The number of outstanding shares of the registrant’s common stock, par value of $0.001 per share, as of the close of business on August 2, 2019 was 25,026,593.

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AQUESTIVE THERAPEUTICS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2019

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

AQUESTIVE THERAPEUTICS, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

AQUESTIVE THERAPEUTICS, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except share and per share data amounts)

(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

AQUESTIVE THERAPEUTICS, INC.

Condensed Consolidated Statements of Changes in Shareholders’ Deficit

(In thousands, except share amounts)

(Unaudited)

* Represents balances as of December 31, 2017 as adjusted for the reorganization from LLC to C corporation business structure effective at the close of business on that date.

See accompanying notes to the condensed consolidated financial statements.

AQUESTIVE THERAPEUTICS, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

AQUESTIVE THERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, in thousands, except share and per share information)

(A) Company Overview

Aquestive Therapeutics, Inc. (“Aquestive” or the “Company”) is a specialty pharmaceutical company focused on identifying, developing and commercializing differentiated products to address unmet medical needs and solving critical healthcare challenges, having been formed effective on January 1, 2018 via the conversion of MonoSol Rx, LLC, a Delaware limited liability company, to a Delaware corporation and a simultaneous name change. The Company has a late-stage proprietary product pipeline focused on the treatment of diseases of the central nervous system, or CNS, and is developing orally administered complex molecules as alternatives to more invasive therapies. Aquestive is pursuing its business objectives through commercialization of self-developed proprietary products and through in-licensing and out-licensing arrangements. Production facilities are located in Portage, Indiana, and corporate headquarters, sales, commercialization operations and primary research laboratory facilities are based in Warren, New Jersey. The Company’s major customer and primary commercialization licensee has global operations headquartered in the United Kingdom with principal operations in the United States; other customers are principally located in the United States.

(B) Corporate Conversion and Reorganization, Stock Splits and IPO

Corporate Conversion and Reorganization

Effective on January 1, 2018, the Company converted from a Delaware limited liability company (LLC) into a Delaware corporation pursuant to a statutory conversion and changed its name from MonoSol Rx, LLC (“MonoSol”) to Aquestive Therapeutics, Inc., having previously operated as an LLC since January 2004. At the time of the statutory conversion, the holders of membership units of MonoSol contributed all of their LLC interests to Aquestive Partners, LLC, or APL, in exchange for identical interests in APL. As a result of the exchange, APL was issued 5,000 shares of voting common stock in Aquestive Therapeutics, Inc. and became the parent and sole stockholder of the Company.

Stock Splits

During 2018, the Board of Directors approved the Amended and Restated Certificate of Incorporation of the Company to:

The net effect of these stock splits is reflected in these financial statements as if they had occurred on January 1, 2018.

Initial Public Offering of Common Stock and Authorized Number of Capital Stock

On July 27, 2018, the Company closed the IPO of 4,500,000 shares of common stock at an offering price of $15.00 per share. The Company received net proceeds of approximately $57,543 after deducting underwriting discounts, commissions, and offering-related transaction costs of approximately $9,957. The underwriter’s over-allotment option was exercised in August 2018 and the Company issued 425,727 additional shares of common stock at $15.00 per share and the Company received additional net proceeds of approximately $5,939, after deducting underwriter discounts of approximately $447. The IPO and overallotment option resulted in total net proceeds of $63,482. Immediately prior to the consummation of the IPO, all of the Company’s outstanding shares of non-voting common stock were automatically converted to 4,922,353 shares of voting common stock.

The accompanying interim unaudited condensed consolidated financial statements were prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and with Article 10 of Regulation S-X for interim financial reporting. In compliance with those rules, certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes for the fiscal year ended December 31, 2018 included in our Annual Report on Form 10-K filed with the SEC on March 14, 2019 (the “2018 Annual Report on Form 10-K”). As included herein, the condensed consolidated balance sheet at December 31, 2018 is derived from the audited consolidated financial statements as of that date. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of the results of interim periods have been included. The Company has evaluated subsequent events for disclosure through the date of issuance of the accompanying unaudited condensed financial statements.

Any reference in these notes to applicable guidance refers to the authoritative U.S. GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”).

(A) Principles of Consolidation

(B) Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, including disclosure of contingent assets and contingent liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.  Significant items subject to estimates and assumptions include allowances for rebates from proprietary product sales, the allowance for sales returns, the useful lives of fixed assets, valuation of share-based compensation, and contingencies.

 (C) Recent Accounting Pronouncements

As an emerging growth company, the Company has elected to take advantage of the extended transition period afforded by the Jumpstart Our Business Startups Act for the implementation of new or revised accounting standards and, as a result, the Company will comply with new or revised accounting standards no later than the relevant dates on which adoption of such standards is required for emerging growth companies.

The Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.

In May 2014, the FASB, issued ASU 2014-09, Revenue from Contracts with Customers, and subsequently issued a number of amendments to this update.  The new standard, as amended, or ASC 606, provides a single comprehensive model to be used in accounting for revenue arising from contracts with customers and supersedes previous revenue recognition guidance. The standard’s core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  In addition, the standard requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

The Company adopted this standard on January 1, 2019, using the modified retrospective method and recorded a cumulative effect adjustment of $2,832 to increase the opening balance of accumulated deficit.  The impact was primarily related to deferral of a portion of the original upfront and milestone payments of its collaborative licensing arrangements resulting in a deferral of $3,100 of previously recognized revenue as of the adoption date.  The cumulative adjustment also reflects $151 net acceleration of revenue related to feasibility and development arrangements with its customers and acceleration of $117 of revenue recognition of the Company’s manufacturing and supply product sales.  Under the modified retrospective method of adoption, the comparative information in the consolidated financial statements has not been revised and continues to be reported under the previously applicable revenue accounting guidance, ASC 605.

For additional information regarding the Company’s revenue, see Note 5, Revenues and Trade Receivables, Net.

In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Non-Employee Share-Based Payment Accounting, which more closely aligns accounting for share-based payments to nonemployees to that of employees under existing guidance of Topic 718. This guidance supersedes previous guidance provided by Subtopic 505-50, Equity – Equity-Based Payments to Non-Employees. The Company adopted the new standard effective January 1, 2019 and recorded a cumulative effect adjustment of $20 to its Accumulated deficit upon adoption.

