDA approval in 2022. We anticipate that the fully automated line for DSUVIA will contribute to a significant decrease in costs of goods sold in 2022 and beyond.

 

Our net loss for the three and nine months ended September 30, 2021 was $8.4 million and $27.2 million, respectively, compared to net losses of $8.9 million and $31.5 million for the three and nine months ended September 30, 2020, respectively. As of September 30, 2021, we had an accumulated deficit of $465.7 million. As of September 30, 2021, we had cash, cash equivalents and short-term investments totaling $48.7 million compared to $42.9 million as of December 31, 2020.

 

Critical Accounting Estimates

 

The accompanying discussion and analysis of our financial condition and results of operations are based upon our unaudited Condensed Consolidated Financial Statements and the related disclosures, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts in our financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. Our critical accounting policies and estimates are detailed in our Annual Report.

 

There have been no significant changes to our critical accounting policies or significant judgements and estimates for the three and nine months ended September 30, 2021, from those previously disclosed in our Annual Report, except to reflect that we apply the graded-vesting attribution method to awards with market conditions that include graded-vesting features. Additionally, we use the Monte Carlo Simulation model to evaluate the derived service period and fair value of awards with market conditions, including assumptions of historical volatility and risk-free interest rate commensurate with the vesting term.

 

Results of Operations

 

Our results of operations have fluctuated from period to period and may continue to fluctuate in the future, based upon the progress of our commercial launch of DSUVIA, our research and development efforts, variations in the level of expenditures related to commercial launch, development efforts and debt service obligations during any given period, and the uncertainty as to the extent and magnitude of the impact from the COVID-19 pandemic. Results of operations for any period may be unrelated to results of operations for any other period. In addition, historical results should not be viewed as indicative of future operating results. In particular, to the extent our commercial and medical affairs personnel continue to be subject to varying levels of restriction on accessing hospitals and ambulatory surgical centers due to COVID-19, and to the extent government authorities and certain healthcare providers are continuing to limit elective surgeries, we expect our sales volume to be adversely affected.

 

24

 

Three and Nine Months Ended September 30, 2021 and 2020

 

Revenue

 

Product Sales Revenue

 

Product sales revenue consists of sales of DSUVIA in the U.S. and, prior to May 13, 2021, Zalviso in Europe.

 

Product sales revenue by product for the three and nine months ended September 30, 2021 and 2020, was as follows:

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
    2021     2020    

$ Change

2021 vs. 2020

   

% Change

2021 vs. 2020

    2021     2020    

$ Change

2021 vs. 2020

   

% Change

2021 vs. 2020

 
    (In thousands, except percentages)  

DSUVIA

  $ 160     $ 935     $ (775 )     (83 )%   $ 733     $ 1,092     $ (359 )     (33 )%

Zalviso

          352       (352 )     (100 )%     270       772       (502 )     (65 )%

Total product sales revenue

  $ 160     $ 1,287     $ (1,127 )     (88 )%   $ 1,003     $ 1,864     $ (861 )     (46 )%

 

The decrease in product sales revenue for the three and nine months ended September 30, 2021, as compared to the three and nine months ended September 30, 2020, was primarily the result of a significant purchase from the Department of Defense in the third quarter of 2020 and the termination of the Collaboration and License Agreement and the Manufacture and Supply Agreement, or the Grünenthal Agreements, pursuant to which Grünenthal sold Zalviso in the European Union through May 12, 2021.

 

Contract and Other Collaboration Revenue

 

Contract and other collaboration revenue included revenue under the DZUVEO Agreement related to the upfront payment received in the third quarter of 2021, and prior to May 13, 2021, under the Grünenthal Agreements related to research and development services, non-cash royalty revenue related to the sale of the majority of our royalty rights and certain commercial sales milestones under the Grünenthal Agreements to SWK Funding, LLC, or SWK, (assignee of PDL BioPharma, Inc., or PDL), in a transaction referred to as the Royalty Monetization, and royalty revenue for sales of Zalviso in Europe.

 

Contract and other collaboration revenue for the three and nine months ended September 30, 2021 and 2020, was as follows:

 

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
    2021     2020    

$ Change

2021 vs. 2020

   

% Change

2021 vs. 2020

    2021     2020    

$ Change

2021 vs. 2020

   

% Change

2021 vs. 2020

 
    (In thousands, except percentages)  

License revenue

  $ 1,696     $     $ 1,696       100 %   $ 1,696     $     $ 1,696       100 %

Non-cash royalty revenue related to Royalty Monetization

          61       (61 )     (100 )%     83       181       (98 )     (54 )%

Royalty revenue

          20       (20 )     (100 )%     28       61       (33 )     (54 )%

Other revenue

    6             6       100 %     6       2,572       (2,566 )     (100 )%

Total contract and other collaboration revenue

  $ 1,702     $ 81     $ 1,621       2,001 %   $ 1,813     $ 2,814     $ (1,001 )     (36 )%

 

As of September 30, 2021, we granted Aguettant the license rights to DZUVEO in the European Union. Accordingly, for the three and nine months ended September 30, 2021, we recognized $1.7 million of the $2.9 million upfront fee as license revenue under the DZUVEO Agreement. In May 2020, Grünenthal terminated the Grünenthal Agreements, accordingly the rights to market and sell Zalviso in Europe reverted back to us on May 12, 2021. Upon notification of early termination by Grünenthal, we recognized approximately $2.6 million of deferred revenue for the discount on Zalviso manufacturing services which were no longer a performance obligation.

