NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019
(Unaudited)
Note 1 – Nature of Operations, Basis of Presentation and Significant Accounting Policies
Business Overview
Adhera Therapeutics, Inc. (formerly known as Marina Biotech, Inc.) and its wholly-owned subsidiaries, MDRNA Research, Inc. (“MDRNA”), Cequent Pharmaceuticals, Inc. (“Cequent”), Atossa Healthcare, Inc. (“Atossa”), and IThenaPharma, Inc. (“IThena”) (collectively “Adhera,” the “Company,) is an emerging specialty pharmaceutical company that leverages innovative distribution models and technologies to improve the quality of care for patients in the United States suffering from chronic diseases. The Company is focused on fixed dose combination (“FDC”) therapies in hypertension, with plans to expand the portfolio of drugs being commercialized to include other therapeutic areas.
The Company’s mission is to provide effective and patient centric treatment for hypertension while actively seeking additional assets that can be commercialized through our proprietary Total Care System (“TCS”). At the core of the Company's TCS system is DyrctAxess, a patented technology platform. DyrctAxess is designed to offer enhanced efficiency, control and access to the information necessary to empower patients, physicians and manufacturers to achieve optimal care.
The Company is focused on demonstrating the therapeutic and commercial value of TCS through the commercialization of Prestalia®, a single-pill FDC of perindopril arginine (“perindopril”) and amlodipine besylate (“amlodipine”) which is used as a first-line treatment for hypertension. Prestalia® was developed by Les Laboratories, Servier, a French pharmaceutical conglomerate, that sells the formulation outside the United States under the brand names Coveram® and/or Viacoram®. Prestalia® was approved by the U.S. Food and Drug Administration (“FDA”) in January 2015 and the license to such product was acquired by the Company from Symplmed in June 2017. By combining Prestalia®, DyrctAxess and an independent pharmacy network, the Company has created a proprietary system for drug adherence including patient counseling and prescription reminder services, including the distribution of blood pressure monitors for therapeutic drug monitoring (“TDM”).
In 2018, the Company discontinued all significant clinical development activities and is evaluating disposition options for its development assets, including but not limited to: (i) a next generation celecoxib program of drug candidates for the treatment of acute and chronic pain; (ii) an FDC used to suppress polyps in the precancerous syndrome and orphan indication Familial Adenomatous Polyposis; (iii) an FDC to treat Colorectal Cancer; and (iv) an FDC for irritable bowel disease (IBD). The Company plans to license or divest these development assets since they no longer align with the Company’s focus on the commercialization of Prestalia and other products.
On September 4, 2019, the Company entered into a Co-Promotion Agreement with Allegis Pharmaceuticals, LLC (“Allegis”) to co-promote Allegis’ FDA approved product Nitrolingual® Pumpspray indicated for acute relief of an attack or prophylaxis of angina pectoris due to coronary artery disease. The Co-Promotion Agreement relates to both the branded and the authorized generic versions of the product.
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and note disclosures required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete audited financial statements. This quarterly report should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. The information furnished in this report reflects all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation of our financial position, results of operations and cash flows for each period presented. The results of operations for the three or nine months ended September 30, 2019 are not necessarily indicative of the results for the year ending December 31, 2019 or for any future period.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Adhera Therapeutics, Inc. and the wholly-owned subsidiaries, Ithena, Cequent, MDRNA, and Atossa, and eliminate any inter-company balances and transactions.
Going Concern and Management’s Liquidity Plans
The accompanying condensed consolidated financial statements have been prepared on the basis that the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business. As of September 30, 2019, the Company had cash and cash equivalents of $2.7 million and has negative working capital of approximately $5.9 million.
The Company has incurred recurring losses and negative cash flows from operations since inception and has funded its operating losses through the sale of common stock, preferred stock, warrants to purchase common stock, convertible notes and secured promissory notes. The Company incurred a net operating loss of approximately $2.6 million and $7.9 million for the three and nine months ended September 30, 2019, respectively. The Company had an accumulated deficit of approximately $34.9 million as of September 30, 2019.
The Company expects to continue to incur operating losses as it executes the commercialization plans for Prestalia®, as well as other strategic and business development initiatives. If the Company is unable to obtain additional financing in the future, there may be a negative impact on the financial viability of the Company. The Company plans to increase working capital by managing its cash flows and expenses, divesting development assets and raising additional capital through private or public equity or debt financing. There can be no assurance that such financing or partnerships will be available on terms which are favorable to the Company or at all. While management of the Company believes that it has a plan to fund ongoing operations, there is no assurance that its plan will be successfully implemented. Failure to raise additional capital through one or more financings, divesting development assets or reducing discretionary spending could have a material adverse effect on the Company’s ability to achieve its intended business objectives. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements do not contain any adjustments that might result from the resolution of any of the above uncertainties.
Summary of Significant Accounting Policies
Use of Estimates
The preparation of the accompanying condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Significant areas requiring the use of management estimates include revenue and related discounts and allowances and accruals related to our operating activity including legal and other consulting expenses. Actual results could differ materially from such estimates under different assumptions or circumstances.
Compensating Balance Arrangements
The Company maintains a $50,000 short-term certificate of deposit as a compensating balance for the Company’s credit card. The certificate of deposit is classified as cash and cash equivalents in the accompanying balance sheet.
Reclassification
Certain reclassifications have been made to prior years' consolidated statements of operations to conform to current period presentation. These reclassifications had no effect on prior years' consolidated net loss or stockholders' deficit.
Fair Value of Financial Instruments
The Company considers the fair value of cash, accounts payable, accounts receivable and accrued expenses not to be materially different from their carrying value. These financial instruments have short-term maturities. We follow authoritative guidance with respect to fair value reporting issued by the Financial Accounting Standards Board (“FASB”) for financial assets and liabilities, which defines fair value, provides guidance for measuring fair value and requires certain disclosures. The guidance does not apply to measurements related to share-based payments. The guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
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Level 1:
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Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
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Level 2:
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Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
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Level 3:
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Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.
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There were no liabilities or assets measured at fair value as of September 30, 2019 or December 31, 2018.
Accounts Receivable, net
Accounts receivable consists of amounts due from wholesale distributors and specialty pharmacy providers. The Company records an allowance for doubtful accounts at the time potential collection risk is identified. The Company estimates its allowance based on historical experience, assessment of specific risks and discussions with individual customers. The Company believes the reserve is adequate to mitigate current collection risks. During the three and nine months ended September 30, 2019, the Company recorded a reduction in the allowance of approximately $55,000 and $14,000, respectively. The Company recorded no allowance for the three or nine months ended September 30, 2018.
