acrx20220630_10q.htm
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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 June 30, 2022

 

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 August 5, 2022, the number of outstanding shares of the registrant’s common stock was 147,331,963.

 



 

1

 

 

 

ACELRX PHARMACEUTICALS, INC.

 

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2022

 

TABLE OF CONTENTS

 

 

     

   Page 

PART I. FINANCIAL INFORMATION          

          5

       
 

Item 1.             

Financial Statements         

 5

       
   

Condensed Consolidated Balance Sheets as of June 30, 2022 (unaudited) and December 31, 2021         

       5

       
   

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2022 and 2021 (unaudited)         

6

       
   

Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the three and six months ended June 30, 2022 and 2021 (unaudited)         

7

       
   

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021 (unaudited)         

8

       
   

Notes to Condensed Consolidated Financial Statements (unaudited)         

9

       
 

Item 2.             

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

23

       
 

Item 3.             

Quantitative and Qualitative Disclosures About Market Risk         

33

       
 

Item 4.             

Controls and Procedures         

33

   

PART II. OTHER INFORMATION          

34

       
 

Item 1.             

Legal Proceedings         

34

       
 

Item 1A.         

Risk Factors         

35

       
 

Item 2.             

Unregistered Sales of Equity Securities and Use of Proceeds         

64

       
 

Item 3.             

Defaults Upon Senior Securities         

64

       
 

Item 4.             

Mine Safety Disclosures         

64

       
 

Item 5.             

Other Information         

64

       
 

Item 6.             

Exhibits         

65

 

Unless the context indicates otherwise, the terms “AcelRx,” “AcelRx Pharmaceuticals,” “we,” “us” and “our” refer to AcelRx Pharmaceuticals, Inc., and its consolidated subsidiaries. “Niyad” is a trademark, and “ACELRX,” “DSUVIA”, “DZUVEO” 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 and continue as a going concern;

     

 

our ability to maintain listing of our securities trading on the Nasdaq exchange;

     

 

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 U.S. Food and Drug Administration, or FDA, regulations concerning the advertising and promotion of DSUVIA;

     

 

the size and growth potential of the markets for DSUVIA, 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 realize the expected benefits and potential value created by the acquisition of Lowell Therapeutics, Inc., or Lowell, for our stockholders, on a timely basis or at all;

     

 

our ability to develop and commercialize products and product candidates that we have in-licensed or acquired;

     

 

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 and supply chain relationships with third party service providers;

     

 

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, including compliance with any import/export controls or restrictions;

     

 

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 obtain adequate government or third-party payer reimbursement;

     

 

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

 

3

 

 

our ability to identify and secure potential commercial partners to develop and then commercialize our developmental product candidates;

     

 

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;

     

 

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 our approved products and product candidates.

 

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)

 

  

June 30, 2022

(unaudited)

  

December 31, 2021(1)

 

Assets

        

Current Assets:

        

Cash and cash equivalents

 $15,165  $7,663 

Restricted cash

  5,000    

Short-term investments

  7,758   38,967 

Accounts receivable, net

  364   160 

Inventories, net

  901   1,111 

Prepaid expenses and other current assets

  2,809   2,588 

Total current assets

  31,997   50,489 

Operating lease right-of-use assets

  3,985   4,302 

Property and equipment, net

  11,075   15,928 

In-process research and development asset

  8,819    

Other assets

  257   2,174 

Restricted cash, net of current portion

     5,000 

Total Assets

 $56,133  $77,893 

Liabilities and Stockholders Equity (Deficit)

        

Current Liabilities:

        

Accounts payable

 $2,400  $2,121 

Accrued and other liabilities

  4,260   6,524 

Long-term debt, current portion

  9,887   8,796 

Operating lease liabilities, current portion

  1,142   1,068 

Total current liabilities

  17,689   18,509 

Long-term debt, net of current portion

     5,007 

Deferred revenue, net of current portion

  1,093   1,151 

Operating lease liabilities, net of current portion

  3,359   3,750 

Liability related to the sale of future royalties

     85,288 

Other long-term liabilities

  849   81 

Total liabilities

  22,990   113,786 

Commitments and Contingencies (Note 10)

          

Stockholders’ Equity (Deficit):

        

Common stock, $0.001 par value—200,000,000 shares authorized as of June 30, 2022 and December 31, 2021; 147,331,963 and 136,819,647 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively

  147   137 

Additional paid-in capital

  444,591   437,554 

Accumulated deficit

  (411,595)  (473,584)

Total stockholders’ equity (deficit)

  33,143   (35,893)

Total Liabilities and Stockholders’ Equity (Deficit)

 $56,133  $77,893 

 

(1)

The condensed consolidated balance sheet as of December 31, 2021 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, 2021.

 

See notes to condensed consolidated financial statements.

 

5

 

 

 

AcelRx Pharmaceuticals, Inc.

 

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except share and per share data)

 

  

Three Months Ended
June 30,

  

Six Months Ended
June 30,

 
  

2022

  

2021

  

2022

  

2021

 

Revenue:

                

Product sales

 $570  $392  $1,012  $843 

Contract and other collaboration

     51      111 

Total revenue

  570   443   1,012   954 
                 

Operating costs and expenses:

                

Cost of goods sold

  876   1,040   1,660   2,080 

Research and development

  1,544   724   2,859   1,693 

Selling, general and administrative

  6,822   8,694   14,160   16,338 

Impairment of property and equipment

  4,901      4,901    

Total operating costs and expenses

  14,143   10,458   23,580   20,111 

Income (loss) from operations

  (13,573

)

  (10,015

)

  (22,568

)

  (19,157

)

Other income:

                

Interest expense

  (327

)

  (614

)

  (717

)

  (1,286

)

Interest income and other (expense) income, net

  51   (16

)

  89   60 

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

  463   799   1,136   1,581 

Gain on extinguishment of liability related to the sale of future royalties

  84,052      84,052    

Total other income

  84,239   169   84,560   355 

Net income (loss) before income taxes

  70,666   (9,846

)

  61,992   (18,802

)

Provision for income taxes

  (3

)

  (5

)

  (3

)

  (5

)

Net income (loss)

 $70,663  $(9,851

)

 $61,989  $(18,807

)

Net income (loss) per share of common stock, basic

 $0.48  $(0.08

)

 $0.42  $(0.16

)

Shares used in computing net income (loss) per share of common stock, basic – See Note 13

  147,139,032   119,120,040   146,385,577   116,204,492 

Net income (loss) per share of common stock, diluted

 $0.48  $(0.08

)

 $0.42  $(0.16

)

Shares used in computing net income (loss) per share of common stock, diluted – See Note 13

  147,209,065   119,120,040   146,420,437   116,204,492 

 

See notes to condensed consolidated financial statements.  

