ACELRX PHARMACEUTICALS INC - Quarter Report: 2020 September (Form 10-Q)

Forward-Looking Statements

This Quarterly Report on Form 10-Q, or Form 10-Q, contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are subject to the “safe harbor” created by that section. The forward-looking statements in this Form 10-Q are contained principally under “Part I. Financial Information - Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II. Other Information - Item 1A. Risk Factors”. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. These statements involve risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Form 10-Q, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. Many important factors affect our ability to achieve our objectives, including:

In addition, you should refer to “Part II. Other Information - Item 1A. Risk Factors” in this Form 10-Q for a discussion of these and other important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Form 10-Q will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. Also, forward-looking statements represent our estimates and assumptions only as of the date of this Form 10-Q. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

AcelRx Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share data)

See notes to condensed consolidated financial statements.

AcelRx Pharmaceuticals, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(In thousands, except share and per share data)

See notes to condensed consolidated financial statements.  

AcelRx Pharmaceuticals, Inc.

Condensed Consolidated Statements of Stockholders’ (Deficit) Equity

(Unaudited)

(in thousands, except share data)

See notes to condensed consolidated financial statements.

AcelRx Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)  

See notes to condensed consolidated financial statements.

AcelRx Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except where otherwise noted)

1. Organization and Summary of Significant Accounting Policies

The Company

AcelRx Pharmaceuticals, Inc., or the Company or AcelRx, was incorporated in Delaware on July 13, 2005 as SuRx, Inc., and in January 2006, the Company changed its name to AcelRx Pharmaceuticals, Inc. The Company’s operations are based in Redwood City, California.

AcelRx is a specialty pharmaceutical company focused on the development and commercialization of innovative therapies for use in medically supervised settings. DSUVIA^® (known as DZUVEO^TM in Europe) and Zalviso^® are both focused on the treatment of acute pain, and each utilize sufentanil, delivered via a non-invasive route of sublingual administration, exclusively for use in medically supervised settings. On November 2, 2018, the U.S. Food and Drug Administration, or FDA, approved DSUVIA for use in adults in a certified medically supervised healthcare setting, such as hospitals, surgical centers, and emergency departments, for the management of acute pain severe enough to require an opioid analgesic and for which alternative treatments are inadequate. The commercial launch of DSUVIA in the United States occurred in the first quarter of 2019. In June 2018, the European Commission, or EC, granted marketing approval of DZUVEO for the treatment of patients with moderate-to-severe acute pain in medically monitored settings. AcelRx is further developing a distribution capability and commercial organization to continue to market and sell DSUVIA in the United States. In geographies where AcelRx decides not to commercialize products by itself, the Company may seek to out-license commercialization rights. The Company currently intends to commercialize and promote DSUVIA/DZUVEO outside the United States with one or more strategic partners, although it has not yet entered into any such arrangement. The timing of the resubmission of the Zalviso new drug application, or NDA, is in part dependent upon the finalization of the FDA’s new opioid approval guidelines and process. AcelRx intends to seek regulatory approval for Zalviso in the United States and, if successful, potentially promote Zalviso either by itself or with strategic partners. Zalviso is approved in Europe and is currently being commercialized by Grünenthal GmbH, or Grünenthal.

The Company has incurred recurring operating losses and negative cash flows from operating activities since inception. Although Zalviso was approved for sale in Europe on September 18, 2015, the Company sold the majority of the royalty rights and certain commercial sales milestones it is entitled to receive under the Amended License Agreement (defined below) with Grünenthal to PDL BioPharma, Inc., or PDL, in a transaction referred to as the Royalty Monetization. In consideration of the expected termination of the Amended License Agreement, under the Royalty Monetization, the Company must use commercially reasonable efforts to negotiate a replacement license agreement with a third party. The Company expects to continue to incur operating losses and negative cash flows until such time as DSUVIA has gained market acceptance and generated significant revenues.

DSUVIA/DZUVEO

DSUVIA, known as DZUVEO in Europe, approved by the FDA in November 2018 and approved by the EC in June 2018, is indicated for use in adults in a certified medically supervised healthcare setting, such as hospitals, surgical centers, and emergency departments, for the management of acute pain severe enough to require an opioid analgesic and for which alternative treatments are inadequate. DSUVIA was designed to provide rapid analgesia via a non-invasive route and to eliminate dosing errors associated with IV administration. DSUVIA is a single-strength solid dosage form administered sublingually via a single-dose applicator, or SDA, by healthcare professionals. Sufentanil is an opioid analgesic currently marketed for intravenous, or IV, and epidural anesthesia and analgesia. The sufentanil pharmacokinetic profile when delivered sublingually avoids the high peak plasma levels and short duration of action observed with IV administration.

DSUVIA was approved with a Risk Evaluation and Mitigation Strategy, or REMS, which restricts distribution to certified medically supervised healthcare settings in order to prevent respiratory depression resulting from accidental exposure. DSUVIA is only distributed to facilities certified in the DSUVIA REMS program following attestation by an authorized representative to comply with appropriate dispensing and use restrictions of DSUVIA. To become certified, a healthcare setting is required to train their healthcare professionals on the proper use of DSUVIA and have the ability to manage respiratory depression. DSUVIA is not available in retail pharmacies or for outpatient use. As part of the REMS program, the Company monitors distribution and audits wholesalers’ data, evaluates proper usage within the healthcare settings and monitors for any diversion and abuse. AcelRx will de-certify healthcare settings that are non-compliant with the REMS program.

Co-Promotion Agreement

On March 15, 2020, the Company entered into a Co-Promotion Agreement, or the Co-Promotion Agreement, with Tetraphase Pharmaceuticals, Inc., or Tetraphase, to co-promote DSUVIA and Tetraphases’s XERAVA™ (eravacycline). Under the terms of the Co-Promotion Agreement, each company is responsible for maintaining compliance under the agreed marketing and promotion plan and achieving a minimum number of sales calls for each product. Either party can terminate the agreement with 15 months written notice. In the event of a change of control, or CoC, of either party, the CoC party will be subject to meeting certain performance standards, and if these performance standards are not met, then a royalty of 10% of net sales on the CoC party’s product will be payable to the non-CoC party until the end of the agreement. The non-CoC party will also be able to solicit the employees of the CoC party in the event of a change of control and have the right to terminate the agreement with one month’s written notice. On July 28, 2020, Tetraphase was acquired by La Jolla Pharmaceutical Company, or La Jolla, and as a result, Tetraphase became a CoC party under the Co-Promotion Agreement. The Promotion Agreement (see below) terminated the Co-Promotion Agreement.