In January 2016, the FASB issued revised guidance governing accounting and reporting of financial instruments (ASU 2016-01) and in 2018 issued technical corrections (ASU 2018-03). This guidance requires that equity investments with readily determinable fair values that are classified as available-for-sale be measured at fair value with changes in value reflected in current earnings. This guidance also simplifies the impairment testing of equity investments without readily determinable fair values and alters certain disclosure requirements. ASU No. 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, also provides guidance as to classification of the change in fair value of financial liabilities. Adoption of this standard was effective on January 1, 2019 and had no material impact on the financial statements given the lack of any such equity investments during the period presented.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This guidance simplifies aspects of accounting for employee share-based payments, including income tax consequences, classification of awards as either equity or liabilities, and classifications within the statement of cash flows. This guidance was effective for annual periods beginning after December 15, 2017, with early adoption permitted. Under the Company’s now-terminated Performance Unit Plans (PUPs), vested grants were unable to be exercised prior to either a change in control of the Company or completion of an IPO, and, as a result, expense recognition related to the settlement of these awards was deferred until the PUPs were formally terminated in April 2018. Because the Company has incurred net operating losses since its incorporation, a full valuation allowance has been provided and, accordingly, there was no financial statement impact of adopting the ASU 2016-09 provisions regarding recognition of tax effects associated with share-based compensation.

Recent Accounting Pronouncements Not Adopted as of June 30, 2019:

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which establishes a comprehensive new lease accounting model. The new standard: (i) clarifies the definition of a lease, (ii) requires a dual approach to lease classification similar to current lease classifications, and (iii) causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease-term of more than twelve months. The new standard is effective for the Company for fiscal years and interim periods beginning after December 15, 2019 and requires modified retrospective application. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its condensed consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), amending existing guidance on the accounting for credit losses on financial instruments within its scope. The guidance introduces an expected loss model for estimating credit losses, replacing the incurred loss model. The new guidance also changes the impairment model for available-for-sale debt securities, requiring the use of an allowance to record estimated credit losses (and subsequent recoveries). The new guidance is effective for the Company beginning after December 15, 2020. The Company is currently evaluating the impact of the adoption of this guidance on its condensed consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, providing guidance on the classification of certain cash receipts and payments in the statement of cash flows intended to reduce diversity in practice, including cash flows related to debt prepayment or extinguishment costs and contingent consideration that may be paid following a business combination. The guidance is effective for the Company for fiscal years beginning after December 31, 2019. Early adoption is permitted. The Company is currently evaluating the effect of the standard on its Condensed Consolidated Statement of Cash Flows.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework. The purpose of the update is to improve the effectiveness of the fair value measurement disclosures that allows for clear communication of information that is most important to the users of financial statements. There were certain required disclosures that have been removed or modified. In addition, the update added the following disclosures: (i) changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period and (ii) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The standard will become effective for the Company for its periods beginning after December 15, 2019; early adoption is permitted. The Company is currently evaluating the impact of ASU 2018-13 on its condensed consolidated financial statements.

Other pronouncements issued by the FASB or other authoritative accounting standards groups with future effective dates are either not applicable or not significant to the condensed consolidated financial statements of the Company.

The Company’s unaudited interim condensed financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities in the ordinary course of business.  The Company’s cash requirements for 2019 and beyond include expenses related to continuing development and clinical evaluation of its products, costs of regulatory filings, patent prosecution expenses and litigation expenses, expenses related to commercialization of its products, debt service requirements, and costs to comply with the requirements of being a public company. As of June 30, 2019, working capital, including cash and cash equivalents, totaled $14,435.

As of the date of issuance of these unaudited interim condensed financial statements, the Company expects that its revenues from licensed and proprietary products, including expected milestone payments, other co-development payments and royalties, manufacturing and sale revenues at anticipated levels, anticipated sales of its proprietary products, cash on hand, and the net proceeds from the issuance on July 15, 2019 of its 12.5% Senior Secured Notes due 2025, including possible future issuances under the Indenture (see Note 18, Subsequent Event), will be adequate to fund its expected cash requirements for at least the next twelve months.

To the extent additional funds are necessary to meet liquidity or other cash needs as the Company continues to execute its business strategy, the Company will seek to satisfy such additional funding requirements through additional debt or equity financings, monetization of  royalty streams, the completion of a licensing transaction for one or more of the Company’s pipeline assets, continuing expense reduction initiatives, or a combination of these potential sources of funds. Although the Company has been successful in raising capital in the past, there is no assurance that these sources of funding will be sufficient or available or on reasonable terms, if at all, which could adversely affect its business prospects.

The Company’s revenues to date have been earned from partnered commercialized products, research and development services provided to customers, licensing of patent-protected intellectual property and commercialization of a proprietary product. 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.

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 the current revenue standard. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. At contract inception, we assess the goods promised in our contracts with customers and identify a performance obligation for each promise to transfer to the customer a good that is distinct. When identifying our performance obligations, we consider all goods or services promised in the contract regardless of whether explicitly stated in the customer contract or implied by customary business practices. The Company’s performance obligations consist mainly of transferring control of goods and services identified in the contracts, purchase orders or invoices.

The Company’s performance obligation with respect to its proprietary product sales is satisfied at a point in time which transfers control upon delivery of the product to its customers. The Company considers control to have transferred upon delivery because the customer has legal title to the asset, physical possession of the asset has been transferred, the customer has significant risks and rewards of ownership of the asset and the Company has a present right to payment at that time. With respect to manufacturing and supply revenue stream, a quantity is ordered and manufactured according to customer’s specifications and represents a single performance obligation. The products manufactured are exclusively for specific customers and have no alternative use. Under the customer arrangements, the Company is entitled to receive payments for progress made to date once the acceptance requirements surrounding quality control are satisfied.  Thus, revenues related to this product stream is recognized at a point in time, when the manufactured product passes quality control testing.

Royalty revenues are estimated based on the provisions of contracts with customers and recognized in the same period that the royalty-based products are sold to the Company’s strategic partners, as all royalties are directly attributable to the Company’s manufacturing activities, and are therefore recognizable at the same time the manufacturing revenue is recognizable. In addition to usage-based royalties, licensing contracts may contain provisions for one-time payments related to certain license fees and milestone achievements. Revenue recognition of these license fees and milestone payments depend on the nature of the specific contract, typically license and milestone payments are recognized at a point in time in the period they are achieved. However, there are limited instances where upon review of the contract, it is determined that the license is non-distinct and limited in nature and does not provide benefit to the customer without purchasing the product, these upfront licensing fees are recognized over time (typically the length of the contract).

Co-development and research fee revenue is recorded over time based upon the progress of services provided in order to complete the specific performance obligation identified in the related contract.

