Aquestive Therapeutics - 10-K annual report 2018

Risks Related to Ownership of Our Common Stock

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our Board of Directors, which is responsible for appointing the members of our management. In addition, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with an interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder, unless such transactions are approved by our board of directors. This provision could have the effect of delaying or preventing a change of control, whether or not it is desired by or beneficial to our stockholders. Further, other provisions of Delaware law may also discourage, delay or prevent someone from acquiring us or merging with us.

Item 1B.  Unresolved Staff Comments

None.

Item 2. Properties

We lease our headquarters and principal laboratory in Warren, New Jersey. Pursuant to various amendments in February 2011, June 2012 and May 2013, we have secured additional space to provide growth of our laboratory facilities and to accommodate our corporate and administrative requirements. In June 2018, we entered into an Amended and Restated Lease Agreement. This extends our lease to February 2020 and increases the space to 23,589 square feet from 16,554. Our monthly base rent for this facility is currently $35,206. We are currently reviewing our options with respect to our headquarters, laboratory and commercialization operations in New Jersey

Item 3. Legal Proceedings

Beginning in August 2013, we were informed of ANDA filings in the United States by Watson Laboratories, Inc. (now Actavis Laboratories, Inc., or Actavis), Par Pharmaceutical, Inc., or Par, Alvogen Pine Brook, Inc., or Alvogen, Teva Pharmaceuticals USA, Inc., or Teva, Sandoz Inc., or Sandoz, and Mylan Technologies Inc. or Mylan, for the approval by the FDA of generic versions of Suboxone Sublingual Film in the United States. We filed patent infringement lawsuits against all six generic companies in the U.S. District Court for the District of Delaware. Of these, cases against three of the six generic companies have been resolved.

After the commencement of the above-mentioned ANDA patent litigation against Teva, Dr. Reddy’s Laboratories acquired the ANDA filings for Teva’s buprenorphine and naloxone sublingual film that are at issue in these trials.

Trials against Dr. Reddy’s, Actavis and Par in the lawsuits involving the Orange Book and process patents occurred in November-December of 2015 and November of 2016. On June 3, 2016, the Court issued its Trial Opinion finding that the asserted claims of U.S. Patent No. 8,603,514, or the ’514 patent, are valid and infringed by Actavis’s and Par’s ANDA Products. On August 31, 2017, the Court upheld U.S. Patent No. 8,900,497, or the ’497 patent, as valid but not infringed by Par’s, Actavis’s or Dr. Reddy’s proposed processes for making their ANDA Products. The Court also again upheld the validity of the ’514 patent but held it was not infringed by Dr. Reddy’s ANDA Products, and upheld the validity of U.S. Patent No. 8,017,150, or the ’150 patent, but held that it was not infringed by Dr. Reddy’s ANDA Products. All of these cases are consolidated on appeal to the Federal Circuit, except that the cases between Indivior and us and Par and certain affiliates have been resolved by a settlement agreement.  Oral argument on the consolidated appeals is scheduled for April 1, 2019.

Trial against Alvogen was held in September 2017. The only issue raised at trial was whether Alvogen’s ANDA Products and processes infringe the ’514 and ’497 patents; Alvogen did not challenge the validity of the patents. In March 2018, the Court issued its opinion finding that Alvogen’s ANDA products and processes would not infringe the ’514 or ’497 patents. We and Indivior appealed the ruling, and the appeal is currently pending before the Federal Circuit, with oral argument scheduled for April 1, 2019.

We are also seeking to enforce our patent rights in multiple cases against BioDelivery Sciences International, Inc., or BDSI. Two cases are currently pending but stayed in the U.S. District Court for the Eastern District of North Carolina:

On November 28, 2016, after the PTAB issued its final written decisions finding that the ’167 patent was not unpatentable in IPR2015-00165, IPR2015-00168 and IPR2015-00169, BDSI filed a notice of appeal of those decisions to the U.S. Court of Appeals for the Federal Circuit. The case was fully briefed, and the Court heard oral arguments on February 9, 2018. On June 19, 2018, BDSI filed a motion to terminate and remand the appeal, which the Company opposed. On July 31, 2018, the Federal Circuit granted the motion, vacating the PTAB’s decisions and remanding for further proceedings before the PTAB.  On February 7, 2019 the PTAB denied BDSI’s petitions in their entirety and terminated the IPR proceedings.

In September 2017, Indivior brought suit against Alvogen for infringement of U.S. Patent No. 9,687,454, or the ’454 patent, based on the filing of an ANDA seeking approval for a generic version of Suboxone Sublingual Film, in the U.S. District Court for the District of New Jersey. In February 2018, we and Indivior amended the complaint, which added us as a plaintiff and a claim for infringement of U.S. Patent No. 9,855,221, or the ’221 patent.

Indivior brought suits against Dr. Reddy’s and Teva in September 2017, and against Par and certain affiliates in October 2017, for infringement of the ’454 patent, in the U.S. District Court for the District of New Jersey. Indivior also brought suit in September 2017 against Actavis Laboratories UT, Inc. for infringement of the ’454 patent, in the U.S. District Court for the District of Utah. On March 13, 2018, the Court granted transfer of this case to the U.S. District Court for the District of Delaware.

In February 2018, we and Indivior brought suit against Actavis, Dr. Reddy’s, Teva, and Par and certain affiliates for infringement of the ’221 patent. The suit against Actavis was filed in the U.S. District Court for the District of Utah, and the other three cases were filed in the U.S. District Court for the District of New Jersey.

In April 2018, we brought suit with Indivior against Actavis, Alvogen, Dr. Reddy’s, Teva, and Par and certain affiliates for infringement of U.S. Patent No. 9,931,305, or the ’305 patent. The cases against Alvogen, Dr. Reddy’s, Teva, and Par are pending in the U.S. District Court for the District of New Jersey, and they have each been consolidated with the actions asserting infringement of the ’454 and ’221 patents. Following transfer of the case asserting the ’454 patent from Utah to Delaware, and by agreement of the parties, the cases against Actavis asserting infringement of the ’454, ’221, and ’305 patents are consolidated in a single action pending in the U.S. District Court for the District of Delaware.

All matters involving Par were resolved on May 11, 2018, when we, Indivior, and Par and certain of its affiliates entered into a settlement agreement resolving patent litigation related to Suboxone (buprenorphine and Naloxone) Sublingual Film. As required by law, the parties submitted the settlement agreement to the U.S. Federal Trade Commission and the U.S. Department of Justice for review.