There were no material revenues or expenses related to the Co-Promotion Agreement in the three and nine months ended September 30, 2020.

Distribution Agreement

On July 17, 2020, the Company entered into a distribution agreement, or the Distribution Agreement, with Zimmer Biomet Dental, or ZB Dental, pursuant to which ZB Dental obtained the exclusive right to promote, market, sell, and arrange to distribute DSUVIA in the United States to clinicians, dentists, surgeons and other licensed health care practitioners that perform dental (including specialty dental), oral-maxillofacial, cranio-maxillofacial or oral surgery procedures, or Professionals, and their respective institutions and facilities that are permitted to use DSUVIA.

ZB Dental’s distribution rights are non-exclusive for crossover ambulatory surgery centers and certain government customers, and do not extend to ambulatory care centers outside the class of trade or into hospitals. ZB Dental will conduct any distribution activities in a manner consistent with DSUVIA’s FDA-approved indication and REMS program, and within the parameters established in the Distribution Agreement. ZB Dental has the right to sublicense its distribution rights to its qualified marketing partners but may not otherwise sublicense its distribution rights to any third party without our prior written consent.

Promotion Agreement

On October 1, 2020, the Company entered into a Promotion Agreement, or the Promotion Agreement, with La Jolla and Tetraphase, effective as of September 30, 2020, pursuant to which the Company, La Jolla and Tetraphase restructured their co-promotion arrangement, with La Jolla agreeing to detail and promote DSUVIA and AcelRx and Tetraphase agreeing to terminate the Co-Promotion Agreement between them. The Company will not detail and promote XERAVA under the Promotion Agreement. Refer to Note 12 “Subsequent Events” for additional information.

Zalviso

Zalviso delivers 15 mcg sufentanil sublingually through a non-invasive delivery route via a pre-programmed, patient-controlled analgesia, or PCA, system. Zalviso is approved in Europe and is in late-stage development in the United States. The Company had initially submitted to the FDA an NDA seeking approval for Zalviso in September 2013 but received a complete response letter, or CRL, on July 25, 2014. Subsequently, the FDA requested an additional clinical study, IAP312, designed to evaluate the effectiveness of changes made to the functionality and usability of the Zalviso device and to take into account comments from the FDA on the study protocol. In the IAP312 study, for which top-line results were announced in August 2017, Zalviso met safety, satisfaction and device usability expectations. These results will supplement the three Phase 3 trials already completed in the Zalviso NDA resubmission.

Termination of Grünenthal Amended Agreements

On December 16, 2013, AcelRx and Grünenthal entered into a Collaboration and License Agreement, or the License Agreement, which was amended effective July 17, 2015 and September 20, 2016, or the Amended License Agreement, which grants Grünenthal rights to commercialize the Zalviso PCA system, or the Product, in the 28 European Union, or EU, member states, at the time of the agreement, plus Switzerland, Liechtenstein, Iceland, Norway and Australia (collectively, the Territory) for human use in pain treatment within, or dispensed by, hospitals, hospices, nursing homes and other medically supervised settings, (collectively, the Field). In September 2015, the EC approved the marketing authorization application, or MAA, previously submitted to the EMA, for Zalviso for the management of acute moderate-to-severe post-operative pain in adult patients. On December 16, 2013, AcelRx and Grünenthal, entered into a Manufacture and Supply Agreement, or the MSA, and together with the License Agreement, the Agreements. Under the MSA, the Company will exclusively manufacture and supply the Product to Grünenthal for the Field in the Territory. On July 22, 2015, the Company and Grünenthal amended the MSA, or the Amended MSA, effective as of July 17, 2015. The Amended MSA and the Amended License Agreement are referred to as the Amended Agreements.

On May 18, 2020, the Company received a notice from Grünenthal that it is exercising its right to terminate the Amended Agreements between the Company and Grünenthal, effective November 13, 2020. Upon termination, the rights to market and sell Zalviso in the European Union, Switzerland, Liechtenstein, Iceland, Norway and Australia, or the Territory, will revert immediately back to the Company, although Grünenthal has the right to sell down its existing Zalviso inventory.

On May 20, 2020, the Company agreed to provide a right of first negotiation for a license agreement to replace the Grünenthal Amended License Agreement to a third party with which the Company is currently negotiating a license agreement for DZUVEO for the European market. This right expired on September 30, 2020.

Principles of Consolidation

The Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Refer to Note 7 “Liability Related to Sale of Future Royalties” for additional information.

Reclassifications

Certain prior period amounts in the Condensed Consolidated Financial Statements have been reclassified to conform to the current period's presentation.

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the rules and regulations of the United States. Securities and Exchange Commission, or SEC. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

Operating results for the three and nine months ended September 30, 2020, are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. The Condensed Consolidated Balance Sheet as of December 31, 2019, was derived from the Company’s audited financial statements as of December 31, 2019, included in the Company’s Annual Report on Form 10-K filed with the SEC. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, which includes a broader discussion of the Company’s business and the risks inherent therein.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Management evaluates its estimates on an ongoing basis including critical accounting policies. Estimates are based on historical experience and on various other market-specific and other relevant assumptions that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

Restructuring Costs

The Company's restructuring costs consist of employee termination benefit costs. Liabilities for costs associated with the cost reduction plan are recognized when the liability is incurred and are measured at fair value. One-time termination benefits are expensed at the date the Company notifies the employee, unless the employee must provide future service, in which case the benefits are expensed ratably over the future service period.

On March 16, 2020, in connection with entering into the Co-Promotion Agreement, the Company initiated a reduction in headcount, designed to eliminate the overlap with the Tetraphase commercial team in order to more efficiently commercialize DSUVIA alongside the Tetraphase commercial team and reduce operating expenses. The Company eliminated 30 positions, primarily within the commercial organization. For the nine months ended September 30, 2020, the Company incurred and paid $0.5 million in employee termination benefits related to this restructuring.