Goodwill and Intangible Assets
The Company periodically reviews the carrying value of intangible assets, including goodwill, to determine whether impairment may exist. Goodwill and certain intangible assets are assessed annually, or when certain triggering events occur, for impairment using fair value measurement techniques. These events could include a significant change in the business climate, legal factors, a decline in operating performance, competition, sale or disposition of a significant portion of the business, or other factors. Specifically, goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. The Company uses level 3 inputs and a discounted cash flow methodology to estimate the fair value of a reporting unit. A discounted cash flow analysis requires one to make various judgmental assumptions including assumptions about future cash flows, growth rates, and discount rates. The assumptions about future cash flows and growth rates are based on the Company’s budget and long-term plans. Discount rate assumptions are based on an assessment of the risk inherent in the respective reporting units. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit.
For the three and nine months ended September 30, 2018, the Company recognized a loss on impairment of an intangible asset including goodwill of approximately $4.8 million. The impairment determination was primarily a result of the decision to divest assets that no longer aligned with the Company’s strategic objectives.
No impairment charges were recognized for the three and nine-month period ended September 30, 2019.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment indicators throughout the year and performs detailed testing whenever impairment indicators are present. In addition, we perform detailed impairment testing for indefinite-lived intangible assets, at least annually, at December 31. When necessary, the Company records charges for impairments. Specifically:
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•
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For finite-lived intangible assets, such as developed technology rights, and for other long-lived assets, we compare the undiscounted amount of the projected cash flows associated with the asset, or asset group, to the carrying amount. If the carrying amount is found to be greater, we record an impairment loss for the excess of book value over fair value. In addition, in all cases of an impairment review, we re-evaluate the remaining useful lives of the assets and modify them, as appropriate; and
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•
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For indefinite-lived intangible assets, such as acquired in-process R&D assets, each year and whenever impairment indicators are present, we determine the fair value of the asset and record an impairment loss for the excess of book value over fair value, if any.
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The Company did not recognize any loss on impairment for the three or nine-month periods ended September 30, 2019 or 2018.
Revenue Recognition
Customers Concentration
The Company operates in one segment and sells its prescription drug (Prestalia®) directly to specialty contracted retail pharmacies and indirectly through wholesalers. For the three months ended September 30, 2019, the Company’s three largest customers accounted for 22%, 20% and 13% of the Company’s total gross sales. For the nine months ended September 30, 2019, the Company’s three largest customers accounted for 30%, 28%, and 18% of the Company’s total gross sales. The Company works with a third-party pharmacy network manager to attract, retain, and manage the Company’s pharmacy customers and distribution channels. For the three and nine months months ended September 30, 2018, the Company’s three largest customers accounted for 42%, 36% and 12% of the Company’s total gross sales.
Revenue, Net
The Company adopted the new revenue recognition guidelines in accordance with ASC 606, Revenue from Contracts with Customers (ASC 606), effective with the quarter ended March 31, 2018.
The Company sells its medicines primarily to wholesale distributors and specialty pharmacy providers under agreements with payment terms typically less than 90 days. These customers subsequently resell the Company’s medicines to health care patients. Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied. The majority of the Company’s contracts have a single performance obligation to transfer medicines. Accordingly, revenues from medicine sales are recognized when the customer obtains control of the Company’s medicines, which occurs at a point in time, typically upon delivery to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring medicines and is generally based upon a list or fixed price less allowances for medicine returns, rebates and discounts. Company records an estimate of unrealized revenue reductions, and the related liability, for bottles sold to pharmacies but not yet prescribed.
Medicine Sales Discounts and Allowances
The nature of the Company’s contracts gives rise to variable consideration because of allowances for medicine returns, rebates and discounts. Allowances for medicine returns, rebates and discounts are recorded at the time of sale to wholesale pharmaceutical distributors and pharmacies. The Company applies significant judgments and estimates in determining some of these allowances. If actual results differ from its estimates, the Company will be required to make adjustments to these allowances in the future. The Company’s adjustments to gross sales are discussed further below.
Patient Access Programs
The Company offers discounts to patients under which the patient receives a discount on his or her prescription. In circumstances when a patient’s prescription is rejected by a third-party payer, the Company will pay for the full cost of the prescription. The Company reimburses pharmacies for this discount directly or through third-party vendors. The Company reduces gross sales by the amount of actual co-pay and other patient assistance in the period based on the invoices received. The Company also records an accrual to reduce gross sales for estimated co-pay and other patient assistance on units sold to distributors or pharmacies that have not yet been prescribed/dispensed to a patient. The Company calculates accrued co-pay and other patient assistance fee estimates using the expected value method. The estimate is based on contract prices, estimated percentages of medicine that will be prescribed to qualified patients, average assistance paid based on reporting from the third-party vendors and estimated levels of inventory in the distribution channel. Accrued co-pay and other patient assistance fees are included in “accrued expenses” on the condensed consolidated balance sheet. Patient assistance programs include both co-pay assistance and fully bought down prescriptions.
Sales Returns
Consistent with industry practice, the Company maintains a return policy that allows customers to return medicines within a specified period prior to and subsequent to the medicine expiration date. Generally, medicines may be returned for a period beginning six months prior to its expiration date and up to one year after its expiration date. The right of return expires on the earlier of one year after the medicine expiration date or the time that the medicine is dispensed to the patient. The majority of medicine returns
result from medicine dating, which falls within the range set by the Company’s policy and are settled through the issuance of a credit to the customer. The Company calculates sales returns using the expected value method. The estimate of the provision for returns is based upon industry experience. This period is known to the Company based on the shelf life of medicines at the time of shipment. The Company records sales returns in “accrued expenses” and as a reduction of revenue.
Cost of Goods Sold
Distribution Service Fees
The Company includes distribution service fees paid for inventory management services as cost of goods sold. The Company calculates accrued distribution service fee estimates using the most likely amount method. The Company accrues estimated distribution fees based on contractually determined amounts. Accrued distribution service fees are included in “accrued expenses” on the condensed consolidated balance sheet.
Shipping Fees
The Company includes fees incurred by pharmacies for shipping medicines to patients as cost of goods sold. The Company calculates accrued shipping fee estimates using the expected value method. The Company records accrued shipping fees in “accrued expenses” on the condensed consolidated balance sheet.
Non-Commercial Product
The Company records the cost of non-commercial product distributed to patients as a cost of goods sold.
Royalties on Product Sales
The Company records royalty fees on the sale of commercial product as a cost of goods sold.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-2, Leases (Topic 842) (“ASU No. 2016-2”). Under ASU No. 2016-2, an entity is required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. For leases with a term of twelve months or less, the lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities by class of underlying assets. ASU No. 2016-2 became effective for the Company beginning in the first quarter of 2019. The Company adopted this standard on January 1, 2019, using a modified retrospective approach at the adoption date through a cumulative-effect adjustment to retained earnings. The adoption did not have a material impact on its condensed consolidated statement of operations. The Company elected to not recognize lease assets and liabilities for leases with an initial term of twelve months or less.
Net Income (Loss) per Common Share
Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss by the weighted average number of common shares and common stock equivalents outstanding for the period. Common stock equivalents are only included when their effect is dilutive. Potentially dilutive securities which include outstanding warrants, stock options and preferred stock have been excluded from the computation of diluted net loss per share as their effect would be anti-dilutive. For all periods presented, basic and diluted net loss were the same.
