TALPHERA, INC. 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 endedDecember 31, 2021 , or Annual Report.
About
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 Moderate-to-severe Received
sublingual tablet, acute pain in a Administration, or FDA, approval
30 mcg medically in November 2018; commercial
supervised launch began first quarter of
setting, 2019.
administered by a
healthcare
professional
DZUVEO® Sufentanil Moderate-to-severe Granted European Commission, or
sublingual tablet, acute pain in a EC, marketing approval in June
30 mcg medically 2018. Sunset date extended to
monitored setting, December 31, 2022 by EC. To be
administered by a commercialized in Europe by
healthcare Laboratoire Aguettant, or
professional Aguettant.
Zalviso® Sufentanil Moderate-to-severe In the U.S., positive results
sublingual tablet acute pain in the from Phase 3 trial, IAP312,
system, 15 mcg hospital setting, announced in August 2017.
administered by
the patient as Approved in the European Union,
needed 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withdrawn in July 2022.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 Cancer Phase 2 clinical trial and End
Sufentanil breakthrough pain of Phase 2 meeting completed.
Sublingual Tablet in opioid-tolerant
Investigational New Drug, or
patients IND, application was
inactivated.
Future development contingent
upon identification of corporate
partnership resources.
ARX-03 Combination Mild sedation and Phase 2 clinical trial and End
Sufentanil/Triazolam pain relief during of Phase 2 meeting completed.
Sublingual Tablet painful procedures IND application was inactivated.
in a physician's
office Future development contingent
upon identification of corporate
partnership resources.
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Pre-filled Syringe Product Candidates
Product/Product Candidate Description Target Use Status
Ephedrine Ephedrine Clinically Product candidate licensed
pre-filled important Aguettant; preparing NDA for
syringe, hypotension submission to FDA.
containing 10 ml occurring in the
of a solution of setting of
Approved in the
3 mg/ml ephedrine anesthesia owned and marketed by Aguettant.
for injection
Phenylephrine Phenylephrine Clinically Product candidate licensed from
pre-filled important Aguettant; preparing NDA for
syringe hypotension submission to FDA.
containing 10 ml resulting
of a solution of primarily from
Approved in the
50 mcg/ml vasodilation in owned and marketed by Aguettant.
phenylephrine for the setting of
injection anesthesia
Nafamostat Product Candidates
Product/Product Candidate Description Target Use Status Niyad™ Lyophilized vial Regional
Submitted an investigational device
containing anticoagulant for exemption, or IDE, and received
nafamostat for injection into Breakthrough Device Designation
injection the from the FDA.
extracorporeal
circuit
LTX-608 Lyophilized vial IV infusion as an IND to be submitted following
containing anti-viral toxicology evaluation to enable
nafamostat for treatment for Phase 2 study
injection COVID-19
LTX-608 Lyophilized vial IV infusion for IND to be submitted following
containing disseminated toxicology evaluation to enable
nafamostat for intravascular Phase 2 study
injection coagulation, or
DIC
LTX-608 Lyophilized vial IV infusion for IND to be submitted following
containing acute respiratory toxicology evaluation to enable
nafamostat for distress Phase 2 study
injection syndrome, or ARDS
LTX-608 Lyophilized vial IV infusion for IND to be submitted following
containing acute toxicology evaluation to enable
nafamostat for pancreatitis Phase 2 study
injection
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 inthe United States and other countries, business closures or business disruptions and the effectiveness of actions taken inthe 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 InApril 2020 , DSUVIA achieved Milestone C approval by theDepartment of Defense , orDoD , a decision that clears the path for theDoD 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. InSeptember 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 inSeptember 2020 , theU.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 aDoD -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 OnJanuary 7, 2022 , we acquiredLowell 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. OnMarch 28, 2022 , we received a close-out letter from theOffice of Prescription Drug Promotion , or OPDP, of theU.S. Food and Drug Administration , or the FDA, to the Warning Letter we received onFebruary 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. OnSeptember 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 onDecember 16, 2013 , with GrünenthalGmbH , or Grünenthal, which was amended effectiveJuly 17, 2015 andSeptember 20, 2016 , or the Amended License Agreement, to PDL BioPharma, Inc., or PDL, in a transaction referred to as the Royalty Monetization. OnAugust 31, 2020 , PDL announced that it had sold its royalty interest for Zalviso toSWK Funding, LLC , or SWK. OnMay 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, effectiveMay 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
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Financial Overview Although the termination of the Royalty Monetization resulted in net income for the three and six months endedJune 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 theU.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 endedJune 30, 2022 was$70.7 million and$62.0 million , respectively, while our net loss for the three and six months endedJune 30, 2021 was$9.9 million and$18.8 million , respectively. As ofJune 30, 2022 , we had an accumulated deficit of$411.6 million . As ofJune 30, 2022 , we had cash, cash equivalents, restricted cash and short-term investments totaling$27.9 million compared to$51.6 million as ofDecember 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 theU.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 inEurope and the related withdrawal of our Marketing Authorization inEurope inJuly 2022 , we do not expect any revenues from Zalviso inEurope in the foreseeable future. Accordingly, we recorded a non-cash impairment charge of$4.9 million for the three months endedJune 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 endedJune 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 inthe 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 endedJune 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
Revenue Product Sales Revenue
Product sales revenue consists of sales of DSUVIA in the
Product sales revenue by product for the three and six months ended
Three Months Ended June 30, Six Months Ended June 30,
$ Change % Change $ Change % Change
2022 vs. 2022 vs. 2022 vs. 2022 vs.