Revenues from sale of products and services and the subsequent related payments are evidenced by a contract with the customer, which includes all relevant terms of sale. For manufacturing and supply and proprietary product sales, invoices are generally issued upon the transfer of control and co-development and research revenue is typically invoiced based on the contractual payment schedule, or upon completion of the service. Invoices are typically payable 30 to 60 days after the invoice date, however some payment terms may reach 105 days depending on the customer. The Company performs a review of each specific customer’s credit worthiness and ability to pay prior to acceptance as a customer. Further, the Company performs periodic reviews of its customers’ creditworthiness, prospectively.

Contract Assets

In limited situations, certain customer contractual payment terms require billing to occur in arrears; accordingly, some portions, or all, of the Company’s performance obligations are completed before we are contractually entitled to bill the customer. In these situations, billing occurs subsequent to revenue recognition, which results in a contract asset. These contract assets are reflected as a component of Trade and other receivables on the Condensed Consolidated Balance Sheet. As of June 30, 2019 and January 1, 2019, such contract assets were $295, and $284, respectively.

Contract Liabilities

In other limited situations, certain customer contractual payment terms allow advanced billings; accordingly, customer cash payments may be received before satisfaction of some or all contractual performance obligations. In these situations, billing occurs in advance of revenue recognition, which results in contract liabilities. These contract liabilities are reflected as Deferred revenue in the Consolidated Balance Sheet. As remaining performance obligations are satisfied, a portion of the deferred revenue balance is recognized in the Company’s results of operations. As of June 30, 2019 and January 1, 2019, such contract liabilities were $2,866 and $3,762, respectively. Revenue recognized for the six-month period ended June 30, 2019 that was reflected in the deferred revenue balance as of January 1, 2019 was $940.

The Company’s revenues were comprised of the following:

Disaggregation of Revenue

The following table provides disaggregated net revenue by geographic area:

Non-United States revenues is derived primarily from products manufactured for the Australian and Malaysian markets.

Trade and other receivables, net consist of the following:

Contract and other receivables totaled $290 as of June 30, 2019, consisting primarily of contract assets related to the adoption of ASC 606 and certain reimbursable customer costs.  Other receivables totaled $33 as of December 31, 2018, consisting primarily of reimbursable costs incurred on behalf of a customer. Sales-related allowances for both periods presented are estimated in relation to revenues recognized for sales of Sympazan® beginning with the launch of this product in December 2018.

The following table presents the changes in the allowance for bad debt:

Sales Related Allowances and Accruals

Revenues from sales of products are recorded net of prompt payment discounts, wholesaler service fees, returns allowances, rebates and co-pay card redemptions. These reserves are based on estimates of the amounts earned or to be claimed on the related sales. These amounts are treated as variable consideration, estimated and recognized as a reduction of the transaction price at the time of the sale. The Company includes these estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized for such transaction will not occur, or when the uncertainty associated with the variable consideration is resolved. The calculation of some of these items requires management to make estimates based on sales data, historical return data, contracts and other related information that may become known in the future. The adequacy of these provisions is reviewed on a quarterly basis.

The following table provides a summary of activity with respect to our sales related allowances and accruals for the six months ended June 30, 2019:

Total reductions of gross product sales from sales-related allowances and accruals were $847 for the six months ended June 30, 2019. Accruals for returns allowances and prompt pay discounts are reflected as a direct reduction to trade receivables, and totaled $88 and $104 at June 30, 2019 and December 31, 2018, respectively. Accruals for wholesaler fees, co-pay cards and rebates are reflected as current liabilities, and totaled $809 and $481 at June 30, 2019 and December 31, 2018, respectively. There were no sales related allowances and accruals at June 30, 2018, as Sympazan was launched in December 2018.

Concentration of Major Customers

Customers are considered major customers when sales exceed 10% of total net sales for the period or outstanding receivable balances exceed 10% of total receivables. For the year ended December 31, 2018, Indivior, Inc. (“Indivior”) provided 89% of the total revenues for the period, and as of that date, the Company’s outstanding receivable balance from Indivior represented approximately 78% of gross receivables. For the six months ended June 30, 2019, revenues provided by Indivior represented approximately 86% of total revenues, and outstanding accounts receivable due from Indivior represented approximately 74% of gross receivables.

Commercial Exploitation Agreement with Indivior

In August 2008, the Company entered into a Commercial Exploitation Agreement with Reckitt Benckiser Pharmaceuticals, Inc. (with subsequent amendments, collectively, the “Indivior License Agreement”). Reckitt Benckiser Pharmaceuticals, Inc. was later succeeded to in interest by Indivior, Inc.  Pursuant to the Indivior License Agreement, the Company agreed to manufacture and supply Indivior’s requirements for Suboxone, a sublingual film formulation, both inside and outside the United States on an exclusive basis.

Under the terms of the Indivior License Agreement, the Company is required to manufacture Suboxone in accordance with current Good Manufacturing Practice standards and according to the specifications and processes set forth in the related quality agreements the Company entered into with Indivior. Additionally, the Company is required to obtain Active Pharmaceutical Ingredients (“API”) for the manufacture of Suboxone directly from Indivior. The Indivior License Agreement specifies a maximum annual threshold quantity of Suboxone that the Company is obligated to fill and requires Indivior to provide the Company with a forecast of its requirements at various specified times throughout the year.  Additionally, in the event Indivior purchases certain large quantities of Suboxone during a specified period, Indivior will be entitled to scaled rebates on rest of the world sales only.

In addition to the purchase price for the Suboxone supplied, Indivior is required to make certain single digit percentage royalty payments tied to net sales value (as provided for in the Indivior License Agreement) in all countries other than the United States and subject to annual maximum amounts and limited to the life of the related United States or international patents.

The Indivior License Agreement contains customary contractual termination provisions, including those for breach, a filing for bankruptcy or corporate dissolution, an invalidation of the intellectual property surrounding Suboxone, or commission of a material breach of the Indivior License Agreement by either party. Additionally, Indivior may terminate if the U.S. Food and Drug Administration (“FDA”) or other applicable regulatory authority declares the Company’s manufacturing site to no longer be suitable for the manufacture of Suboxone or Suboxone is no longer suitable to be manufactured due to health or safety reasons. The initial term of the Indivior License Agreement was seven years from the commencement date. Thereafter, the Indivior License Agreement automatically renews for successive one-year periods, unless either party provides the other with written notice of its intent not to renew at least one year prior to the expiration of the initial or renewal term.