The following table presents the computation of net loss per share (in thousands, except share and per share data):
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2019
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2018
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2019
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2018
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Numerator
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Net loss
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$
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(2,556
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)
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$
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(7,779
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)
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$
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(7,894
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)
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$
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(13,788
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)
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Preferred stock dividends
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(389
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)
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|
(379
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)
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(1,128
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)
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(650
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)
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Net Loss allocable to common stock holders
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$
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(2,945
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)
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$
|
(8,158
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)
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$
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(9,022
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)
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$
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(14,438
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)
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Denominator
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Weighted average common shares outstanding used to compute net loss per share, basic and diluted
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10,869,530
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11,241,684
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10,830,816
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10,864,036
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Net loss per share of common stock, basic and diluted
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Net loss per share
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$
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(0.27
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)
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$
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(0.73
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)
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$
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(0.83
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)
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$
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(1.33
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)
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Potentially dilutive securities not included in the calculation of diluted net loss per common share because to do so would be anti-dilutive are as follows:
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For the Three and Nine Months ended September 30,
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2019
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2018
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Stock options outstanding
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4,820,407
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5,380,957
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Warrants
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35,667,329
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35,646,829
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Series C Preferred Stock
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68,000
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68,000
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Series D Preferred Stock
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3,000
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3,000
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Series E Preferred Stock
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34,780,000
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34,990,000
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Series F Preferred Stock
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3,810,000
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3,080,000
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Total
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79,148,736
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79,168,786
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Note 2 – Inventory
Inventory consists of raw material, work-in-process and finished goods stated at the lower of cost or net realizable value with cost determined on a first-in, first-out basis. The Company reviews the composition of inventory at each reporting period in order to identify obsolete, slow-moving, quantities in excess of expected demand, or otherwise non-salable items.
Inventory as of September 30, 2019 and December 31, 2018 are as follows:
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September 30, 2019
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December 31, 2018
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(in thousands)
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Work-in-Process
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$
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223
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|
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$
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—
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Raw Materials
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73
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|
|
147
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Finished Goods
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177
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|
95
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Inventory, Net
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$
|
473
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$
|
242
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Note 3 - Intangible Assets
Intangible Asset Summary
Intangible assets as of September 30, 2019 are as follows:
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Net Book Value
September 30, 2019
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Remaining
Estimated
Useful Life
(Years)
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Annual
Amortization
Expense
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(in thousands)
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Intangible asset - Prestalia
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$
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276
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|
|
4.25
|
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$
|
65
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Intangible asset - DyrctAxess
|
63
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|
|
11.84
|
|
5
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Total
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$
|
339
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|
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$
|
70
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Amortization expense for the three months ended September 30, 2019 and September 30, 2018 was approximately $18,000 and $41,000, respectively. Amortization expense for the nine months ended September 30, 2019 and September 30, 2018 was approximately $53,000 and $288,000, respectively.
Note 4 – Notes Payable
On June 28, July 3, July 17, and August 5, 2019 the Company entered into term loan subscription agreements with certain accredited investors, pursuant to which the Company issued secured promissory notes (the “Notes”) in the aggregate principal amount of approximately $5.7 million. The Company paid $707,000 in debt issuance costs which was recorded as a debt discount to be amortized as interest expense over the term of the loan using the effective interest rate method.
The Notes accrue interest at a rate of 12.0% per annum. Interest is payable quarterly with the first interest payment to be made on December 28, 2019, and each subsequent payment every three months thereafter.
The unpaid principal balance of the Notes, plus accrued and unpaid interest thereon, will mature on the earliest to occur of: (i) June 28, 2020 (subject to extension for up to sixty (60) days based upon the mutual agreement of the Company and the holders of a majority of the unpaid principal balance of all outstanding Notes) or (ii) at any time following an Event of Default. The Notes may not be prepaid without the prior written consent of the holders of the Notes. The Notes are secured by a first lien and security interest on all the assets of the Company and certain of its wholly owned subsidiaries.
The Company recognized approximately and $147,000 and $148,000 in interest expense related to Notes for the three and nine months ended September 30, 2019, respectively.
Note 5 - Licensing Agreements
Les Laboratories Servier
As a result of the Asset Purchase Agreement that the Company entered into with Symplmed Pharmaceuticals LLC in June 2017, Symplmed assigned to the Company an Amended and Restated License and Commercialization Agreement with Les Laboratories Servier, pursuant to which the Company has the exclusive right to manufacture, have manufactured, develop, promote, market, distribute and sell Prestalia® in the U.S. (and its territories and possessions). The terms of the agreement include single-digit royalty payments based on net sales and milestone payments based upon the attainment of sales thresholds. The agreement includes a termination clause pursuant to which Servier has the right to terminate the agreement in various circumstances, including, without limitation, as a result of the failure by the Company to achieve certain sales thresholds by the dates set forth in the agreement.
For the three month and nine month periods ended September 30, 2019 the Company paid $8,000 and $27,000, respectively, for royalties under the license agreement with Les Laboratories -Servier. No royalties were paid for the three or nine month periods ended September 30, 2018.
Biofarma
As consideration for the Prestalia Trademark license which the Company assumed in connection with the Asset Purchase Agreement with Symplmed, the Company pays low single digit royalties to Biofarma, an affiliate of Servier and the holder of the Prestalia trademark. For the three month and nine month periods ended September 30, 2019 the Company paid $1,000 and $3,000, respectively, to Biofarma. No royalties were paid for the three or nine month period ended September 30, 2018.
License of DiLA2 Assets
On March 16, 2018, the Company entered into an exclusive sublicensing agreement for certain intellectual property rights to its DiLA2 delivery system. The agreement included an upfront payment of $200,000 and future additional consideration for sales
and development milestones. The upfront fee was contingent upon the Company obtaining a third-party consent to the agreement within ninety days of execution. As of September 30, 2019 and December 31, 2018, the Company had not obtained consent for the sublicense and has classified the upfront payment as an accrued liability on its balance sheet.
Note 6 - Related Party Transactions
Due to Related Party
The Company and other related entities have had a commonality of ownership and/or management control, and as a result, the reported operating results and/or financial position of the Company could significantly differ from what would have been obtained if such entities were autonomous.
The Company had a Master Services Agreement (“MSA”) with Autotelic Inc., a related party that is partly owned by one of the Company’s former Board members and executive officers, namely Vuong Trieu, Ph.D., effective November 15, 2016. The MSA stated that Autotelic Inc. will provide business functions and services to the Company and allowed Autotelic Inc. to charge the Company for these expenses paid on its behalf. The MSA included personnel costs allocated based on amount of time incurred and other services such as consultant fees, clinical studies, conferences and other operating expenses incurred on behalf of the Company. The MSA required a 90-day written termination notice in the event either party requires to terminate such services. We and Autotelic Inc. agreed to terminate the MSA effective October 31, 2018. Dr. Trieu resigned as a director of our company effective October 1, 2018.