The headcount reduction was completed in the first quarter of 2020. No additional expenses are anticipated in connection with this cost reduction plan.

Significant Accounting Policies

The Company’s significant accounting policies are detailed in its Annual Report on Form 10-K for the year ended December 31, 2019. There have been no significant changes to the Company’s significant accounting policies during the nine months ended September 30, 2020, from those previously disclosed in its 2019 Annual Report on Form 10-K, except to reflect revenue recognition under bill-and-hold arrangements, wherein the customer agrees to buy product from the Company but requests delivery at a later date. For these transactions, the Company deems that control passes to the customer when the product is ready for delivery. The Company recognizes revenue under these types of arrangements when a signed agreement is in place, the transaction is billable, the customer has significant risk and rewards for the product and the ability to direct the assets, the product has been set aside specifically for the customer, and the product cannot be redirected to another customer.

Recently Issued Accounting Pronouncements 

In June 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2016-13, “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments,” or ASU 2016-13. ASU 2016-13 replaces the incurred loss impairment model in current GAAP with a model that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. ASU 2016-13 is effective for the Company beginning January 1, 2023, with early adoption allowed beginning January 1, 2020. In May 2019, the FASB issued ASU 2019-05, “Financial Instruments – Credit Losses,” or ASU 2019-05, to allow entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. The new effective dates and transition align with those of ASU 2016-13. Management is currently assessing the date of adoption and the impact ASU 2016-13 and ASU 2019-05 will have on the Company, but it does not anticipate adoption of these new standards to have a material impact on the Company’s financial position, results of operations or cash flows.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The amendments provide optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company is currently evaluating its contracts and the optional expedients provided by the new standard, but it does not anticipate its adoption to have a material impact on the Company’s financial position, results of operations or cash flows.

2. Investments and Fair Value Measurement

Investments

The Company classifies its marketable securities as available-for-sale and records its investments at fair value. Available-for-sale securities are carried at estimated fair value based on quoted market prices or observable market inputs of almost identical assets, with the unrealized holding gains and losses included in accumulated other comprehensive income (loss). Marketable securities which have maturities beyond one year as of the end of the reporting period are classified as non-current.

The table below summarizes the Company’s cash, cash equivalents and short-term investments (in thousands):

There were no other-than-temporary impairments for these securities at September 30, 2020 or December 31, 2019. No gross realized gains or losses were recognized on the available-for-sale securities and, accordingly, there were no amounts reclassified out of accumulated other comprehensive income (loss) to earnings during the three and nine months ended September 30, 2020 and September 30, 2019.

As of September 30, 2020, and December 31, 2019, the contractual maturity of all investments held was less than one year.

Fair Value Measurement

The Company’s financial instruments consist of Level I and II assets and Level III liabilities. Money market funds are highly liquid investments and are actively traded. The pricing information on these investment instruments are readily available and can be independently validated as of the measurement date. This approach results in the classification of these securities as Level 1 of the fair value hierarchy. For Level II instruments, the Company estimates fair value by utilizing third party pricing services in developing fair value measurements where fair value is based on valuation methodologies such as models using observable market inputs, including benchmark yields, reported trades, broker/dealer quotes, bids, offers and other reference data. Such Level II instruments typically include U.S. treasury, U.S. government agency securities and commercial paper. As of September 30, 2020, and December 31, 2019, the Company held, in addition to Level II assets, a contingent put option liability associated with the Loan Agreement with Oxford. See Note 5 “Long-Term Debt” for further description. The Company’s estimate of fair value of the contingent put option liability was determined by using a risk-neutral valuation model, wherein the fair value of the underlying debt facility is estimated both with and without the presence of the default provisions, holding all other assumptions constant. The resulting difference between the two estimated fair values is the estimated fair value of the default provisions, or the contingent put option, which is included under other long-term liabilities on the Condensed Consolidated Balance Sheets. Changes to the estimated fair value of this liability is recorded in interest income and other income (expense), net in the Condensed Consolidated Statements of Comprehensive Loss. The fair value of the underlying debt facility is estimated by calculating the expected cash flows in consideration of an estimated probability of default and expected recovery rate in default and discounting such cash flows back to the reporting date using a risk-free rate.

The following table sets forth the fair value of the Company’s financial assets and liabilities by level within the fair value hierarchy (in thousands):

The following tables set forth a summary of the changes in the fair value of the Company’s Level III financial liabilities for the three and nine months ended September 30, 2020 and September 30, 2019 (in thousands):

3. Inventories, net

Inventories consist of raw materials, work in process and finished goods and are stated at the lower of cost or net realizable value and consist of the following (in thousands):

During the three and nine months ended September 30, 2020, the Company recorded inventory impairment charges of $0.2 million and $0.6 million, respectively. In the nine months ended September 30, 2020, $0.3 million of these charges related to the termination of the Amended Agreements, while $0.3 million related to DSUVIA inventory, primarily inventory that may expire before being sold.

4. Revenue from Contracts with Customers

The following table summarizes revenue from contracts with customers for the three and nine months ended September 30, 2020 and 2019 into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors (in thousands):

For additional details on the Company’s accounting policy regarding revenue recognition, refer to Note 1 “Organization and Summary of Significant Accounting Policies - Revenue from Contracts with Customers” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, and Note 1 “Organization and Summary of Significant Accounting Policies – Significant Accounting Policies” in this Quarterly Report on Form 10-Q.

Product Sales

The Company’s commercial launch of DSUVIA in the United States occurred in the first quarter of 2019. Zalviso has been sold in Europe by the Company’s collaboration partner, Grünenthal. Grünenthal has exercised its right to terminate the Amended Agreements, effective November 13, 2020.

