TALPHERA, INC. The following discussion and analysis should be read in conjunction with our audited financial statements and the related notes that appear elsewhere in this Annual Report on Form 10-K. This discussion and analysis generally covers our financial condition and results of operations for the year endedDecember 31, 2020 , including year-over-year comparisons versus the year endedDecember 31, 2019 . Our Annual Report on Form 10-K for the year endedDecember 31, 2019 includes a discussion and analysis of our financial condition and results of operations for the year endedDecember 31, 2018 in Item 7 of Part II, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Overview We are a specialty pharmaceutical company focused on the development and commercialization of innovative therapies for use in medically supervised settings. DSUVIA® (known as DZUVEO inEurope ) and Zalviso, are both focused on the treatment of acute pain, and each utilize sufentanil, delivered via a non-invasive route of sublingual administration, exclusively for use in medically supervised settings. OnNovember 2, 2018 , theU.S. Food and Drug Administration , or FDA, approved our resubmitted NDA for DSUVIA for use in adults in certified medically supervised healthcare settings, such as hospitals, surgical centers, and emergency departments, for the management of acute pain severe enough to require an opioid analgesic and for which alternative treatments are inadequate. InJune 2018 , theEuropean Commission , or EC, granted marketing approval of DZUVEO for the treatment of patients with moderate-to-severe acute pain in medically monitored settings. We are further developing a distribution capability and commercial organization to continue to market and sell DSUVIA inthe United States . The commercial launch of DSUVIA inthe United States occurred in the first quarter of 2019. In geographies where we decide not to commercialize ourselves, including for DZUVEO inEurope , we may seek to out-license commercialization rights. We currently intend to commercialize and promote DSUVIA/DZUVEO outsidethe United States with one or more strategic partners, although we have not yet entered into any such arrangement. The timing of the resubmission of the Zalviso NDA is dependent upon the finalization of theFDA's new opioid approval guidelines and process. If we are successful in obtaining approval of Zalviso inthe United States , we plan to potentially promote Zalviso either by ourselves or with strategic partners. Zalviso was approved for sale in theEuropean Union onSeptember 18, 2015 , and was initially commercialized by GrünenthalGmbH , or Grünenthal. OnMay 18, 2020 , we received a notice from Grünenthal that it was exercising its right to terminate the Collaboration and License Agreement, or, as amended, the License Agreement, which granted Grünenthal the European rights to commercialize Zalviso in the 28 EU member states at the time of the agreement, plusSwitzerland ,Liechtenstein ,Iceland ,Norway andAustralia , or the Territory, for human use in pain treatment in medically supervised settings, and the related Manufacture and Supply Agreement, or, as amended, the MSA, under which AcelRx exclusively manufactured and supplied Zalviso to Grünenthal for commercial sales in the Territory. The MSA, together with the License Agreement, are referred to as the Grünenthal Agreements. The terms of the Grünenthal Agreements were extended toMay 2021 to enable Grünenthal to sell down its Zalviso inventory, a right it had under the Grünenthal Agreements. The rights to market and sell Zalviso in the Territory revert back to us inMay 2021 . Product Development Programs
Our product development portfolio features two innovative therapies for the treatment of acute pain. Please refer to "Part I. Item 1. Business-Our Portfolio" for a detailed discussion of DSUVIA and Zalviso.
Promotion Agreement OnOctober 1, 2020 , we entered into a promotion agreement, or the Promotion Agreement, with La Jolla Pharmaceutical Company, or La Jolla, and Tetraphase Pharmaceuticals, Inc., or Tetraphase, effective as ofSeptember 30, 2020 , pursuant to which La Jolla will detail and promote DSUVIA. Under the terms of this agreement, La Jolla is responsible for maintaining compliance under the agreed marketing and promotion plan and achieving a minimum number of sales calls per calendar quarter. We will not detail and promote XERAVA™ (eravacycline) under this agreement. The Promotion Agreement has a two-year term. We may terminate the agreement upon 30 days' notice. After one year, La Jolla may terminate the agreement upon 30 days' notice and may do so earlier in the event we undergo a change of control and change in management. We will pay La Jolla a revenue share on net sales of DSUVIA in the sales territories covered by the Promotion Agreement, other than sales to certain excluded accounts. These sales territories do not overlap with the territories covered by our sales force. If La Jolla fails to meet its detailing requirements in a given calendar quarter, it will pay us a royalty on net sales of XERAVA inthe United States during such quarter.
The Promotion Agreement terminated the co-promotion agreement, or the
Co-Promotion Agreement, we entered into with Tetraphase on
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On March 16, 2020 , in connection with entering into the Co-Promotion Agreement,
we eliminated 30 positions, mainly within the commercial organization. As of
December 31, 2020 , we had approximately 25 sales representatives, including
those under the Promotion Agreement with La Jolla.
Distribution Agreement
On July 17, 2020 , we entered into a distribution agreement, or the Distribution
Agreement, with Zimmer Biomet Dental, or ZB Dental, pursuant to which ZB Dental
obtained the exclusive right to promote, market, sell, and arrange to distribute
DSUVIA in the United States to clinicians, dentists, surgeons and other licensed
health care practitioners that perform dental (including specialty dental),
oral-maxillofacial, cranio-maxillofacial or oral surgery procedures, or
Professionals, and their respective institutions and facilities that are
permitted to use DSUVIA.