Supplemental Agreement with Indivior

On September 24, 2017, the Company entered into an agreement with Indivior, or the Indivior Supplemental Agreement. Pursuant to the Indivior Supplemental Agreement, we conveyed to Indivior all of our existing and future rights in the settlement of various ongoing patent enforcement legal actions and disputes related to the Suboxone product. Under the Indivior Supplemental Agreement, we are entitled to receive certain payments from Indivior commencing on the date of the agreement through January 1, 2023. Once paid, all payments made under the Indivior Supplemental Agreement are non-refundable, and total payments under this agreement are capped at $75,000. Through February 20, 2019, the at-risk launch date of the competing generic products of Dr. Reddy’s Labs and Alvogen, we received an aggregate of $40,750 from Indivior under the Indivior Supplemental Agreement, of which $4,250 was collected during the three months ended March 31, 2019.  Further payments under the Indivior Supplemental Agreement are suspended until adjudication of related patent infringement litigation is completed. If such litigation is successful, which cannot be assured, in addition to the amounts already received as described in the foregoing, we may receive up to an additional $34,250, consisting of (i) up to $33,000 in the aggregate from any combination of (a) performance or event-based milestone payments and (b) single digit percentage royalties on net revenue earned by Indivior on sales of Suboxone and (ii) and an additional $1,250 that was earned through the issuance to the Company of additional process patent rights.

All payments made by Indivior to the Company pursuant to the Indivior Supplemental Agreement are in addition to, and not in place of, any amounts owed by Indivior to the Company pursuant to the Indivior License Agreement. Indivior’s payment obligations under the Indivior Supplemental Agreement are subject to certain factors affecting the market for Suboxone and may terminate prior to January 1, 2023 in the event certain contingencies relating to such market occur.

License Agreement with Sunovion Pharmaceuticals, Inc.

In April 2016, we entered into a license agreement with Cynapsus Therapeutics Inc. (which was later succeeded to in interest by Sunovion), referred to as the Sunovion License Agreement, pursuant to which we granted Sunovion an exclusive, worldwide license (with the right to sub-license) to certain intellectual property, including existing and future patents and patent applications, covering all oral films containing APL-130277 (apomorphine) for the treatment of off episodes in Parkinson’s disease patients, as well as two other fields. Our licensee, Sunovion, as sponsor of APL-130277, submitted an NDA to the FDA on March 29, 2018. According to statements by Sunovion, following the January 2019 PDUFA date, Sunovion received a Complete Response Letter from the FDA which requires additional data, but does not require additional clinical studies.

In consideration for the rights granted to Sunovion under the Sunovion License Agreement, we received aggregate payments totaling $18,000 to date. In addition to the upfront payment of $5,000, we have also earned an aggregate of $13,000 in connection with specified regulatory and development milestones in the United States and Europe (the “Initial Milestone Payments”), all of which have been received to date. No payments were received during the three and six months ended June 30, 2019. We are also entitled to receive certain contingent one-time milestone payments related to product availability and regulatory approval in the United States and Europe, certain one-time milestone payments based on the achievement of specific annual net sales thresholds of APL-130277, and ongoing mid-single digit percentage royalty payments related to the net sales of APL-130277 (subject to reduction to low-single digit percentage royalty payments in certain circumstances), subject to certain minimum payments. The maximum aggregate milestone payments that may be paid to us pursuant to the Sunovion License Agreement is equal to $45,000. With the exception of the Initial Milestone Payments, there can be no guarantee that any such milestones will in fact be met or that additional milestone payments will be payable.

This Sunovion License Agreement will continue until terminated by us or Sunovion in accordance with the termination provisions of the Sunovion License Agreement. Absent early termination, the Sunovion License Agreement continues (on a country-by-country basis) until the expiration of all applicable licensed patents. Upon termination, all rights to intellectual property granted to Sunovion to develop and commercialize products will revert to the Company and Sunovion must continue to pay royalties to the Company on each sale of Sunovion’s remaining inventory of products which include apomorphine as their API.

Agreement to Terminate CLA with KemPharm

In March 2012, the Company entered into an agreement with KemPharm, Inc. (“KemPharm”) to terminate a Collaboration and License Agreement entered into in April 2011. Under this termination arrangement, we have the right to participate in any and all value that KemPharm may derive from the commercialization or any other monetization of KP 415 and KP 484 compounds or their derivatives. Among these monetization transactions are those related to any business combinations involving KemPharm and collaborations, royalty arrangements, or other transactions from which KemPharm may realize value from these compounds. The Company has not received payments under this arrangement during any of the periods presented herein, and there can be no guarantee that any such payments will be made in the future.

Note 7.

Financial Instruments – Fair Value Measurements

Certain assets and liabilities are reported on a recurring basis at fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. To increase consistency and comparability in such measurements, the FASB established a three-level hierarchy which requires maximization of the use of observable inputs and minimization of the use of unobservable inputs when estimating fair value. The three levels of the fair value hierarchy include:

The Company’s Level 1 assets for the periods presented included cash and cash equivalents, including money market funds. The Company held no Level 2 or Level 3 assets or liabilities as of either balance sheet date presented herein. Prior to exercise in connection with the July 2018 IPO, outstanding warrants held by Perceptive Credit Opportunities Fund were categorized as Level 3 liabilities. This warrant liability was estimated at fair value based primarily on independent third-party appraisals prepared and reported periodically, consistent with generally-accepted valuation methods of the Uniform Standards of Professional Appraisal Practice, the American Society of Appraisers and the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held Company Equity Securities Issued as Compensation. See Note 13 for further information on the Company’s warrants. In addition, Level 3 inputs provide the basis for estimated fair values of stock options granted during 2018 and 2019, which values were estimated using the Black-Scholes-Merton pricing model based on assumptions disclosed in Note 15.

The carrying amounts reported in the balance sheets for Trade and other receivables, Prepaid and other current assets, Accounts payable and accrued expenses, and deferred revenue approximate fair value based on the short-term maturity of these assets and liabilities.

The components of Inventory, net is as follows:

Total depreciation and amortization related to property and equipment was $711 and $765 for the three-month periods ended June 30, 2019 and 2018, respectively. For the respective six-month periods, these expenses totaled $1,447 and 1,705.

The following table provides the components of identifiable intangible assets, all of which are finite lived:

Amortization expense was $13 and $12 for the three-month periods ended June 30, 2019 and 2018, respectively. For the corresponding six-month periods, these expenses totaled $26 and $25, respectively. During the remaining life of the purchased patent, estimated annual amortization expense is $50 for each of the years from 2019 to 2022.