Contract and Other Collaboration

Amended License Agreement

Under the Amended License Agreement with Grünenthal, the Company is eligible to receive approximately $194.5 million in additional milestone payments, based upon successful regulatory and product development efforts ($28.5 million) and net sales target achievements ($166.0 million). Grünenthal will also make tiered royalty and supply and trademark fee payments in the mid-teens up to the mid-twenties percent range, depending on the level of sales achieved, on net sales of Zalviso. A portion of the tiered royalty payment, exclusive of the supply and trademark fee payments, will be paid to PDL BioPharma, Inc. or PDL, in connection with the Royalty Monetization. On August 31, 2020, PDL announced it sold its royalty interest for Zalviso to SWK Funding, LLC. For additional information on the Royalty Monetization, see Note 7 “Liability Related to Sale of Future Royalties”.

Amended MSA

Under the terms of the Amended MSA with Grünenthal, the Company will manufacture and supply the Product for use in the Field for the Territory exclusively for Grünenthal. The Product will be supplied at prices approximating the Company’s manufacturing cost, subject to certain caps, as defined in the MSA Amendment. The MSA Amendment requires the Company to use commercially reasonable efforts to enter stand-by contracts with third parties providing significant supply and manufacturing services and, under certain specified conditions, permits Grünenthal to use a third-party back-up manufacturer to manufacture the Product for Grünenthal’s commercial sale in the Territory.

As mentioned above, Grünenthal has exercised its right to terminate the Amended Agreements, effective November 13, 2020. In May 2020, upon notification of early termination by Grünenthal, the Company recognized approximately $2.6 million of deferred revenue for the future significant and incremental discount on Zalviso manufacturing services which are no longer a performance obligation.

Contract Liability

At September 30, 2020, approximately $0.2 million of deferred revenue, all of which represented the current portion, was attributable to the significant and incremental discount on Zalviso manufacturing services for Grünenthal under the Amended Agreements. This deferred revenue is being recognized on a straight-line basis over the period such discount is made available to Grünenthal, which will continue until the last shipment of Zalviso product is made to Grünenthal.

The following table presents changes in the Company’s contract liability for the nine months ended September 30, 2020 (in thousands):

For the three and nine months ended September 30, 2020 and 2019, the Company recognized the following revenue from performance obligations satisfied or eliminated under the Amended Agreements (in thousands):

5. Long-Term Debt 

Loan Agreement with Oxford

On May 30, 2019, the Company entered into the Loan Agreement with Oxford Finance LLC, or Oxford, as the Lender. Under the Loan Agreement, the Lender made a term loan to the Company in an aggregate principal amount of $25.0 million, or the Loan, which was funded on May 30, 2019. The Company used approximately $8.9 million of the proceeds from the Loan to repay its outstanding obligations under the Prior Agreement, as described above. After deducting all loan initiation costs and outstanding interest on the Prior Agreement, the Company received $15.9 million in net proceeds.

In connection with the Loan Agreement, on May 30, 2019, the Company issued warrants to the Lender and its affiliates, or the Warrants, which are exercisable for an aggregate of 176,679 shares of the Company’s common stock with a per share exercise price of $2.83. The Warrants have been classified within stockholders’ deficit and accounted for as a discount to the loan by allocating the gross proceeds on a relative fair value basis. For further discussion, see Note 8 “Warrants”.

As of September 30, 2020, the accrued balance due under the Loan Agreement with Oxford was $22.9 million. Interest expense related to the Loan Agreement was $0.7 million, $0.2 million of which represented amortization of the debt discount, for the three months ended September 30, 2020, and $2.4 million, $0.7 million of which represented amortization of the debt discount, for the nine months ended September 30, 2020.

Non-Interest Bearing Payments for the Construction of Leasehold Improvements

In August 2019, the Company entered into a Site Readiness Agreement, or SRA, with Catalent Pharma Solutions, LLC, or Catalent, in contemplation of entering into a commercial supply agreement for its product DSUVIA at a future date. Under the SRA, the Company is building out a suite within Catalent’s production facility in Kansas City. If additional equipment and facility modifications are required to meet the Company’s product needs, the Company may be required to contribute to the cost of such additional equipment and facility modifications. The Company has determined that it is the owner of the leasehold improvements related to the build-out which will be paid for in four installments of $0.5 million through July 2022. As of September 30, 2020, the accrued balance under the SRA is $0.8 million, and $1.7 million of these leasehold improvements have been capitalized. The effective interest rate related to the payments at September 30, 2020 was 14.35%. The leasehold improvements are recorded as property and equipment, net, in our Condensed Consolidated Balance Sheets.

6. Leases 

The Company leases office and laboratory space for its corporate headquarters, located at 301 – 351 Galveston Drive, Redwood City, California, and has entered into an agreement to sublease approximately 47% of this office and laboratory space. In addition, the Company has entered into an agreement for commercial supply manufacturing services related to the Company’s Zalviso drug product with a contract manufacturing organization, which it accounts for as an operating lease.

The components of lease expense are presented in the following table (in thousands):

The weighted average remaining lease term and discount rate related to the operating leases are presented in the following table:

Future minimum lease payments as of September 30, 2020 are presented in the following table (in thousands):

Reported as:

Future minimum sublease payments as of September 30, 2020 are presented in the following table (in thousands):

The rent receivable balance reported in the balance sheet as of September 30, 2020, is as follows (in thousands):

Reported as:

7. Liability Related to Sale of Future Royalties

In September 2015, the Company entered into the Royalty Monetization with PDL for which it received gross proceeds of $65.0 million. Under the Royalty Monetization, PDL will receive 75% of the European royalties under the Amended License Agreement with Grünenthal, as well as 80% of the first four commercial milestones worth $35.6 million (or 80% of $44.5 million), up to a capped amount of $195.0 million over the life of the arrangement.