On June 14, 2018, Dr. Reddy’s notified the U.S. District Court for the District of New Jersey that the FDA had granted final approval of its ANDAs and that it had launched generic versions of Suboxone Sublingual Film.  The Company and Indivior filed a motion for a preliminary injunction and a request for a temporary restraining order, and the Court granted the request on June 15, 2018 enjoining and restraining Dr. Reddy’s from offering for sale, selling or importing its generic versions of Suboxone Sublingual Film.  On July 13, 2018, the Court granted the preliminary injunction, which enjoined Dr. Reddy’s from launching a generic version of Suboxone during the pendency of the litigation and until further order from the Court.  Dr. Reddy’s appealed the preliminary injunction ruling to the Federal Circuit, and the Court heard oral argument on the appeal on October 4, 2018. On November 20, 2018, the Federal Circuit issued an opinion and judgment vacating the preliminary injunction.  On February 4, 2019, the Federal Circuit denied our petition for panel rehearing and rehearing en banc.  The mandate from the Federal Circuit issued on February 19, 2019, and the Judge in the District of New Jersey vacated the preliminary injunction against Dr. Reddy’s the same day.

On January 22, 2019, the Company and Indivior filed a motion for preliminary injunction and request for a temporary restraining order, seeking to prevent Alvogen from launching its generic versions of Suboxone Sublingual Film.  The FDA granted final approval to Alvogen’s generic versions of Suboxone Sublingual Film on January 24, 2019.  The Court entered a temporary restraining order on January 25, 2019, enjoining and restraining Alvogen from offering for sale, selling or importing its generic versions of Suboxone Sublingual Film.  On February 2, 2019, the Court entered the parties’ stipulation enjoining Alvogen from offering for sale, selling or importing its generic versions of Suboxone Sublingual Film unless and until the dissolution or vacation of the injunction against Dr. Reddy’s.  Following issuance of the mandate in the Dr. Reddy’s matter described above, on February 19, 2019, the Judge in the District of New Jersey also vacated the injunction against Alvogen.

The orders by the Judge in the District of New Jersey in the Dr. Reddy’s and Alvogen matters described above permit Dr. Reddy’s and Alvogen to launch their generic versions of Suboxone Sublingual Film prior to the expiration of the patents at issue in those matters.  Accordingly, on February 19, 2019, Indivior launched the authorized generic version of Suboxone Sublingual Film, which we manufacture exclusively for sale and marketing by Sandoz Inc., as sub-lessee of Indivior.  On February 20, 2019, both Dr. Reddy’s and Alvogen both announced that they had launched their generic versions of Suboxone Sublingual Film, and on February 22, 2019 Mylan Pharmaceuticals, Inc. launched their generic version of this product.  These launches are “at risk” because Dr. Reddy’s and Alvogen have launched their generic versions of Suboxone Sublingual Film even though they are the subject of ongoing patent infringement litigation.

On September 22, 2016, forty-one states and the District of Columbia, or the States, brought suit against Indivior and us in the U.S. District Court for the Eastern District of Pennsylvania, alleging violations of federal and state antitrust statutes and state unfair trade and consumer protection laws relating to Indivior’s launch of Suboxone Sublingual Film in 2010. After filing, the case was consolidated for pre-trial purposes with the In re Suboxone (Buprenorphine Hydrochloride and Naloxone) Antitrust Litigation, MDL No. 2445, or the Suboxone MDL, a multidistrict litigation relating to putative class actions on behalf of various private plaintiffs against Indivior relating to its launch of Suboxone Sublingual Film. While we were not named as a defendant in the original Suboxone MDL cases, the action brought by the States alleges that we participated in an antitrust conspiracy with Indivior in connection with Indivior’s launch of Suboxone Sublingual Film and engaged in related conduct in violation of federal and state antitrust law. We moved to dismiss the States’ conspiracy claims, but by order dated October 30, 2017, the Court denied our motion to dismiss. We filed an answer denying the States’ claims on November 20, 2017. The fact discovery period closed July 27, 2018, but the parties agreed to conduct certain fact depositions in August 2018.  The case is currently in the expert discovery phase, which is scheduled to close May 30, 2019. We are not able to determine or predict the ultimate outcome of this proceeding or provide a reasonable estimate, or range of estimate, of the possible outcome or loss, if any, in this matter.

On December 27, 2016, we were named as a co-defendant in product liability suit brought by Laurence and Michelle Allen, as Co-Administrators of the Estate of John Bradley Allen, in the U.S. District Court for the Northern District of New York.  This suit, which also named Indivior Inc. and Indivior PLC as defendants, asserts causes of action for negligence, strict liability, and failure to warn against the defendants in connection with the manufacture and sale of Suboxone Sublingual Film.  Plaintiffs allege that John Bradley Allen’s use of Suboxone Sublingual Film was a substantial contributing cause of his mental anguish and death and seek $100 million in damages.  All defendants moved to dismiss the complaint on April 10, 2017, and those motions were fully briefed on May 18, 2017.  Aquestive was dismissed from the case on May 9, 2017, and the remainder of the case was closed on August 9, 2018, after the complaint was dismissed in favor of Indivior.

Item 4.  Mine Safety Disclosures

Not applicable.

Market Information

Our common stock began trading on the NASDAQ Global Select Market on July 24, 2018 under the symbol “AQST”. Prior to that date there was no public market for our common stock.

Holders of Record

As of March 8, 2019, we had approximately 166 holders of record of our common stock.  Certain shares are held in “street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number.  This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.

Dividend Policy

Use of Proceeds

Item 6.  Selected Financial Data

The following table sets forth our selected financial data. We derived the statement of operations data for the years ended December 31, 2018, 2017 and 2016 and the balance sheet data as of December 31, 2018 2017, and 2016 from our audited financial statements. Our historical results are not necessarily indicative of results to be expected for any period in the future. The selected financial data presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes thereto, included elsewhere in this Annual Report on Form 10-K. The selected financial data in this section are not intended to replace our financial statements and the related notes thereto.

Balance Sheet Data:

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the notes to those financial statements appearing elsewhere in the Annual Report on Form 10-K. This discussion contains forward-looking statements that involve significant risks and uncertainties.  As a result of many factors, such as those set forth under “Risk Factors”; in Part 1 Item 1A of this Annual Report on Form 10-K, our actual results may differ materially from those anticipated in these forward-looking statements. All dollar amounts are stated in thousands.

Overview

We are a specialty pharmaceutical company focused on developing and commercializing differentiated products to address unmet medical needs. We have a commercial product and a late-stage proprietary product pipeline focused on the treatment of CNS diseases. We believe that the characteristics of these patient populations and shortcomings of available treatments create opportunities for the development and commercialization of meaningfully differentiated medicines. Sympazan, an oral soluble film formulation of clobazam used as an adjunctive therapy for seizures associated with a rare, intractable form of epilepsy know as LGS, was approved by the FDA on November 1, 2018.  The Company commercially launched Sympazan in December 2018.