Accounts payable and accrued expenses consisted of the following:

On August 16, 2016, the Company entered into a Loan Agreement and Guaranty (the “Loan Agreement”) with Perceptive Credit Opportunities Fund, LP (“Perceptive”). Upon closing, the Company borrowed $45,000 from Perceptive and was permitted to borrow up to an additional $5,000 within one year of the closing date based upon achievement of a defined milestone which was met in March 2017 and the balance of the facility was borrowed at that time. The initial loan proceeds were used to pay the existing debt obligation of $37,500 due to White Oak Global Advisors, LLC, with the balance available for general business purposes. On July 15, 2019, this loan from Perceptive was repaid in full as part of a refinancing transaction. See Note 18, Subsequent Events.

On May 21, 2018, the Company and Perceptive agreed to make certain amendments to the loan agreement then in effect.  In the event that a qualified IPO could be consummated on or before December 31, 2018, the Company and Perceptive agreed to postpone the initial loan principal payments, delay the loan maturity date to December 16, 2020 and retain interest rate terms, payable monthly, at one-month LIBOR or approximately 2% plus 9.75%, subject to a minimum rate of 11.75%. Accordingly, commencing on May 31, 2019, seven monthly loan principal payments were due in the amount of $550. Thereafter, monthly principal payments in the amount of $750 were due through the maturity date, December 16, 2020, at which time the full amount of the remaining outstanding loan balance was due. At June 30, 2019 and December 31, 2018, respectively, $550 and $4,600 was classified as current debt. The Company’s tangible and intangible assets are subject to first priority liens to the extent of the outstanding debt. Further, under the Loan Agreement, as amended, the Company was 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 had agreed to release liens related to these royalties and fees. Other significant terms of the Loan Agreement, as amended, included financial covenants, change of control triggers and limitations on additional indebtedness, asset sales, acquisitions and dividend payments. Financial covenant requirements included (1) minimum liquidity under which a $4,000 minimum cash balance must be maintained at all times and (2) a minimum revenue requirement under which minimum revenues for the trailing twelve consecutive months, measured at the end of each calendar quarter. As of June 30, 2019, the Company was in compliance with all financial covenants under the Loan Agreement, as amended. Also, as of that date, the carrying value of the Company’s loan payable approximated its market value. At closing of the Loan Agreement, as amended, Perceptive received a warrant to purchase senior common equity interests representing 4.5% of the fully diluted common units of the Company on an as converted basis, which was automatically exercised in full at the time of the IPO (see Note 13).

The Company capitalizes legal and other third-party costs incurred in connection with obtaining debt as deferred debt issuance costs and applies the unamortized portion as a reduction of the outstanding face amount of the related loan in accordance with ASU 2015-03, Interest – Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. Similarly, the Company amortizes debt discounts, such as those represented by warrants issued to its lenders, and offsets those as a direct reduction of its outstanding debt. Amortization expense arising from deferred debt issuance costs and debt discounts for the six-month periods ended June 30, 2019 and 2018 were $781 and $923, respectively; for the corresponding three-month periods these expenses totaled $392 and $465.

Unamortized deferred debt issuance costs and deferred debt discounts totaled $2,016 as of June 30, 2019 and $2,797 as of December 31, 2018.

The warrant issued to Perceptive in connection with the Agreement was, by its terms, set to expire on August 16, 2023 and provided certain rights and preferences including anti-dilution adjustments so that, upon exercise, they would represent 4.5% of the Company’s fully diluted common stock on an as converted basis, subject to dilution for certain financing including the issuance of shares upon termination of our PUPs. The warrant also provided Perceptive with a put right which, if exercised under certain circumstances, would require the Company to purchase the warrant for $3,000 within the first year of the loan or $5,000 thereafter. Because these re-purchase terms could have required net-cash settlement, the appraised value of this warrant at the time of issuance of $5,800 was classified as a liability, rather than as a component of equity, and was treated as a debt discount, with the unamortized portion applied to reduce the face amount of the loan in the accompanying Condensed Consolidated Balance Sheet.

Immediately prior to pricing of the Company’s IPO, Perceptive received 863,400 shares of common stock issuable pursuant to the automatic exercise of warrants at a total price of $116.  As a result, the warrant liability of $12,951 was reclassified to Additional paid-in capital during the third quarter of 2018.  A Level 1 market price of $15.00, the initial price at which the Company’s common stock was publicly offered, was used in determining fair value as of the warrants’ conversion date.

During interim periods, the Company used an independent third-party valuation to assist in determining the fair value of these warrants due to the absence of available Level 1 and Level 2 inputs. During the three-months and six months period June 30, 2018, as a result of an increase in the estimated fair value of this warrant liability, net losses included a non-cash loss of $1,859 and $1,162, respectively. No gain or loss was recognizable for any periods subsequent to the date of exercise of the warrants in July 2018. The fair values at both the date of the issuance and the dates of all interim balance sheets prior to exercise were based on unobservable Level 3 inputs. Fair value was based on the aggregate equity of the Company, which was estimated utilizing the income and market valuation approaches. A probability weighted return model was then utilized to allocate the resulting aggregate equity value of the Company to the underlying securities. Estimates and assumptions impacting the fair value measurement included the following factors: the then-current state of development of the Company’s pipeline product candidates, including status of clinical trials; the Company’s progress towards an IPO, including selection of investment bankers, assessment of the IPO marketplace and other funding alternatives and a discount rate of 26.5% and a volatility rate of 90%.

Basic net loss per share is calculated by dividing net loss by the weighted-average number of common shares.

As a result of the Company’s net losses incurred for the three and six-month periods ended June 30, 2019 and June 30, 2018, respectively, all potentially dilutive instruments outstanding would have anti-dilutive effects on per-share calculations for these periods.  Therefore, basic and diluted net loss per share were the same, as reflected below.

As of June 30, 2019, the Company’s potentially dilutive instruments included 1,983,142 options to purchase common shares and 142,852 unvested restricted stock units (“RSUs”) that were excluded from the computation of diluted weighted average shares outstanding because these securities had an anti-dilutive impact due to the loss reported. No such equity securities were issued as of June 30, 2018.

The Company recognized share-based compensation in its Condensed Consolidated Statements of Operations and Comprehensive Loss during 2019 and 2018 as follows:

The 2018 expense presented above also include those arising from the Company’s prior incentive plan that was terminated and settled in April 2018 through the issuance of non-voting common shares.  Under that Performance Unit Plan, vest grants were not exercisable prior to a change in control or completion of an IPO and accordingly, compensation expenses for these awards were initially recognized in April 2018 upon plan participant and Board approval.