The Company periodically assesses the expected royalty and milestone payments using a combination of historical results, internal projections and forecasts from external sources. To the extent such payments are greater or less than the Company’s initial estimates or the timing of such payments is materially different than its original estimates, the Company will prospectively adjust the amortization of the liability and the effective interest rate. During the three months ended June 30, 2019, the Company made a material revision to its estimates which resulted in an interest income rate on the Royalty Monetization liability balance at a prospective average rate of approximately 4.2%, which will be applied over the remaining term of the agreement. The change in estimate of future payments to PDL was a result of lower projected European royalties and milestones from sales of Zalviso over the life of the liability. The change in estimate results in interest income being recognized prospectively, over the remaining term of the agreement, as the estimated expected payments are less than the $65.0 million in gross proceeds received. During the three months ended June 30, 2020, Grünenthal notified the Company that it was terminating the Amended License Agreement, effective November 13, 2020. There is a continuing obligation on the Company’s part, through the term of the Royalty Monetization, to use commercially reasonable efforts to negotiate a replacement license agreement, or New Arrangement. However, without a New Arrangement to commercialize Zalviso in the Territory, the Company is currently unable to estimate the future payments to PDL over the remaining life of the Royalty Monetization. If the Company is unable to find a New Arrangement, a contingent gain of up to approximately $65 million may be recognized when it is realized upon expiration of the liability at the end of the Royalty Monetization term. Due to the significant judgments and factors related to the estimates of future payments under the Royalty Monetization, there are significant uncertainties surrounding the amount and timing of future payments and the probability of realization of the estimated contingent gain.

The change in estimate reduced the effective interest rate over the life of the liability to 0% by recording interest income over the remaining term of the arrangement as an offset to the interest expense that was recognized in prior periods. The effective interest income rates for both the three and nine months ended September 30, 2020 was approximately 3.6%. The change in estimate resulted in a decrease of $2.7 million to the net loss, or $0.03 per share of common stock, basic and diluted, for the three months ended September 30, 2019, and a decrease of $5.4 million to the net loss, or $0.07 per share of common stock, basic and diluted, for the nine months ended September 30, 2019. The effective interest income rate for the three months ended September 30, 2019 was approximately 4.2%. The effective interest income rate for the nine months ended September 30, 2019 was 0.5%.

The following table shows the activity within the liability account for the nine months ended and the period from inception to September 30, 2020 (in thousands):

As royalties are remitted to PDL from ARPI LLC, as described in Note 1 “Organization and Summary of Significant Accounting Policies - Non-Cash Interest Income (Expense) on Liability Related to Sale of Future Royalties” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, the balance of the liability will be effectively repaid over the life of the agreement. The Company will record non-cash royalty revenues and non-cash interest expense within its Condensed Consolidated Statements of Comprehensive Loss over the term of the Royalty Monetization. On August 31, 2020, PDL announced it sold its royalty interest for Zalviso to SWK Funding, LLC.

8. Warrants

Loan Agreement Warrants

In connection with the Loan Agreement, on May 30, 2019, the Company issued warrants to the Lender and its affiliates, which are exercisable for an aggregate of 176,679 shares of the Company’s common stock with a per share exercise price of $2.83, or the Warrants. As of September 30, 2020, warrants to purchase 176,679 shares of common stock issued to the Lender and its affiliates had not been exercised and were still outstanding. These warrants expire in May 2029.

9. Stockholders’ Equity

Common Stock

Registered Direct Offering

On July 23, 2020, the Company completed a registered direct offering in which it issued and sold 9,433,962 shares of its common stock at a price of $1.06 per share. The total net proceeds from this offering were approximately $10.0 million, after deducting estimated expenses payable by the Company of $49,000. No underwriter or placement agent participated in the offering.

ATM Agreement 

The Company has entered into a Controlled Equity Offering^SM Sales Agreement, or the ATM Agreement, with Cantor Fitzgerald & Co., or Cantor, as agent, pursuant to which the Company may offer and sell, from time to time through Cantor, shares of the Company’s common stock having an aggregate offering price of up to $40.0 million. On May 9, 2019, the Company increased the aggregate offering amount of shares of the Company’s common stock which may be offered and sold under the ATM Agreement by $40.0 million, for a total of $80.0 million.

There were no shares of common stock sold pursuant to the ATM Agreement during the three months ended September 30, 2020. During the nine months ended September 30, 2020, the Company issued and sold 876,800 shares of common stock pursuant to the ATM Agreement, respectively, for which the Company received net proceeds of approximately $1.5 million. As of September 30, 2020, the Company has the ability to sell $43.8 million of the Company’s common stock under the ATM Agreement.

New and Amended Stock Plans

2020 Equity Incentive Plan

On June 16, 2020, at the 2020 Annual Meeting of Stockholders of the Company, the Company’s stockholders, upon the recommendation of the Company’s Board of Directors, approved the Company’s 2020 Equity Incentive Plan, or the 2020 EIP.

As of June 16, 2020, no more awards may be granted under the 2011 Equity Incentive Plan, or the 2011 EIP, although all outstanding stock options and other stock awards previously granted under the 2011 EIP will continue to remain subject to the terms of the 2011 EIP.

The initial aggregate number of shares of the Company’s common stock issuable pursuant to stock awards under the 2020 EIP was 5,500,000 shares. In addition, the share reserve will be increased by the number of returning shares, if any, as such shares become available from time to time under the 2006 Plan and the 2011 EIP, for an additional number of shares not to exceed 14,892,170 shares. The term of any option granted under the 2020 EIP is determined on the date of grant but shall not be longer than 10 years. The Company issues new shares for settlement of vested restricted stock units and exercises of stock options. The Company does not have a policy of purchasing its shares relating to its stock-based programs.

Amended and Restated 2011 Employee Stock Purchase Plan

Additionally, on June 16, 2020, the Company’s stockholders, upon the recommendation of the Company’s Board of Directors, approved the Amended and Restated 2011 Employee Stock Purchase Plan, or the Amended 2011 ESPP, which increased the aggregate number of shares of the Company’s common stock reserved for issuance under the 2011 Employee Stock Purchase Plan, or ESPP, to 4,900,000 shares, subject to adjustment for certain changes in the Company’s capitalization, and removed the “evergreen” provision from the ESPP.

10. Stock-Based Compensation

The Company recorded total stock-based compensation expense for stock options, stock awards and the Amended 2011 ESPP as follows (in thousands):

As of September 30, 2020, there were, in the aggregate, 5,885,526 shares available for grant, 12,914,185 options outstanding and 1,425,327 restricted stock units outstanding under the Company’s equity incentive plans.