Our most advanced proprietary product candidates, which we intend to commercialize ourselves, include:

In addition to these product candidates, we have a portfolio of commercialized and development-stage licensed products.  Our largest commercialized licensed product to date is Suboxone, a sublingual film formulation of buprenorphine and naloxone, which is the market leader for the treatment of opioid dependence.

We manufacture all of our licensed and proprietary products at our FDA- and DEA-inspected facilities and anticipate that our current manufacturing capacity is sufficient for commercial quantities of our products and product candidates currently in development. Not all collaborative or licensed products of the Company that may be commercially launched in the future will necessarily be manufactured by the Company.  We have produced over 2 billion doses of Suboxone and commercial doses of non-pharmaceutical products for all customers since 2006. Our products are developed using our proprietary PharmFilm technology and know-how. Our patent portfolio currently comprises at least 200 issued patents worldwide, of which at least 40 are U.S. patents, and more than 90 pending patent applications worldwide.

We were originally formed in Delaware in January 2004 and until December 31, 2017, we conducted our business through MonoSol Rx, LLC, a Delaware limited liability company, or MonoSol. From the period of organization through October 31, 2017, our predecessor was a limited liability company, or LLC, treated as a partnership for income tax purposes. From November 1, 2017 through December 31, 2017, MonoSol elected to be taxed as a C corporation. On January 1, 2018, MonoSol converted from a Delaware LLC into a Delaware corporation pursuant to a statutory conversion and changed its name to Aquestive Therapeutics, Inc.  In a corporate reorganization conducted following the conversion of MonoSol into a Delaware corporation, the holders of units of MonoSol contributed their interests in MonoSol to Aquestive Partners, LLC, or APL, in exchange for identical interests in APL and following such exchange APL became our parent and sole stockholder. Aquestive Therapeutics, Inc., our current corporate form, was formed effective on January 1, 2018 via the conversion of MonoSol Rx, LLC to, a Delaware corporation. As part of this conversion our charter approved the authorization of 25,000 shares of common stock and 5,000 shares of common stock were issued and outstanding as of March 31, 2018. As of March 31, 2018, our shares were 100% owned by APL. On April 16, 2018, we terminated our performance unit plans, or the PUP Plans, and as a result, we accelerated the vesting of any unvested performance units and issued non-voting shares of common stock to the holders of our performance units in order to compensate such holders of record. In April 2018, our board of directors approved a Certificate of Amendment to the Certificate of Incorporation in order to: (i) increase the authorized number of capital stock from 25,000 to 350,000,000 shares, (ii) authorize the issuance of non-voting common stock, and (iii) effect a forward stock split of shares of our common stock, such that each share be subdivided and reclassified into 37,212 shares of voting common stock. In July 2018, our board of directors approved a Certificate of Amendment to the Certificate of Incorporation in order to affect a reverse stock split of shares of our common stock at a ratio of 1 for 12.34. For purposes of our consolidated financial statements, the stock splits have been presented as if each had occurred on January 1, 2018. At the consummation of our initial public offering in July 2018, our shares held by APL were distributed to the holders of interests in APL in exchange for such interests, and APL was subsequently liquidated.

On July 27, 2018 we closed the initial public offering (“IPO”) of 4,500,000 shares of common stock at an offering price of $15.00 per share. On July 25, 2018 the company began trading on the Nasdaq Global Market under ticker symbol “AQST”. The offering resulted in aggregate gross proceeds of $67,500 before underwriting discounts and other costs and expenses of the offering. In August 2018, the underwriters exercised the over-allotment option granted to them in connection with the Offering, and on August 15, 2018 the Company completed the sale of 425,727 additional shares of common stock resulting in additional gross proceeds of $6,386 before underwriting discounts and other costs and expenses of the offering.  Total net proceeds to Aquestive after underwriters’ discounts and other costs and expenses of the offering totaled $63,482.

In 2013, we made a strategic decision to develop our own pipeline of proprietary pharmaceutical products and to pursue commercialization of these products. Revenues from these development efforts began being realized in late 2018, with Sympazan, following applicable regulatory approval. Substantial investments have been made since 2013 in the development of our proprietary pipeline. We expect to continue these investments for Sympazan and through the pre-launch and commercialization phases we are undertaking throughout 2019, in advance of the planned commercial launches of the additional CNS products in our late-stage pipeline, subject to FDA approval. These development and commercialization expenses in addition to utilizing the proceeds from the company’s recent IPO will also utilize funds generated from licensing related revenue.  As of December 31, 2018, we had $60,599 in cash and cash equivalents. As a result of our investments in product development and recent investments in pre-launch commercialization initiatives, as well as the settlement of obligations related to our MonoSol Rx, LLC Performance Unit Plan through the issuance of non-voting common stock, as of December 31, 2018, we had net shareholders’ equity of $10,080. For the years ended December 31, 2018 and 2017, we incurred net losses of $61,376 and $8,943, respectively.

We expect to continue to incur net losses for at least the next few years as we pursue the development, commercialization and marketing of our proprietary product candidates. Our net losses may fluctuate significantly from period to period, depending on the timing of our planned clinical trials and expenditures on our other research and development, as well as our commercialization activities. We expect our expenses will increase substantially over time as we:

Our business has been financed through a combination of revenue from licensed product activities, equity investments from our stockholders and debt proceeds from our credit facilities. In addition, we may require additional financing to execute our business strategy.

We believe our existing cash and cash equivalents and expected revenue from our licensed product activities will be sufficient to fund our operations at least through the next 12 months of operations, including our planned investments in the commercialization of our late stage CNS product candidates, expected research and development investments in our complex molecule product pipeline candidates, capital expenditures and investments in new product candidates in epilepsy and other CNS diseases. We have based this expectation on assumptions that could change, or prove to be inaccurate, and we could utilize our available financial resources sooner than we currently expect. The key assumptions underlying this expectation include:

We have no committed sources of additional capital. We may attempt to raise additional capital during favorable market conditions even if we have sufficient funds for planned operations. Until we become profitable, if ever, we expect to need to raise additional capital in the future to further the development, commercialization and marketing of our epilepsy products, Sympazan and Libervant, our ALS product, Exservan, and our other product candidates, and to conduct our business, there can be no assurance that such needed capital or debt financing will be available on favorable terms, or at all. We may seek to obtain additional financing in the future through the issuance of our common stock, through other public or private equity or debt financings, through non-dilutive capital raising events that may result from royalty streams that may be realizable from our licensed products, and through collaborations or licensing arrangements with other companies or other means, if available. We may not be able to raise additional capital on terms acceptable to us, or at all, and any failure to raise capital as and when needed could compromise our ability to execute on our business plan and cause us to delay or curtail our operations until such funding is received. To the extent that we raise additional funds by issuance of equity securities, our stockholders may experience dilution, and debt financings, if available, may involve restrictive covenants or may otherwise constrain our financial flexibility. To the extent that we raise additional funds through collaborative or licensing arrangements, it may be necessary to relinquish some rights to our intellectual property or grant licenses on terms that are not favorable to us. In addition, payments made by potential collaborators or licensors generally will depend upon our achievement of negotiated development and regulatory milestones. Failure to achieve these milestones may harm our future capital position.

