cori_Current folio_10Q

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2017

OR

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                to               .

Commission File Number: 001-36375

Corium International, Inc.

(Exact name of registrant as specified in its charter)

Delaware

 

38-3230774

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification Number)

 

Corium International, Inc.
235 Constitution Drive
Menlo Park, California 94025

(Address of principal executive offices and zip code)

(650) 298-8255

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ☒ No ☐

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”  “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

Large accelerated filer ☐

 

Accelerated filer ☐

 

 

 

Non-accelerated filer ☒ (Do not check if a smaller reporting company)

 

Smaller reporting company ☐

 

 

 

 

 

 

Emerging growth company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☒

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

As of August 8, 2017, there were approximately 35,742,655 shares of the Registrant’s Common Stock outstanding.

 

 

 


 

Table of Contents

TABLE OF CONTENTS

 

 

Page

PART I. FINANCIAL INFORMATION 

 

2

 

 

 

ITEM 1. FINANCIAL STATEMENTS 

 

2

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 

 

18

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 

 

30

ITEM 4. CONTROLS AND PROCEDURES 

 

31

 

 

 

PART II. OTHER INFORMATION 

 

32

 

 

 

ITEM 1. LEGAL PROCEEDINGS 

 

32

ITEM 1A. RISK FACTORS 

 

32

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 

 

72

ITEM 3. DEFAULTS UPON SENIOR SECURITIES 

 

72

ITEM 4. MINE SAFETY DISCLOSURES 

 

72

ITEM 5. OTHER INFORMATION 

 

72

ITEM 6. EXHIBITS 

 

73

SIGNATURES 

 

74

 

 

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Table of Contents

PART I

ITEM 1.FINANCIAL STATEMENTS

CORIUM INTERNATIONAL, INC.

CONDENSED BALANCE SHEETS

(in thousands, except share and per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

As of June 30,

 

As of September 30,

 

 

    

2017

    

2016

    

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

66,563

 

$

39,833

 

Accounts receivable

 

 

4,577

 

 

4,336

 

Unbilled accounts receivable

 

 

260

 

 

346

 

Inventories

 

 

2,521

 

 

2,424

 

Prepaid expenses and other current assets

 

 

1,133

 

 

1,341

 

Total current assets

 

 

75,054

 

 

48,280

 

Restricted cash

 

 

666

 

 

666

 

Property and equipment, net

 

 

12,451

 

 

11,147

 

Intangible assets, net

 

 

7,356

 

 

7,057

 

TOTAL ASSETS

 

$

95,527

 

$

67,150

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

5,404

 

$

2,737

 

Accrued expenses and other current liabilities

 

 

4,925

 

 

4,271

 

Long-term debt, current portion

 

 

54

 

 

77

 

Capital lease obligations, current portion

 

 

 —

 

 

72

 

Recall liability, current portion

 

 

160

 

 

460

 

Deferred contract revenues, current portion

 

 

121

 

 

355

 

Total current liabilities

 

 

10,664

 

 

7,972

 

Long-term debt, net of current portion

 

 

52,040

 

 

50,966

 

Recall liability, net of current portion

 

 

1,808

 

 

1,859

 

Deferred contract revenues, net of current portion

 

 

3,500

 

 

3,500

 

Total liabilities

 

 

68,012

 

 

64,297

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, par value of $0.001 per share, 150,000,000 shares authorized; 35,739,278 and 22,391,631 shares issued and outstanding as of June 30, 2017 and September 30, 2016

 

 

36

 

 

22

 

Additional paid-in capital

 

 

229,817

 

 

170,319

 

Accumulated deficit

 

 

(202,338)

 

 

(167,488)

 

Total stockholders’ equity

 

 

27,515

 

 

2,853

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

95,527

 

$

67,150

 

 

See accompanying notes to condensed financial statements.

 

 

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CORIUM INTERNATIONAL, INC.