11. Net Loss per Share of Common Stock

The Company’s basic net loss per share of common stock is calculated by dividing the net loss by the weighted average number of shares of common stock outstanding for the period. The diluted net loss per share of common stock is computed by giving effect to all potential common stock equivalents outstanding for the period determined using the treasury stock method. For purposes of this calculation, options to purchase common stock, RSUs, and warrants to purchase common stock were considered to be common stock equivalents. In periods with a reported net loss, common stock equivalents are excluded from the calculation of diluted net loss per share of common stock if their effect is antidilutive.

The following outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share of common stock for the periods presented because including them would have been antidilutive:  

12. Subsequent Event

Promotion Agreement

On October 1, 2020, the Company entered into the Promotion Agreement with La Jolla and Tetraphase, effective as of September 30, 2020, pursuant to which the Company, La Jolla and Tetraphase restructured their co-promotion arrangement, with La Jolla agreeing to detail and promote DSUVIA and AcelRx and Tetraphase agreeing to terminate the Co-Promotion Agreement between them. The Company will not detail and promote XERAVA under the Promotion Agreement.

Under the terms of the Promotion Agreement, La Jolla is responsible for maintaining compliance under the agreed marketing and promotion plan and achieving a minimum number of sales calls per calendar quarter. The La Jolla promotion activities will be overseen by a joint marketing and sales committee, which will be responsible for developing marketing plans for the products, provided that AcelRx will be responsible for developing the marketing strategy for, creating the promotional materials for, and handling sales and distribution of, its products.

The Promotion Agreement has a two-year term. The Company may terminate the Promotion Agreement upon 30 days’ notice. After one year, La Jolla may terminate the Promotion Agreement upon 30 days’ notice and may do so earlier in the event of a change of control and change in management of the Company. Additionally, either party may terminate the Promotion Agreement in the event of an uncured material breach or insolvency event of the other party and in the event of other specified circumstances relating to the Company’s products, such as safety.

The Company will pay La Jolla a revenue share on net sales of its products in the sales territories covered by the Promotion Agreement, other than sales to certain excluded accounts. These sales territories do not overlap with the territories covered by the Company’s sales force. If La Jolla fails to meet its detailing requirements in the Promotion Agreement in a given calendar quarter, it will pay the Company a royalty on net sales of XERAVA in the United States during such quarter.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the unaudited financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, or Form 10-Q, and with the audited Consolidated Financial Statements and related notes thereto included as part of our Annual Report on Form 10-K for the year ended December 31, 2019, or Annual Report.

About AcelRx Pharmaceuticals, Inc.

We are a specialty pharmaceutical company focused on the development and commercialization of innovative therapies for use in medically supervised settings.

Our Portfolio

The following table summarizes our portfolio.

Promotion Agreement

On October 1, 2020, we entered into a promotion agreement, or the Promotion Agreement, with La Jolla Pharmaceutical Company, or La Jolla, and Tetraphase Pharmaceuticals, Inc., or Tetraphase, effective as of September 30, 2020, pursuant to which La Jolla will detail and promote DSUVIA. Under the terms of this agreement, La Jolla is responsible for maintaining compliance under the agreed marketing and promotion plan and achieving a minimum number of sales calls per calendar quarter. We will not detail and promote XERAVA™ (eravacycline) under this agreement.

The Promotion Agreement has a two-year term. We may terminate the agreement upon 30 days’ notice. After one year, La Jolla may terminate the agreement upon 30 days’ notice and may do so earlier in the event we undergo a change of control and change in management. We will pay La Jolla a revenue share on net sales of DSUVIA in the sales territories covered by the Promotion Agreement, other than sales to certain excluded accounts. These sales territories do not overlap with the territories covered by our sales force. If La Jolla fails to meet its detailing requirements in a given calendar quarter, it will pay us a royalty on net sales of XERAVA in the United States during such quarter.

The Promotion Agreement terminated the co-promotion agreement, or the Co-Promotion Agreement, we entered into with Tetraphase on March 15, 2020.

On March 16, 2020, in connection with entering into the Co-Promotion Agreement, we eliminated 30 positions, mainly within the commercial organization. As of September 30, 2020, we had approximately 25 sales representatives, including those under the Promotion Agreement with La Jolla.

Distribution Agreement

On July 17, 2020, we entered into a distribution agreement, or the Distribution Agreement, with Zimmer Biomet Dental, or ZB Dental, pursuant to which ZB Dental obtained the exclusive right to promote, market, sell, and arrange to distribute DSUVIA in the United States to clinicians, dentists, surgeons and other licensed health care practitioners that perform dental (including specialty dental), oral-maxillofacial, cranio-maxillofacial or oral surgery procedures, or Professionals, and their respective institutions and facilities that are permitted to use DSUVIA.

ZB Dental’s distribution rights are non-exclusive for crossover ambulatory surgery centers and certain government customers, and do not extend to ambulatory care centers outside the class of trade or into hospitals. ZB Dental will conduct any distribution activities in a manner consistent with DSUVIA’s FDA-approved indication and REMS program, and within the parameters established in the Distribution Agreement. ZB Dental has the right to sublicense its distribution rights to its qualified marketing partners but may not otherwise sublicense its distribution rights to any third party without our prior written consent.

DSUVIA is expected to be available for order by Professionals exclusively through ZB Dental in the United States, pending satisfaction of applicable licensing requirements; prior to such satisfaction, ZB Dental sales representatives will promote and market DSUVIA on our behalf.

Termination of Grünenthal Amended Agreements

On May 18, 2020, we received a notice from Grünenthal that it is exercising its right to terminate the amended Collaboration and License Agreement, or the Amended License Agreement, and the amended Manufacture and Supply Agreement, or the Amended MSA, together referred to as the Amended Agreements, between AcelRx and Grünenthal, effective November 13, 2020. Upon termination, the rights to market and sell Zalviso in the European Union, Switzerland, Liechtenstein, Iceland, Norway and Australia, or the Territory, will revert immediately back to us, although Grünenthal has the right to sell down its existing Zalviso inventory. We have a continuing obligation to use commercially reasonable efforts to negotiate a replacement license agreement, or New Arrangement; however, we have not yet entered into such an arrangement.