 

6

 

 

AcelRx Pharmaceuticals, Inc.

Condensed Consolidated Statements of Stockholders Equity (Deficit)

(Unaudited)

(in thousands, except share data)

 

    Common Stock    

Additional
Paid-in

Capital

   

Accumulated

Deficit

   

Total
Stockholders
Equity

(Deficit)

 
   

Shares

   

Amount

                         

Balance as of December 31, 2021

    136,819,647     $ 137     $ 437,554     $ (473,584 )   $ (35,893 )

Stock-based compensation

                783             783  

Issuance of common stock upon vesting of restricted stock units, net of shares withheld for employee taxes

    515,393             (58 )           (58 )

Issuance of common stock in connection with asset acquisition

    9,620,532       10       5,501             5,511  

Issuance of common stock upon ESPP purchase

    153,435             58             58  

Net loss

                      (8,674 )     (8,674 )

Balance as of March 31, 2022

    147,109,007     $ 147     $ 443,838     $ (482,258 )   $ (38,273 )

Stock-based compensation

                753             753  

Issuance of common stock upon vesting of restricted stock units

    222,956                          

Net income

                      70,663       70,663  

Balance as of June 30, 2022

    147,331,963     $ 147     $ 444,591     $ (411,595 )   $ 33,143  

 

 

    Common Stock     Additional
Paid-in
Capital
    Accumulated
Deficit
   

Total

Stockholders' Equity

(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  

Issuance of common stock upon vesting of restricted stock units, net of shares withheld for employee taxes

    404,172             (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

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

Stock-based compensation

                1,172             1,172  

Issuance of common stock upon vesting of restricted stock units

    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

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

See notes to condensed consolidated financial statements.

7

 

 

AcelRx Pharmaceuticals, Inc.

 

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

  

Six Months
Ended June 30,

 
  

2022

  

2021

 

Cash flows from operating activities:

        

Net income (loss)

 $61,989  $(18,807)

Adjustments to reconcile net income (loss) to net cash used in operating activities:

        

Non-cash royalty revenue related to royalty monetization

     (83)

Non-cash interest income on liability related to royalty monetization

  (1,136)  (1,581)

Depreciation and amortization

  881   1,029 

Non-cash interest expense related to debt financing

  250   430 

Stock-based compensation

  1,536   2,261 
Non-cash gain on termination of liability related to royalty monetization  (84,152)   

Impairment of property and equipment

  4,901    

Other

  (7)  (61)

Changes in operating assets and liabilities:

        

Accounts receivable

  (204)  531 

Inventories

  201   143 

Prepaid expenses and other assets

  (212)  (277)

Accounts payable

  286   (65)

Accrued liabilities

  (1,582)  (963)

Operating lease liabilities

  (402)  (563)

Deferred revenue

  (29)  (49)

Net cash used in operating activities

  (17,680)  (18,055)

Cash flows from investing activities:

        

Purchase of property and equipment

  (158)  (1,615)

Purchase of investments

  (7,369)  (38,201)

Cash paid for asset acquisition, net of cash acquired

  (1,687)   

Proceeds from maturities of investments

  38,562   24,784 

Net cash provided by (used in) investing activities

  29,348   (15,032)

Cash flows from financing activities:

        

Payment of long-term debt

  (4,166)  (4,167)

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

     36,360 

Net proceeds from issuance of common stock through equity plans

  58   196 

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

  (58)  (249)

Net cash (used in) provided by financing activities

  (4,166)  32,140 

Net increase in cash, cash equivalents and restricted cash

  7,502   (947)

Cash, cash equivalents and restricted cash—Beginning of period (See reconciliation in Note 1)

  12,663   27,274 

Cash, cash equivalents and restricted cash—End of period (See reconciliation in Note 1)

 $20,165  $26,327 

 

NONCASH INVESTING ACTIVITIES:

               

Purchases of property and equipment in accounts payable and accrued liabilities

    1,464       839  

Liability for held back shares in connection with asset acquisition in other long-term liabilities

    800        

Issuance of common stock in connection with asset acquisition

    5,511        

Establishment of right-of-use asset and lease liability

    85        

 

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. The Company subsequently 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, or the DZUVEO Agreement. Zalviso was approved in Europe and was commercialized by Grünenthal GmbH, or Grünenthal, through May 12, 2021 (see Termination of Grünenthal Agreements below). In July 2022, the European Marketing Authorization for Zalviso was withdrawn. 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. On January 7, 2022, the Company closed the definitive merger agreement dated as of November 14, 2021, or the Merger Agreement, to acquire Lowell Therapeutics, Inc., or Lowell, a privately held company (see Note 4. “Asset Acquisition” below). As a result of the Merger Agreement, the Company acquired Niyad™, a regional anticoagulant for the dialysis circuit during continuous renal replacement therapy for acute kidney injury patients in the hospital, that the Company plans to study under an investigational device exemption, or IDE, and which has received Breakthrough Device Designation status from the FDA. While not approved for commercial use in the U.S., the active drug component of Niyad, nafamostat, has been approved in Japan and South Korea as a regional anticoagulant for the dialysis circuit, disseminated intravascular coagulation, and acute pancreatitis. Niyad is a lyophilized formulation of nafamostat, a broad-spectrum, synthetic serine protease inhibitor, with anticoagulant, anti-inflammatory, and potential anti-viral activities. The second intended indication for Niyad is as a regional anticoagulant for the dialysis circuit for chronic kidney disease patients undergoing intermittent hemodialysis in dialysis centers. In addition, the Company acquired LTX-608, a proprietary nafamostat formulation for direct IV infusion that it intends to develop for the treatment of acute respiratory distress syndrome, or ARDS, and disseminated intravascular coagulation, or DIC.

 

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.

 

9

 

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. In July 2022, the European Marketing Authorization for Zalviso was withdrawn.

 

Termination of Royalty Monetization

 

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 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. On May 31, 2022, the Company entered into the Termination Agreement with SWK to fully terminate the Royalty Monetization for which the Company paid cash consideration of $0.1 million. Neither PDL nor SWK retains any further interest in the Royalty Monetization. Accordingly, effective May 31, 2022, the Royalty Monetization is no longer reflected on the Company’s financial statements or other records as a sale of assets to PDL or SWK and all security interests and other liens of every type held by the parties to the Royalty Monetization have been terminated and automatically released without further action by any party. The $84.1 million gain on extinguishment of the liability related to the sale of future royalties is recognized in the Condensed Consolidated Statements of Operations as Other Income.