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except share and per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Nine Months Ended June 30,

 

 

    

2017

    

2016

    

2017

    

2016

    

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenues

 

$

5,906

 

$

7,264

 

$

16,301

 

$

18,930

 

Contract research and development revenues

 

 

1,936

 

 

1,983

 

 

5,320

 

 

4,228

 

Other revenues

 

 

267

 

 

1,359

 

 

801

 

 

1,947

 

Total revenues

 

 

8,109

 

 

10,606

 

 

22,422

 

 

25,105

 

Costs and operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product revenues

 

 

3,935

 

 

4,626

 

 

10,892

 

 

12,924

 

Cost of contract research and development revenues

 

 

2,977

 

 

2,742

 

 

7,891

 

 

8,601

 

Research and development expenses

 

 

9,122

 

 

5,516

 

 

22,650

 

 

15,566

 

General and administrative expenses

 

 

3,284

 

 

3,116

 

 

9,288

 

 

9,106

 

Amortization of intangible assets

 

 

159

 

 

168

 

 

514

 

 

489

 

Loss on disposal of equipment

 

 

 6

 

 

 —

 

 

 6

 

 

 2

 

Total costs and operating expenses

 

 

19,483

 

 

16,168

 

 

51,241

 

 

46,688

 

Loss from operations

 

 

(11,374)

 

 

(5,562)

 

 

(28,819)

 

 

(21,583)

 

Interest income

 

 

77

 

 

54

 

 

149

 

 

142

 

Interest expense

 

 

(2,087)

 

 

(1,984)

 

 

(6,178)

 

 

(5,932)

 

Loss before income taxes

 

 

(13,384)

 

 

(7,492)

 

 

(34,848)

 

 

(27,373)

 

Income tax expense

 

 

 —

 

 

 —

 

 

 2

 

 

 3

 

Net loss and comprehensive loss

 

$

(13,384)

 

$

(7,492)

 

$

(34,850)

 

$

(27,376)

 

Net loss per share attributable to common stockholders, basic and diluted

 

$

(0.43)

 

$

(0.34)

 

$

 (1.30)

 

$

(1.23)

 

Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted

 

 

31,457,702

 

 

22,321,581

 

 

26,784,678

 

 

22,254,849

 

 

See accompanying notes to condensed financial statements

 

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CORIUM INTERNATIONAL, INC.

Condensed Statement of Stockholders’ Equity

(in thousands, except share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Total

 

 

Common Stock

 

Paid-in

 

Accumulated

 

Stockholders’

 

    

Shares

    

Amount

    

Capital

    

Deficit

    

Equity

Balance - September 30, 2016

 

22,391,631

 

$

22

 

$

170,319

 

$

(167,488)

 

$

2,853

Issuance of common stock in connection with February 2017 public offering, net of issuance costs

 

6,666,667

 

 

 7

 

 

18,507

 

 

 —

 

 

18,514

Issuance of common stock in connection with May 2017 public offering, net of issuance costs

 

6,440,000

 

 

 7

 

 

37,615

 

 

 —

 

 

37,622

Issuance of common stock under Employee Stock Purchase Plan

 

134,855

 

 

 —

 

 

436

 

 

 —

 

 

436

Issuance of common stock upon exercise of stock options

 

98,625

 

 

 —

 

 

229

 

 

 —

 

 

229

Restricted stock units vested and released

 

7,500

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Stock-based compensation expense

 

 —

 

 

 —

 

 

2,711

 

 

 —

 

 

2,711

Net loss and comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

(34,850)

 

 

(34,850)

Balance - June 30, 2017

 

35,739,278

 

$

36

 

$

229,817

 

$

(202,338)

 

$

27,515

 

See accompanying notes to condensed financial statements.