Financial Operations Overview

Our revenues to date have been earned from our product development pipeline, marketed product activities and self-developed medicines. These activities generate revenues in four primary categories: manufacturing and supply revenue, co-development and research fees, license and royalty revenue, and proprietary product sales, net.

Currently, we produce two licensed pharmaceutical products: Suboxone and Zuplenz. We are the exclusive manufacturer for these products. We manufacture based on receipt of purchase orders from our licensees, and our licensees accept delivery of these orders at shipping point. As a result, under ASC 605, we record revenues when product is shipped, and title passes to the customers. Our licensees are responsible for all other aspects of commercialization of these products.

We expect future revenue from licensed activities to be based on volume demand for licensed products, new collaborations for product development, and additional licensing of our intellectual property.

We work with our licensees to co-develop pharmaceutical products. In this regard, we earn fees through performance of specific tasks, activities, or completion of stages of development defined within a contractual arrangement with the relevant licensee. The nature and extent of these performance obligations, broadly referred to as milestones or deliverables, are usually dependent on the scope and structure of the project as contracted, as well as the complexity of the product and the specific regulatory approval path necessary for that product.

Once a viable product opportunity is identified from our co-development and research activities with our licensees, we may out-license to our licensees the rights to utilize our intellectual property related to their marketing of such products globally. As a result, we earn revenue from license fees received under such license, development and supply agreements. We also may earn royalties based on our licensees’ sales of products that use our intellectual property that are marketed and sold in the countries where we patented technology rights.

Our costs and expenses are primarily the result of the following activities: generation of manufacture and supply revenues; development of our pipeline of proprietary product candidates; selling, general and administrative expenses, including pre-launch commercialization efforts related to our CNS product candidates, intellectual property procurement, protection, prosecution and litigation expenses, corporate management functions and interest on our corporate borrowings. We primarily record our costs and expenses in the following categories:

Manufacture and supply costs and expenses are comprised primarily of costs and expenses related to manufacturing our proprietary dissolving film products for our marketed licensed pharmaceutical products, including raw materials, direct labor and fixed overhead principally in our Portage, Indiana facilities.  In 2019, we expect the costs of our proprietary products manufactured to be a greater factor in these expenses, but such costs were minimal in 2018. Our material costs include the costs of raw materials used in the production of our proprietary dissolving film and primary packaging materials. Direct labor costs consist of payroll costs (including taxes and benefits) of employees engaged in production activities. Fixed and semi-fixed overhead principally consists of indirect payroll, facilities rent, utilities and depreciation for leasehold improvements and production machinery and equipment.

Our manufacture and supply costs and expenses are impacted by our customers’ supply requirements. Costs of production reflect the costs of raw materials that are purchased at market prices and production efficiency (measured by the cost of a salable unit).  These costs can increase or decrease based on the amount of direct labor and materials required to produce a product and the allocation of fixed overhead, which is dependent on the levels of production.

Since our inception, we have focused significant resources on our research and development activities.  Research and development expenses primarily consist of:

We expect our research and development expenses to increase over the next several years as we expand our efforts to identify and develop additional product candidates.  We will hire additional skilled colleagues to perform these activities, conduct clinical trials and ultimately seek regulatory approvals for any product candidate that successfully completes those clinical trials.

Selling, general and administrative expenses consist primarily of salaries, benefits, share-based compensation, commercialization and marketing costs and other related costs for executive, finance, selling and operational personnel. Other significant costs include facility and related costs not otherwise included in research and development expenses such as: professional fees for legal, consulting, tax and accounting services; insurance; selling; market research; advisory board and key opinion leaders; depreciation; and general corporate expenses, inclusive of IT systems related costs.

Interest expense consists of interest costs related to the Loan Agreement, as well as amortization of loan costs and debt discounts. Our interest is subject to changes in one-month LIBOR and represents a monthly cash payment obligation. This debt facility is discussed in more depth in Liquidity and Capital Resources.

Interest income consists of earnings derived from an interest-bearing account.  There is no minimum amount to be maintained in the account nor any fixed length of period for which interest is earned.  We expect to continue generating income in 2019 from our interest-bearing cash accounts, albeit on a declining cash balance that is expected to be applied to operating costs as needed.

Changes in the fair value of warrants resulted from non-cash periodic revaluations of the warrants issued to Perceptive Credit Opportunities Fund in connection with the Loan Agreement.  Effective with the automatic exercise of the warrants by Perceptive prior to our IPO in July 2018, these warrants are no longer outstanding and no future related charges to earnings will be incurred.

Results of Operations

We recorded revenue of $67,430 and $66,918 in 2018 and 2017, respectively, generating net losses of $61,376 and $8,943 for each of those years, respectively.

The following discussion of our results of operations explains the material drivers of these results of operations.

The following table sets forth our revenue data for the periods indicated.

Revenues increased 1% or $512 in 2018 to $67,430 compared to $66,918 in 2017. This increase came primarily from increases in license and royalty revenue, followed by an increase in co-development and research fees, offset in part by lower manufacture and supply revenue.

Manufacture and supply revenue decreased approximately 7% or $2,773 in 2018 to $37,319 as compared to $40,092 in 2017 due to a one-time $2,000 flat fee earned in the 2017 period for certain manufacturing exclusivity rights.  Excluding this flat fee, the 2% decrease is attributable to lower volume due primarily to a reduction of purchase orders placed by Indivior for Suboxone.

License and royalty revenue increased 7% or $1,566 in 2018 to $24,699 compared to $23,133 in 2017. This increase was primarily related to license fees on our licensed products Suboxone and APL-130277(Apomorphine).  License fees totaled $23,500 in the 2018 period compared to $22,000 of license fees recognized during the 2017 period.  Suboxone related license fees were $2,500 higher in 2018 as compared to those of 2017 while Apomorphine related license fees were $1,000 less in 2018 when compared to 2017. Further Suboxone license payments are suspended until adjudication of related patent infringement litigation occurs. Royalty revenues earned on Suboxone and Zuplenz increased modestly year-over-year on similar product sales volumes flowing through our licensees’ sales and distribution channels.  License fees are generally driven by transfer of rights, patent performance contingencies, specific FDA or other regulatory achievements, sales levels achievements or other contingencies and milestones, and will likely fluctuate significantly from quarter-to-quarter.