ZB Dental's distribution rights are non-exclusive for crossover ambulatory
surgery centers and certain government customers, and do not extend to
ambulatory care centers outside the class of trade or into hospitals. ZB Dental
will conduct any distribution activities in a manner consistent with DSUVIA's
FDA-approved indication and REMS program, and within the parameters established
in the Distribution Agreement. ZB Dental has the right to sublicense its
distribution rights to its qualified marketing partners but may not otherwise
sublicense its distribution rights to any third party without our prior written
consent.
DSUVIA is expected to be available for order by Professionals exclusively
through ZB Dental in
General Trends and Outlook COVID-19-related Government-mandated shelter-in-place orders and related safety policies on account of the COVID-19 pandemic continue to prevent us from operating our business in the normal course. Beginning in early 2020, state and local officials issued orders in response to the pandemic which included, among other things, requirements for residents to shelter in place and for non-essential businesses to cease activities at facilities within certain cities, counties, and states. State and local officials have taken different approaches to these orders, and some have not issued any such orders. Once issued, the orders have been relaxed and then tightened, depending on the rate of COVID-19 cases. As a result of these orders, we implemented a work from home policy for ourCalifornia -based employees and we continue to adhere to the various and diverse orders issued by government officials in the jurisdictions in which we operate. In addition, some hospitals, ambulatory surgery centers and other healthcare facilities have barred visitors that are not caregivers or mission-critical and otherwise restricted access to such facilities, and we have no visibility as to when these restrictions will be lifted. 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 be adversely impacted as long as access to healthcare facilities by our commercial and medical affairs personnel continues to be limited. 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. As a result of international travel restrictions, the timing for testing and acceptance of our DSUVIA high-volume packaging line has been delayed. Based on our best estimate, we project that the line will be installed in the first half of 2021, with FDA approval expected in 2022. We will continue to engage with various elements of our supply chain and distribution channel, including our customers, contract manufacturers, and logistics and transportation providers, to meet demand for products and to remain informed of any challenges within our supply chain. We continue to monitor demand and intend to adapt our plans as needed to continue to drive our business and meet our obligations during the evolving COVID-19 pandemic. However, if the COVID-19 pandemic continues and persists for an extended period of time, we may face disruptions to our supply chain and operations, and associated delays in the manufacturing and supply of our products. Such supply disruptions may adversely impact our ability to generate sales of and revenues from our products and our business, financial condition, results of operations and growth prospects could be adversely affected. As the global pandemic of COVID-19 continues to rapidly evolve, it could result in a significant long-term disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity. The extent to which the COVID-19 pandemic impacts our business, our ability to generate sales of and revenues from our approved products, and our future clinical development and regulatory efforts will depend on future developments that are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions, quarantines and social distancing requirements 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. 59 --------------------------------------------------------------------------------
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. 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. Financial Overview We have incurred net losses and generated negative cash flows from operations since inception and expect to incur losses in the future as we continue commercialization activities to support theU.S. launch of DSUVIA, support European sales of Zalviso by any replacement partner, and any future research and development activities needed to support theU.S. approval of Zalviso, once, and if, the NDA is resubmitted. As a result, we expect to continue to incur operating losses and negative cash flows until such time as DSUVIA has gained market acceptance and generated significant revenues.
We will incur capital expenditures related to the installation of our high-volume automated packaging line for DSUVIA, which we project will be installed in the first half of 2021 with FDA approval expected in 2022. We anticipate that the high-volume line for DSUVIA will contribute to a significant decrease in costs of goods sold in 2022 and beyond.
Our net losses were$40.4 million ,$53.2 million and$47.1 million during the years endedDecember 31, 2020 , 2019 and 2018, respectively. As ofDecember 31, 2020 , we had an accumulated deficit of$438.5 million . As ofDecember 31, 2020 , we had cash, cash equivalents and short-term investments totaling$42.9 million compared to$66.1 million as ofDecember 31, 2019 . Critical Accounting Estimates The accompanying discussion and analysis of our financial condition and results of operations are based upon our 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. Note 1 "Organization and Summary of Significant Accounting Policies" in the accompanying Notes to Consolidated Financial Statements describes the significant accounting policies used in the preparation of the financial statements. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below. A critical accounting policy is defined as one that is both material to the presentation of our financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition and results of operations. Specifically, critical accounting estimates have the following attributes: (i) we are required to make assumptions about matters that are highly uncertain at the time of the estimate; and (ii) different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on our financial condition or results of operations. We believe the following policies to be the most critical to an understanding of our financial condition and results of operations because they require us to make estimates, assumptions and judgments about matters that are inherently uncertain. Management has discussed the development, selection and disclosure of the following estimates with the Audit Committee.
Revenue from Contracts with Customers
We follow the provisions of ASC Topic 606, Revenue from Contracts with
Customers. The guidance provides a unified model to determine how revenue is
recognized. We recognize revenue upon transfer of control of promised products
or services to customers in an amount that reflects the consideration we expect
to receive in exchange for those products or services. We sell our products
primarily through wholesale distributors.