 

Liquidity and Going Concern

 

The Condensed Consolidated Financial Statements for the three and six months ended June 30, 2022 were prepared on the basis of a going concern, which contemplates that the Company will be able to realize assets and discharge liabilities in the normal course of business. The termination of the Royalty Monetization resulted in net income for the three and six months ended June 30, 2022; however, before this, the Company had incurred recurring operating losses and negative cash flows from operating activities since inception and expects to continue to incur operating losses and negative cash flows in the future. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Considering the Company’s current cash resources and its current and expected levels of operating expenses for the next twelve months, management expects to need additional capital to fund its planned 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. Management may seek to raise such additional capital through public or private equity offerings, including under the Controlled Equity OfferingSM Sales Agreement, or the ATM Agreement, with Cantor Fitzgerald & Co., or Cantor, debt securities, monetize or securitize certain assets, refinance its loan agreement, enter into product development, license or distribution agreements with third parties, or divest DSUVIA in the United States, DZUVEO in Europe, or any of the Company’s product candidates. While management believes its plans to raise additional funds will alleviate the conditions that raise substantial doubt about the Company’s ability to continue as a going concern, these plans are not entirely within the Company’s control and cannot be assessed as being probable of occurring. Additional funds may not be available when the Company needs them on terms that are acceptable to the Company, or at all. If adequate funds are not available, the Company may be required to further reduce its workforce, reduce the scope of, or cease, the commercial launch of DSUVIA, or the development of its product candidates in advance of the date on which the Company’s cash resources are exhausted to ensure that the Company has sufficient capital to meet its obligations and continue on a path designed to preserve stockholder value. In addition, if additional funds are raised through collaborations, strategic alliances or licensing arrangements with third parties, the Company may have to relinquish rights to its technologies, future revenue streams or product candidates, or to grant licenses on terms that may not be favorable to the Company.

 

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.

 

Basis of Presentation

 

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the rules and regulations of the United States Securities and Exchange Commission, or SEC. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States 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.

 

10

 

Operating results for the three and six months ended June 30, 2022, are not necessarily indicative of the results that may be expected for the year ending December 31, 2022, or any future period. The Condensed Consolidated Balance Sheet as of December 31, 2021, was derived from the Company’s consolidated audited financial statements as of December 31, 2021, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 10, 2022. These consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, which includes a broader discussion of the Company’s business and the risks inherent therein.

 

Reclassifications 

 

Certain prior year amounts in the Consolidated Financial Statements have been reclassified to conform to the current year's presentation. In particular, the restricted cash classified as “Cash and cash equivalents” has been reclassified to “Restricted cash, net of current portion” in the Condensed Consolidated Balance Sheets as of December 31, 2021 and in the Condensed Consolidated Statement of Cash Flows as of December 31, 2021, June 30, 2021 and December 31, 2020. See “—Cash, Cash Equivalents and Restricted Cash” below.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the 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.

 

Cash, Cash Equivalents and Restricted Cash

 

The Company considers all highly liquid investments with an original maturity (at date of purchase) of three months or less to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks.

 

On May 30, 2019, the Company entered into the Loan Agreement with Oxford Finance LLC, or Oxford, as the Lender. The Loan Agreement requires that the Company always maintain unrestricted cash of not less than $5.0 million in accounts subject to control agreements in favor of the Lender, tested monthly as of the last day of the month. As of June 30, 2022, the Company has classified these unrestricted funds as restricted cash on the Condensed Consolidated Balance Sheets.

 

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets that sum to the total of the same such amounts in the Condensed Consolidated Statement of Cash Flows:

 

  

Balance as of

 
  

June 30, 2022

  

December 31, 2021

 

Cash and cash equivalents

 $15,165  $7,663 

Restricted cash

  5,000    

Restricted cash, net of current portion

     5,000 

Total cash, cash equivalents, and restricted cash

 $20,165  $12,663 

 

  

Balance as of

 
  

June 30, 2021

  

December 31, 2020

 

Cash and cash equivalents

 $21,327  $22,274 

Restricted cash, net of current portion

  5,000   5,000 

Total cash, cash equivalents, and restricted cash

 $26,327  $27,274 

 

11

 
 

Restructuring Costs

 

The Company's restructuring costs consist of employee termination benefit costs. Liabilities for costs associated with the cost reduction plan are recognized when the liability is incurred and are measured at fair value. One-time termination benefits are expensed at the date the Company notifies the employee, unless the employee must provide future service, in which case the benefits are expensed ratably over the future service period.

 

In May 2022, the Company initiated a reorganization that eliminated approximately 40% of its employees, primarily within the commercial organization. For the three months ended June 30, 2022, the Company incurred approximately $0.5 million in employee termination benefits related to this restructuring, all which has been paid at June 30, 2022. This headcount reduction was completed in the second quarter of 2022. No additional expenses are anticipated in connection with this cost reduction plan.

 

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, 2021. There have been no significant changes to the Company’s significant accounting policies during the six months ended June 30, 2022, from those previously disclosed in its 2021 Annual Report on Form 10-K, except as follows:

 

Acquisitions

 

The Company evaluates acquisitions of assets and other similar transactions to assess whether or not the transaction should be accounted for as a business combination or asset acquisition by first applying a screen test to determine whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If so, the transaction is accounted for as an asset acquisition. If not, further determination is required as to whether or not the Company has acquired inputs and processes that have the ability to create outputs, which would meet the definition of a business. Significant judgment is required in the application of the screen test to determine whether an acquisition is a business combination or an acquisition of assets.

 

Acquisitions meeting the definition of business combinations are accounted for using the acquisition method of accounting, which requires that the purchase price be allocated to the net assets acquired at their respective fair values. In a business combination, any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill.

 

For asset acquisitions, a cost accumulation model is used to determine the cost of an asset acquisition. Direct transaction costs are recognized as part of the cost of an asset acquisition. The Company also evaluates which elements of a transaction should be accounted for as a part of an asset acquisition and which should be accounted for separately. The cost of an asset acquisition, including transaction costs, is allocated to identifiable assets acquired and liabilities assumed based on a relative fair value basis. Goodwill is not recognized in an asset acquisition. Any difference between the cost of an asset acquisition and the fair value of the net assets acquired is allocated to the non-monetary identifiable assets based on their relative fair values. When a transaction accounted for as an asset acquisition includes an in-process research and development (“IPR&D”) asset, the IPR&D asset is only capitalized if it has an alternative future use other than in a particular research and development project. For an IPR&D asset to have an alternative future use: (a) the Company must reasonably expect that it will use the asset acquired in the alternative manner and anticipate economic benefit from that alternative use, and (b) the Company’s use of the asset acquired is not contingent on further development of the asset subsequent to the acquisition date (that is, the asset can be used in the alternative manner in the condition in which it existed at the acquisition date). Otherwise, amounts allocated to IPR&D that have no alternative use are expensed. Asset acquisitions may include contingent consideration arrangements that encompass obligations to make future payments to sellers contingent upon the achievement of future financial targets. Contingent consideration is not recognized until all contingencies are resolved and the consideration is paid or probable of payment, at which point the consideration is allocated to the assets acquired on a relative fair value basis.