 

 

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CORIUM INTERNATIONAL, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended June 30,

 

 

    

2017

    

2016

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net loss and comprehensive loss

 

$

(34,850)

 

$

(27,376)

 

Adjustments to reconcile net loss to net cash used by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization of property and equipment

 

 

801

 

 

1,375

 

Loss on disposal of equipment

 

 

 6

 

 

 2

 

Amortization of intangible assets

 

 

514

 

 

489

 

Noncash amortized debt issue costs on long-term debt and capital leases

 

 

273

 

 

155

 

Noncash amortized discount on long-term debt and capital leases

 

 

12

 

 

15

 

Stock-based compensation expense

 

 

2,711

 

 

2,540

 

Issuance of payment-in-kind notes in lieu of cash interest payments

 

 

1,369

 

 

1,326

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(241)

 

 

370

 

Unbilled accounts receivable

 

 

86

 

 

295

 

Inventories

 

 

(97)

 

 

72

 

Prepaid expenses and other current assets

 

 

208

 

 

(92)

 

Accounts payable

 

 

2,530

 

 

(748)

 

Accrued expenses and other current liabilities

 

 

110

 

 

(196)

 

Deferred contract revenues

 

 

(234)

 

 

158

 

Recall liability

 

 

(351)

 

 

(558)

 

Net cash used by operating activities

 

 

(27,153)

 

 

(22,173)

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,974)

 

 

(1,056)

 

Payments for patents and licensing rights

 

 

(813)

 

 

(724)

 

Change in restricted cash

 

 

 —

 

 

(666)

 

Net cash used by investing activities

 

 

(2,787)

 

 

(2,446)

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net of issuance costs

 

 

56,136

 

 

 —

 

Payment of transaction costs associated with issuance of long-term debt

 

 

 —

 

 

(200)

 

Principal payments on long-term debt

 

 

(58)

 

 

(53)

 

Principal payments on capital lease obligations

 

 

(73)

 

 

(610)

 

Proceeds from exercise of stock options

 

 

229

 

 

170

 

Proceeds from issuance of common stock under Employee Stock Purchase Plan

 

 

436

 

 

488

 

Net cash provided (used) by financing activities

 

 

56,670

 

 

(205)

 

NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

26,730

 

 

(24,824)

 

CASH AND CASH EQUIVALENTS — Beginning of period

 

 

39,833

 

 

72,218

 

CASH AND CASH EQUIVALENTS — End of period

 

$

66,563

 

$

47,394

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

Cash paid for interest

 

$

4,524

 

$

4,434

 

Cash paid for income taxes

 

$

 4

 

$

 3

 

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Property and equipment purchases included in accounts payable

 

$

310

 

$

65

 

Unpaid transaction costs associated with issuance of long-term debt

 

$

544

 

$

 —

 

 

See accompanying notes to condensed financial statements.

 

 

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CORIUM INTERNATIONAL, INC.

Notes to the Condensed Financial Statements

1.    Organization, Description of Business and Summary of Significant Accounting Policies

Organization

Corium International, Inc., a Delaware corporation (the “Company”), is a commercial-stage biopharmaceutical company focused on the development, manufacture and commercialization of specialty pharmaceutical products that leverage the Company’s broad experience with advanced transdermal and transmucosal delivery systems. The Company refers to its Transdermal Delivery Systems as “TDS.”

In the normal course of business, the Company enters into collaborative agreements with partners to develop and manufacture products based on the Company’s drug delivery technologies and product development expertise. Revenues consist of net sales of products manufactured, royalties and profit-sharing payments based on sales of such products by partners, and product development fees for research and development activities under collaboration agreements with partners. The Company is also engaged in the research and development of its own proprietary transdermal drug delivery products.

The Company’s fiscal year ends on September 30.  References to “fiscal” refer to the years ended September 30.

Basis of Presentation

The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and follow the requirements of the Securities and Exchange Commission (the “SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. The interim balance sheet as of June 30, 2017, statements of operations and comprehensive loss for the three and nine months ended June 30, 2017 and 2016, statement of stockholders’ equity for the nine months ended June 30, 2017, and statements of cash flows for the nine months ended June 30, 2017 and 2016 are all unaudited. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments necessary to present fairly the Company’s financial position as of June 30, 2017, its results of operations for the three and nine months ended June 30, 2017 and 2016, and its cash flows for the nine months ended June 30, 2017 and 2016. The financial data and the other financial information contained in these notes to the financial statements related to the nine-month periods are also unaudited. The results of operations for the nine months ended June 30, 2017 are not necessarily indicative of the results to be expected for the year ending September 30, 2017 or for any future annual or interim period. The balance sheet as of September 30, 2016 has been derived from the audited financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements.