During the period commencing November 15, 2016 (the “Effective Date”) and ending on the date that the Company had completed an equity offering of either common or preferred stock in which the gross proceeds therefrom is no less than $10.0 million (the “Equity Financing Date”), the Company paid Autotelic the following compensation: cash in an amount equal to the actual labor cost (paid on a monthly basis), plus 100% markup in warrants for shares of the Company’s common stock with a strike price equal to the fair market value of the Company’s common stock at the time said warrants were issued. The Company also paid Autotelic for the services provided by third party contractors plus 20% mark up. The warrant price per share was calculated based on the Black-Scholes model.
After the Equity Financing Date, the Company paid Autotelic Inc. a cash amount equal to the actual labor cost plus 100% mark up of provided services and 20% mark up of provided services by third party contractors or material used in connection with the performance of the contracts, including but not limited to clinical trial, non-clinical trial, Contract Manufacturing Organizations, FDA regulatory process, Contract Research Organizations and Chemistry and Manufacturing Controls.
In accordance with the MSA, Autotelic Inc. billed the Company for personnel and service expenses Autotelic Inc. incurred on behalf of the Company. For the nine months ended and September 30, 2018, Autotelic Inc. billed a total of approximately $778,000, including personnel costs of $371,000. No costs were billed for the period ended September 30, 2019. An unpaid balance of approximately $4,000 is included in due to related party in the accompanying balance sheets for both periods ending September 30, 2019 and December 31, 2018.
In April 2018, and in connection with the closing of our private placement on that date, we entered into a Compromise and Settlement Agreement with Autotelic Inc. pursuant to which we agreed to issue to Autotelic Inc. an aggregate of 162.59 shares of Series E Preferred Stock to settle accounts payable of $813,000 and Warrants to purchase up to 1,345,040 shares of common stock to satisfy accrued and unpaid fees in the aggregate amount of approximately $740,000, and other liabilities, owed to Autotelic Inc. as of March 31, 2018 pursuant to the MSA. The warrants have a five-year term, an initial exercise price of $0.55, and have a fair value of approximately $1.5 million resulting in a loss on settlement of debt of approximately $750,000.
Transactions with BioMauris, LLC/Erik Emerson
Until February of 2019, the Company had engaged the services of BioMauris, LLC, of which Erik Emerson, our former Chief Commercial Officer and a current director of Adhera, is Executive Chairman.
During the nine months ended September 30, 2019 and 2018, the Company recorded approximately $32,000 and $496,000, respectively, for related party expenses incurred under the agreement. As of December 31, 2018, the Company recorded approximately, $24,000 as a related party liability on the accompanying balance sheet for amounts due BioMauris, LLC. No related party liability was recorded as of September 30, 2019.
Beginning in the second quarter of 2019 when components of the financial transaction took place and fully effective in July 2019, Mr. Emerson, a member our Board of Directors and our former Chief Commercial Officer, became the owner of an equity interest of approximately 22% in Pharma Hub Network, our third-party network manager. During the third quarter of 2019, the
Company terminated the relationship with Pharma Hub Network. For the three and nine months ended September 30, 2019, the Company recorded approximately $25,000 and $62,000, respectively, of related party expense for services provided by Pharma Hub Network. No related party liability was recorded as of September 30, 2019 or December 31, 2018.
Note 7 - Stockholders’ Equity
Series E Convertible Preferred Stock Private Placement
In April and May 2018, the Company entered into Subscription Agreements with certain accredited investors and conducted a closing pursuant to which we sold 2,812 shares of our Series E Preferred, at a purchase price of $5,000 per share of Series E Preferred. Each share of Series E Preferred is initially convertible into shares of our common stock at a conversion price of $0.50 per share of common stock. In addition, each investor received a 5 year warrant to purchase 0.75 shares of common stock for each share of common stock issuable upon the conversion of the Series E Preferred purchased by such investor at an initial exercise price equal to $0.55 per share of common stock, subject to adjustment thereunder. In July of 2018, the conversion price of the warrants was adjusted down to $0.50 upon issuance of the Series F Convertible Preferred Stock. Series E Preferred accrues 8% dividends per annum which are payable in cash or stock at the Company’s discretion. The Series E Preferred has voting rights, dividend rights, liquidation preferences, conversion rights and anti-dilution rights as described in the Certificate of Designation of Preferences, Rights and Limitations of the Preferred Stock, which we filed with the Secretary of State of Delaware in April 2018. The Warrants have full-ratchet anti-dilution protection, are exercisable for a period of five years and contain customary exercise limitations.
We received net proceeds of approximately $12.2 million from the sale of the Series E Preferred, after deducting placement agent fees and estimated expenses payable by us of approximately $2.0 million associated with such closing. In connection with the private placement described above, we also issued to the placement agent for such private placement a Warrant to purchase 2,958,460 shares of our common stock.
In October 2018, an investor converted 2 shares of Series E Preferred into 20,000 shares of our common stock.
In April 2019, the Company issued 107,846 unregistered shares of our common stock to a holder of our Series E Convertible Preferred Stock in connection with the conversion of $53,923 of “Stated Value” of our Series E Convertible Preferred Stock.
As of September 30, 2019, the Company had recorded accrued dividends of approximately $2.0 million on Series E Preferred Stock.
Series F Convertible Preferred Stock Private Placement
In July 2018, the Company entered into Subscription Agreements with certain accredited investors and conducted a closing pursuant to which we sold 308 shares of our Series F Preferred, at a purchase price of $5,000 per share of Series F Preferred. Each share of Series F Preferred is initially convertible into shares of our common stock at a conversion price of $0.50 per share of common stock. In addition, each investor received a 5 year warrant (the “Warrants”, and collectively with the Preferred Stock, the “Securities”) to purchase 0.75 shares of common stock for each share of common stock issuable upon the conversion of the Series F Preferred purchased by such investor at an initial exercise price equal to $0.55 per share of common stock, subject to adjustment thereunder. The Series F Preferred accrues 8% dividends per annum which are payable in cash or stock at the Company’s discretion. The Series F Preferred has voting rights, dividend rights, liquidation preferences, conversion rights and anti-dilution rights as described in the Certificate of Designation of Preferences, Rights and Limitations of the Preferred Stock, which we filed with the Secretary of State of Delaware in July 2018. The Warrants have full-ratchet anti-dilution protection, are exercisable for a period of five years and contain customary exercise limitations.
The Company received proceeds of approximately $1.4 million from the sale of the Securities, after deducting placement agent fees and estimated expenses payable by us of approximately $180,000 associated with such closing. We used the proceeds of the offering for funding our commercial operations to the sale and promotion of our Prestalia product, working capital needs, capital expenditures, the repayment of certain liabilities and other general corporate purposes. In connection with the private placement described above, we also issued to the placement agent for such private placement a Warrant to purchase 308,000 shares of our common stock. The Warrant has a five-year term and an initial exercise price of $0.55 per share.