 

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.

 

12

 

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,” which provides elective amendments for entities that have contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of 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. In January 2021, the FASB issued ASU 2021-01,Reference Rate Reform (Topic 848),” to expand and clarify the scope of Topic 848 to include derivative instruments on discounting transactions. The amendments in this ASU are effective in the same timeframe as ASU 2020-04. The Company is currently evaluating the impact this guidance will have on its Consolidated Financial Statements.

 

 

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.

 

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

 

  

As of June 30, 2022

 
  

Amortized Cost

  

Gross Unrealized
Gains

  

Gross Unrealized
Losses

  

Fair
Value

 

Cash, cash equivalents and restricted cash:

                

Cash

 $2,637  $  $  $2,637 

Money market funds

  1,150         1,150 

Commercial paper

  16,378         16,378 

Total cash, cash equivalents and restricted cash

  20,165         20,165 
                 

Short-term investments:

                

Commercial paper

  7,758         7,758 

Total short-term investments

  7,758         7,758 

Total cash, cash equivalents, restricted cash and short-term investments

 $27,923  $  $  $27,923 

 

 

  

As of December 31, 2021

 
  

Amortized Cost

  

Gross Unrealized
Gains

  

Gross Unrealized
Losses

  

Fair
Value

 

Cash, cash equivalents and restricted cash:

                

Cash

 $1,443  $  $  $1,443 

Money market funds

  2,822         2,822 

Commercial paper

  8,398         8,398 

Total cash, cash equivalents and restricted cash

  12,663         12,663 
                 

Short-term investments:

                

Commercial paper

  29,504         29,504 

Corporate debt securities

  9,463         9,463 

Total short-term investments

  38,967         38,967 

Total cash, cash equivalents, restricted cash and short-term investments

 $51,630  $  $  $51,630 

 

13

 

There were no other-than-temporary impairments for these securities at June 30, 2022 or December 31, 2021. 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 six months ended June 30, 2022 and 2021.

 

As of June 30, 2022, and December 31, 2021, 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 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. treasury, U.S. government agency securities and commercial paper. As of June 30, 2022, and December 31, 2021, the Company held a contingent put option liability associated with the Loan Agreement with Oxford, determined to be a Levell III instrument. The Company’s estimate of fair value of the contingent put option liability was determined by 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, net in the Condensed Consolidated Statements of Operations. 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.

 

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 June 30, 2022

 
  

Fair Value

  

Level I

  

Level II

  

Level III

 

Assets

                

Money market funds

 $1,150  $1,150  $  $ 

Commercial paper

  24,136      24,136    

Total assets measured at fair value

 $25,286  $1,150  $24,136  $ 
                 

Liabilities

                

Contingent put option liability

 $49  $  $  $49 

Total liabilities measured at fair value

 $49  $  $  $49 

 

 

  

As of December 31, 2021

 

Assets

 Fair Value  Level I  Level II  Level III 

Money market funds

 $2,822  $2,822  $  $ 

Commercial paper

  37,902      37,902    

Corporate debt securities

  9,463      9,463    

Total assets measured at fair value

 $50,187  $2,822  $47,365  $ 
                 

Liabilities

                

Contingent put option liability

 $81  $  $  $81 

Total liabilities measured at fair value

 $81  $  $  $81 

 

14

 
 

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 six months ended June 30, 2022 and 2021 (in thousands):

 

 

Three Months
Ended
June 30,
2022

 

Six Months
Ended
June 30,
2022

 

Fair value—beginning of period

$55 $81 

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

 (6

)

 (32

)

Fair value—end of period

$49 $49 

 

  

Three Months
Ended
June 30,
2021

  

Six Months
Ended
June 30,
2021

 

Fair value—beginning of period

 $181  $246 

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

  (53

)

  (118

)

Fair value—end of period

 $128  $128 

 

 

There were no transfers between Level I, Level II or Level III of the fair value hierarchy during the three and six months ended June 30, 2022 and 2021.

 

 

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

 
  

June 30, 2022

  

December 31, 2021

 

Raw materials

 $680  $722 

Work-in-process

     159 

Finished goods

  221   230 

Total

 $901  $1,111 

 

The Company did not record any inventory impairment charges for the three and six months ended June 30, 2022. The Company recorded inventory impairment charges of $0 and $0.1 million for the three and six months ended June 30, 2021, respectively, primarily related to Zalviso component parts inventory.

 

 

4. Asset Acquisition

 

On January 7, 2022, the Company closed the Merger Agreement with Lowell. Under the terms of the agreement, the Company acquired the product nafamostat, and the associated patents and historical know-how. The acquisition was valued at approximately $32.5 million plus cash acquired of $3.5 million and certain other adjustments. Pursuant to the terms of the Merger Agreement, all options to purchase capital stock and all shares of Lowell capital stock issued and outstanding immediately before the effective time of the merger were cancelled in exchange for the right to receive (i) 9,009,538 shares of AcelRx common stock issued at a five day daily volume weighted average price of $0.57284 per share as of January 7, 2022, or the Acquisition Date, valued at $5.2 million on closing, (ii) cash in the amount of $3.5 million, (iii) 1,396,526 shares of AcelRx common stock to be held back to satisfy any potential indemnification and other obligations of Lowell and its securityholders valued at $0.8 million, (iv) $0.5 million cash and stock paid for sellers’ transaction costs and (v) up to $26.0 million of contingent consideration payable in cash or stock at AcelRx's option, upon the achievement of regulatory and sales-based milestones.

 

The shares issued pursuant to the Merger Agreement were issued in private placements pursuant to the exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, or the Securities Act, including Rule 506 of Regulation D promulgated under the Securities Act, or Regulation D, without general solicitation as a transaction not involving any public offering.

 

The Merger Agreement has been accounted for as an asset acquisition of a single IPR&D asset that has an alternative future use. The initial measurement of the asset purchased of $8.8 million was based on the purchase cost of $12.4 million including (i) $6.0 million common stock fair value on the closing date (issued and held back on the acquisition date), (ii) $0.5 million seller’s costs paid by the Company, (iii) $3.5 million cash and (iv) approximately $2.5 million of transaction costs less purchase price allocated to cash acquired of $3.5 million. Due to the nature of regulatory and sales-based milestones, the contingent consideration of up to $26.0 million was not included in the initial cost of the assets purchased as they are contingent upon events that are outside the Company’s control, such as regulatory approvals and issuance of patents, and are not considered probable until notification is received. However, upon achievement or anticipated achievement of each milestone, the Company shall recognize the related, appropriate payment as an additional cost of the acquired IPR&D asset. As of June 30, 2022, none of the contingent events has occurred.