Share-Based Compensation Equity Awards

The following tables provides information about the Company’s restricted stock and stock option unit activity during the six months ended June 30, 2019:

Unrecognized compensation costs related to awards of RSUs are expected to be recognized over a weighted-average period of less than three years.

The fair values of stock options granted during 2019 were estimated using the Black-Scholes-Merton pricing model based on the following assumptions:

The weighted average grant date fair value of stock options granted during 2019 was $7.51. During the six months ended June 30, 2019, options were granted with exercise prices ranging from $4.38 to $8.05, and accordingly, given Aquestive’s share price of $4.20 at the close of the Company’s second quarter of 2019, these options provided no intrinsic value at that date. Similarly, options granted in 2018 provided no intrinsic value at June 30, 2019.

As of June 30, 2019, $11,352 of total unrecognized compensation expenses related to non-vested stock options is expected to be recognized over a weighted average period of 2.3 years from the date of grant.

The Company’s Board of Directors adopted the Aquestive Therapeutics, Inc. Employee Stock Purchase Plan, or ESPP in June 2018, as amended and restated effective as of January 1, 2019. The Employee Stock Plan, features two six-month offering periods per year, running from January 1 to June 30 and July 1 to December 31. Under the ESPP, employees may elect to purchase the Company’s common stock at the lower of 85% of the fair value of shares on either the first or last day of the offering period. During the six months ended June 30, 2019, 31,393 shares were purchased at a total discount of $20 and were issued under the ESPP, effective as of that date.

The Company has accounted for income taxes under the asset and liability method, which requires deferred tax assets and liabilities to be recognized for the estimated future tax consequences attributable to differences between financial statement carrying amounts and respective tax bases of existing assets and liabilities, as well as net operating loss carryforwards and research and development credits.  Valuation allowances are provided if it is more likely than not that some portion or all of the deferred tax asset will not be realized.

The Company’s tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items.  For the three months ended June 30, 2019 and 2018, the Company recorded no income tax benefit from its pretax losses of $20,472 and $36,493, respectively, and similarly for the sixth months ended June 30, 2019 and 2018, the Company recorded no tax benefit from its pretax loss of $35,198 and $32,394, respectively, due to realization uncertainties.

The Company’s U.S. Federal statutory rate is 21%.  The primary factor impacting the effective tax rate for the three and six months ended June 30, 2019 is the anticipated full year operating loss which will require full valuation allowances against any associated net deferred tax assets.

(A) Operating Leases

The Company has entered into various lease agreements for production and research facilities and offices. Most leases contain renewal options. Certain leases contain purchase options and require the Company to pay for taxes, maintenance and operating expenses. All of the Company’s leases are classified as operating leases.

Rent expense for all leased manufacturing facilities and sales, laboratory and office space totaled $399 and $292 for the three-month periods ended June 30, 2019 and 2018, respectively and $771 and $623 for the six-month periods ended June 30, 2019 and 2018, respectively.

(B) Litigation and Contingencies

From time to time, the Company has been and may again become involved in legal proceedings arising in the ordinary course of business, including product liability, intellectual property, commercial litigation, or environmental or other regulatory matters.  

Patent-Related Litigation

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.(“Par”), Alvogen Pine Brook, Inc. (“Alvogen”), Teva Pharmaceuticals USA, Inc.  (“Teva”), Sandoz Inc. (“Sandoz”), and Mylan Technologies Inc. (“Mylan”), for the approval by the FDA of generic versions of Suboxone Sublingual Film in the United States. The Company filed patent infringement lawsuits against all six generic companies in the U.S. District Court for the District of Delaware. After the commencement of the ANDA patent litigation against Teva, Dr. Reddy’s Laboratories (“DRL”) acquired the ANDA filings for Teva’s buprenorphine and naloxone sublingual film that are at issue in these trials.

Of these, cases against three of the six generic companies have been resolved.

On March 22, 2019, Aquestive and Indivior brought suit against Aveva Drug Delivery Systems, Inc., Apotex Corp., and Apotex Inc. for infringement of the ’150, ’514, ’454, and ’305 patents, seeking an injunction and potential monetary damages.  The case is pending in the Southern District of Florida, and the defendants filed their answers to the complaint, including counterclaims for non-infringement and invalidity of the asserted patents as well as two other patents that were not asserted in the original complaint.

The Company is also seeking to enforce its patent rights in multiple cases against BioDelivery Sciences International, Inc. (“BDSI”). Two cases are currently pending but stayed in the U.S. District Court for the Eastern District of North Carolina:

•

The first, a declaratory judgment action brought by BDSI against Indivior and Aquestive, seeks declarations of invalidity and non-infringement of U.S. Patents Nos. 7,897,080, or the ’080 patent, 8,652,378, or the ’378 patent, and 8,475,832, or the ’832 patent. This case is stayed pending final resolution of the above-mentioned appeals on related patents.

•

The second was filed by us and Indivior related to BDSI’s infringing Bunavail product, and alleges infringement of the Company’s patent, U.S. Patent No. 8,765,167, or the ’167 patent, and seeks an injunction and potential monetary damages. Shortly after the case was filed, BDSI filed four IPRs challenging the asserted ’167 patent.  On March 24, 2016, the Patent Trial and Appeal Board, or the PTAB, issued a final written decision finding that all claims of the ’167 patent were valid. The case was stayed in May 2016 pending the final determination of the appeals on those decisions.  Following the PTAB’s February 7, 2019 decisions on remand denying institution, Aquestive and Indivior submitted a notice to the Court on February 15, 2019 notifying the Court that the stay should be lifted as a result of the PTAB’s decisions. We are awaiting further action from the Court.

Antitrust 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 and seeking an injunction, civil penalties, and disgorgement. 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 the Company was not named as a defendant in the original Suboxone MDL cases, the action brought by the States alleges that the Company 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. The Company moved to dismiss the States’ conspiracy claims, but by order dated October 30, 2017, the Court denied this motion to dismiss. An answer denying the States’ claims was filed on November 20, 2017. The fact discovery period closed on July 27, 2018, but the parties agreed to conduct certain fact depositions in August 2018.  The expert discovery phase closed May 30, 2019, but additional reports and depositions are being conducted through August 1, 2019.  Summary judgement motions and Daubert motions relating to expert witnesses are due on September 26, 2019.  At this time, management cannot determine or predict the ultimate outcome of this proceeding or provide a reasonable estimate, or range of estimates, of the possible outcome or loss, if any, in this matter.