On November 9, 2018, the Company entered into Subscription Agreements with certain accredited investors and conducted a closing pursuant to which we sold 73 shares of our Series F Preferred Stock, at a purchase price of $5,000 per share of Preferred Stock. Each share of Series F Preferred is initially convertible into shares of our common stock at a conversion price of $0.50 per share of common stock. In addition, each investor received a 5 year warrant to purchase 0.75 shares of common stock for each share of common stock issuable upon the conversion of the Series F Preferred purchased by such investor at an initial exercise price equal to $0.55 per share of common stock, subject to adjustment thereunder. We received total net proceeds of approximately $0.3 million
from the issuance of the securities described above, after deducting placement agent fees and estimated expenses payable by us associated with such closing. In connection with the private placement described above, we also issued to the placement agent for such private placement a Warrant to purchase 73,000 shares of our common stock. The Warrant has a five-year term and an initial exercise price of $0.55 per share.
As of September 30, 2019, the Company had recorded accrued dividends of approximately $177,000 on Series F Preferred Stock.
Warrants
As of September 30, 2019, there were 35,667,329 warrants outstanding, with a weighted average exercise price of $0.63 per share, and annual expirations as follows:
|
|
|
|
|
|
|
Expiring in 2020
|
1,189,079
|
|
|
Expiring in 2021
|
343,750
|
|
|
Expiring in 2023
|
33,795,847
|
|
|
Expiring thereafter
|
338,653
|
|
|
Total
|
35,667,329
|
|
The above includes price adjustable warrants totaling 34,737,030 shares.
A total of 600,000 warrants expired during the three and nine months ended September 30, 2019.
Tender Offer - May 2019
On May 28, 2019, the Company filed a Tender Offer Statement on Schedule TO. The Schedule TO related to the offer (the “Offer”) by the Company to all holders of the Company’s outstanding warrants that were issued to investors in connection with the Company’s private placement of its Series E Convertible Preferred Stock and Series F Convertible Preferred Stock during 2018, which warrants are exercisable for shares of the Company’s common stock at an exercise price of $0.50 per share (subject to adjustment) with respect to the warrants that were issued in connection with the Company’s private placement of its Series E Convertible Preferred Stock and $0.55 per share with respect to the warrants that were issued in connection with the Company’s private placement of its Series F Convertible Preferred Stock, to receive two (2) shares of common stock in exchange for every warrant tendered by the holders thereof.
On June 6, 2019, the Company amended the Schedule TO to change the conversion terms on the issuance of warrant.
On July 2, 2019, the Company announced the termination of the exchange offer. As a result of the termination of the Offer, no Warrants were accepted for exchange or exchanged pursuant to the Offer.
Tender Offer - August 2019
On August 20, 2019, the Company filed a Tender Offer Statement on Schedule TO. The Schedule TO related to the offer by the Company to all holders of the Company’s outstanding shares of Series E Convertible Preferred Stock and Series F Convertible Preferred Stock to receive, in exchange for each share of preferred stock tendered by the holders thereof, such number of shares of common stock as is equal to the quotient obtained by dividing the “stated value” of such share of preferred stock by $0.50.
On September 26, 2019, the Company announced the termination of the Offer. As a result of the termination of the Offer, no shares of preferred stock were accepted for exchange or exchanged pursuant to the Offer.
Note 8 - Stock Incentive Plans
Stock Options
The following table summarizes stock option activity for the nine months ended September 30, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Shares
|
|
Weighted
Average
Exercise Price
|
|
Outstanding, December 31, 2018
|
5,613,057
|
|
|
$
|
0.83
|
|
|
Options granted
|
1,635,000
|
|
|
0.37
|
|
|
Options expired / forfeited
|
(2,427,650
|
)
|
|
0.64
|
|
|
Outstanding, September 30, 2019
|
4,820,407
|
|
|
0.71
|
|
|
Exercisable, September 30, 2019
|
2,986,333
|
|
|
$
|
0.76
|
|
The following table summarizes additional information on stock options outstanding at September 30, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Range of
Exercise
Prices
|
|
Number Outstanding
|
|
Weighted-
Average
Remaining Contractual Life (Years)
|
|
Weighted Average Exercise
Price
|
|
Number Exercisable
|
|
Weighted Average Exercise
Price
|
|
$0.28 - $1.00
|
|
4,312,000
|
|
|
8.59
|
|
$
|
0.57
|
|
|
2,762,000
|
|
|
$
|
0.66
|
|
|
$1.50 - $1.80
|
|
493,207
|
|
|
7.93
|
|
$
|
1.79
|
|
|
209,133
|
|
|
$
|
1.79
|
|
|
$2.60 - $6.35
|
|
15,200
|
|
|
0.77
|
|
$
|
4.48
|
|
|
15,200
|
|
|
$
|
4.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
4,820,407
|
|
|
8.50
|
|
$
|
0.71
|
|
|
2,986,333
|
|
|
$
|
0.76
|
|
Weighted-Average Exercisable Remaining Contractual Life (Years) 8.09
During the nine months ended September 30, 2019, the Company granted an aggregate of 1,635,000 stock options to employees. No stock options were granted for the three month period ended September 30, 2019.
Total expense related to stock options was approximately $72,000 and $814,000 for the three months ended September 30, 2019 and 2018, respectively and approximately $708,000 and $1.3 million for the nine months ended September 30, 2019 and 2018, respectively.
As of September 30, 2019, the Company had approximately $831,000 of total unrecognized compensation expense related to unvested stock options.
As of September 30, 2019, the intrinsic value of options outstanding was zero.
Note 9 - Commitments and Contingencies
Litigation
Because of the nature of the Company’s business it is subject to claims and/or threatened legal actions, which arise out of the normal course of business. Other than the disclosure below, as of the date of this filing, the Company is not aware of any pending lawsuits against it, its officers or directors.
Paragraph IV Challenge
The Company’s Prestalia product was involved in a paragraph IV challenge regarding patents issued to perindopril arginine. This challenge, which was pending in the United States District Court for the District of Delaware (No. 1:17-cv-276), was captioned Apotex Inc. and Apotex Corp. v. Symplmed Pharmaceuticals, LLC and Les Laboratoires Servier. The challengers (Apotex Inc. and Apotex Corp. (“Apotex”)) filed an Abbreviated New Drug Application seeking FDA approval to market a generic version of Prestalia and included a Paragraph (IV) certification. In the litigation, Apotex sought a declaratory judgment that no valid claims of the two patents the Company listed in the FDA Orange Book as having claims covering Prestalia, U.S. Patent No. 6,696,481 and 7,846,961, will be infringed by the Apotex proposed generic version of Prestalia and that the claims of those patents are invalid. The challenge was designed to provide Apotex with an opportunity to enter the market with a generic version of Prestalia, ahead of the expiration of the patents with claims covering that product.