The accompanying condensed financial statements and related financial information should be read in conjunction with the audited financial statements and the related notes thereto for the year ended September 30, 2016 included in the Company’s Annual Report on Form 10-K, which was filed with the SEC on December 20, 2016.

There have been no material changes to the significant accounting policies or recent accounting pronouncements previously disclosed in the Company’s audited financial statements for the year ended September 30, 2016.

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Liquidity

With the exception of fiscal 2013, the Company has incurred losses from operations since fiscal 2006 and has an accumulated deficit of $202.3 million as of June 30, 2017. The Company has financed its operations primarily through the proceeds from the sale of equity securities, and various debt and capital lease financings.

The Company believes that its existing cash and cash equivalents will not be sufficient to fund operations in compliance with its debt covenants as currently planned through the next 12 months, which raises substantial doubt about the Company’s ability to continue as a going concern. The Company has based this belief on assumptions and estimates that may prove to be wrong, and the Company could spend its available financial resources less or more rapidly than currently expected. The Company will continue to require additional sources of cash to develop product candidates and to fund development and commercialization operations.  Management intends to seek additional capital through collaborative or other funding arrangements with partners, equity and/or debt financings, or through other sources of financing. The Company is also pursuing alternatives to its current debt covenants, including refinancing the existing debt. In the event that additional financing is required from outside sources, the Company may not be able to raise such financing on terms acceptable to the Company or at all. If the Company is unable to raise additional capital when required or on acceptable terms, the Company may be required to significantly delay, scale back or discontinue one or more of the product development programs or commercialization efforts or other aspects of the Company’s business plans, and its business, operating results and financial condition would be adversely affected.

The Company is currently in compliance with the covenants under the Company’s term loan agreement with CRG, a structured debt and equity investment management firm. However, the Company anticipates that, based on its current operating plan for products and services currently under contract, and without securing additional sources of external funding, its current cash and cash equivalent balances will not be sufficient to maintain compliance with the minimum liquidity financial covenant through the next 12 months or the minimum annual revenue covenant of $50.0 million for the 12 months ending June 30, 2018. Failure to meet either covenant would be considered an event of default on the Company’s debt obligation, and could result in the acceleration of the Company’s existing indebtedness, causing the outstanding principal of approximately $52.5 million, plus an early prepayment premium and an additional fee, to be immediately due and payable to CRG. As of June 30, 2017, the prepayment premium was 7.5% and the additional fee was 1.0%. The Company may not have sufficient cash and cash equivalents to repay all of the outstanding debt in full if repayment of such debt were accelerated. Due to these uncertainties, there is substantial doubt about the Company’s ability to continue as a going concern.

The unaudited condensed financial statements as of June 30, 2017 have been prepared under the assumption that the Company will continue as a going concern for the next 12 months. The Company’s ability to continue as a going concern is dependent upon its uncertain ability to secure new sources of revenue, obtain additional equity and/or debt financing or refinancing, generate operating efficiencies, reduce expenditures and amend or obtain a waiver on the financial covenants of the existing term loan agreement with CRG.  The unaudited condensed financial statements as of June 30, 2017 do not include any adjustments that might result from the outcome of this uncertainty.

Use of Estimates

Estimates and assumptions are required to be used by management in the preparation of financial statements in conformity with U.S. GAAP that affect the reported amounts of assets, liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of operating revenues and operating expenses during the reporting period. Those estimates and assumptions affect revenue recognition, deferred revenues, impairment of long-lived assets, determination of fair value of stock-based awards and other debt- and equity-related instruments, accounting for clinical trial expenses and accounting for income taxes. As future events and their effects cannot be determined with precision, actual results could differ from those estimates.