 

15

 
 

The following table summarizes the total consideration for the acquisition and the value of the IPR&D asset acquired (in thousands):

 

Consideration

    

Cash

 $3,536 

Issuance of common stock to Lowell security holders in connection with asset acquisition

  5,161 

Issuance of common stock to settle Lowell’s transaction costs in connection with asset acquisition

  350 

Liability for issuance of 1,396,526 hold back shares to Lowell securityholders(1)

  800 

Transaction costs

  2,521 

Total consideration

 $12,368 
     

IPR&D Asset Acquired

    

Purchase price

 $12,368 

Cash acquired

  (3,549)

Total IPR&D asset acquired(2)

 $8,819 

 

(1) Recorded as Other long-term liabilities in the Condensed Consolidated Balance Sheets.

 

(2) Recorded as In-process research and development asset in the Condensed Consolidated Balance Sheets.

 

The IPR&D asset will be treated initially as an indefinite-lived asset, and as a long-lived asset, it will be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the IPR&D asset achieves regulatory approval and the asset life is determined to be finite, the asset’s useful life will be estimated, and the asset will be amortized over its remaining useful life. No impairment losses were recorded on the IPR&D asset during the three and six months ended June 30, 2022.

 

 

5. Property and Equipment, Net

 

Property and equipment, net consist of the following (in thousands):

 

  

Balance as of

 
  

June 30, 2022

  

December 31, 2021

 

Laboratory equipment

 $4,406  $4,406 

Leasehold improvements

  5,838   5,838 

Computer equipment and software

  1,589   1,589 

Construction in process

  9,459   13,805 

Tooling

  826   826 

Furniture and fixtures

  250   250 
   22,368   26,714 

Less accumulated depreciation and amortization

  (11,293

)

  (10,786

)

Property and equipment, net

 $11,075  $15,928 

 

 

As of June 30, 2022, the Company decided to realign its cost structure from a focus on commercialization to a focus on advancing our recently acquired late-stage development pipeline, namely the pre-filled syringes and Niyad product candidates. As a result, the Company also decided to not focus any development resources on Zalviso in the United States and does not expect to resubmit the Zalviso NDA in the foreseeable future. In addition, due to the termination of the agreements with Grünenthal for Zalviso in Europe and the related withdrawal of the Marketing Authorization in Europe in July 2022, the Company does not expect any revenues from Zalviso in Europe in the foreseeable future. Accordingly, the Company determined that it is no longer probable that it will realize the future economic benefit associated with the costs of the Zalviso-related purchased equipment and manufacturing-related facility improvements the Company has made at its contract manufacturer and, therefore, recorded a non-cash impairment charge of $4.9 million to the Zalviso-related assets for the three and six months ended June 30, 2022. The impairment charge was recorded as operating expense in the Condensed Consolidated Statement of Operations. Depreciation and amortization expense was $0.2 million and $0.5 million for the three and six months ended June 30, 2022, respectively, and $0.3 million and $0.5 million for the three and six months ended June 30, 2022, respectively.

 

16

 
 

6. Revenue from Contracts with Customers

 

The following table summarizes revenue from contracts with customers for the three and six months ended June 30, 2022 and 2021 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
June 30, 2022

  

Six months ended
June 30, 2022

 

Product sales:

        

DSUVIA

 $444  $886 

DZUVEO1

  126   126 

Total product sales

 $570  $1,012 

1 Represents sales to our partner in Europe for their expected product launch in the third quarter of 2022.

 

 

  

Three months ended
June 30, 2021

  

Six months ended
June 30, 2021

 

Product sales:

        

DSUVIA

 $392  $573 

Zalviso

     270 

Total product sales

  392   843 
         

Contract and collaboration revenue:

        

Non-cash royalty revenue related to Royalty Monetization (Note 9)

  38   83 

Royalty revenue

  13   28 

Total revenues from contract and other collaboration

  51   111 

Total revenue

 $443  $954 

 

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, 2021.

 

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, at which time, due to the termination of the Grünenthal Agreements, the rights to market and sell Zalviso in Europe reverted back to the Company. In July 2022, the European Marketing Authorization for Zalviso was withdrawn. DZUVEO sales in Europe by the Company’s collaboration partner, Aguettant, have not commenced as of June 30, 2022.

 

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 and license revenue recognized under the DZUVEO Agreement. For the three and six months ended June 30, 2022, the Company did not record any contract and other collaboration revenue.

 

Contract Liabilities

 

A contract liability of $1.2 million was recorded on the Condensed Consolidated Balance Sheets as deferred revenue as of June 30, 2022, $0.1 million of which represented the current portion, 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.

 

17

 

The following table presents changes in the Company’s contract liability for the six months ended June 30, 2022 and 2021 (in thousands):

 

Balance at January 1, 2022

 $1,237 

Deductions for performance obligations satisfied:

    

In current period

  (29)

Balance at June 30, 2022

 $1,208 

 

Balance at January 1, 2021

 $49 

Deductions for performance obligations satisfied:

    

In current period

  (49)

Balance at June 30, 2021

 $ 

 

 

 

7. Long-Term Debt

 

Loan Agreement with Oxford

 

On May 30, 2019, the Company entered into the Loan Agreement with Oxford. 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. The Loan Agreement requires that the Company always maintain unrestricted cash of not less than $5.0 million in accounts subject to control agreements in favor of the Lender, tested monthly as of the last day of the month.

 

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 June 30, 2022 and December 31, 2021, the accrued balance due under the Loan Agreement with Oxford was $9.4 million and $13.3 million, respectively. Interest expense related to the Loan Agreement was $0.3 million, $0.1 million of which represented amortization of the debt discount, and $0.7 million, $0.2 million of which represented amortization of the debt discount, for the three and six months ended June 30, 2022, respectively, while such interest expense was $0.6 million, $0.2 million of which represented amortization of the debt discount, and $1.2 million, $0.4 million of which represented amortization of the debt discount for the three and six months ended June 30, 2021, 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 June 30, 2022 and December 31, 2021, the accrued balance under the SRA was $0.5 million, and $1.7 million of these leasehold improvements had been capitalized. The effective interest rate related to the payments at June 30, 2022 was 14.4%. The leasehold improvements are recorded as property and equipment, net, in our Condensed Consolidated Balance Sheets.