Apotex entered into negotiations with Symplmed Pharmaceuticals, LLC (which entity sold its assets relating to Prestalia® to us in June 2017, including its License and Commercialization Agreement with Les Laboratories Servier) and Les Laboratories
Servier (which entity owns or controls intellectual property rights relating to Prestalia®, which rights have been licensed to the Company to resolve the challenge in the second quarter of 2017. Such parties, along with us, have reached an agreement on terms that result in a delay to the challengers’ ability to enter the market with a generic version of Prestalia, while still providing the challenger with the right to enter the market prior to the expiration of the patent covering such product. Specifically, the parties have entered into a Confidential Settlement Agreement in connection with the settlement of the matter, pursuant to which, among other things, the parties entered into a Confidential License Agreement, whereby Symplmed, Servier and our company agreed to grant to Apotex a non-transferable, non-sublicensable, perpetual, irrevocable, royalty-free, non-exclusive license to the two patents listed in the FDA Orange Book as having claims covering Prestalia to make, use and market a generic version of Prestalia, or import a generic version of Prestalia from India into the United States, on or after January 1, 2021.
As a result of the foregoing, the matter is now settled.
Leases
The Company entered into a Standard Form Office Lease with ROC III Fairlead Imperial Center, LLC, as landlord, pursuant to which we lease our corporate headquarters located at 4721 Emperor Boulevard, Suite 350, Durham, North Carolina 27703 for a term of 37 months starting on October 1, 2018. Our base monthly rent for such space is currently $6,458, which amount will increase to $7,057 for the final month of the term. Other than the lease for our corporate headquarters, we do not own or lease any real property or facilities that are material to our current business operations. As we expand our business operations, we may seek to lease additional facilities of our own in order to support our operational and administrative needs under our current operating plan.
The Company adopted ASU No. 2016-2 on January 1, 2019, using a modified retrospective approach at the adoption date through a cumulative-effect adjustment to retained earnings. The adoption did not have a material impact on its condensed consolidated statement of operations. However, the new standard required the Company to establish approximately $0.2 million of liabilities and corresponding right-of-use assets of approximately $0.2 million on its condensed consolidated balance sheet for operating leases on rented office properties that existed as of the January 1, 2019, adoption date. The total right-of-use asset was approximately $157,000 as of September 30, 2019 and is reflected in the operating lease right of use asset on the accompanying condensed consolidated balance sheet. The total related liability was approximately $165,000 as of September 30, 2019, of which approximately $77,000 is included in current portion of operating lease liability and approximately $88,000 is reflected in operating lease liability, net of current portion on the accompanying condensed consolidated balance sheet.
Note 10 - Subsequent Events
Except for the events discussed below, there were no subsequent events that required recognition or disclosure. The Company evaluated subsequent events through the date the financial statements were issued and filed with the Securities and Exchange Commission.
On October 30, 2019, the Company repurchased 20 shares of Series F Convertible Preferred Stock including accrued and unpaid dividends and warrants to purchase 150,000 shares of common stock for $100,000 from our former CEO pursuant to an amendment to the settlement agreement dated April 4, 2019. The Company also committed to purchase from such officer the remaining Series F Convertible Preferred Stock and related warrants for $100,000 by not later than March 1, 2020.
On November 1, 2019, the Company issued 350,000 stock options to an employee at exercise price of $.09 per share. The grant included both time and performance based vesting.
On November 19, 2019, the Company entered into an Amendment No. 4 to the Amended and Restated License and Commercialization Agreement with Les Laboratories Servier, which modified the agreement to delay the date by which the Company would be required to meet certain net sales milestones as set forth in the agreement. As per the license and commercialization agreement, as amended, Les Laboratories Servier may terminate the agreement if net sales of Prestalia® by the Company are below $1.0 million for two successive calendar quarters beginning after June 30, 2020.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes a number of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that reflect management’s current views with respect to future events and financial performance. The following discussion should be read in conjunction with the financial statements and related notes contained in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (“SEC”) on
April 16, 2019. Forward-looking statements are projections in respect of future events or financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other comparable terminology.
Forward-looking statements are inherently subject to risks and uncertainties, many of which we cannot predict with accuracy and some of which we might not even anticipate. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions at the time made, we can give no assurance that such expectations will be achieved. Future events and actual results, financial and otherwise, may differ materially from the results discussed in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements after the date of this Quarterly Report on Form 10-Q or to conform them to actual results, new information, future events or otherwise, except as otherwise required by securities and other applicable laws.
The following factors, among others, could cause our or our industry’s future results to differ materially from historical results or those anticipated:
|
|
|
|
•
|
our ability to obtain additional and substantial funding for our company on an immediate basis, whether pursuant to a capital raising transaction arising from the sale of our securities, a strategic transaction or otherwise;
|
|
|
|
|
•
|
our ability to repay or restructure any outstanding indebtedness owed by our company to third parties, including the indebtedness represented by the secured promissory notes that we issued between June and August 2019, or to convert such indebtedness into the equity securities of our company;
|
|
|
|
|
•
|
our ability to attract and/or maintain research, development, commercialization and manufacturing partners, including, in particular, Les Laboratories Servier (from which company we license rights with respect to our Prestalia product), and to fulfill our obligations under any agreements that we have entered into with such partners, such that such agreements remain in full force and effect;
|
|
|
|
|
•
|
the ability of our company and/or a partner to successfully complete product research and development, including pre-clinical and clinical studies and commercialization;
|
|
|
|
|
•
|
the ability of our company and/or a partner to obtain and maintain required governmental approvals, including product patent approvals, and to comply with all required regulatory and reporting obligations with respect thereto;
|
|
|
|
|
•
|
the ability of our company and/or a partner to develop and commercialize products that can compete favorably with those of our competitors;
|
|
|
|
|
•
|
the timing of costs and expenses related to the research and development programs of our company and/or our partners;
|
|
|
|
|
•
|
the timing and recognition of revenue from milestone payments and other sources not related to product sales;
|
|
|
|
|
•
|
our ability to obtain suitable facilities in which to conduct our planned business operations on acceptable terms and on a timely basis;
|
|
|
|
|
•
|
our ability to satisfy our disclosure obligations under the Securities Exchange Act of 1934, as amended, and to maintain the registration of our common stock thereunder;
|
|
|
|
|
•
|
our ability to attract and retain qualified officers, employees and consultants as necessary; and
|
|
|
|
|
•
|
costs associated with any product liability claims, patent prosecution, patent infringement lawsuits and other lawsuits.
|
These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled “Risk Factors” set forth in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on April 16, 2019, any of which may cause our company’s or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks may cause our or our industry’s actual results, levels of activity or performance to be materially different from any future results, levels of activity or performance expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity or performance. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements. We are under no duty to update any forward-looking statements after the date of this report to conform these statements to actual results.
As used in this quarterly report and unless otherwise indicated, the terms “we,” “us,” “our” or the “Company” refer to Adhera Therapeutics, Inc., a Delaware corporation, and its wholly-owned subsidiaries, MDRNA Research, Inc., Cequent Pharmaceuticals, Inc., Atossa Healthcare, Inc., and IthenaPharma, Inc. Unless otherwise specified, all dollar amounts are expressed in United States dollars. Our common stock is currently listed on the OTC Market, OTCQB tier, under the symbol “ATRX.”