In determining the appropriate amount of revenue to be recognized as we fulfill
our obligations under our agreements, we perform the following steps:
(i) identification of the promised goods or services in the contract;
(ii) determination of whether the promised goods or services are performance
obligations, including whether they are distinct in the context of the contract;
(iii) measurement of the transaction price, including the constraint on variable
consideration; (iv) allocation of the transaction price to the performance
obligations based on estimated selling prices; and (v) recognition of revenue
when (or as) we satisfy each performance obligation.
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Product sales revenue
We sell our product primarily through distributors. Revenues from product sales
are recognized when distributors obtain control of our product, which occurs at
a point in time, upon delivery to such distributors. These distributors
subsequently resell the product to certified medically supervised healthcare
settings. In addition to distribution agreements with these customers, we enter
into arrangements with group purchasing organizations, or GPOs, and other
certified medically supervised healthcare settings that provide for privately
negotiated discounts with respect to the purchase of our products. For revenue
recognition under bill-and-hold arrangements, wherein the customer agrees to buy
product from us but requests delivery at a later date, we deem that control
passes to the customer when the product is ready for delivery. We recognize
revenue under these types of arrangements when a signed agreement is in place,
the transaction is billable, the customer has significant risk and rewards for
the product and the ability to direct the asset, the product has been set aside
specifically for the customer, and the product cannot be redirected to another
customer. Revenue from product sales is recorded at the transaction price, net
of estimates for variable consideration consisting of chargebacks, government
rebates, returns, distribution fees and GPO fees. Variable consideration is
recorded at the time product sales are recognized resulting in a reduction in
product revenue. The amount of variable consideration that is included in the
transaction price may be constrained and is included in the net sales price only
to the extent that it is probable that a significant reversal in the amount of
the cumulative revenue recognized will not occur in a future period. Variable
consideration is estimated using the most-likely amount method, which is the
single-most likely outcome under a contract and is typically at the stated
contractual rate. Where appropriate, these estimates take into consideration a
range of possible outcomes that are probability-weighted in accordance with the
expected value method under ASC Topic 606 for relevant factors. These factors
include current contractual and statutory requirements, specific known market
events and trends, industry data, and/or forecasted customer buying and payment
patterns. Actual amounts of consideration ultimately received may differ from
our estimates. If actual results vary materially from our estimates, we will
adjust these estimates, which will affect revenue from product sales and
earnings in the period such estimates are adjusted. These estimates include:
Chargebacks - Our customers subsequently resell our product to qualified
healthcare providers. In addition to distribution agreements with customers, we
enter into arrangements with qualified healthcare providers that provide for
chargebacks and discounts with respect to the purchase of our product.
Chargebacks represent the estimated obligations resulting from contractual
commitments to sell product to qualified healthcare providers at prices lower
than the list prices charged to customers who directly purchase the product from
us. Customers charge us for the difference between what they pay for the product
and the ultimate selling price to the qualified healthcare providers. These
reserves are established in the same period that the related revenue is
recognized, resulting in a reduction of product revenue and accounts receivable.
Chargeback amounts are determined at the time of resale to the qualified
healthcare providers by customers, and we issue credits for such amounts
generally within a few weeks of the customer's notification to us of the resale.
Reserves for chargebacks consists of credits that we expect to issue for units
that remain in the distribution channel inventories at each reporting period end
that we expect will be sold to the qualified healthcare providers, and
chargebacks for units that our customers have sold to the qualified healthcare
providers, but for which credits have not been issued.
Government Rebates - We are subject to discount obligations under state Medicaid
programs. We estimate our Medicaid rebates and record them in the same period
the related product revenue is recognized, resulting in a reduction of product
revenue and the establishment of a current liability that is included in accrued
liabilities on the Consolidated Balance Sheet.
Returns - We allow our distributors to return product for credit 6 months prior
to, and up to 12 months after, the product expiration date. As such, there may
be a significant period of time between the time the product is shipped and the
time the credit is issued on returned product.
Distribution Fees - Distribution fees include fees paid to certain customers for
sales order management, data and distribution services. Distribution fees are
recorded as a reduction of revenue in the period the related product revenue is
recognized.
GPO Fees - We pay administrative fees to GPOs for services and access to data.
These fees are based on contracted terms and are paid after the quarter in which
the product was purchased by the GPOs' members.
Trade Discounts and Allowances - We provide our customers with discounts which
include early payment incentives that are explicitly stated in our contracts and
are recorded as a reduction of revenue in the period the related product revenue
is recognized.
61-------------------------------------------------------------------------------- We believe our estimated allowances for chargebacks, government rebates and product returns require a high degree of judgment and are subject to change based on our limited experience and certain quantitative and qualitative factors. We believe our estimated allowances for distribution fees, GPO fees and trade discounts and allowances do not require a high degree of judgment because the amounts are settled within a relatively short period of time. We will continue to assess our estimates of variable consideration as we accumulate additional historical data and will adjust these estimates accordingly. Changes in product revenue allowance estimates could materially affect our results of operations and financial position.