Co-development and research fees increased 40% or $1,491 in 2018 to $5,184 compared to $3,693 in 2017. The increase was driven by the timing of the achievement of research and development performance obligations on licensed products, related milestones and are normally expected to fluctuate significantly one reporting period to the next.

The following table sets forth our expense data for the periods indicated:

Manufacturing and supply costs and expenses increased 6% or $1,168 to $20,988 in 2018 compared to $19,820 in 2017 driven primarily by $940 in higher production costs and $363 in higher scrap costs period over period.  Adding to this increase in 2018 was $345 of compensation cost attributable to manufacturing operations and associated with the issuance of the non-voting common shares and related withholding taxes, which the Company elected to pay on behalf of the former performance unit holders and share-based compensation of $69.  These increases were offset in part by a $550 decrease in costs attributable to lower volume due to timing of Indivior purchase orders period over period.

Research and development expenses increased 4% or $979 to $23,112 in 2018 as compared to $22,133 in 2017 primarily due to $2,186 of compensation costs allocable to research and development expenses and associated with the issuance of non-voting common shares and related withholding taxes, which the Company elected to pay on behalf of the former performance unit holders, and $397 of share-based compensation.  These increases were offset in part by decreased project spend driven by the timing of clinical trial activities on our proprietary products in development and lower regulatory submission related costs and support.

Below is a depiction of research and development expenses by type of cost for each period presented:

Selling, general and administrative expenses increased 188% or $47,186 to $72,264 in 2018 as compared to $25,078 in 2017 primarily due to $24,767 of compensation cost allocable to selling, general and administrative expenses and associated with the issuance of the non-voting common shares and related withholding taxes, which the Company elected to pay on behalf of the former performance unit holders and $2,176 of share-based compensation expense. The remaining increase of $20,243 is primarily attributable to investments in our commercialization, branding and marketing capabilities in preparation for the launch of Sympazan and the expected launches of Libervant and Exservan. These costs included those for personnel, external consultants and other resources that enabled us to establish the key commercial functions such as sales and marketing, market access and medical affairs. Increased legal fees incurred in connection with the ongoing state anti-trust litigation and other patent related matters also contributed to this result. In addition, additional personnel and other external resources have been engaged to further assist us in operations as a public company, also contributing to the overall increase in these expenses.

Interest expense remained consistent, increasing $4 to $7,711 in 2018 compared to $7,707 in 2017. This was the result of an increase in our indebtedness of $5,000 incurred on March 9, 2017, and the increase in the LIBOR rate in 2018 of $59, offset in part by lower discount and loan acquisition cost amortization associated with the extended debt principal payment dates.  Our interest expense is subject to increases based on one-month LIBOR.

Interest income increased $552 in 2018 as compared to 2017, as a result of investing the net cash proceeds from our IPO in an interest-bearing account.

Other expenses per the table above increased by $4,160 in 2018 compared to 2017, principally due to the expense incurred associated with the fair value of the warrants of $5,278 in 2018 compared to $1,123 in 2017.  For periods prior to our IPO, which was effective July 24, 2018, we remeasured the fair value of outstanding warrants each quarter in accordance with the AICPA Practice Aid, Valuation of Privately-Held Company Equity Securities issued as compensation.  Market pricing of $15.00, the initial price at which the Company’s common stock was offered, was used in determining fair value at the time of exercise of those warrants.

Liquidity and Capital Resources

Since our inception in January 2004, we have incurred significant losses and as a result of our IPO, as of December 31, 2018, we have net stockholders’ equity of $10,080. We have funded our operations primarily with equity and debt financings and milestone and royalty payments from our collaboration licensees. Through December 31, 2018, we received net proceeds from debt and equity issuances of $190,939 as follows:

We generate revenue from licensed products and proprietary product sales, net and related activities, but the costs to generate these revenues and the costs and expenses of our proprietary CNS and complex molecule development programs, related commercialization efforts, PUP costs and interest and warrant valuation expenses have resulted in the $61,376 deficit we have accumulated since our inception.

We had $60,599 in cash and cash equivalents as of December 31, 2018. We have no committed sources of capital and our borrowing capability under the Loan Agreement is fully drawn.

On July 27, 2018, we closed the IPO of 4,500,000 shares of common stock at an offering price of $15.00 per share. We received net proceeds of approximately $57,543, after deducting underwriting discounts, commissions, and offering related transaction costs of approximately $9,957. On August 15, 2018, the underwriters exercised their over-allotment option and the Company issued 425,727 at $15.00 per share.  The Company received additional net proceeds of approximately $5,939, after deducting underwriter discounts of approximately $447. The Company’s IPO produced total gross proceeds of approximately $73,886 and we received net proceeds of approximately $63,482, after deducting underwriter discounts and costs and expenses of the offering.

On August 16, 2016, we entered into a Credit Agreement and Guarantee with Perceptive Credit Opportunities Fund, which we amended on May 21, 2018, or, as so amended, the Loan Agreement. At closing, we borrowed $45,000 under the Loan Agreement and were permitted to borrow up to an additional $5,000 within one year of the closing date based on achievement of a defined milestone. In March 2017, we met our performance obligations under the terms of the Loan Agreement and received the remaining $5,000 available to us under the Loan Agreement. Proceeds under the Loan Agreement were used to repay an existing debt obligation of $37,500, with the balance available for general corporate purposes. The loan from Perceptive was originally scheduled to mature on August 16, 2020.

However, upon the consummation of our initial public offering, the maturity date was extended to December 16, 2020. The loan bears interest, payable monthly, at one-month LIBOR, currently approximately 2.38% plus 9.75%, subject to a minimum rate of 11.75%. The loan is interest-only through April 2019, as amended.