2022 2021 2021 2021 2022 2021 2021 2021
(In thousands, except percentages)
DSUVIA $ 570 $ 392 $ 178 45 % $ 1,012 $ 573 $ 439 77 %
Zalviso - - - - % - 270 (270 ) (100 )%
Total product
sales revenue $ 570 $ 392 $ 178 45 % $ 1,012 $ 843 $ 266 20 %
The increase in DSUVIA product sales revenue for the three and six months ended
June 30, 2022 , as compared to the three and six months ended June 30, 2021 , was
primarily the result of increased sales volume for DSUVIA and DZUVEO. For the
six months ended June 30, 2021 , there was $0.3 million in product sales revenue
of Zalviso by Grünenthal. In May 2020 , Grünenthal terminated the Collaboration
and License Agreement and the Manufacture and Supply Agreement, or together, the
Grünenthal Agreements, accordingly the rights to market and sell Zalviso in
Europe reverted back to us on May 12, 2021 .
27
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On
Contract and Other Collaboration Revenue
Contract and other collaboration revenue included revenue under the Grünenthal Agreements, related to research and development services, non-cash royalty revenue related to the sale of the majority of our royalty rights and certain commercial sales milestones to SWK under the Royalty Monetization, and royalty revenue for sales of Zalviso inEurope . Contract and other collaboration revenue for the three and six months endedJune 30, 2021 was$0.05 million and$0.1 million , respectively. Cost of Goods Sold
Total cost of goods sold for the three and six months ended
Three Months Ended June 30, Six Months Ended June 30,
$ Change % Change $ Change % Change
2022 vs. 2022 vs. 2022 vs. 2022 vs.
2022 2021 2021 2021 2022 2021 2021 2021
(In thousands, except percentages)
Direct costs $ 301 $ 124 $ 177 143 % $ 454 $ 435 $ 19 4 %
Indirect costs 575 916 (341 ) (37 )% 1,206 1,645 (439 ) (27 )%
Total costs of
goods sold
Direct costs from contract manufacturers for DSUVIA totaled$0.3 million and$0.5 million , respectively, for the three and six months endedJune 30, 2022 . Direct costs from contract manufacturers for DSUVIA and Zalviso totaled$0.1 million and$0.4 million , respectively, for the three and six months endedJune 30, 2021 , and included inventory impairment charges of$0 and$0.1 million , respectively, primarily related to Zalviso component parts inventory. The increase in direct costs for the three months endedJune 30, 2022 as compared to the three months endedJune 30, 2021 is primarily due to DZUVEO third-party manufacturing costs. For the six months endedJune 30, 2022 as compared to the six months endedJune 30, 2021 , the increase in indirect costs related to DZUVEO manufacturing expenses was mostly offset by a decrease in costs incurred related to Zalviso component parts. Direct cost of goods sold for DSUVIA and Zalviso includes the inventory costs of the active pharmaceutical ingredient, or API, third-party contract manufacturing costs, estimated warranty costs, packaging and distribution costs, shipping, handling and storage costs. The indirect costs to manufacture DSUVIA totaled$0.6 million and$1.2 million for the three and six months endedJune 30, 2022 , while the indirect costs to manufacture DSUVIA and Zalviso totaled$0.9 million and$1.6 million for the three and six months endedJune 30, 2021 , respectively. The decrease in indirect costs for the three and six months endedJune 30, 2022 as compared to the prior year periods is primarily due to reductions in compensation expense. Indirect costs include internal personnel and related costs for purchasing, supply chain, quality assurance, depreciation and related expenses.