Contract and other collaboration revenue
We entered into award contracts with theDoD to support the development of DSUVIA. These contracts provided for the reimbursement of qualified expenses for research and development activities. Revenue under these arrangements was recognized when the related qualified research expenses were incurred. We were entitled to reimbursement of overhead costs associated with the study costs under theDoD arrangements. We estimated this overhead rate by utilizing forecasted expenditures. Final reimbursable overhead expenses were dependent on direct labor and direct reimbursable expenses throughout the life of each contract, which increased or decreased based on actual expenses incurred. We also generate revenue from collaboration agreements. These agreements typically include payments for upfront signing or license fees, cost reimbursements for development and manufacturing services, milestone payments, product sales, and royalties on licensee's future product sales. Product sales related revenue under these collaboration agreements is classified as product sales revenue, while other revenue generated from collaboration agreements is classified as contract and other collaboration revenue.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC Topic 606. Our performance obligations include delivering product to our distributors, commercialization license rights, development services, services associated with the regulatory approval process, joint steering committee services, demonstration devices, manufacturing services, material rights for discounts on manufacturing services, and product supply. We have optional additional items in contracts, which are considered marketing offers and are accounted for as separate contracts when the customer elects such options. Arrangements that include a promise for future commercial product supply and optional research and development services at the customer's or our discretion are generally considered as options. We assess if these options provide a material right to the licensee and if so, such material rights are accounted for as separate performance obligations. If we are entitled to additional payments when the customer exercises these options, any additional payments are recorded in revenue when the customer obtains control of the goods or services. Transaction Price We have both fixed and variable consideration. Non-refundable upfront fees and product supply selling prices are considered fixed, while milestone payments are identified as variable consideration when determining the transaction price. Funding of research and development activities is considered variable until such costs are reimbursed at which point, they are considered fixed. We allocate the total transaction price to each performance obligation based on the relative estimated standalone selling prices of the promised goods or services for each performance obligation. At the inception of each arrangement that includes milestone payments, we evaluate whether the milestones are considered probable of being achieved and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the value of the associated milestone (such as a regulatory submission by us) is included in the transaction price. Milestone payments that are not within our control, such as approvals from regulators, are not considered probable of being achieved until those approvals are received.
For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (a) when the related sales occur, or (b) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).
Allocation of Consideration
As part of the accounting for these arrangements, we must develop assumptions
that require judgment to determine the stand-alone selling price of each
performance obligation identified in the contract. Estimated selling prices for
license rights and material rights for discounts on manufacturing services are
calculated using an income approach model and can include the following key
assumptions: the development timeline, sales forecasts, costs of product sales,
commercialization expenses, discount rate, the time which the manufacturing
services are expected to be performed, and probabilities of technical and
regulatory success. For all other performance obligations, we use a cost-plus
margin approach.
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Timing of Recognition Significant management judgment is required to determine the level of effort required under an arrangement and the period over which we expect to complete our performance obligations under the arrangement. We estimate the performance period or measure of progress at the inception of the arrangement and re-evaluate it each reporting period. This re-evaluation may shorten or lengthen the period over which revenue is recognized. Changes to these estimates are recorded on a cumulative catch-up basis. If we cannot reasonably estimate when our performance obligations either are completed or become inconsequential, then revenue recognition is deferred until we can reasonably make such estimates. Revenue is then recognized over the remaining estimated period of performance using the cumulative catch-up method. Revenue is recognized for products at a point in time when control of the product is transferred to the customer in an amount that reflects the consideration we expect to be entitled to in exchange for those product sales, which is typically once the product physically arrives at the customer, and for licenses of functional intellectual property at the point in time the customer can use and benefit from the license. For performance obligations that are services, revenue is recognized over time proportionate to the costs that we have incurred to perform the services using the cost-to-cost input method. Inventories Inventories are valued at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method for all inventories. Inventory includes the cost of the active pharmaceutical ingredients, or API, raw materials and third-party contract manufacturing and packaging services. Indirect overhead costs associated with production and distribution are allocated to the appropriate cost pool and then absorbed into inventory based on the units produced or distributed, assuming normal capacity, in the applicable period. Indirect overhead costs in excess of normal capacity are recorded as period costs in the period incurred. DSUVIA was approved by the FDA inNovember 2018 . Prior to FDA approval, all manufacturing costs for DSUVIA were expensed to research and development. Upon FDA approval, manufacturing costs for DSUVIA manufactured for commercial sale have been capitalized. Our policy is to write down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value and inventory in excess of expected requirements. We periodically evaluate the carrying value of inventory on hand for potential excess amount over demand using the same lower of cost or net realizable value approach as that used to value the inventory. Because the predetermined, contractual transfer prices we received from Grünenthal were less than the direct costs of manufacturing, all Zalviso inventories were carried at net realizable value. Cost of Goods Sold Cost of goods sold for product revenue includes third party manufacturing costs, shipping costs, and indirect overhead costs associated with production and distribution which are allocated to the appropriate cost pool and recognized when revenue is recognized. Indirect overhead costs in excess of normal capacity are recorded as period costs in the period incurred. Under the Amended Agreements with Grünenthal, we sold Zalviso to Grünenthal at predetermined, contractual transfer prices that were less than the direct costs of manufacturing and recognized indirect costs as period costs where they were in excess of normal capacity and not recoverable on a lower of cost or net realizable value basis. Cost of goods sold for Zalviso shipped to Grünenthal includes the inventory costs of API, third-party contract manufacturing costs, packaging and distribution costs, shipping, handling and storage costs, depreciation and costs of the employees involved with production. Leases InFebruary 2016 , the FASB issued Accounting Standards Update, or ASU, No. 2016-02, Leases (Topic 842), to enhance the transparency and comparability of financial reporting related to leasing arrangements. We adopted the standard effectiveJanuary 1, 2019 . At the inception of an arrangement, we determine whether the arrangement is or contains a lease based on the unique facts and circumstances present. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable. As such, we utilize our incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received. Lease expense is recognized over the expected term on a straight-line basis. Operating leases are recognized on the balance sheet as right-of-use assets, operating lease liabilities current and operating lease liabilities non-current. As a result, we no longer recognize deferred rent on the balance sheet. 63 --------------------------------------------------------------------------------
Research and Development Expenses
We expense research and development expenses as incurred. Research and development expenses consist primarily of direct and research-related allocated overhead costs such as facilities costs, salaries and related personnel costs, and material and supply costs. In addition, research and development expenses include costs related to clinical trials to validate our testing processes and procedures and related overhead expenses. Expenses resulting from clinical trials are recorded when incurred based in part on factors such as estimates of work performed, patient enrollment, progress of patient studies and other events. We make good faith estimates that we believe to be accurate, but the actual costs and timing of clinical trials are highly uncertain, subject to risks and may change depending upon a number of factors, including our clinical development plan. Stock-Based Compensation We measure and recognize compensation expense for all stock-based payment awards made to our employees and directors, including employee stock options, restricted stock units and employee stock purchases related to the Employee Share Purchase Plan, or ESPP, on estimated fair values. The fair value of equity-based awards is amortized over the vesting period of the award using a straight-line method. The Black-Scholes option pricing model requires inputs such as expected term, expected volatility and risk-free interest rate. These inputs are subjective and generally require significant analysis and judgment to develop. The expected term, which represents the period of time that options granted are expected to be outstanding, is derived by analyzing the historical experience of similar awards, giving consideration to the contractual terms of the stockbased awards, vesting schedules and expectations of future employee behavior. Expected volatilities are estimated using the historical stock price performance over the expected term of the option, which are adjusted as necessary for any other factors which may reasonably affect the volatility of AcelRx's stock in the future. The riskfree interest rate is based on theU.S. Treasury yield in effect at the time of the grant for the expected term of the award. We recognize forfeitures as they occur and do not anticipate paying any dividends in the near future.
Non-Cash Interest Expense on Liability Related to Sale of Future Royalties
InSeptember 2015 , we sold certain royalty and milestone payment rights from the sales of Zalviso in theEuropean Union by our former commercial partner, Grünenthal, pursuant to the Collaboration and License Agreement, dated as ofDecember 16, 2013 , as amended, to PDL for an upfront cash purchase price of$65.0 million . Under the relevant accounting guidance, because of our significant continuing involvement, the Royalty Monetization has been accounted for as a liability that will be amortized using the effective interest method over the life of the arrangement. In order to determine the amortization of the liability, we are required to estimate the total amount of future royalty and milestone payments to be received byARPI LLC and paid to PDL, up to a capped amount of$195.0 million , over the life of the arrangement. The aggregate future estimated royalty and milestone payments (subject to the capped amount), less the$61.2 million of net proceeds we received, are recorded as interest expense over the life of the liability. Consequently, we impute interest on the unamortized portion of the liability and record interest expense related to the Royalty Monetization accordingly. During the three months endedJune 30, 2020 , Grünenthal notified us that it was terminating the Amended License Agreement, effectiveNovember 13, 2020 . The terms of the Grünenthal Agreements were extended toMay 2021 to enable Grünenthal to sell down its Zalviso inventory, a right it had under the Grünenthal Agreements. The rights to market and sell Zalviso in the Territory revert back to us inMay 2021 . There is a continuing obligation on our part, through the term of the Royalty Monetization, to use commercially reasonable efforts to negotiate a replacement license agreement, or New Arrangement. However, without a New Arrangement to commercialize Zalviso inEurope , we are currently unable to reliably estimate the future payments to PDL over the remaining life of the Royalty Monetization. If we are unable to find a New Arrangement, a contingent gain of up to approximately$65 million may be recognized when it is realized upon expiration of the liability at the end of the Royalty Monetization term. Due to the significant judgments and factors related to the estimates of future payments under the Royalty Monetization, there are significant uncertainties surrounding the amount and timing of future payments and the probability of realization of the estimated contingent gain. We will record non-cash royalty revenues and non-cash interest (income) expense within our Consolidated Statements of Comprehensive Loss over the term of the Royalty Monetization. When the expected payments under the Royalty Monetization are lower than the gross proceeds of$65.0 million received, we defer recognition of any probable contingent gain until the Royalty Monetization liability expires. 64 --------------------------------------------------------------------------------
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 healthcare providers are continuing to limit elective surgeries, we expect our sales volume to be adversely affected.
Years Ended
Revenue Product Sales Revenue
Product sales revenue consists of sales of DSUVIA in the
Product sales revenue by product for the years ended
Years Ended
December 31, $ Change % Change
2020 2019 2020 vs. 2019 2020 vs. 2019
DSUVIA $ 1,409 $ 377 $ 1,032 274 %
Zalviso 1,112 1,453 (341 ) (23 )%
Total product sales revenue $ 2,521 $ 1,830 $ 691 38 %
The increase in DSUVIA product sales revenue for the year ended
The decrease in Zalviso product sales revenue for the year endedDecember 31, 2020 , as compared to the prior year, was primarily the result of decreased orders from Grünenthal. As ofDecember 31, 2020 , we had current deferred revenue under the Grünenthal Agreements of$49.0 thousand .