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Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents with a single domestic financial institution that is well capitalized. The Company provides credit, in the normal course of business, to its partners and performs credit evaluations of such partners.

For the three and nine months ended June 30, 2017, three partners accounted for 96% and 93% of the Company’s revenues and three partners accounted for 97% of accounts receivable as of June 30, 2017. For the three and nine months ended June 30, 2016, three partners accounted for 84% and 85% of the Company’s revenues. As of September 30, 2016, four partners accounted for 84% of accounts receivable.

Restricted Cash

The Company’s restricted cash consists solely of cash maintained in a separate deposit account used to secure a letter of credit issued by a bank to a former landlord pursuant to a terminated lease agreement. The Company has classified the restricted cash as noncurrent on the condensed balance sheet.

Comprehensive Income (Loss)

For the three and nine months ended June 30, 2017 and 2016, the Company did not recognize any other comprehensive income (loss) and, therefore, the net loss and comprehensive loss was the same for all periods presented.

Reclassifications

The Company reclassified certain balances in the condensed statements of cash flows for prior periods to conform to current presentation.  The reclassifications did not impact total cash flows from operating, investing or financing activities.

2.  Fair Value Measurements

Financial assets and liabilities are recorded at fair value. Except as noted below, the carrying values of the Company’s financial instruments, including cash equivalents, accounts receivable, and accounts payable, approximated their fair values due to the short period of time to maturity or repayment.

Assets and liabilities recorded at fair value on a recurring basis in the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset, or an exit price that would be paid to transfer a liability, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:

Level I —Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

Level II —Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

Level III —Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

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The Company did not have any transfers between Levels I, II and III of the fair value hierarchy during the nine months ended June 30, 2017.  The Company’s policy is to determine the need for transfers between levels at the end of the reporting period when circumstances in the underlying valuation criteria are evaluated for changes requiring transfer between levels.

The Company’s financial assets that are measured at fair value on a recurring basis by level within the fair value hierarchy are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2017

 

 

    

Level I

    

Level II

    

Level III

    

Total

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds 

 

$

67,664

 

$

 —

 

$

 —

 

$

67,664

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2016

 

 

    

Level I

    

Level II

    

Level III

    

Total

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

39,950

 

$

 —

 

$

 —

 

$

39,950

 

The Company did not have Level II or Level III liabilities as of June 30, 2017 and September 30, 2016.

The carrying values of the Company’s long-term debt reflects the principal amount, adjusted for any unamortized debt issuance costs and discount. The following financial liabilities have carrying values that differ from their fair value as estimated by the Company based on market quotes for instruments with similar terms and remaining maturities (Level III valuation) (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2017

 

 

    

Carrying

    

Fair

    

 

 

 

 

 

Value 

 

Value 

 

Difference 

 

Long-term debt

 

$

52,094

 

$

52,971

 

$

877

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2016

 

 

    

Carrying

    

Fair

    

 

 

 

 

 

Value 

 

Value 

 

Difference 

 

Long-term debt

 

$

51,043

 

$

51,649

 

$

606

 

 

 

3.  Inventories

Inventories consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

As of June 30,

 

As of September 30,

 

 

    

2017

    

2016

    

Raw materials

 

$

1,430

 

$

1,307

 

Work in process

 

 

366

 

 

411

 

Finished goods

 

 

725

 

 

706

 

Total inventories

 

$

2,521

 

$

2,424

 

 

 

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4. Long-Term Debt

Outstanding long-term debt consists of the following (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

As of June 30,

 

As of September 30,

 

 

 

    

2017

    

2016

    

 

Term loan agreement expiring June 30, 2019, less unamortized issuance costs of $817 and $544 and unamortized discount of $31 and $43 as of June 30, 2017 and September 30, 2016. See terms of the agreement below.