On July 15, 2019, Aquestive Therapeutics, Inc. completed the private placement of up to $100 million aggregate principal of its 12.5% Senior Secured Notes due 2025 (the “Notes”) and issued warrants for two million shares of common stock (the “Warrants”), $.001 per value, through its structuring agent, Morgan Stanley & Co., LLC and entered into a purchase agreement and related indenture (the “Purchase Agreement” or “Indenture”) governing these Notes. The Company simultaneously entered into related agreements including a Collateral Agreement with U.S. Bank National Association as trustee and collateral agent, and a Lien Subordination and Intercreditor Agreement for the benefit of Madryn Health Partners, other institutional noteholders and U.S. Bank National Association in dual roles providing terms governing an asset-based loan facility.

Upon closing, the Company issued $70 million of the principal of the Notes (the “Initial Notes”) along with the Warrants and rights of first offer (the “First Offer Rights”) to the lenders participating in this transaction for Notes and Warrants (the “Lenders”).  Issuance of the Initial Notes, Warrants and First Offer Rights has provided net proceeds of $66,951. In addition to the Initial Notes, the Indenture may provide access to further loans of up to $30,000 that may become available in two tranches of Additional Notes tied to the NDA filing for and FDA approval of Libervant, an important part of our drug candidate pipeline. Provided that no events of default exist, the Company may elect, subject to majority lenders’ approval, to offer to the Lenders participation in a $10,000 additional offering of 12.5% senior secured notes (the “First Additional Offering”) under terms similar to the Initial Notes, on or before March 31, 2021, upon the filing of the Libervant NDA with the FDA. A second identical funding opportunity would allow, on or before March 31, 2021, the Company to obtain an additional $20,000 if the first option has been elected and funded, or, if not elected or funded, an additional $30,000 may be offered for issuance following FDA approval of Libervant.  There can be no assurance that any such additional financing will be consummated.

Proceeds from issuance of the Initial Notes and Warrants were used to fully repay the Company’s $52,092 outstanding indebtedness to Perceptive Credit Holdings, LP, related early repayment fees and legal and other fees incurred in executing this Indenture. Remaining proceeds of $14,859 will be used to support the advancement of Aquestive’s late-stage development pipeline, ongoing proprietary product commercialization and for general corporate operations.

The Notes provide a stated fixed rate of 12.5%, payable quarterly in arrears, with the initial quarterly principal repayment of the Initial Notes due on September 30, 2021 and the final quarterly payment due at maturity on June 30, 2025. Principal payments are scheduled to increase annually from 10% of the face amount of the debt then outstanding during the first four quarters to 40% of the initial loan principal during the final four quarters. Aquestive may elect, at its option, to prepay the Notes at any time at premiums that range from 101.56% of outstanding principal if prepayment occurs on or after the 5^th anniversary of the issue date of the Notes to 112.5% if redemption occurs during the third year after the issuance of the Notes. In the event that redemption occurs within the two years after the issuance of the Notes, a make-whole fee is required, based on the present value of remaining interest payments using an agreed-upon discount rate linked to the then-current U.S. Treasury rate. The Indenture also includes change of control provisions under which the Company may be required to repurchase the Notes at 101% of remaining principal plus accrued interest at the election of the lenders.

Collateral for the loan consists of a first priority lien on substantially all property and assets, including intellectual property, of the Company. This secured obligation provides payment rights that are senior to all existing and future subordinated indebtedness of the Company and provides Lenders with perfected security interests in substantially all of the Company’s assets. In the event that asset-based loans of up to $10,000 may be obtained, subject receivables and inventory assets will provide a second priority lien to senior secured note holders. The Company’s license of its IP to a third-party drug development enterprise (specifically, Sunovion Pharmaceutical’s APL-130277 product) is one of the various assets serving as collateral for this loan. The loan indenture permits the Company to monetize this asset while specifying that a portion of the proceeds, up to $40,000 if the First Additional Offering has not been elected or funded, or, $50,000 if it has been elected and funded, must be applied to prepay the Initial Notes, at 112.5% of the principal amount of the Notes being repurchased, plus accrued and unpaid interest, if any, thereon to the date of repurchase, to the extent elected by the Note holders, assuming that such monetization , up to such $40,000 or $50,000 level, as applicable, equals or exceeds those levels and if such monetization does not equal or exceed such level, such prepayment would be pro-rated among the Note holders. To the extent that lenders do not elect repayment of the debt at the date of monetization, the amount not elected up to $40,000 (or $50,000 with the first re-opener) will be held in a collateral account until approval of Libervant by the FDA, at which time this cash collateral is to be released to the Company.  Proceeds in excess of $40,000 (or $50,000 with the first re-opener) can be used immediately for general corporate purposes.

Affirmative and negative covenants specified in the Indenture are considered typical for loans of this nature, including, but not limited to, specifications relating to preservation of corporate existence, publicly traded status, intellectual property and business interests; limitations or prohibitions of dividend payments or other dispositions, repurchases of shares, additional debt, certain equity issuances, asset transfers or dispositions, creation  or occurrence of additional liens, entering into licensing or monetization arrangements other than as permitted under the Indenture, and perfection of security interests. Events of default include various commonly specified conditions, including but not limited to, bankruptcy, insolvency, material adverse changes, failure to meet Indenture payment or other obligations, compliance with regulatory requirements and preservation of the corporate existence and business operations.

The Warrants, expiring in June 2025, entitle the Lenders to purchase two million shares of the Company’s common stock, and include registration rights, specify an exercise price of $4.25 and a term of six years.

You should read this section in conjunction with our unaudited condensed interim consolidated financial statements and related notes included in Part I Item 1 of this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes thereto and management’s discussion and analysis of financial condition and results of operations for the years ended December 31, 2018 and 2017 included in our 2018 Annual Report on Form 10-K.

Forward-Looking Statements

This Quarterly Report on Form 10-Q and certain other communications made by us includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “may,” “will,” or the negative of those terms, and similar expressions, are intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements about our growth and future financial and operating results and financial position, regulatory approvals and pathways, clinical trial timing and plans, the achievement of clinical and commercial milestones, product orders and fulfillment, short-term and longer term liquidity and cash requirements, cash funding and cash burn, business strategies, market opportunities, financing, and other statements that are not historical facts.