 

 

8. Leases

 

Office Lease

 

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

 

The Company has entered into commercial supply manufacturing services agreements related to Zalviso and DSUVIA containing fixed fees which it has determined are in-substance lease payments. For additional information on these agreements, refer to Note 9 “Leases” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

 

18

 

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

 

   

Three Months Ended
June 30,

   

Six Months Ended
June 30,

 
   

2022

   

2021

   

2022

   

2021

 

Operating lease costs

  $ 343     $ 440     $ 686     $ 780  

Gain on derecognition of operating lease

                      (522

)

Sublease income

          (50

)

          (199

)

Loss on termination of sublease

          331             331  

Net lease costs

  $ 343     $ 721     $ 686     $ 390  

 

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

 

   

June 30, 2022

   

June 30, 2021

 

Weighted-average remaining lease term – operating leases (years)

 

4.57

   

5.41

 

Weighted-average remaining discount rate – operating leases

    12.8

%

    12.8

%

 

Maturities of lease liabilities as of June 30, 2022 are presented in the following table (in thousands):

 

Year:

       

2022 (remaining six months)

  $ 921  

2023

    1,344  

2024

    1,040  

2025

    1,040  

2026

    1,040  

Thereafter

    415  

Total future minimum lease payments

    5,800  

Less imputed interest

    (1,299 )

Total

  $ 4,501  

 

Reported as:        

Operating lease liabilities

  $ 4,501  

Operating lease liabilities, current portion

    (1,142 )

Operating lease liabilities, net of current portion

  $ 3,359  

 

 

9. 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 assessed the expected royalty and milestone payments using a combination of historical results, internal projections and forecasts from external sources. To the extent such payments were greater or less than the Company’s initial estimates or the timing of such payments is materially different than its original estimates, the Company prospectively adjusted 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. On August 31, 2020, PDL sold its royalty interest for Zalviso to SWK Funding, LLC, or SWK, under the Royalty Monetization. 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.

 

On May 31, 2022, the Company entered into the Termination Agreement with SWK to fully terminate the Royalty Monetization for which the Company paid cash consideration of $0.1 million, and neither PDL nor SWK retains any further interest in the Royalty Monetization. Accordingly, effective May 31, 2022, the Royalty Monetization is no longer reflected on the Company’s consolidated financial statements or other records as a sale of assets to PDL or SWK and all security interests and other liens of every type held by the parties to the Royalty Monetization have been terminated and automatically released without further action by any party. The $84.1 million gain on extinguishment of the liability related to the sale of future royalties is recognized in the Condensed Consolidated Statements of Operations as Other Income.

 

19

 

The effective interest income rate for each of the three- and six-month periods ended June 30, 2022, was approximately 3.2%. The effective interest income rate for each of the three- and six-month periods ended June 30, 2021, was approximately 3.6%.

 

The following table shows the activity within the liability account related to the sale of future royalties for the six months ended June 30, 2022 and the period from inception on September 18, 2015 to June 30, 2022 (in thousands):

 

  

Six months

ended
June 30, 2022

  

Period from
inception to
June 30, 2022

 

Liability related to sale of future royalties — beginning balance

 $85,288  $ 

Proceeds from sale of future royalties

     61,184 

Non-cash royalty revenue

     (1,083

)

Non-cash interest (income) expense recognized

  (1,136

)

  24,051 

Consideration paid for termination of Royalty Monetization

  (100

)

  (100)

Gain on termination of liability related to sale of future royalties

  (84,052

)

  (84,052

)

Liability related to sale of future royalties as of June 30, 2022

 $  $ 

 

As mentioned above, the Royalty Monetization was terminated on May 31, 2022.

 

 

10. Commitments and Contingencies

 

Litigation

 

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. On December 16, 2021, the Court appointed co-lead plaintiffs. Plaintiffs’ amended complaint was filed on March 7, 2022. The amended complaint names the Company and three of its officers and continues to allege 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 amended complaint also alleges a violation of Section 20A of the Exchange Act against the individual defendants for alleged insider trading. On May 6, 2022, the Company filed a motion to dismiss the amended complaint with prejudice and briefing was complete on July 21, 2022. A hearing on the motion to dismiss is set for September 1, 2022.

 

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, October 26, 2021, and November 17, 2021, three 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 four complaints seek unspecified damages, attorneys’ fees, and other costs. On December 6, 2021, the Court entered an order consolidating all four actions and staying the consolidated action pending the outcome of any motion to dismiss the securities class action. Please see “Part II., Item 1A. Risk Factors—Risks of a General Nature—Litigation 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.

 

 

11. Stockholders Equity

 

Common Stock

 

ATM Agreement 

 

The Company has entered into the ATM Agreement with 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.

 

20

 

The Company did not sell any shares of common stock pursuant to the ATM Agreement for the three and six months ended June 30, 2022. For the three and six months ended June 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. As of June 30, 2022, 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.

 

 

12. Stock-Based Compensation

 

The Company recorded total stock-based compensation expense for stock options, restricted stock units, or RSUs, and the Amended and Restated 2011 Employee Stock Purchase Plan, or the Amended ESPP, as follows (in thousands):

 

   

Three Months Ended
June 30,

   

Six Months Ended
June 30,

 
   

2022

   

2021

   

2022

   

2021

 

Cost of goods sold

  $ 16     $ 21     $ 35     $ 43  

Research and development

    153       200       327       381  

Selling, general and administrative

    584       951       1,174       1,837  

Total

  $ 753     $ 1,172     $ 1,536     $ 2,261  

The following table summarizes restricted stock unit activity under the Company’s equity incentive plans:

           

Weighted

 
   

Number of

   

Average

 
   

Restricted

   

Grant Date

 
   

Stock Units

   

Fair Value

 

Restricted stock units outstanding, January 1, 2022

    1,774,376     $ 1.71  

Granted

    1,061,826       0.40  

Vested

    (880,315 )     1.78  

Forfeited

    (313,288 )     1.29  

Restricted stock units outstanding, June 30, 2022

    1,642,599     $ 0.91  

 

Upon vesting, certain of the Company’s RSUs may be settled on a net-exercise basis to cover any required withholding tax with the remaining amount converted into an equivalent number of shares of common stock. There were 0 and 141,966 shares of common stock underlying vested RSUs that were withheld during the three and six months ended June 30, 2022, respectively, based on the value of the RSUs as determined by the Company’s closing stock price on the applicable vesting date.

 

The following table summarizes stock option activity under the Company’s equity incentive plans:  

 

   

Number
of Stock Options
Outstanding

   

Weighted-
Average
Exercise
Price

   

Weighted-
Average
Remaining
Contractual
Life (Years)

   

Aggregate
Intrinsic
Value

 
                           

(in thousands)

 

January 1, 2022

    14,284,050     $ 2.99                  

Granted

    2,123,650       0.40                  

Forfeited

    (552,745 )     1.37                  

Expired

    (812,693 )     3.31                  

Exercised

                           
                                 

June 30, 2022

    15,042,262     $ 2.67       5.8     $  
                                 

Vested and exercisable options—June 30, 2022

    10,473,947     $ 3.31       4.5     $  

Vested and expected to vest—June 30, 2022

    15,042,262     $ 2.67       5.8     $  

 

21

 

The per-share weighted average grant date fair value of the options granted for the six months ended June 30, 2022 was estimated at $0.30 per share on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

 

   

Six months ended

June 30, 2022

 

Expected term (in years)

    6.3    

Risk-free interest rate

  1.6% - 2.2%  

Expected volatility

    88%    

Expected dividend rate

    0%    

 

As of June 30, 2022, there were 6,352,183 shares available for grant under the Company’s equity incentive plans and 4,302,929 shares available for grant under the Amended ESPP.