 

$

51,654

 

$

50,546

 

 

Notes payable to lessor for tenant improvements. The note calls for monthly payments of principal and interest of $3 at an interest rate of 7% and is due September 2017

 

 

 9

 

 

34

 

 

Notes payable to lessor for tenant improvements. The note calls for monthly payments of principal and interest of $6 at an interest rate of 7% and is due November 2024

 

 

431

 

 

463

 

 

Total

 

 

52,094

 

 

51,043

 

 

Less current portion

 

 

54

 

 

77

 

 

Long-term portion

 

$

52,040

 

$

50,966

 

 

On July 13, 2012, the Company completed a $35.0 million term loan agreement with CRG, a structured debt and equity investment management firm. In August 2012 and December 2012, the Company drew down $29.0 million and $6.0 million under this agreement. On November 14, 2014, the agreement was amended to, among other things, increase the principal amount available under the term loan by $10.0 million, extend the interest-only period to June 30, 2018, and extend the maturity from June 30, 2017 to June 30, 2019. The amended agreement provides for a maximum borrowing of $45.0 million, excluding PIK notes, as defined below. The amended agreement requires interest to be paid quarterly at a simple annual rate of 15%, and all outstanding principal be repaid in four equal quarterly payments beginning on June 30, 2018, with interest continuing to accrue on the unpaid principal at a simple annual rate of 15%. In addition, the amended agreement contains a provision whereby the Company can, at each quarterly payment due date prior to June 30, 2018, choose to convert that portion of each quarterly interest obligation equal to 3.5% of the then-outstanding principal into additional notes (payment-in-kind (“PIK”) notes). Amounts outstanding under the term loan agreement are collateralized by all of the Company’s assets. The amended agreement also provides for an early prepayment premium, the amount of which varies with the date on which prepayment is made, if the Company chooses to repay principal prior to June 30, 2018 or upon other specified events, including a change of control. On December 4, 2014, the Company borrowed the remaining $10.0 million of principal provided for in the amended agreement. As of June 30, 2017 and September 30, 2016, the Company had converted $7.5 million and $6.1 million of interest into PIK notes, each of which added to the then-outstanding principal and is included in the balances shown as of those dates. As of June 30, 2017, the principal amount outstanding under the term loan agreement, including all PIK notes, was $52.5 million.

The term loan agreement was amended in December 2016 to modify the financial covenants for minimum annual revenues (beginning with the 12 months ended June 30, 2017) in exchange for a fee equal to 1.0% of the aggregate principal amount of all loans and PIKs advanced by CRG to the Company under the term loan agreement. This fee will be due upon the loan maturity date of June 30, 2019 or upon the earlier acceleration of the loan pursuant to its terms.  Based on the current loan balance and projected PIK borrowings, this fee is expected to be approximately $0.5 million. The Company has been in continuous compliance with the financial covenants since the inception of the loan.

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5. Contingencies

The Company may be subject to legal proceedings and litigation arising in the ordinary course of business. Management is not aware of any legal matters in which the final disposition is expected to have a material effect on the business, except as noted below.

On September 23, 2016, a complaint was filed against the Company by LBA Realty Fund III-Company VII, LLC, a Delaware Limited Liability Company (the “Landlord”), in the Superior Court of California, County of Alameda, LBA Realty Fund III-Company VII, LLC vs. Corium International, Inc., alleging breach of contract with respect to the lease agreement dated February 12, 2016 between the Landlord and the Company. The complaint alleges that the Company breached the lease when the Company provided written notice to the Landlord to terminate the lease on July 29, 2016 and seeks damages in excess of $10.0 million as well as declaratory relief. On or about November 16, 2016, the Company filed its answer generally denying the allegations and setting forth its defenses.  At the same time, the Company filed a cross-complaint seeking compensatory damages, among other relief, for the Landlord’s material breaches with respect to the lease agreement.  The parties are currently engaged in discovery. The parties have also participated in an initial mediation, and may participate in further mediation after further discovery has taken place. A Case Management Conference has been scheduled for January 23, 2018. A trial date of May 11, 2018 has been set. At this time, the Company is unable to assess whether any loss or adverse effect on the Company’s financial condition is reasonably possible as a result of this lawsuit or to estimate the range of any potential losses.  Accordingly, the Company has not accrued any liability associated with this complaint. The Company does not believe that this lawsuit has any merit, and plans to defend vigorously against this claim, while prosecuting its cross-complaint.