Contract and Other Collaboration Revenue
Contract and other collaboration revenue includes revenue under the Grünenthal Agreements related to research and development services, non-cash royalty revenue related to the Royalty Monetization and royalty revenue for sales of Zalviso inEurope .
Contract and other collaboration revenue for the years ended
Years Ended
December 31, $ Change % Change
2020 2019 2020 vs. 2019 2020 vs. 2019
Non-cash royalty revenue related to
Royalty Monetization (See Note 8) $ 242 $ 312 $ (70 ) (22 )%
Royalty revenue 81 104 (23 ) (22 )%
Other revenue 2,572 43 2,529 5,881 %
Total contract and other
collaboration revenue $ 2,895 $ 459 $ 2,436 531 %
We estimate and recognize royalty revenue and non-cash royalty revenue on a
quarterly basis. Adjustments to estimated revenue are recognized in the
subsequent quarter based on actual revenue earned per the royalty reports
received from Grünenthal. In addition, under the Royalty Monetization, we sold a
portion of the expected royalty stream and commercial milestones from the
European sales of Zalviso by Grünenthal to PDL. On
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As mentioned above, we commenced commercial sales of DSUVIA in the first quarter of 2019.
Total costs of goods sold for the years ended
Years Ended
December 31, $ Change % Change
2020 2019 2020 vs. 2019 2020 vs. 2019
Direct costs $ 1,900 $ 2,525 $ (625 ) (25 )%
Indirect costs 4,132 4,281 (149 ) (3 )%
Total costs of goods sold $ 6,032 $ 6,806 $ (774 ) (11 )%
Direct costs from contract manufacturers for DSUVIA and Zalviso totaled $1.9
million and $2.5 million in the years ended December 31, 2020 and 2019,
respectively. 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.
We periodically evaluate the carrying value of inventory on hand for potential
excess amounts over demand using the same lower of cost or net realizable value
approach as that used to value the inventory. During the year ended December 31,
2020 , we recorded inventory impairment charges of $0.7 million , of which $0.3
million related to the termination of the Grünenthal Agreements, and $0.4
million related to DSUVIA, primarily as a result of inventory that may expire
before being sold. During the year ended December 31, 2019 , we recorded an
inventory impairment reserve of approximately $1.0 million as a result of an
analysis to estimate potential DSUVIA inventory that may expire before being
sold. This represented initial DSUVIA batches produced for development and
therefore represented shorter dated product than batches manufactured for
commercial sale.
The indirect costs to manufacture DSUVIA and Zalviso totaled $4.1 million and
$4.3 million in the years ended December 31, 2020 and 2019, respectively.
Indirect costs include internal personnel and related costs for purchasing,
supply chain, quality assurance, depreciation and related expenses. We expect
these indirect costs to represent a smaller percentage of revenue as our product
sales increase.
Research and Development Expenses
The majority of our operating expenses to date have been for research and development activities related to Zalviso and DSUVIA. Research and development expenses included the following:
• expenses incurred under agreements with contract research organizations and
clinical trial sites;
• employee-related expenses, which include salaries, benefits and stock-based
compensation;
• payments to third party pharmaceutical and engineering development
contractors;
• payments to third party manufacturers;
• depreciation and other allocated expenses, which include direct 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 the Zalviso NDA, once, and if, it is resubmitted. The
timing of the resubmission of the Zalviso NDA is in part dependent on the
finalization of the FDA's new opioid approval guidelines and process.
We track external development expenses on a program-by-program basis. Our
development resources are shared among all our programs. Compensation and
benefits, facilities, depreciation, stock-based compensation, and development
support services are not allocated specifically to projects and are considered
research and development overhead.
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Below is a summary of our research and development expenses for the years ended
December 31, 2020 and 2019, were as follows (in thousands, except percentages):
Years Ended
December 31, $ Change % Change
2020 2019 2020 vs. 2019 2020 vs. 2019
DSUVIA $ 812 $ 658 $ 154 23 %
Zalviso 95 549 (454 ) (83 )%
Overhead 3,110 3,454 (344 ) (10 )%
Total research and development expenses
(644 ) (14 )%
Research and development expenses during the year ended December 31, 2020 , as
compared to the year ended December 31, 2019 , decreased by $0.6 million
primarily due to decreases in Zalviso-related spending and overhead expenses,
partially offset by increases in DSUVIA-related spending.
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 years endedDecember 31, 2020 and 2019, were as follows (in thousands, except percentages): Years Ended December 31, $ Change % Change 2020 2019 2020 vs. 2019 2020 vs. 2019 Selling, general and administrative expenses$ 36,330 $ 45,027 $ (8,697 ) (19 )% Selling, general and administrative expenses decreased by$8.7 million during the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . The decrease is primarily due to net decreases in selling, general and administrative expenses including a$4.0 million reduction in personnel costs, a$3.3 million reduction in DSUVIA commercialization-related expenses, and a$1.5 million reduction in travel-related expenses.