 

25

 

Cost of Goods Sold

 

We commenced commercial sales of DSUVIA in the first quarter of 2019.

 

Total cost of goods sold for the three and nine months ended September 30, 2021 and 2020, was as follows: 

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
    2021     2020    

$ Change

2021 vs. 2020

   

% Change

2021 vs. 2020

    2021     2020    

$ Change

2021 vs. 2020

   

% Change

2021 vs. 2020

 
    (In thousands, except percentages)  

Direct costs

  $ 134     $ 771     $ (637 )     (83 )%   $ 569     $ 1,396     $ (827 )     (59 )%

Indirect costs

    305       1,080       (775 )     (72 )%     1,950       3,336       (1,386 )     (42 )%

Total costs of goods sold

  $ 439     $ 1,851     $ (1,412 )     (76 )%   $ 2,519     $ 4,732     $ (2,213 )     (47 )%

 

Direct costs from contract manufacturers for DSUVIA and Zalviso totaled $0.1 million and $0.6 million, respectively, in the three and nine months ended September 30, 2021, and included inventory impairment charges of $0.1 and $0.2 million, respectively, primarily related to DSUVIA and Zalviso component parts inventory. Direct costs from contract manufacturers for DSUVIA and Zalviso in the three and nine months ended September 30, 2020 totaled $0.8 million and $1.4 million, respectively, and included inventory impairment charges of $0.2 million and $0.6 million, respectively. In the nine months ended September 30, 2020, $0.3 million of these charges related to the termination of the Grünenthal Agreements, while $0.3 million related to DSUVIA inventory, primarily inventory that may expire before being sold. Direct cost of goods sold for DSUVIA and Zalviso includes the inventory costs of the active pharmaceutical ingredient, or API, third-party contract manufacturing costs, estimated warranty costs, packaging and distribution costs, shipping, handling and storage costs.

 

The indirect costs to manufacture DSUVIA and Zalviso totaled $0.3 million and $2.0 million in the three and nine months ended September 30, 2021, respectively, while the indirect costs to manufacture DSUVIA and Zalviso totaled $1.1 million and $3.3 million for the three and nine months ended September 30, 2020, respectively. Indirect costs include internal personnel and related costs for purchasing, supply chain, quality assurance, depreciation and related expenses.

 

Research and Development Expenses

 

The majority of our operating expenses to date have been for research and development activities related to Zalviso and DSUVIA. Research and development expenses included the following:

 

 

expenses incurred under agreements with contract research organizations and clinical trial sites;

 

employee-related expenses, which include salaries, benefits and stock-based compensation;

 

payments to third party pharmaceutical and engineering development contractors;

 

payments to third party manufacturers;

 

depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities and equipment, and equipment and laboratory and other supply costs; and

 

costs for equipment and laboratory and other supplies.

 

We expect to incur future research and development expenditures to support the FDA regulatory review of our product candidates. The timing of the resubmission of the Zalviso NDA is in part dependent on the finalization of the FDA’s new opioid approval guidelines and process.

 

We track external development expenses on a program-by-program basis. Our development resources are shared among all our programs. Compensation and benefits, facilities, depreciation, stock-based compensation, and development support services are not allocated specifically to projects and are considered research and development overhead.

 

26

 

Below is a summary of our research and development expenses for the three and nine months ended September 30, 2021 and 2020:

 

    Three Months Ended September 30,     Nine Months Ended September 30,  

Drug Indication/Description


 

2021

   

2020

   

$ Change

2021 vs. 2020

   

% Change

2021 vs. 2020

   

2021

   

2020

   

$ Change

2021 vs. 2020

   

% Change

2021 vs. 2020

 

 

  (In thousands, except percentages)  

DSUVIA

  $ 646     $ 187     $ 459       245 %   $ 990     $ 667     $ 323       48 %

Zalviso

    20       43       (23 )     (53 )%     32       75       (43 )     (57 )%

Overhead

    750       726       24       3 %     2,087       2,439       (352 )     (14 )%

Total research and development expenses

  $ 1,416     $ 956     $ 460       48 %   $ 3,109     $ 3,181     $ (72 )     (2 )%

 

Research and development expenses for the three months ended September 30, 2021 increased by $0.5 million as compared to the three months ended September 30, 2020, primarily due to increased Catalent manufacturing-related DSUVIA development expenses. Research and development expenses for the nine months ended September 30, 2021 decreased as compared to the nine months ended September 30, 2020, primarily due to decreases in personnel-related overhead expenses and Zalviso-related spending, partially offset by increased Catalent manufacturing-related DSUVIA development expenses.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses consisted primarily of salaries, benefits and stock-based compensation for personnel engaged in commercialization, administration, finance and business development activities. Other significant expenses included allocated facility costs and professional fees for general legal, audit and consulting services.

 

Total selling, general and administrative expenses for the three and nine months ended September 30, 2021 and 2020, were as follows:

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
   

2021

   

2020

   

$ Change

2021 vs. 2020

   

% Change

2021 vs. 2020

   

2021

   

2020

   

$ Change

2021 vs. 2020

   

% Change

2021 vs. 2020

 
    (In thousands, except percentages)  

Selling, general and administrative expenses

  $ 8,640     $ 7,598     $ 1,042       14 %   $ 24,978     $ 28,484     $ (3,506 )     (12