Corporate Overview
Nature of Business
We are an emerging specialty pharmaceutical company that leverages innovative distribution models and technologies to improve the quality of care for patients in the United States suffering from chronic diseases. We are focused on fixed dose combination (“FDC”) therapies in hypertension, with plans to expand the portfolio of drugs we commercialize to include other therapeutic areas.
Our mission is to provide effective and patient centric treatment for hypertension and resistant hypertension while actively seeking additional assets that can be commercialized through our proprietary Total Care System (“TCS”). At the core of our TCS is DyrctAxess, our patented technology platform. DyrctAxess is designed to offer enhanced efficiency, control and access to the information necessary to empower patients, physicians and manufacturers to achieve optimal care.
We began marketing Prestalia®, a single-pill FDC of perindopril arginine (“perindopril”) and amlodipine besylate (“amlodipine”) in June of 2018. By combining Prestalia®, DyrctAxess and an independent pharmacy network, we have created a proprietary system for drug adherence and the effective treatment of hypertension, improving the distribution of FDC hypertensive drugs, such as our FDA-approved product Prestalia®, as well as improving the distribution of devices for therapeutic drug monitoring (“TDM”) (e.g., blood pressure monitors), as well as patient counseling and prescription reminder services. We are focused on demonstrating the therapeutic and commercial value of our TCS through the commercialization of Prestalia®. Prestalia® was developed in coordination with Les Laboratories Servier, a French pharmaceutical conglomerate, that sells the formulation outside the United States under the brand names Coveram® and/or Viacoram®. Prestalia® was approved by the U.S. Food and Drug Administration (“FDA”) in January 2015 and is distributed through our DyrctAxess platform, which we acquired in 2017.
By combining Prestalia, DyrectAxess, and a specialty pharma network, we have created a proprietary platform for drug adherence and the effective treatment of hypertension, improving the distribution of FDC hypertensive drugs, such as our FDA-approved product Prestalia, devices for therapeutic drug monitoring (e.g., blood pressure and other cardiac monitors), as well as patient counseling and prescription reminder services.
As our strategy is to be a commercial pharmaceutical company, we will drive a primary corporate focus on revenue generation through our commercial assets, while continuing to develop our technology platform and TCS. We intend to create value through the expanded commercialization of our FDA-approved product, Prestalia®, while continuing to develop and leverage our TCS to further strengthen our commercial presence.
On September 4, 2019, we entered into a Co-Promotion Agreement with Allegis Pharmaceuticals, LLC (“Allegis”) to co-promote Allegis’ FDA approved product Nitrolingual® Pumpspray, indicated for acute relief of an attack or prophylaxis of angina pectoris due to coronary artery disease. The Co-Promotion Agreement relates to both the branded and the authorized generic versions of the product.
Results of Operations
Comparison of the Three Months Ended September 30, 2019 to the Three Months Ended September 30, 2018
Net Sales
We recorded net sales of approximately $51,000, net of related discounts for the three months ended September 30, 2019 compared to net sales of approximately $135,000 for the three-month period ended September 30, 2018. The decrease in sales represents revenues from the sale of Prestalia®. The reduction in sales was primarily due to our strategic decision to transition to a new pharmacy network during the quarter which will reduce costs and provide nationwide distribution of Prestalia® and our production supply issues including production delays and serialization activities.
Cost of Sales
Cost of sales were $106,000 for the three months ended September 30, 2019 compared to $67,000 for the three months ended September 30, 2018, and represents cost of sales from the sale of Prestalia®. The increase in cost of sales was primarily due to an increase in the cost of services provided by the pharmacy network utilized for the three month period ended September 30, 2019 as compared to the three months ended September 30, 2018.
Operating Expenses
Our operating expenses for the three months ended September 30, 2019 and 2018 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
September 30, 2019
|
|
September 30, 2018
|
|
Increase/(Decrease)
|
|
|
(in thousands)
|
|
Sales and marketing
|
$
|
1,311
|
|
|
$
|
871
|
|
|
$
|
440
|
|
|
General and administrative expenses
|
840
|
|
|
2,141
|
|
|
(1,301
|
)
|
|
Goodwill and intangible asset impairment
|
—
|
|
|
4,794
|
|
|
(4,794
|
)
|
|
Amortization
|
18
|
|
|
41
|
|
|
(23
|
)
|
|
Total operating expenses
|
$
|
2,169
|
|
|
$
|
7,847
|
|
|
$
|
(5,678
|
)
|
Sales, Marketing and Commercial Operations
For the three months ended September 30, 2019, sales, marketing and commercial operations expense increased by approximately $440,000 as compared to the prior period, primarily due to our digital marketing campaign and other marketing related activities for Prestalia® and regulatory consulting costs incurred for manufacturing serialization.
General and Administrative
General and administrative expense decreased by approximately $1.3 million for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018, primarily due to decrease in share-based compensation of approximately $737,000 and reorganization costs of $282,000 incurred for the three months ended September 30, 2018 compared to no reorganization cost for the same period of 2019.
Goodwill and intangible asset impairment
During the three months ended September 30, 2019, the Company determined that an intangible asset and goodwill was impaired and, as a result, a loss on impairment of $4.8 million was recognized for the three-month period ended September 30, 2018. The impairment determination was primarily a result of the decision to divest of assets that no longer align with the Company’s strategic objectives. There was no such loss on impairment for the three months ended September 30, 2019.
Amortization Expense
Amortization of intangible assets decreased by approximately $23,000 for the three-month period ended September 30, 2019 primarily due to the write-off of intangibles in 2018 as a result of our decision to divest assets that no longer align with our strategic objectives.
Other Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
September 30, 2019
|
|
September 30, 2018
|
|
(Increase)/Decrease
|
|
|
(in thousands)
|
|
Interest expense
|
$
|
(332
|
)
|
|
$
|
—
|
|
|
$
|
(332
|
)
|
|
Loss on settlement
|
—
|
|
|
—
|
|
|
—
|
|
|
Total other expense, net
|
$
|
(332
|
)
|
|
$
|
—
|
|
|
$
|
(332
|
)
|
Total net other expense for the three months ended September 30, 2019 increased by $332,000 compared to the three months ended September 30, 2018 primarily due to accrued interest and amortization of debt issuance costs for our term loan.
Comparison of the Nine Months Ended September 30, 2019 to the Nine Months Ended September 30, 2018
Net Sales
We recorded net sales of approximately $120,000 for the nine months ended September 30, 2019 as compared to approximately $135,000 for the nine months ended September 30, 2018, which represents revenues from the sale of Prestalia®. The reduction in sales was primarily due to our strategic decision to transition to a new pharmacy network during the third quarter of
2019 which will reduce costs and provide nationwide distribution of Prestalia® and our production supply issues including production delays and serialization activities.