In
Other Income (Expense)
Total other income (expense) for the years ended
Years Ended
December 31, $ Change % Change
2020 2019 2020 vs. 2019 2020 vs. 2019
Interest expense $ (3,305 ) $ (2,535 ) $ (770 ) 30 %
Interest income and other income
(expense), net 583 2,166 (1,583 ) (73 )%
Non-cash interest income (expense) on
liability related to sale of future
royalties 3,310 1,337 1,973 148 %
Total other income (expense) $ 588 $ 968 $ (380 ) (39 )%
Interest expense consisted primarily of interest accrued or paid on our debt
obligation agreements and amortization of debt discounts. Interest expense
increased for the year ended December 31, 2020 , as compared to the year ended
December 31, 2019 , primarily as a result of a higher average outstanding loan
balance. As of December 31, 2020 , the accrued balance due under the Loan
Agreement with Oxford was $21.0 million . Refer to Note 6 "Long-Term Debt" in the
accompanying notes to the Consolidated Financial Statements for additional
information.
Interest income and other income (expense), net, for the years ended December
31, 2020 and 2019 primarily consisted of interest earned on our investments. The
decrease in interest income and other income (expense), net, in the year ended
December 31, 2020 , compared to the year ended December 31, 2019 , was primarily
due to a lower average investment balance, combined with lower yields on those
investments.
67-------------------------------------------------------------------------------- The non-cash interest income (expense) 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 8 "Liability Related to Sale of Future Royalties", the Royalty Monetization has been recorded as debt under the applicable accounting guidance. We periodically assess the expected royalty and milestone payments using a combination of historical results, internal projections and forecasts from external sources. To the extent such payments are greater or less than our initial estimates or the timing of such payments is materially different than our original estimates, we will prospectively adjust the amortization of the liability and the interest rate. During the three months endedJune 30, 2019 , we made a material revision to our estimates as the expected payments under the Royalty Monetization are less than the$65.0 million in gross proceeds received. The change in estimate reduced the effective interest rate over the life of the liability to 0% by recording interest income over the remaining term of the arrangement, prospectively, as an offset to the interest expense that was recognized in prior periods, and resulted in a decrease of$8.1 million to the net loss for the year endedDecember 31, 2019 . The effective interest income rate for the years endedDecember 31, 2020 and 2019, was approximately 3.6% and 1.4%, respectively. We anticipate that we will record approximately$3 million in non-cash interest income related to the Royalty Monetization for the year endedDecember 31, 2021 .
Liquidity and Capital Resources
Liquidity We have incurred losses and generated negative cash flows from operations since inception. We expect to continue to incur significant losses in 2021 and may incur significant losses and negative cash flows from operations in the future. We have funded our operations primarily through issuance of equity securities, borrowings, payments from our commercial partner, 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. As ofDecember 31, 2020 , we had cash, cash equivalents and investments totaling$42.9 million , compared to$66.1 million as ofDecember 31, 2019 . The decrease was primarily due to cash required to fund our continuing operations, including debt service, as we continued our commercialization activities for DSUVIA and support for Grünenthal's European sales of Zalviso, as well as business development activities. We anticipate that our existing capital resources will permit us to meet our capital and operational requirements for at least the next twelve months; however, our expectations may change depending on a number of factors including the extent and magnitude of the impact from the COVID-19 pandemic, in particular the negative impact on sales volumes as our sales force is limited in its access to potential customers, our expenditures related tothe United States commercial launch of DSUVIA and the timing of business development activities. 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. OnJuly 23, 2020 , we completed a registered direct offering in which we issued and sold 9,433,962 shares of our common stock at a price of$1.06 per share. The total net proceeds from this offering were approximately$10.0 million .
On
OnJanuary 22, 2021 , we completed an underwritten public offering in which we issued and sold 14,500,000 shares of our common stock to the underwriter at a price of$1.7625 per share. OnJanuary 27, 2021 , the underwriters exercised their option in full and purchased an additional 2,175,000 shares at a price of$1.7625 per share. The total net proceeds from this offering of an aggregate 16,675,000 shares were approximately$28.9 million . We have a Controlled Equity OfferingSM Sales Agreement, or, as amended, the ATM Agreement, withCantor Fitzgerald & Co. , or Cantor, as agent, pursuant to which we may offer and sell, from time to time through Cantor, shares of our common stock. During the year endedDecember 31, 2020 , we issued and sold 876,800 shares of common stock pursuant to the ATM Agreement, for which we received net proceeds of approximately$1.4 million . As ofDecember 31, 2020 , we had the ability to sell approximately$43.8 million of our common stock under the ATM Agreement. Subsequent toDecember 31, 2020 , we issued and sold approximately 3.0 million additional shares of common stock and received additional net proceeds of approximately$7.4 million , after deducting fees and expenses, under the ATM Agreement. As ofMarch 4, 2021 , we had the ability to sell approximately$36.2 million of our common stock 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 and used approximately$8.9 million of the proceeds from the Loan to repay our outstanding obligations under the Prior Agreement. After deducting all loan initiation costs and outstanding interest on the Prior Agreement, we received$15.9 million in net proceeds. As ofDecember 31, 2020 , the accrued balance under the Loan Agreement was$21.0 million . For more information, see Note 6 "Long-Term Debt" in the accompanying notes to the Consolidated Financial Statements. 68