 

 

13. Net Income (Loss) per Share of Common Stock

 

The Company’s basic net income (loss) per share of common stock is calculated by dividing the net income (loss) by the weighted average number of shares of common stock outstanding for the period. The diluted net income (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 if their effect is antidilutive.

 

The following table sets forth the computation of the Company’s basic and diluted net income (loss) per share of common stock during the three and six months ended June 30, 2022 and 2021 (in thousands, except for share and per share amounts):

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2022

  

2021

  

2022

  

2021

 
  

(in thousands, except share and per share amounts)

 

Numerator:

                

Net income (loss)

 $70,663  $(9,851

)

 $61,989  $(18,807

)

Denominator:

                

Weighted average shares outstanding — basic

  147,139,032   119,120,040   146,385,577   116,204,492 

Dilutive effect of RSUs

  70,033      34,860    

Weighted average shares outstanding — diluted

  147,209,065   119,120,040   146,420,437   116,204,492 
                 

Net income (loss) per share — basic

 $0.48  $(0.08

)

 $0.42  $(0.16

)

Net income (loss) per share — diluted

 $0.48  $(0.08

)

 $0.42  $(0.16

)

 

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

 

  

Three Months Ended

June 30,

  

Six Months Ended

June 30,

 
  

2022

  

2021

  

2022

  

2021

 

RSUs, stock options and ESPP to purchase common stock

  16,520,200   16,907,412   16,463,459   16,907,412 

Common stock warrants

  17,676,679   176,679   17,676,679   176,679 

 

In addition, the shares held back and contingently issuable in connection with the Lowell Merger, as described in Note 4. above, have also been excluded from the computation of diluted net income (loss) per share of common stock for the periods presented because the contingencies for issuance of these shares have not been met.

 

 

14. Subsequent Event

 

On August 3, 2022, the Company entered into a Securities Purchase Agreement with Lincoln Park Capital Fund, LLC, or the Purchaser, pursuant to which the Company issued on August 3, 2022, in a private placement transaction, an aggregate of 3,000 shares of Series A Preferred Stock, par value $0.001 per share, together with a warrant to purchase up to an aggregate of 1,623,008 shares of common stock of the Company at an exercise price of $0.2033 per share (subject to adjustment as provided in the warrant, for an aggregate subscription amount equal to $300,000. The warrant is immediately exercisable and has a term ending on February 3, 2028.

 

22

 
 
 

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, 2021, 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

 

Our portfolio of products and product candidates consists of sufentanil sublingual products and product candidates, pre-filled syringe product candidates, and nafamostat product candidates as further described below.

 

Sufentanil Sublingual Products/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.

 

Approved in the European Union, where it was marketed commercially by Grünenthal GmbH, or Grünenthal, through May 12, 2021. Marketing Authorization withdrawn in July 2022. 

 

Future development and commercialization efforts contingent upon identification of corporate partnership resources.         

             

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.

 

23

 

Pre-filled Syringe Product Candidates

 

Product/Product Candidate

 

Description

 

Target Use

 

Status

Ephedrine

 

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

 

Clinically important hypotension occurring in the setting of anesthesia

 

Product candidate licensed Aguettant; preparing 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 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; owned and marketed by Aguettant.

 

Nafamostat Product Candidates

 

Product/Product Candidate

 

Description

 

Target Use

 

Status

Niyad™

 

Lyophilized vial containing nafamostat for injection

 

Regional anticoagulant for injection into the extracorporeal circuit

 

Submitted an investigational device exemption, or IDE, and received Breakthrough Device Designation from the FDA.

             

LTX-608

 

Lyophilized vial containing nafamostat for injection

 

IV infusion as an anti-viral treatment for COVID-19

 

IND to be submitted following toxicology evaluation to enable Phase 2 study

             

LTX-608

 

Lyophilized vial containing nafamostat for injection

 

IV infusion for disseminated intravascular coagulation, or DIC

 

IND to be submitted following toxicology evaluation to enable Phase 2 study

             

LTX-608

 

Lyophilized vial containing nafamostat for injection

 

IV infusion for acute respiratory distress syndrome, or ARDS

 

IND to be submitted following toxicology evaluation to enable Phase 2 study

             

LTX-608

 

Lyophilized vial containing nafamostat for injection

 

IV infusion for acute pancreatitis

 

IND to be submitted following toxicology evaluation to enable Phase 2 study

 

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. 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 emerging variants. 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.

 

24

 

As a result of COVID-19 and related international travel restrictions, in addition to the testing requirements of our vendor, 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 the first half of 2023.

 

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 continues to impact 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.

 

Inflation

 

We do not believe that inflation has had a material impact on our business or operating results during the periods presented. However, inflation, led by supply chain constraints, federal stimulus funding, increases to household savings, and the sudden macroeconomic shift in activity levels arising from the loosening or removal of many government restrictions and the broader availability of COVID-19 vaccines, has had, and may continue to have, an impact on overhead costs and transportation costs and may in the future adversely affect our operating results. In addition, increased inflation has had, and may continue to have, an effect on interest rates. Increased interest rates may adversely affect our borrowing rate and our ability to obtain, or the terms under which we can obtain, any potential additional funding.

 

Department of Defense

 

In April 2020, DSUVIA achieved Milestone C approval by the Department of Defense, or DoD, a decision that clears the path for the DoD to begin placing orders for DSUVIA for inclusion in all Army Sets, Kits, and Outfits, or SKOs, for deployed/deploying troops. This SKO fulfillment is dependent on the Army’s completion of their product information package including instructions on fulfillment and training which remains in process. In September 2020, we announced that DSUVIA was added to the DoD Joint Deployment Formulary, a core list of pharmaceutical products that are designated for deploying military units across all service branches. Also in September 2020, the U.S. Army awarded AcelRx with an initial contract of up to $3.6 million over the next four years for the purchase of DSUVIA to support a DoD-sponsored study to aid the development of clinical practice guidelines. We believe that study will initiate clinically in 2022. Since the fourth quarter of 2020, DSUVIA orders are being fulfilled for the Army Prepositioned Stock Program, or APS. The aforementioned clinical and APS orders are separate from the planned SKO fulfillment.