Research and Development Expenses
The majority of our operating expenses to date have been for research and development activities related to Zalviso and DSUVIA. Research and development expenses included the following:
• expenses incurred under agreements with contract research organizations
and clinical trial sites;
• employee-related expenses, which include salaries, benefits and
stock-based compensation;
• payments to third party manufacturers;
• depreciation and other allocated expenses, which include direct andallocated expenses for rent and maintenance of facilities and equipment,
and equipment and laboratory and other supply costs; and
• costs for equipment and laboratory and other supplies.
We expect to incur future research and development expenditures to support the
FDA regulatory review of our product candidates and anticipated activities
required for the development of our nafamostat product candidates, and the
preparation and submission of the NDAs for our two in-licensed pre-filled
syringe, or PFS, product candidates from Aguettant. Future development of
Zalviso in
28
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We track external development expenses on a program-by-program basis. Our
development resources are shared among all our programs. Compensation and
benefits, facilities, depreciation, stock-based compensation, and development
support services are not allocated specifically to projects and are considered
research and development overhead.
Below is a summary of our research and development expenses for the three and
six months ended
Three Months Ended June 30, Six Months Ended June 30,
Drug $ Change % Change $ Change % Change
Indication/Description 2022 vs. 2022 vs. 2022 vs. 2022 vs.
---------------------- 2022 2021 2021 2021
2022 2021 2021 2021
(In thousands, except percentages)
DSUVIA $ 364 $ 182 $ 182 100 % $ 756 $ 344 $ 412 120 %
PFS 64 - 64 100 % 120 - 120 100 %
Niyad 257 - 257 100 % 258 - 258 100 %
Overhead 859 542 317 58 % 1,725 1,349 376 28 %
Total research and
development expenses
69 %
Research and development expenses for the three and six months ended June 30,
2022 increased as compared to the three and six months ended June 30, 2021 ,
primarily due to Niyad development activities, increased DSUVIA
manufacturing-related development costs, regulatory costs, depreciation expense
and compensation costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consisted primarily of salaries, benefits and stock-based compensation for personnel engaged in commercialization, administration, finance and business development activities. Other significant expenses included allocated facility costs and professional fees for general legal, audit and consulting services.
Total selling, general and administrative expenses for the three and six months
ended
Three Months Ended June 30, Six Months Ended June 30,
$ Change % Change $ Change % Change
2022 vs. 2022 vs. 2022 vs. 2022 vs.
2022 2021 2021 2021 2022 2021 2021 2021
(In thousands, except percentages)
Selling, general
and
administrative
expenses $ 6,822 $ 8,694 $ (1,872 ) (22 )% $14,160$ 16,338 $ (2,178 ) (13 )% Selling, general and administrative expenses decreased by$1.9 million and$2.2 million for the three and six months endedJune 30, 2022 , respectively, as compared to the three and six months endedJune 30, 2021 . The decrease for the three months endedJune 30, 2022 as compared to the three months endedJune 30, 2021 , is primarily due to net decreases in selling, general and administrative expenses including$0.7 million in facilities-related expenses in the second quarter of 2022, primarily due to the termination of our former headquarters lease and related sublease in 2021,$0.5 million in DSUVIA-related selling expenses and$0.4 million in non-cash stock-based compensation expense. The decrease for the six months endedJune 30, 2022 as compared to the six months endedJune 30, 2021 , is primarily due to net decreases in selling, general and administrative expenses including$0.8 million in personnel-related expenses,$0.7 million reduction in non-cash stock-based compensation expense and$0.5 million in DSUVIA-related selling expenses. In the second quarter of 2022, we eliminated 14 positions, mainly within the commercial organization. For additional information regarding the Restructuring Costs see Note 1 "Organization and Summary of Significant Accounting Policies" in the accompanying notes to the Condensed Consolidated Financial Statements.