Additionally, pursuant to the Loan Agreement, commencing on May 31, 2019, seven monthly principal payments are due in the amount of $550. Thereafter, monthly principal payments in the amount of $750 are due through the maturity date (as extended), at which time the full amount of the remaining outstanding loan balance is due. Our tangible and intangible assets are subject to first priority liens to the extent of the outstanding debt. Other significant terms include financial covenants, change of control triggers and limitations on additional indebtedness, asset sales, acquisitions and dividend payments. The Loan Agreement contains certain financial covenants, which include (1) a minimum liquidity requirement pursuant to which we must maintain a monthly cash balance of $4,000 at all times and (2) a minimum revenue requirement pursuant to which on a quarterly basis (calculation date) we must maintain minimum revenues for the twelve consecutive trailing months ended prior to the calculation date. Further, under the Loan Agreement, as amended, we are permitted, subject to Perceptive’s consent, to monetize the royalty and fees derived from sales of certain Apomorphine products and, in connection with such monetization, Perceptive has agreed to release liens related to these royalties and fees.  Further, the Loan Agreement originally contained a requirement that we make a mandatory prepayment in the amount of 25% of the net cash proceeds to us upon consummation of our initial public offering; however, as amended, in connection with the consummation of our initial public offering, such requirement no longer applies.

As of December 31, 2018, we were compliant with all financial and other covenants under the Loan Agreement.

Finally, upon the closing of our initial public offering, Perceptive received 863,400 shares of common stock issuable pursuant to the automatic exercise of warrants from APL’s ownership interest for a total exercise price of $116.

The following table provides information regarding our cash flows for the years ended December 31, 2018 and 2017:

Net cash used for operating activities for the year ended December 31, 2018 was $12,991.  The use of cash can be understood as represented by three major factors: 1) our net loss of $61,376 partially offset by 2) non-cash operating expenses totaling $40,387 and further offset by 3) changes in operating assets and liabilities of $7,998. The non-cash operating expenses of $40,387 primarily resulted from $29,940 of share-based compensation which included $27,298 related to the termination of the Company’s Performance Unit Plans in the second quarter of 2018 and $2,642 of share-based compensation expense recorded in the second, third and fourth quarters of 2018.  Other significant components included non-cash charges of $5,278 related to an increase in the fair value of the Perceptive warrants through the date of exercise and $5,169 related to other non-cash charges such as depreciation, amortization and amortization of debt issuance costs.

Net cash provided by operating activities for the year ended December 31, 2017 was $5,824 and was attributed to our $8,943 net loss partially offset by non-cash charges to 2017 earnings of $6,886, which included depreciation and amortization of long-lived assets and amortization of debt issuance costs. Further offsets to the net loss were provided by changes in working capital accounts totaling $7,881, primarily through collections of trade receivables and increases in trade payables as management sought to optimize its liquidity.

Net cash used for investing activities was $1,824 for the year ended December 31, 2018 compared to $2,068 for the twelve months ended December 31, 2017.  This decrease in net cash used for investing activities was primarily attributable to timing of capital expenditures for plant and equipment purchases.

Net cash provided by financing activities was $58,035 for the year ended December 31, 2018 compared to cash provided by financing activities of $4,414 for the year ended December 31, 2017.  The cash provided  in 2018 was a result of $68,714 of proceeds received from our initial public offering of common stock and $116 of proceeds received as part of the Perceptive warrant exercise, offset in part by the $4,768 in transaction costs paid as part of our initial public offering and $6,027 related to the payment of withholding taxes associated with the share-based compensation recorded during  2018.  Net cash provided by financing activities was $4,414 for the year ended December 31, 2017, which was primarily a result of $5,000 of debt proceeds received in 2017 from an additional draw under the Loan Agreement offset in part by $610 of related transaction costs incurred related to our initial public offering.

We expect that our existing cash, including the net proceeds from our initial public offering, combined with our expected revenue from our licensed product activities, and Sympazan, our recently launched proprietary product, will be sufficient to fund our operations at least through the next 12 months of operations, including our planned investments in the commercialization of our late stage CNS product candidates and other expected costs and expenses, including those related to research and development investments in our complex molecule product pipeline candidates, capital expenditures and investments in new product candidates in epilepsy and other CNS diseases. We have based this expectation on assumptions that could change or prove to be inaccurate, and we could utilize our available financial resources sooner than we currently expect.

The key assumptions underlying this expectation include:

While we expect to pursue non-dilutive capital opportunities around our future royalty streams and our refinancing options surrounding our senior secured debt, at this time we have no committed sources of additional capital. We may attempt to raise additional capital during favorable market conditions or when other strategic opportunities may become available, even if we have sufficient funds for planned operations. Until we become profitable, if ever, we expect to need to raise additional capital in the future to further the commercialization of Sympazan and advance the development and commercialization of our CNS products, Libervant and Exservan, and that of our other product candidates and to conduct our business. We may seek to obtain additional financing in the future through the monetization of royalty streams from licensed products such as APL-130277 subject to our licensing agreement with Sunovion Pharmaceuticals, Inc., and KP-415 and KP-484 both associated with KemPharm, Inc. and/or others (but we cannot be assured of any such royalty streams or monetization of any such streams), the issuance of our common stock, through other public or private equity or debt financings, third-party funding, marketing and distribution arrangements, as well as other collaborations, strategic alliances and licensing arrangements, or any combination of these approaches. We may not be able to raise additional capital on terms acceptable to us, or at all, and any failure to raise capital as and when needed could compromise our ability to execute on our business plan and cause us to delay or curtail our operations until such funding is received. To the extent that we raise additional funds by issuance of equity securities, our stockholders may experience dilution, and debt financings, if available, may involve restrictive covenants or may otherwise constrain our financial flexibility. To the extent that we raise additional funds through collaborative or licensing arrangements, it may be necessary to relinquish some rights to our intellectual property or grant licenses on terms that are not favorable to us. In addition, payments made by potential collaborators or licensors generally will depend upon our achievement of negotiated development and regulatory milestones. Failure to achieve these milestones may harm our future capital position.

If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate our research and development programs, or reduce our planned commercialization efforts. We also may be required to evaluate additional licensing opportunities, if any become available, of our proprietary product candidate programs that we currently plan to self-commercialize.

We expect to incur additional costs to support the obligations of a public company to various regulatory agencies, to investors and in order to comply with certain legislation and regulations, such as the Sarbanes-Oxley Act of 2002. These expenditures will include the costs of additional employees with specific skills and experiences such as SEC reporting or internal controls as well as additional costs to outside service providers such as audit, tax and legal fees.

Contractual Obligations and Commitments

Our contractual obligations relate to our debt agreement and operating leases for our facilities. The following table sets forth a summary of our contractual obligations as of December 31, 2018:

We have entered into various lease agreements for production and research facilities and offices. Most leases contain renewal options. Certain leases contain purchase options and require us to pay for taxes, maintenance and operating expenses. All of our leases are currently classified as operating leases. See Item 2 Properties for a further description.

Off-Balance Sheet Arrangements

We did not have any material off balance sheet arrangements as of December 31, 2018, except for operating leases, nor do we have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities.