6.  Collaboration and Partner Arrangements

The Company has recognized the following revenues from its collaboration and partner agreements (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Nine Months Ended June 30,

 

 

 

    

2017

    

2016

    

2017

    

2016

    

 

Mayne

 

$

2,207

 

$

 —

 

$

4,411

 

$

 —

 

 

Teva

 

 

 —

 

 

2,708

 

 

 —

 

 

5,504

 

 

Endo / Par

 

 

 —

 

 

1,853

 

 

363

 

 

5,445

 

 

P&G

 

 

4,406

 

 

4,392

 

 

12,519

 

 

10,294

 

 

Agile

 

 

1,154

 

 

767

 

 

4,014

 

 

2,182

 

 

Other

 

 

342

 

 

886

 

 

1,115

 

 

1,680

 

 

Total revenues

 

$

8,109

 

$

10,606

 

$

22,422

 

$

25,105

 

 

Included in total revenues above are royalties and profit sharing, which totaled $0.1 million and $0.7 million for the three and nine months ended June 30, 2017, compared to $0.5 million and $1.7 million for the corresponding periods in 2016.

In March 2017, Mayne acquired the marketing rights to the Fentanyl Transdermal Delivery System, or Fentanyl TDS, manufactured by the Company.  This product is an AB-rated generic equivalent to Duragesic®, indicated for the management of pain in opioid-tolerant patients.

On April 25, 2017, the Company and P&G entered into a commercial supply agreement (the “P&G Supply Agreement”), effective May 1, 2017.  Pursuant to the P&G Supply Agreement, the Company will continue to produce and supply to P&G oral care products that are sold under the brand name Crest Whitestrips, at specified pricing levels. The P&G Supply Agreement will remain in effect until March 31, 2022, absent early termination for material uncured breach.

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7.  Warrants

The Company issued warrants to purchase shares of the Company's capital stock as part of several transactions occurring from fiscal 2008 through fiscal 2013. The warrants were recorded as equity instruments at the date of their issuances based on the terms of the warrants.

As of June 30, 2017 and September 30, 2016, warrants to purchase 51,386 shares of common stock, on an as‑converted basis, were outstanding with a weighted-average exercise price of $9.26 per share. All of the common stock warrants are exercisable at any time up to ten years from issuance. These warrants expire at various dates between December 2020 and November 2021. The fair value of these warrants was recorded in stockholders’ equity upon issuance.

8.  Convertible Preferred Stock, Common Stock and Stockholders' Equity

Convertible Preferred Stock

The Company was authorized to issue up to 5.0 million shares of preferred stock as of June 30, 2017 and September 30, 2016 with a par value of $0.001 per share. No preferred stock was outstanding as of those dates.

Common Stock

In May 2017, the Company completed an underwritten public offering pursuant to an effective shelf registration statement on Form S-3 (File No. 333-208800) of 6,440,000 shares of common stock, including 840,000 shares sold upon full exercise of the underwriters' option to purchase additional shares of common stock, at a public offering price of $6.25 per share.  The Company received net proceeds of $37.6 million after deducting underwriting discounts and commissions and other issuance costs and expenses of $2.6 million.

In February 2017, the Company completed an underwritten public offering pursuant to an effective shelf registration statement on Form S-3 (File No. 333-204025) of 6,666,667 shares of common stock at a public offering price of $3.00 per share.  The Company received net proceeds of $18.5 million after deducting underwriting discounts and commissions and other issuance costs and expenses of $1.5 million.