On May 20, 2020, we agreed to provide a right of first negotiation for a license agreement to replace the Grünenthal Amended License Agreement to a third party with which the Company is currently negotiating a license agreement for DZUVEO for the European market. This right expired on September 30, 2020.

General Trends and Outlook

COVID-19-related

Government-mandated shelter-in-place orders and related safety policies on account of the COVID-19 pandemic continue to prevent us from operating our business in the normal course. Beginning in March and April of 2020, state and local officials issued orders in response to the pandemic which included, among other things, requirements for residents to shelter in place and for non-essential businesses to cease activities at facilities within certain cities, counties, and states. State and local officials have taken different approaches to these orders, and some have not issued any such orders. Once issued, the orders have been relaxed and then tightened, depending on the rate of COVID-19 cases. As a result of these orders, we implemented a work from home policy for our California-based employees and we continue to adhere to the various and diverse orders issued by government officials in the jurisdictions in which we operate. In addition, hospitals, ambulatory surgery centers and other healthcare facilities have barred visitors that are not caregivers or mission-critical and otherwise restricted access to such facilities, and we have no visibility as to when these restrictions will be lifted. As a result, the educational and promotional efforts of our commercial and medical affairs personnel have been substantially reduced, and in some cases, stopped. We expect our near-term sales volumes to be adversely impacted as long as access to healthcare facilities by our commercial and medical affairs personnel continues to be limited. As a result, we also anticipate our operating expenses during this period to be lower than expected, primarily due to reduced travel, educational and promotional activities by our commercial and medical affairs teams. We will continue to evaluate the impact on our revenues and related metrics and operating expenses during this period and assess the need to adjust our expenses and expectations.

We have heard from a number of hospital customers and government representatives, and also read numerous media reports about a shortage of intravenous sedatives and analgesics, namely fentanyl, which we understand is directly and indirectly attributable to the COVID-19 situation. In response to a shortage of intravenous fentanyl and other IV opioids during the COVID-19 pandemic, AcelRx began outreach efforts to health care settings to inform them of how DSUVIA may help with these shortages.

As a result of international travel restrictions, the timing for testing and acceptance of our DSUVIA high-volume packaging line has been delayed. Based on our best estimate, we project that the line will be installed and qualification completed in 2021.

We will continue to engage with various elements of our supply chain and distribution channel, including our customers, contract manufacturers, and logistics and transportation providers, to meet demand for products and to remain informed of any challenges within our supply chain. We continue to monitor demand and intend to adapt our plans as needed to continue to drive our business and meet our obligations during the evolving COVID-19 pandemic. However, if the COVID-19 pandemic continues and persists for an extended period of time, we may face disruptions to our supply chain and operations, and associated delays in the manufacturing and supply of our products. Such supply disruptions may adversely impact our ability to generate sales of and revenues from our products and our business, financial condition, results of operations and growth prospects could be adversely affected.

As the global pandemic of COVID-19 continues to rapidly evolve, it could result in a significant long-term disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity. The extent to which the COVID-19 pandemic impacts our business, our ability to generate sales of and revenues from our approved products, and our future clinical development and regulatory efforts will depend on future developments that are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions, quarantines and social distancing requirements in the United States and other countries, business closures or business disruptions and the effectiveness of actions taken in the United States and other countries to contain and treat the virus.

Department of Defense

In April 2020, DSUVIA achieved Milestone C approval by the Department of Defense, or DoD, a decision that clears the path for the DoD to begin placing orders for DSUVIA. In September 2020, we announced that DSUVIA was added to the DoD Joint Deployment Formulary, a core list of pharmaceutical products that are designated for deploying military units across all service branches. Also in September 2020, the U.S. Army awarded AcelRx with an initial contract of up to $3.6 million over the next four years for the purchase of DSUVIA to support a DoD-sponsored study to aid the development of clinical practice guidelines.

Financial Overview

We have incurred net losses and generated negative cash flows from operations since inception and expect to incur losses in the future as we continue commercialization activities to support the U.S. launch of DSUVIA, support European sales of Zalviso by Grünenthal or any replacement partner, and any future research and development activities needed to support the U.S. approval of Zalviso, once, and if, the NDA is resubmitted. As a result, we expect to continue to incur operating losses and negative cash flows until such time as DSUVIA has gained market acceptance and generated significant revenues.

We will incur capital expenditures related to the installation of our high-volume automated packaging line for DSUVIA, from which we expect to have qualified product being packaged beginning in 2021. We anticipate that the high-volume line for DSUVIA will contribute to a significant decrease in costs of goods sold in 2022 and beyond.

Our net loss for the three and nine months ended September 30, 2020 was $8.9 million and $31.5 million, respectively, compared to net losses of $12.7 million and $38.8 million for the three and nine months ended September 30, 2019, respectively. As of September 30, 2020, we had an accumulated deficit of $429.6 million. As of September 30, 2020, we had cash, cash equivalents and short-term investments totaling $43.0 million compared to $66.1 million as of December 31, 2019.

Critical Accounting Estimates 

The accompanying discussion and analysis of our financial condition and results of operations are based upon our unaudited Condensed Consolidated Financial Statements and the related disclosures, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts in our financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. Our critical accounting policies and estimates are detailed in our Annual Report.

There have been no significant changes to our critical accounting policies or significant judgements and estimates for the three and nine months ended September 30, 2020, from those previously disclosed in our Annual Report, except to reflect revenue recognition under bill-and-hold arrangements, wherein the customer agrees to buy product from us but requests delivery at a later date. For these transactions, we deem that control passes to the customer when the product is ready for delivery. We recognize revenue under these types of arrangements when a signed agreement is in place, the transaction is billable, the customer has significant risk and rewards for the product and the ability to direct the asset, the product has been set aside specifically for the customer, and the product cannot be redirected to another customer.