Critical Accounting Policies and Use of Estimates

We have based our management’s discussion and analysis of our financial condition and results of operations on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles, or GAAP, in the US. The preparation of the consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities at the date of the financial statements as well as the revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments including those related to revenue recognition, inventory costs, liabilities and accruals, clinical trial expenses, share-based compensation and the valuation of deferred tax assets. We base our estimates on historical experience when available and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While significant accounting policies are more fully described in Note 3, Summary of Significant Accounting Policies, of the notes to our consolidated financial statements included in this filing, we believe that the following accounting policies are those that are most critical to the significant judgements and estimates used in the preparation of our consolidated financial statements.

Revenues include the sale of our two commercialized licensed products, fees from co-development and research services, fees from licensed proprietary technologies and patent rights, royalties based on specified product sales, and most recently, self-developed product sales. Related contractual payment arrangements typically include payments due for delivered products or services, up-front payments and milestone payments linked to specified performance obligations under development and research arrangements and fixed or contingent periodic payments under licensing or other service arrangements. Contracts may also include multiple-element arrangements. These are evaluated to identify deliverables and separate units of accounting. Deliverables generally represent obligations to provide analytical or testing services and reports, licenses for the use of intellectual property, manufactured products, or other performance obligations. Pursuant to FASB ASC Topic 605, Revenue Recognition, revenue is recognized when there is persuasive evidence of an agreement, title has passed or delivery has occurred, the price is fixed or determinable, and collection is reasonably assured.

We may enter into licensing, development and supply agreements that contain multiple deliverables. Under the provisions of FASB ASC Subtopic 605-25, Revenue – Multiple Deliverables, Accounting for Revenue Arrangements with Multiple Deliverables, we evaluate whether these deliverables constitute separate units of accounting. A deliverable qualifies as a separate unit of accounting when the item delivered to the customer has standalone value and, if there is a general right of return for the items delivered to the customer, delivery or performance of the undelivered elements is considered probable and substantially in our control. Revenue from such arrangements is recognized when we have substantially completed our obligations under the terms of the arrangement and our remaining involvement is inconsequential and perfunctory. If we have significant continuing involvement under such an arrangement, fees are recognized over the estimated performance period. We recognize revenue derived from milestone payments for its research and development activities upon the achievement of specified milestones if (i) the milestone is substantive in nature, the achievement of the milestone was not reasonably assured at the inception of the agreement and achievement is linked to our performance, (ii) consideration earned relates to past and complete performance and (iii) the milestone payment is nonrefundable. Payments received in excess of amounts earned are classified as deferred revenue until earned.

Revenues from proprietary product sales are recorded when the goods are shipped and title passes to the customer, typically at time of delivery. At the time of sale, estimates for several revenue deductions are recorded. When estimating the impact of these revenue deductions from gross sales for a reporting period, knowledge of historical trends and judgmental estimates are required for each deduction. For sales of Sympazan, returns allowances and prompt pay discounts are estimated based on historical return rates if available, as well as on contractual terms, and these estimates are recorded as a reduction of receivables. Estimates affecting accrued liabilities include those related to wholesaler service fees, co-pay card redemption costs and Medicare, Medicaid and other rebates and are similarly based on historical results and contract terms.

We classified the Perceptive Warrants as a liability on our balance sheets up to the effective date of our IPO, July 24, 2018, as they were free-standing financial instruments with the potential to require us to transfer assets upon exercise. The Perceptive Warrants were initially recorded at fair value on date of grant and were subsequently remeasured to fair value at each balance sheet date. We utilized a third-party professional appraisal firm to assist in determining fair value of the warrant due to the absence of available Level 1 and 2 inputs prior to the IPO date.  The fair value for period prior to the IPO date were based on unobservable Level 3 inputs.  Changes in fair value of the Perceptive Warrants were reported in Other Expense in the statement of operations and comprehensive loss through the effective date of our IPO, July 24, 2018.

The terms of the Perceptive Warrants conveyed the right to purchase 863,400 shares of our common stock, and this right was automatically exercised at the time of the IPO through issuance of common shares at a total price of $116.  As a result, the warrant liability was classified to additional paid in capital during the third quarter of 2018.  A Level 1 market pricing of $15.00, the initial price at which the Company’s common stock was offered, was used in determining fair value of the warrants as of the effective exercise date.

On December 22, 2017, the TCJA was enacted into law which overhauled the Internal Revenue Code of 1986, as amended, to revitalize our nation’s economy. One significant aspect of this new legislation was to lower the U.S. Corporate tax rate from 35% to 21%.  From the period January 1, 2017 through October 31, 2017, we were a Delaware limited liability company treated as a partnership for income tax purposes. From November 1, 2017 through December 31, 2017, we elected to be taxed as a C corporation. The tax reform legislation did not have a material impact on our provision for income taxes for the two-month period ended December 31, 2017 due to the valuation allowance against our net deferred tax assets. On January 1, 2018, we converted into a Delaware corporation and incorporated as Aquestive Therapeutics, Inc.

Income taxes are recorded in accordance with FASB ASC Topic 740 Income Taxes, or ASC 740, which provides for deferred taxes using an asset and liability approach. Income taxes have been calculated on a separate tax return basis. Certain of our activities and costs have been included in the tax returns filed by our predecessor company, MonoSol Rx, LLC. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Tax benefits are recognized when it is more likely than not that a tax position will be sustained during an audit. Valuation allowances are provided if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

We account for uncertain tax positions in accordance with the provision of ASC 740. When uncertain tax positions exist, we recognize the tax benefit of tax provisions to the extent that the benefit of tax positions will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position, as well as consideration of the available facts and circumstances. To date, we have not had any significant uncertain tax positions.

Prior to the Company’s conversion from an LLC to a C Corporation, share-based compensation had been issued pursuant to two Performance Unit Plans, both of which were within the scope of FASB ASC Subtopic 718-30, Compensation – Stock Compensation – Awards Classified as Liabilities. The fair value of this compensation was measurable by the increase in fair value at the time of settlement over the fair value determined at the grant date. Because the Company was privately owned during this time and had no public market for its LLC membership interests, significant judgements and estimates were necessarily inherent in the determination of fair values at various grant dates. Accordingly, the Company’s Board of Directors relied on various inputs to assist in their assessment of fair value, including relevant third-party investments, use of an enterprise value approach or use of an independent third-party valuation. Pursuant to the Performance Unit Plans, vested grants were not exercisable prior to either a change in control of the Company or completion of an IPO. These performance conditions rendered the grants contingent and, accordingly, expense recognition was deferred until either of the conditions were satisfied. On April 16, 2018, these Performance Unit Plans were formally terminated through actions of both the Board of Directors and the required approvals of certain plan participants. As a result, vesting of unvested performance units was accelerated and the Company issued non-voting common shares to compensate the performance unit holders. Immediately prior to the consummation of the IPO, all of the Company’s outstanding shares of non-voting common stock that had been issued in April 2018 were automatically converted to 4,922,353 shares of the voting common stock of Aquestive.