-------------------------------------------------------------------------------- OnMay 18, 2020 , we received a notice from Grünenthal that it was exercising its right to terminate the Grünenthal Agreements. The terms of the Grünenthal Agreements were extended toMay 2021 to enable Grünenthal to sell down its Zalviso inventory. There is a continuing obligation on our part, through the term of the Royalty Monetization, to use commercially reasonable efforts to negotiate a New Arrangement. The Royalty Monetization will be repaid to SWK (assignee of PDL) over the life of the agreement through a portion of the European royalties and milestones received under the Grünenthal Agreements and any New Arrangement, if executed. For more information, see Note 8 "Liability Related to the Sale of Future Royalties" in the accompanying notes to the Consolidated Financial Statements. Our cash and investment balances are held in a variety of interest-bearing instruments, including obligations of commercial paper, corporate debt securities,U.S. government sponsored enterprise debt securities and money market funds. Cash in excess of immediate requirements is invested with a view toward capital preservation and liquidity. We do not expect COVID-19 to have a material impact on our high quality, short-dated investments. Cash Flows Years Ended December 31, 2020 2019 Net cash used in operating activities$ (38,505 ) $ (51,180 ) Net cash provided by (used in) investing activities 34,139 (36,563 ) Net cash provided by financing activities 16,956 14,452
Cash Flows from Operating Activities
The primary use of cash for our operating activities during these periods was to fund commercial readiness activities for our approved product, DSUVIA, and our product candidate, Zalviso, in addition to the support of Grünenthal's European sales of Zalviso. 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$38.5 million during the year endedDecember 31, 2020 , reflected a net loss of$40.4 million , partially offset by aggregate non-cash charges of$4.2 million and included an approximate$2.3 million net change in our operating assets and liabilities. Non-cash charges included$4.4 million for stock-based compensation expense,$3.3 million in non-cash interest income on the liability related to the Royalty Monetization,$1.9 million in depreciation expense and$1.1 million in non-cash interest expense related to debt financing. The net change in our operating assets and liabilities included a$1.0 million increase in accounts payable and a$3.2 million decrease in deferred revenue. Cash used in operating activities of$51.2 million during the year endedDecember 31, 2019 , reflected a net loss of$53.2 million , partially offset by aggregate non-cash charges of$6.0 million . Non-cash charges included$5.1 million in stock-based compensation expense,$1.7 million in depreciation expense, a$1.0 million inventory impairment charge and$0.7 million in non-cash interest income on the liability related to the Royalty Monetization. The net change in our operating assets and liabilities of$3.9 million included a$3.4 million increase in inventories.
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 year endedDecember 31, 2020 , cash provided by investing activities of$34.1 million was the net result of$80.6 million in proceeds from maturity of investments, offset by$44.6 million for purchases of investments and purchases of property and equipment of$1.9 million . During the year endedDecember 31, 2019 , cash used in investing activities of$36.6 million was the net result of$100.1 million for purchases of investments and$3.5 million for purchases of property and equipment, offset by$67.0 million in proceeds from maturity of investments. 69 --------------------------------------------------------------------------------
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 year endedDecember 31, 2020 , cash provided by financing activities was primarily due to$21.3 million in net proceeds received in connection with equity financings, and$0.4 million in net proceeds received through our equity plans, partially offset by$4.7 million used for payment of long-term debt. During the year endedDecember 31, 2019 , cash provided by financing activities was primarily due to$24.8 million in net proceeds received in connection with the Loan Agreement with Oxford, offset by$8.9 million for the repayment of the Prior Agreement,$3.5 million in payments of long-term debt under the Prior Agreement, plus$1.2 million in net proceeds received under the Sales Agreement and$0.8 million in proceeds as a result of stock purchases made under our 2011 Employee Stock Purchase Plan, or ESPP, and stock option exercises.
Operating Capital and Capital Expenditure Requirements
Our current operating plan includes expenditures related to the continued launch of DSUVIA inthe United States . This plan includes an assumption that COVID-19 related restrictions on access to potential customers and elective surgeries will continue to be lifted, as well as anticipated activities required to resubmit the Zalviso NDA. 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 Zalviso inthe United States and intend to update our cash forecasts accordingly. Our forecast that our existing capital resources will permit us to meet our capital and operational requirements for at least the next twelve months is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially.
Our future capital requirements may vary materially from our expectations based on numerous factors, including, but not limited to, the following:
• the accuracy of our estimates regarding the sufficiency of our cash
resources and expenses;
• the impact and timing of COVID-19 on our operations, our salesrepresentatives' access to hospitals or other healthcare facilities, and our
level of sales;
• expenditures related to the launch of DSUVIA and potential commercialization
of Zalviso;
• future manufacturing, selling and marketing costs related to DSUVIA and
Zalviso, including our contractual obligations to Grünenthal or another
third party for Zalviso;
• costs associated with business development activities and licensing
transactions;
• the outcome, timing and cost of the regulatory resubmission of Zalviso and
any approval for Zalviso;
• the initiation, progress, timing and completion of any post-approval
clinical trials for DSUVIA, or Zalviso, if approved;
• changes in the focus and direction of our business strategy and/or research
and development programs;
• milestone and royalty revenue we receive under our collaborative development
and commercialization arrangements;
• 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
Zalviso;
• the extent to which we acquire or invest in businesses, products or
technologies; and
• the expenses associated with any possible 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 I., Item 1A. Risk Factors-Risks Related to Our Financial
Condition and Need for
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Through
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