Impairment of Property and Equipment
We have decided to not focus any development resources on Zalviso inthe United States and do not expect to resubmit the Zalviso NDA in the foreseeable future. In addition, we do not expect any revenues from Zalviso inEurope in the foreseeable future. Accordingly, we determined that it is no longer probable that we will realize the future economic benefit associated with the costs of the Zalviso-related purchased equipment and manufacturing-related facility improvements we have made at our contract manufacturer and, therefore, recorded a non-cash impairment charge of$4.9 million to the Zalviso-related assets for the three months endedJune 30, 2022 . 29 --------------------------------------------------------------------------------
Other Income
Total other income for the three and six months ended
Three Months Ended June 30, Six Months Ended June 30,
$ Change % Change $ Change % Change
2022 vs. 2022 vs. 2022 vs. 2022 vs.
2022 2021 2021 2021 2022 2021 2021 2021
(In thousands, except percentages)
Interest expense $ (327 ) $ (614 ) $ 287 (47 )% $ (717 ) $ (1,286 ) $ 569 (44 )%
Interest income
and other income
(expense), net 51 (16 ) 67 (419 )% 89 60 29 48 %
Non-cash
interest income
(expense) on
liability
related to sale
of future
royalties 463 799 (336 ) (42 )% 1,136 1,581 (445 ) (28 )%
Gain on
extinguishment
of liability
related to sale
of future
royalties 84,052 - 84,052 100 % 84,052 - 84,052 100 %
Total other
income (expense)
Interest expense consisted primarily of interest accrued or paid on our debt obligation agreements and amortization of debt discounts. Interest expense decreased for the three and six months endedJune 30, 2022 , as compared to the three and six months endedJune 30, 2021 , primarily as a result of a lower average outstanding loan balance. As ofJune 30, 2022 , the outstanding balance due under the Loan Agreement with Oxford was$9.4 million . Refer to Note 7 "Long-Term Debt" in the accompanying notes to the Condensed Consolidated Financial Statements for additional information.
Interest income and other income (expense), net, for the three and six months
ended
The non-cash interest income on the liability related to the sale of future royalties is attributable to the Royalty Monetization that we completed inSeptember 2015 . As described in Note 9 "Liability Related to Sale of Future Royalties", the Royalty Monetization was recorded as debt under the applicable accounting guidance. The effective interest income rate for each of the three and six months endedJune 30, 2022 was approximately 3.2%, while the effective interest income rate for each of the three and six months endedJune 30, 2021 was approximately 3.6%. OnMay 31, 2022 , we entered into the Termination Agreement with SWK to fully terminate the Royalty Monetization and we recognized an$84.1 million gain on extinguishment of the liability related to the sale of future royalties. Liquidity and Going Concern Liquidity The termination of the Royalty Monetization resulted in net income for the three and six months endedJune 30, 2022 ; however, before this, we had incurred recurring operating losses and negative cash flows from operating activities since inception and we expect to continue to incur operating losses and negative cash flows in the future. These conditions raise substantial doubt about our ability to continue as a going concern. Considering our current cash resources and current and expected levels of operating expenses for the next twelve months, we expect to need additional capital to fund our planned operations for at least one year from the date this Quarterly Report on Form 10-Q is filed with theUnited States Securities and Exchange Commission , orSEC . We 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 withCantor Fitzgerald & Co. , or Cantor, debt securities, monetize or securitize certain assets, refinance our loan agreement, enter into product development, license or distribution agreements with third parties, or divest DSUVIA inthe United States , DZUVEO inEurope , or any of our product candidates. While we believe our plans to raise additional funds will alleviate the conditions that raise substantial doubt about our ability to continue as a going concern, these plans are not entirely within our control and cannot be assessed as being probable of occurring. Additional funds may not be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available, we may be required to further reduce our workforce, reduce the scope of, or cease, the commercial launch of DSUVIA, or the development of our product candidates in advance of the date on which our cash resources are exhausted to ensure that we have sufficient capital to meet its obligations and continue on a path designed to preserve stockholder value. In addition, if we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish rights to our technologies, future revenue streams or product candidates, or to grant licenses on terms that may not be favorable to us. 30 -------------------------------------------------------------------------------- We have funded our operations primarily through issuance of equity