Cost of Sales
Cost of sales were approximately $304,000 for the nine months ended September 30, 2019 as compared to $67,000 for the nine months ended September 30, 2018, which represents cost of sales from the sale of Prestalia®. The increase in cost of sales was primarily due to an increase in the cost of services provided by the pharmacy network utilized for the nine month period ended September 30, 2019 as compared to the nine months ended September 30, 2018.
Operating Expenses
Our operating expenses for the nine months ended September 30, 2019 are summarized as follows in comparison to our expenses for the nine months ended September 30, 2018.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Nine Months Ended
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|
|
September 30, 2019
|
|
September 30, 2018
|
|
Increase/(Decrease)
|
|
|
(in thousands)
|
|
Sales and marketing
|
$
|
3,518
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|
|
$
|
3,457
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|
|
$
|
61
|
|
|
Research and development
|
—
|
|
|
173
|
|
|
(173
|
)
|
|
General and administrative expenses
|
3,806
|
|
|
4,120
|
|
|
(314
|
)
|
|
Goodwill and intangible asset impairment
|
—
|
|
|
4,794
|
|
|
(4,794
|
)
|
|
Amortization
|
53
|
|
|
288
|
|
|
(235
|
)
|
|
Total operating expenses
|
$
|
7,377
|
|
|
$
|
12,832
|
|
|
$
|
(5,455
|
)
|
Sales, Marketing and Commercial Operations
For the nine months ended September 30, 2019, sales, marketing and commercial operations expense increased by approximately $61,000, as compared to the prior period, primarily due to our digital marketing campaign related to the sales of Prestalia®.
Research and Development
For the nine months ended September 30, 2019, research and development expense decreased by approximately $173,000, as compared to the nine months ended September 30, 2018 due to the transition of our strategic focus from R&D activities to sales, marketing and commercial operations activities beginning in the second quarter of 2018.
General and Administrative
General and administrative expense decreased by approximately $314,000 for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018, primarily due to a decrease in stock based compensation expense offset by severance payments made to executive management during the nine months ended September 30, 2019.
Goodwill and intangible asset impairment
During the nine months ended September 30, 2018, the Company determined that an intangible asset and goodwill was impaired and, as a result, a loss on impairment of $4.8 million was recognized for the nine-month period ended September 30, 2018. The impairment determination was primarily a result of the decision to divest of assets that no longer align with the Company’s strategic objectives. There was no such loss on impairment for the nine months ended September 30, 2019.
Amortization Expense
Amortization of intangible assets decreased by approximately $235,000 for the nine-month period ended September 30, 2019 primarily due to the write-off of intangibles in 2018 as a result of our decision to divest assets that no longer align with our strategic objectives.
Other Expense
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Nine Months Ended
|
|
|
September 30, 2019
|
|
September 30, 2018
|
|
(Increase)/Decrease
|
|
|
(in thousands)
|
|
Interest expense
|
$
|
(333
|
)
|
|
$
|
(149
|
)
|
|
$
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(184
|
)
|
|
Loss on settlement
|
—
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|
|
(875
|
)
|
|
875
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|
|
Total other expense, net
|
$
|
(333
|
)
|
|
$
|
(1,024
|
)
|
|
$
|
691
|
|
Total net other expense for the nine months ended September 30, 2019 decreased approximately $691,000 compared to the nine months ended September 30, 2018 primarily due to a loss on settlement of a related party liability for the nine months ended September 30, 2018 as compared to the same period of 2019. Interest expense for the nine months ended September 30, 2019, included approximately $148,000 for interest expense and amortization of debt issuance costs for our term loan.
Liquidity & Capital Resources
Working Capital
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|
|
|
|
|
|
|
|
|
|
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(in thousands)
|
September 30, 2019
|
|
December 31, 2018
|
|
Current assets
|
$
|
3,578
|
|
|
$
|
4,677
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|
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Current liabilities
|
(9,432
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)
|
|
(2,214
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)
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|
Working (deficit) capital
|
$
|
(5,854
|
)
|
|
$
|
2,463
|
|
Negative working capital as of September 30, 2019 was approximately $5.9 million as compared to working capital of approximately $2.5 million as of December 31, 2018. The decrease in working capital is primarily related to an increase in our current liabilities as of September 30, 2019 including approximately $5.2 million of notes payable net of issuance costs, an increase in accrued dividends for our convertible preferred stock of approximately $1.1 million and an increase in accounts payable and accrued expenses related to our operating activities.
Cash Flows and Liquidity
Net cash used in Operating Activities
Net cash used in operating activities was approximately $6.2 million during the nine months ended September 30, 2019. This was primarily due to our net operating loss of approximately $7.9 million, partially offset by non-cash share-based compensation of approximately $0.7 million and other changes in operating assets and liabilities including an increase in accounts payable and accrued expenses.
Comparatively, net cash used in operating activities was approximately $7.0 million during the nine months ended September 30, 2018. This was primarily due to the net operating loss of approximately $13.8 million offset by non-cash charges of approximately $4.8 million for impairment of goodwill and intangible asset impairment and approximately $2.0 million for other changes in working capital including $1.3 million of non-cash share-based compensation.
Net cash used in Investing Activities
There was no cash used in or provided by investing activities for the nine months ended September 30, 2019. Cash used in investing activities for the period ended September 30, 2018 was approximately $28,000 for the purchase of furniture for the corporate office.
Net cash provided by Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2019 was approximately $5.0 million from the issuance of promissory notes to certain accredited investors during the second and third quarters of 2019. For the nine months ended September 30, 2018, cash provided by financing activities was approximately $13.4 million primarily due to the issuance of preferred stock.
We will need to raise additional operating capital during the fourth quarter of 2019 in order to maintain our operations and to realize our business plan. Without additional sources of cash and/or the deferral, reduction, or elimination of significant planned expenditures, we will not have the cash resources to continue as a going concern thereafter.
Future Financing
We will require immediate substantial additional funds to implement our strategic initiatives and continue the commercialization of Prestalia®. Historically, we have raised additional capital to supplement our commercialization, clinical development and operational expenses. We will need to raise substantial additional funds required through equity financing, debt financing, strategic alliances or other sources, which may result in further dilution in the equity ownership of our shares. There can be no assurance that additional financing will be available when needed or, if available, that it can be obtained on commercially reasonable terms. Failure to raise additional capital through one or more financings, divesting development assets or reducing discretionary spending could have a material adverse effect on our ability to achieve our intended business objectives. These factors raise substantial doubt about our ability to continue as a going concern.
Off-Balance Sheet Arrangements
As of September 30, 2019, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Critical Accounting Policies and Estimates
Our significant accounting policies are more fully described in the notes to our financial statements included herein for the period ended September 30, 2019 and in the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.
New and Recently Adopted Accounting Pronouncements
Any new and recently adopted accounting pronouncements are more fully described in Note 1 to our financial statements included herein for the period ended September 30, 2019.