These forward-looking statements are based on our current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Such risks and uncertainties include, but are not limited to, risks associated with the Company’s development work, including any delays or changes to the timing, cost and success of our product development activities and clinical trials; the risks of delays in FDA approval of our drug candidates or failure to receive approval; the risks inherent in commercializing a new product (including technology risks, financial risks, market risks and implementation risks and regulatory limitations); risk of development of our sales and marketing capabilities; risk of legal costs associated with and the outcome of our patent litigation challenging third party at risk generic sale of our proprietary products; risk of sufficient capital and cash resources, including access to available debt and equity financing and revenues from operations, to satisfy all of our short-term and longer term cash requirements and other cash needs, at the times and in the amounts needed; risk of availability of refinancing of existing debt facilities; risk of failure to satisfy all debt covenants and of any default under our senior secured notes; risk related to government claims against Indivior for which we license, manufacture and sell Suboxone and which accounts for the substantial part of our current operating revenues; risks related to the outsourcing of certain sales, marketing and other operational and staff functions to third parties; risk of the rate and degree of market acceptance of our products and product candidates; the success of any competing products, including generics; risk of the size and growth of our product markets; risk of the effectiveness and safety of our products and product candidates; risk of compliance with all FDA and other governmental and customer requirements for our manufacturing facilities; risks associated with intellectual property rights and infringement claims relating to the Company’s products; risk of unexpected patent developments; the impact of existing and future legislation and regulatory provisions on product exclusivity; legislation or regulatory action affecting pharmaceutical product pricing, reimbursement or access; claims and concerns that may arise regarding the safety or efficacy of the Company’s products and product candidates; risk of loss of significant customers; risks related to legal proceedings, including patent infringement, investigative and antitrust litigation matters; changes in governmental laws and regulations; risk of product recalls and withdrawals; uncertainties related to general economic, political, business, industry, regulatory and market conditions and other unusual items; and other risks and uncertainties affecting the Company including those described in the “Risk Factors” section and in other sections included in the Company’s Annual Report on Form 10‑K filed with the SEC on March 14, 2019 and in our quarterly reports on Form 10-Q. Given these uncertainties, you should not place undue reliance on these forward-looking statements, which address matters only as of the date made. All subsequent forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by this cautionary statement. The Company assumes no obligation to update forward-looking statements or outlook or guidance after the date of this report whether as a result of new information, future events or otherwise, except as may be required by applicable law.

Overview

We are a specialty pharmaceutical company focused on developing and commercializing differentiated products with our proprietary PharmFilm® technology to meet patients’ unmet needs and solve therapeutic problems to address unmet medical needs. We have three commercial products on the market, including one that is proprietary and two that are out-licensed, as well as 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 known as Lennox-Gastaut Syndrome, LGS, was approved by the FDA on November 1, 2018.  The Company commercially launched Sympazan in December 2018.

		Three Months Ended June 30,								Change
(In thousands, except %)		2019				2018				$					%
Manufacture and supply revenue		$	8,915			$	8,684			$	231				3	%
License and royalty revenue			424				4,532				(4,108	)			(91	%)
Co-development and research fees			1,019				712				307				43	%
Proprietary product sales, net			771				-				771				100	%
Total revenues		$	11,129			$	13,928			$	(2,799	)			(20	%)

		Three Months Ended June 30,								Change
(In thousands, except %)		2019				2018				$					%
Manufacture and supply		$	5,420			$	4,973			$	447				9	%
Research and development			8,151				7,994				157				2	%
Selling, general and administrative			16,246				33,668				(17,422	)			(52	)%
Interest expense			1,937				1,927				10				1	%
Interest income			(153	)			-				153			NM
Other			-				1,859				(1,859	)		NM

		Six Months Ended June 30,								Change
(In thousands, except %)		2019				2018				$					%
Manufacture and supply revenue		$	15,584			$	20,244			$	(4,660	)			(23	%)
License and royalty revenue			5,046				14,032				(8,986	)			(64	%)
Co-development and research fees			1,789				3,063				(1,274	)			(42	%)
Proprietary product sales, net			1,353				-				1,353				100	%
Total revenues		$	23,772			$	37,339			$	(13,567	)			(36	%)

		Six Months Ended June 30,								Change
(In thousands, except %)		2019				2018				$					%
Manufacture and supply		$	8,926			$	10,609			$	(1,683	)			(16	)%
Research and development			12,454				12,895				(441	)			(3	)%
Selling, general and administrative			34,154				41,213				(7,059	)			(17	)%
Interest expense			3,863				3,876				(13	)			0	%
Interest income			(427	)			(22	)			405			NM
Other			-				1,162				(1,162	)		NM

(In thousands)		2019				2018
Net cash (used for) provided by operating activities		$	(34,846	)		$	1,296
Net cash (used for) investing activities			(486	)			(886	)
Net cash (used for) financing activities			(3,102	)			(7,151	)
Net decrease in cash and cash equivalents		$	(38,434	)		$	(6,741	)

Number		Description
4.1		Indenture Dated as of July 15, 2019, among Aquestive Therapeutics, Inc, as Issuer, any Guarantor that becomes party thereto and U.S. Bank National Association, as Trustee and Collateral Agent, (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed by Aquestive Therapeutics, Inc. on July 16, 2019).
4.2		Form of Warrant (incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K filed by Aquestive Therapeutics, Inc. in July 16, 2019).
10.1		Form of Purchase Agreement (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Aquestive Therapeutics, Inc. in July 16, 2019).
10.2		Collateral Agreement dated as of July 15, 2019, among Aquestive Therapeutics, Inc., as Issuer, the Other Grantors for time to time party thereto, U.S. Bank National Association, as Trustee, and U.S. Bank National Association, as Collateral Agent (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by Aquestive Therapeutics, Inc. on July 16, 2019).
31.1		Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a), as amended, under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2		Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a), as amended, under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
32.2		Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
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101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

		Aquestive Therapeutics, Inc. (REGISTRANT)
Date:	August 6, 2019	/s/ Keith J. Kendall
		Keith J. Kendall
		President and Chief Executive Officer
		(Principal Executive Officer)
Date:	August 6, 2019	/s/ John T. Maxwell
		John T. Maxwell
		Chief Financial Officer
		(Principal Financial Officer)

I, Keith J. Kendall, certify that:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: August 6, 2019

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	/s/ JOHN T. MAXWELL
	John T. Maxwell
	Chief Financial Officer (Principal Financial Officer)

	/s/ KEITH J. KENDALL
	Keith J. Kendall
	Chief Executive Officer (Principal Executive Officer)

	/s/ JOHN T. MAXWELL
	John T. Maxwell
	Chief Financial Officer (Principal Financial Officer)