securities, borrowings, payments from Grünenthal, monetization of certain future royalties and commercial sales milestones from the European sales of Zalviso by Grünenthal, funding of approximately$22.6 million from theDoD , and more recently with revenues from sales of DSUVIA since the commercial launch in the first quarter of 2019 and the upfront payment under the DZUVEO Agreement with Aguettant. As ofJune 30, 2022 , we had cash, cash equivalents, restricted cash and short-term investments totaling$27.9 million compared to$51.6 million as ofDecember 31, 2021 . The decrease was primarily due to cash required to fund our continuing operations, including debt service, development activities for our newly acquired late-stage pipeline product candidates, commercialization activities for DSUVIA, including installation of our fully automated packaging line for DSUVIA, and business development activities. If we are unsuccessful in our efforts to raise additional capital, based on our current and expected levels of operating expenses our current capital will not be sufficient to fund our operations for the next twelve months and will not be sufficient to fund our operations until such time as we may be able to generate sufficient revenues to sustain our operations. We entered the ATM Agreement with Cantor, as agent, pursuant to which we may offer and sell, from time to time through Cantor, shares of our common stock. We did not sell any shares of common stock pursuant to the ATM Agreement for the three and six months endedJune 30, 2022 . For the three and six months endedJune 30, 2021 , we 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 ofJune 30, 2022 , we had the ability to 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. OnMay 30, 2019 , we entered into the Loan Agreement with Oxford. Under the Loan Agreement, we borrowed an aggregate principal amount of$25.0 million under a term loan. After deducting all loan initiation costs and outstanding interest on the prior loan agreement with Hercules, we received$15.9 million in net proceeds. As ofJune 30, 2022 , the outstanding balance under the Loan Agreement was$9.4 million . For more information, see Note 7 "Long-Term Debt" in the accompanying notes to the Condensed Consolidated Financial Statements. Our cash and investment balances are held in a variety of interest-bearing instruments, including obligations of commercial paper, corporate debt securities,U.S. government sponsored enterprise debt securities and money market funds. Cash in excess of immediate requirements is invested with a view toward capital preservation and liquidity. We do not expect COVID-19 to have a material impact on our high quality, short-dated investments. Cash Flows
The following is a summary of our cash flows for the periods indicated and has been derived from our Condensed Consolidated Financial Statements which are included elsewhere in this Form 10-Q (in thousands):
Six Months Ended June 30,
2022 2021
Net cash used in operating activities $ (17,680 ) $ (18,055 )
Net cash provided by (used in) investing activities 29,348 (15,032 )
Net cash (used in) provided by financing activities (4,166 ) 32,140
Cash Flows from Operating Activities
The primary use of cash for our operating activities during these periods was to fund commercial activities for our approved product, DSUVIA, and more recently for development of our newly acquired late-stage pipeline product candidates. Our cash used in operating activities also reflected changes in our working capital, net of adjustments for non-cash charges, such as depreciation and amortization of our fixed assets, stock-based compensation, non-cash interest income (expense) related to the sale of future royalties and interest expense related to our debt financings. Cash used in operating activities of$17.7 million during the six months endedJune 30, 2022 , reflected net income of$62.0 million , offset by aggregate non-cash inflows of$77.7 million and included an approximate$2.0 million net change in our operating assets and liabilities. Non-cash inflows included an$84.2 million gain on the termination of the Royalty Monetization, partially offset by a$4.9 million charge for the impairment of Zalviso-related property and equipment and$1.5 million in stock-based compensation expense. The net change in our operating assets and liabilities included a$1.6 million decrease in accrued liabilities and a$0.4 million decrease in operating lease liabilities. 31
-------------------------------------------------------------------------------- Cash used in operating activities of$18.1 million during the six months endedJune 30, 2021 , reflected a net loss of$18.8 million , partially offset by aggregate non-cash charges of$2.0 million and included an approximate$1.3 million net change in our operating assets and liabilities. Non-cash charges included$2.3 million for stock-based compensation expense,$1.6 million in non-cash interest income on the liability related to the Royalty Monetization, and$1.0 million in depreciation and amortization expense. The net change in our operating assets and liabilities included a$1.0 million decrease in accrued liabilities.