In accordance with ASC 718, Compensation — Stock Compensation, the Company recorded a total charge to earnings representing the cost of this compensation totaling $27,298, consisting of $19,123 which relates to the estimated fair market value at the issuance date of the 4,922,353 non-voting common shares and $8,175 related to withholding taxes which the Company committed to pay on behalf of the performance unit holders.  This compensation expense was estimated using an independent third-party valuation prepared in accordance with the American Institute of Certified Public Accountants Practice Aide, Valuation of Privately-Held Company Equity Securities Issued as Compensation. This valuation assumed a discount for lack of marketability of 34%, taking into consideration the illiquid nature of the security as well as other qualitative characteristics that would make it less marketable than the more senior securities. Volatility was assumed at 90%, based on that of comparable public companies.  The weighted average cost of capital of 27.5% was also based on that of comparable public companies as well as market interest rate data. If we had made different assumptions in determinations of fair value at either the grant dates or at the time of issuance of the non-voting common shares issued in settlement of those grants, our equity-based compensation expense, net loss and net loss per share of common stock could have been significantly different.

We provide certain employees, non-employee directors and consultants with performance incentives under our share-based compensation plans.  Under these plans, we may grant restricted stock units and stock options in order to align long-term financial interest of selected participants with those of its shareholders, strengthen the commitment of such persons to the Company, and attract and retain competent and dedicated persons whose efforts will enhance long-term growth, profitability and share value.  Compensation cost relating to share-based payments transactions is recognized in the Consolidated Statements of Operations and Comprehensive Income (Loss) for the year-ended December 31, 2018, at their fair values at their grant dates. All share-based payments to employees, including grants of employee stock options, are recognized in the statement of operations as compensation expense over the vesting period of the awards.  We determine the fair value of option awards using the Black-Scholes-Merton option pricing model that incorporates certain assumptions, such as the risk-free interest rate, expected volatility, expected dividend yield and expected life of the options.  Restricted Stock Units are valued based upon the value of the Company’s underlying common stock.  See Note 15 to the consolidated financial statements contained in Item 8.  Financial Statements and Supplementary Data for additional discussion.

Recent Accounting Pronouncements

Refer to Note 3. “Summary of Significant Accounting Policies” in the accompanying notes to our consolidated financial statements for a discussion of recent accounting pronouncements.

JOBS Act

On April 5, 2012, the Jumpstart Our Business Startups Act, or the JOBS Act, was enacted. The JOBS Act provides that, among other things, an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. As an emerging growth company, we have elected to take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for public emerging growth companies.

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk

Our exposure to market risk due to changes in interest rates relates primarily to the increase or decrease in the amount of interest expense from fluctuations in one-month LIBOR associated with the Loan Agreement. For each 1% increase in one-month LIBOR in excess of 2%, our annual interest expense would increase by approximately $500,000. Our cash and cash equivalents are maintained in FDIC protected accounts with no exposure to material changes in interest rates. From the end of August 2018 thru December 31, 2018, our interest rate on deposited cash ranged from 1.87% to 2.05%.  For 2019, our interest rate is approximately 2.3% for cash deposited in the interest-bearing account.  We do not purchase, sell or hold derivatives or other market risk sensitive instruments to hedge interest rate risk or for trading purposes. We are in the process of developing a comprehensive investment strategy for our cash and cash equivalents whose underlying premise would be to preserve principal while at the same time maximizing the income that we received from our investments without significantly increasing risk.

Our accounts receivables are concentrated predominantly with Indivior.  With the recent launch of Sympazan, our concentration with three large regional wholesalers of pharmaceutical products is not significant presently but may become so in future periods should Sympazan sales increase and should other pipeline products become approved by the FDA and become distributed through these three regional, or other, wholesalers. In the event of non-performance or non-payment by either Indivior or the wholesalers, there may be a material adverse impact on our financial condition, results of operations or net cash flow.

Item 8. Financial Statements and Supplementary Data

Our financial statements, together with the report of our independent registered public accounting firm, appear in this Annual Report on Form 10-K beginning on page F-1.

Item 9.  Change in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures.

We maintain disclosure controls that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding our required disclosures.

As of December 31, 2018, our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Our principal executive officer and principal financial officer have concluded based upon the evaluation described above that, as of December 31, 2018, our disclosure controls and procedures were effective at the reasonable assurance level.

Due to a transition period established by SEC rules applicable to newly public companies, our management is not required to evaluate the effectiveness of our internal control over financial reporting until after the filing of our Annual Report on Form 10-K for the year-ended December 31, 2018.

This Annual report on Form 10-K does not include an attestation of our registered public accounting firm due to an exemption established by the JOBS Act for “emerging growth companies”.

There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information.

None.

Item 10.  Directors, Executive Officers, and Corporate Governance

The information required by this item is incorporated by reference to the information set forth in the sections titled “Proposal 1 – Election of Directors,” “Executive Officers,” and “Information Regarding the Board and Corporate Governance” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our 2018 Proxy Statement, expected to be filed with the SEC within 120 days following the end of our fiscal year.

Item 11.  Executive Compensation

The information required in this item in incorporated by reference to the information set forth in the section titled “Executive Officer and Director Compensation” in our 2018 Proxy Statement expected to be filed with the SEC within 120 days following the end of our fiscal year.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item is incorporated by reference to the information set forth in the section titled “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in our 2018 Proxy Statement, expected to be filed with the SEC within 120 days following the end of our fiscal year.

Item 13.  Certain Relationships and Related Party Transactions and Director Independence

The information required by this item is incorporated by reference to the information set forth in the section titled “Transactions with Related Persons” and “Information regarding the Board and Corporate Governance – Board Independence” in our 2018 Proxy Statement, expected to be filed with the SEC within 120 days following the end of our fiscal year.

Item 14.  Principal Accountant Fees and Services

The information required by this item is incorporated by reference to the information set forth in the section titled “Independent Registered Public Accounting Firm Fees” contained in Proposal 2 in our 2018 Proxy Statement, expected to be filed with the SEC within 120 days following the end of our fiscal year.

The response to this portion of Item 15 is set forth under Item 8 hereof.

All financial statement schedules have been omitted because they are not applicable, not required or the required information is given in the Financial Statements or Notes thereto.

The exhibits below are filed as part of this Form 10-K other than Exhibit 32.1, which shall be deemed furnished.