 

Recent Developments

 

On January 7, 2022, we acquired Lowell Therapeutics, Inc., or Lowell, in a transaction for consideration of approximately $32.5 million plus net cash acquired and certain other adjustments, inclusive of approximately $26.0 million of contingent consideration payable in cash or stock at AcelRx's option, upon the achievement of regulatory and sales-based milestones. For additional information regarding the acquisition of Lowell, see Note 4. “Asset Acquisition” in the accompanying notes to the Condensed Consolidated Financial Statements.

 

On March 28, 2022, we received a close-out letter from the Office of Prescription Drug Promotion, or OPDP, of the U.S. Food and Drug Administration, or the FDA, to the Warning Letter we received on February 11, 2021 relating to certain DSUVIA-related promotional materials we used in 2019. The close-out letter indicated that the FDA had concluded its evaluation of our corrective actions in response to the Warning Letter and that we had addressed the issues raised by the Warning Letter.

 

On September 18, 2015, we sold the majority of the royalty rights and certain commercial sales milestones we were entitled to receive under the Collaboration and License Agreement, entered into on December 16, 2013, with Grünenthal GmbH, or Grünenthal, which was amended effective July 17, 2015 and September 20, 2016, or the Amended License Agreement, to PDL BioPharma, Inc., or PDL, in a transaction referred to as the Royalty Monetization. On August 31, 2020, PDL announced that it had sold its royalty interest for Zalviso to SWK Funding, LLC, or SWK. On May 31, 2022, we entered into the Termination Agreement with SWK to fully terminate the Royalty Monetization for which we paid cash consideration of $0.1 million, and neither PDL nor SWK retains any further interest in the Royalty Monetization. Accordingly, effective May 31, 2022, the Royalty Monetization is no longer reflected on our financial statements or other records as a sale of assets to PDL or SWK and all security interests and other liens of every type held by the parties to the Royalty Monetization have been terminated and automatically released without further action by any party. The $84.1 million gain on extinguishment of the liability related to the sale of future royalties is recognized in the Condensed Consolidated Statements of Operations as Other Income.

 

25

 

Financial Overview

 

Although the termination of the Royalty Monetization resulted in net income for the three and six months ended June 30, 2022, 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 fund any future research and development activities needed to support the FDA regulatory review of our product candidates.

 

We will incur capital expenditures related to our fully automated packaging line for DSUVIA, which has been installed, and awaits final site acceptance testing by our contract manufacturer and submission of final data to the FDA for approval. FDA approval is expected in the first half of 2023. We anticipate that the fully automated line for DSUVIA will contribute to a significant decrease in costs of goods sold in 2023 and beyond.

 

Our net income for the three and six months ended June 30, 2022 was $70.7 million and $62.0 million, respectively, while our net loss for the three and six months ended June 30, 2021 was $9.9 million and $18.8 million, respectively. As of June 30, 2022, we had an accumulated deficit of $411.6 million. As of June 30, 2022, we had cash, cash equivalents, restricted cash and short-term investments totaling $27.9 million compared to $51.6 million as of December 31, 2021.

 

To extend our financial resources, we are realigning our cost structure from a focus on commercialization to a focus on advancing our recently acquired late-stage development pipeline, namely the pre-filled syringes and Niyad product candidates. As a result, we have also decided to not focus any development resources on Zalviso in the U.S. and do not expect to resubmit the Zalviso NDA in the foreseeable future. In addition, due to the termination of our agreements with Grünenthal for Zalviso in Europe and the related withdrawal of our Marketing Authorization in Europe in July 2022, we do not expect any revenues from Zalviso in Europe in the foreseeable future. Accordingly, we recorded a non-cash impairment charge of $4.9 million for the three months ended June 30, 2022 related to Zalviso property and equipment. Future development of Zalviso will be contingent upon identification of corporate partnership resources.

 

We believe that the uptake of DSUVIA will be maximized through a partner with a larger commercial infrastructure and, as such, we are in discussions with potential partners that can execute a more robust commercial plan to support DSUVIA sales expansion, while further reducing our operating costs. The ultimate structure of a potential transaction with a third party may take multiple forms and is not known at this time. Accordingly, we initiated a reorganization that we estimate will result in an annual savings of $9 million beginning in the third quarter of 2022, and will eliminate approximately 40% of our employees. For the three and six months ended June 30, 2022, we recognized $0.5 million in restructuring charges related to this restructuring in our Condensed Consolidated Statement of Operations.

 

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 six months ended June 30, 2022, from those previously disclosed in our Annual Report, except as follows:

 

Acquisitions

 

We evaluate acquisitions of assets and other similar transactions to assess whether or not the transaction should be accounted for as a business combination or asset acquisition by first applying a screen test to determine whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If so, the transaction is accounted for as an asset acquisition. If not, further determination is required as to whether or not we have acquired inputs and processes that have the ability to create outputs, which would meet the definition of a business. Significant judgment is required in the application of the screen test to determine whether an acquisition is a business combination or an acquisition of assets.

 

26

 

Acquisitions meeting the definition of business combinations are accounted for using the acquisition method of accounting, which requires that the purchase price be allocated to the net assets acquired at their respective fair values. In a business combination, any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill.

 

For asset acquisitions, a cost accumulation model is used to determine the cost of an asset acquisition. Direct transaction costs are recognized as part of the cost of an asset acquisition. We also evaluate which elements of a transaction should be accounted for as a part of an asset acquisition and which should be accounted for separately. The cost of an asset acquisition, including transaction costs, is allocated to identifiable assets acquired and liabilities assumed based on a relative fair value basis. Goodwill is not recognized in an asset acquisition. Any difference between the cost of an asset acquisition and the fair value of the net assets acquired is allocated to the non-monetary identifiable assets based on their relative fair values. When a transaction accounted for as an asset acquisition includes an in-process research and development (“IPR&D”) asset, the IPR&D asset is only capitalized if it has an alternative future use other than in a particular research and development project. For an IPR&D asset to have an alternative future use: (a) we must reasonably expect that we will use the asset acquired in the alternative manner and anticipate economic benefit from that alternative use, and (b) our use of the asset acquired must not be contingent on further development of the asset subsequent to the acquisition date (that is, the asset can be used in the alternative manner in the condition in which it existed at the acquisition date). Otherwise, amounts allocated to IPR&D that have no alternative use are expensed. Our asset acquisitions typically include contingent consideration arrangements that encompass obligations to make future payments to sellers contingent upon the achievement of future financial targets. Contingent consideration is not recognized until all contingencies are resolved and the consideration is paid or probable of payment, at which point the consideration is allocated to the assets acquired on a relative fair value basis.

 

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.

 

Three and Six Months Ended June 30, 2022 and 2021

 

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 six months ended June 30, 2022 and 2021, was as follows (in thousands, except percentages):

 

    Three Months Ended June 30,     Six Months Ended June 30,  
   

2022