Cash Flows from Investing Activities
Our investing activities have consisted primarily of our capital expenditures and purchases and sales and maturities of our available-for-sale investments.
During the six months endedJune 30, 2022 , cash provided by investing activities of$29.3 million was primarily the net result$38.6 million in proceeds from maturity of investments partially offset by$7.4 million for purchases of investments and$1.7 million in cash paid for the Lowell asset acquisition, net of cash acquired. During the six months endedJune 30, 2021 , cash used in investing activities of$15.0 million was primarily the net result of$38.2 million for purchases of investments and$1.6 million for purchases of property and equipment, partially offset by$24.8 million in proceeds from maturity of investments.
Cash Flows from Financing Activities
Cash flows from financing activities primarily reflect proceeds from the sale of our securities and payments made on debt financings.
During the six months endedJune 30, 2022 , cash used in financing activities of$4.2 million was primarily due to long-term debt payments under the Loan Agreement with Oxford. During the six months endedJune 30, 2021 , cash provided by financing activities of$32.1 million was primarily due to$36.4 million in net proceeds received in connection with equity financings, partially offset by$4.2 million used for payment of long-term debt.
Capital Commitments and Capital Resources
Our current operating plan includes expenditures related to the development of our product candidates and the continued launch of DSUVIA inthe United States . In addition, onJanuary 7, 2022 , we acquired 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. Our operating plan includes anticipated activities required for the development and supply of our nafamostat product candidates, and the preparation and submission of the NDAs for our two in-licensed PFS product candidates from Aguettant. These assumptions may change as a result of many factors. We will continue to evaluate the work necessary to successfully launch DSUVIA and gain approval of our product candidates inthe United States and intend to update our cash forecasts accordingly. Considering our current cash resources and current and expected levels of operating expenses for the next twelve months, we expect to need additional capital to fund our planned operations for at least the next twelve months.
Our future capital requirements may vary materially from our expectations based on numerous factors, including, but not limited to, the following:
• the ability to remain the listing of our common stock on the Nasdaq; • the ability to raise capital with limited authorized shares of our common
stock;
• the duration, impact and timing of COVID-19 on our operations, our sales
representatives' access to hospitals or other healthcare facilities, and
our level of sales;
• expenditures related to the launch of DSUVIA and potential
commercialization of our product candidates, if approved;
• future manufacturing, selling and marketing costs related to DSUVIA and
our product candidates, if approved, including our contractual obligations
to Aguettant under the DZUVEO Agreement;
• costs associated with business development activities and licensing
transactions;
• the outcome, timing and cost of the regulatory submissions for our product
candidates, including our two in-licensed product candidates from
Aguettant, and any approvals for our product candidates;
• the outcome, timing and cost of the development of our nafamostat product
candidates;
• the initiation, progress, timing and completion of any post-approval
clinical trials for DSUVIA, or our product candidates, if approved;
• changes in the focus and direction of our business strategy and/or
research and development programs;
32--------------------------------------------------------------------------------
• milestone and royalty revenue we receive under our collaborative
development and commercialization arrangements, including the DZUVEO
Agreement;
• delays that may be caused by changing regulatory requirements;
• the costs involved in filing and prosecuting patent applications and
enforcing and defending patent claims;
• the timing and terms of future in-licensing and out-licensing
transactions;
• the cost and timing of establishing sales, marketing, manufacturing and
distribution capabilities;
• the cost of procuring clinical and commercial supplies of DSUVIA and our
product candidates, if approved;
• the extent to which we acquire or invest in businesses, products and
product candidates or technologies; and
• the expenses associated with litigation.
In the long-term, our existing capital resources will not be sufficient to fund
our operations until such time as we may be able to generate sufficient revenues
to sustain our operations. We will have to raise additional funds through the
sale of our equity securities, monetization of current and future assets,
issuance of debt or debt-like securities or from development and licensing
arrangements to sustain our operations and continue our development programs.
Please see "Part II., Item 1A. Risk Factors-Risks Related to Our Financial
Condition and Need for
We have material cash requirements and other contractual obligations related to our Loan Agreement with Oxford (as described in Note 7 "Long-Term Debt" in the accompanying notes to the Condensed Consolidated Financial Statements) and contract manufacturing services and office rent (as described in Note 8 "Leases" in the accompanying notes to the Condensed Consolidated Financial Statements).
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