Results of Operations

Our results of operations have fluctuated from period to period and may continue to fluctuate in the future, based upon the progress of our commercial launch of DSUVIA, our research and development efforts, variations in the level of expenditures related to commercial launch, development efforts and debt service obligations during any given period, and the uncertainty as to the extent and magnitude of the impact from the COVID-19 pandemic. Results of operations for any period may be unrelated to results of operations for any other period. In addition, historical results should not be viewed as indicative of future operating results. In particular, to the extent our commercial and medical affairs personnel continue to be subject to varying levels of restriction on accessing hospitals and ambulatory surgical centers due to COVID-19, and to the extent government authorities and healthcare providers are continuing to limit elective surgeries, we expect our sales volume to be adversely affected.

Three and Nine Months Ended September 30, 2020 and 2019

Revenue

Product Sales Revenue

Product sales revenue consists of sales of DSUVIA in the U.S. and Zalviso in Europe.

Product sales revenue by product for the three and nine months ended September 30, 2020 and 2019 was as follows:

The increase in DSUVIA product sales revenue for the three and nine months ended September 30, 2020, as compared to the prior year periods, is primarily due to DoD purchases of DSUVIA.

The decrease in Zalviso product sales revenue for the three and nine months ended September 30, 2020, as compared to the prior year periods, was primarily the result of decreased orders from Grünenthal. During the three months ended June 30, 2020, Grünenthal terminated the Amended Agreements, effective November 13, 2020. As of September 30, 2020, we had current deferred revenue under the Amended Agreements with Grünenthal of $0.2 million.     

Contract and Other Collaboration Revenue

Contract and other collaboration revenue includes revenue under the Amended Agreements related to research and development services, non-cash royalty revenue related to the Royalty Monetization and royalty revenue for sales of Zalviso in Europe.

Contract and other collaboration revenue for the three and nine months ended September 30, 2020 and 2019 was as follows (in thousands):

We estimate and recognize royalty revenue and non-cash royalty revenue on a quarterly basis. Adjustments to estimated revenue are recognized in the subsequent quarter based on actual revenue earned per the royalty reports received from Grünenthal. In addition, under the Royalty Monetization, we sold a portion of the expected royalty stream and commercial milestones from the European sales of Zalviso by Grünenthal to PDL. On August 31, 2020, PDL announced it sold its royalty interest for Zalviso to SWK Funding, LLC.

Cost of Goods Sold

As mentioned above, we commenced commercial sales of DSUVIA in the first quarter of 2019.

Total cost of goods sold for the three and nine months ended September 30, 2020 and 2019 was as follows (in thousands):

Direct costs from contract manufacturers for DSUVIA and Zalviso for the three and nine months ended September 30, 2020 totaled $0.8 million and $1.4 million, respectively, including inventory impairment charges of $0.2 million and $0.6 million, respectively. In the nine months ended September 30, 2020, $0.3 million of these charges related to the termination of the Amended Agreements, while $0.3 million related to DSUVIA, primarily inventory that may expire before being sold. Direct costs from contract manufacturers for DSUVIA and Zalviso for the three and nine months ended September 30, 2019 totaled $1.3 million and $2.0 million, respectively. During the quarter ended September 30, 2019, we recorded an inventory impairment reserve of approximately $0.9 million as a result of an analysis to estimate potential DSUVIA inventory that may expire before being sold. Direct cost of goods sold for DSUVIA and Zalviso includes the inventory costs of the active pharmaceutical ingredient, or API, third-party contract manufacturing costs, estimated warranty costs, packaging and distribution costs, shipping, handling and storage costs.

The indirect costs to manufacture DSUVIA and Zalviso totaled $1.1 million and $3.3 million for the three and nine months ended September 30, 2020, respectively, while the indirect costs to manufacture DSUVIA and Zalviso for the three and nine months ended September 30, 2019 totaled $0.8 million and $3.2 million, respectively. Indirect costs include internal personnel and related costs for purchasing, supply chain, quality assurance, depreciation and related expenses.

Research and Development Expenses

The majority of our operating expenses to date have been for research and development activities related to Zalviso and DSUVIA. Research and development expenses included the following:

We expect to incur future research and development expenditures to support the FDA regulatory review of the Zalviso NDA, once, and if, it is resubmitted. The timing of the resubmission of the Zalviso NDA is in part dependent on the finalization of the FDA’s new opioid approval guidelines and process.

We track external development expenses on a program-by-program basis. Our development resources are shared among all our programs. Compensation and benefits, facilities, depreciation, stock-based compensation, and development support services are not allocated specifically to projects and are considered research and development overhead.

Below is a summary of our research and development expenses during the three and nine months ended September 30, 2020 and 2019 (in thousands, except percentages):

Research and development expenses for the three and nine months ended September 30, 2020 decreased as compared to the three and nine months ended September 30, 2019 and included decreases in Zalviso-related spending and overhead expenses, partially offset by increases in DSUVIA-related spending.

Selling, General and Administrative Expenses 

Selling, general and administrative expenses consisted primarily of salaries, benefits and stock-based compensation for personnel engaged in commercialization, administration, finance and business development activities. Other significant expenses included allocated facility costs and professional fees for general legal, audit and consulting services.

Total selling, general and administrative expenses for the three and nine months ended September 30, 2020 and 2019, were as follows (in thousands, except percentages):

Selling, general and administrative expenses decreased by $3.3 million during the three months ended September 30, 2020, as compared to the three months ended September 30, 2019 and decreased by $3.8 million during the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019. The decrease in the three months ended September 30, 2020 as compared to the three months ended September 30, 2019, is primarily due to net decreases in selling, general and administrative expenses including a $1.8 million reduction in personnel costs, a $1.1 million reduction in DSUVIA commercialization-related expenses, such as travel, and a decrease in business development expenses of $0.3 million. The decrease in the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019, is primarily due to net decreases in selling, general and administrative expenses including a $1.9 million reduction in personnel costs, and a $2.5 million reduction in DSUVIA commercialization-related expenses, such as travel, partially offset by a $1.0 million increase in business development expenses.

In March 2020, we eliminated 30 positions, mainly within the commercial organization. For additional information regarding the Restructuring Costs see Note 1 “Organization and Summary of Significant Accounting Policies” in the accompanying notes to the Condensed Consolidated Financial Statements.

 Other Income (Expense)

Total other expense for the three and nine months ended September 30, 2020 and 2019, was as follows (in thousands, except percentages):