The Company was authorized to issue up to 150.0 million shares of common stock as of June 30, 2017 and September 30, 2016 with a par value of $0.001 per share. As of June 30, 2017, there were 35,739,278 shares of common stock outstanding and as of September 30, 2016, there were 22,391,631 shares of common stock outstanding.

Controlled Equity Offering

In December 2015, the Company entered into a Controlled Equity OfferingSM Sales Agreement with Cantor Fitzgerald & Co., as agent (“Cantor Fitzgerald”), pursuant to which the Company may offer and sell, from time to time through Cantor Fitzgerald, shares of its common stock, par value $0.001 per share, with aggregate proceeds of up to $20.0 million. The offer and sale of these shares will be made pursuant to a shelf registration statement on Form S-3 and the related prospectus (File No. 333-204025) filed by the Company with the SEC on May 8, 2015 and declared effective by the SEC on May 21, 2015, as supplemented by a prospectus supplement dated and filed with the SEC on December 30, 2015. The Company will pay Cantor Fitzgerald a commission of 3.0% of the aggregate gross proceeds from any shares of common stock sold by Cantor Fitzgerald. The Company has not sold any shares of common stock under this sales agreement.

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9.  Stock-Based Compensation

Equity Incentive Plans

As of June 30, 2017 and September 30, 2016, the Company had three equity incentive plans, all of which are sponsored by the Company. On March 19, 2014, the Company’s board of directors approved the adoption of the 2014 Equity Incentive Plan (the "2014 Plan"), which is the only plan under which the Company currently can issue shares. Under the 2014 Plan, the Company had initially reserved a total of 1.0 million shares of common stock plus the remaining unissued shares under the Company's 2012 Equity Incentive Plan (the "2012 Plan"), which was adopted in 2012 and was replaced by the 2014 Plan. The 2014 Plan provides for the grant of incentive stock options (ISOs), nonstatutory stock options (NSOs), stock appreciation rights, restricted stock awards, restricted stock unit awards, stock bonus awards, performance-based stock awards, and other forms of equity compensation, all of which may be granted to employees (including officers), non-employee directors and consultants of the Company. The Company also sponsored the 2002 Stock Option Plan that expired in 2012. The term “Corium Plans” refers to the 2014 Plan, the 2012 Plan and the 2002 Stock Option Plan.

On January 1 of each year during the ten-year term of the 2014 Plan, the number of shares of common stock issuable under the 2014 Plan will be automatically increased by up to 4% of the number of shares of common stock outstanding as of the preceding December 31, unless a lesser number of shares is agreed to by the Company’s board of directors. On January 10, 2017 and January 11, 2016, the Company’s board of directors authorized an increase of 902,298 and 888,776 shares to be added to the total number of shares of common stock issuable under the 2014 Plan. As of June 30, 2017 and September 30, 2016, the Company had reserved 5,326,153 and 4,529,980 shares of common stock for issuance pursuant to the 2014 Plan. As of June 30, 2017 and September 30, 2016, the Company had 1,165,519 and 1,192,476 shares of common stock available for issuance pursuant to the 2014 Plan.

Stock Options

The exercise price of each stock option granted under the Corium Plans is required to be no less than the fair market value of the Company’s common stock on the date of the grant. The maximum term of stock options granted under the Corium Plans is ten years and the vesting period is typically four years.

A summary of stock option activity under the Corium Plans during the nine months ended June 30, 2017 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Weighted

    

Weighted
Average

    

 

 

 

 

 

Stock

 

Average

 

Remaining

 

Aggregate

 

 

 

Options

 

Exercise

 

Contractual

 

Intrinsic Value

 

 

 

Outstanding

 

Price

 

Life (Years)

 

(In thousands)

 

Balance - September 30, 2016

 

3,307,504

 

$

4.69

 

6.57

 

$

5,538

 

Options granted

 

868,450

 

$

4.54

 

 

 

 

 

 

Options exercised

 

(98,625)

 

$

2.33

 

 

 

 

 

 

Options forfeited / cancelled

 

(19,195)

 

$

7.00

 

 

 

 

 

 

Balance - June 30, 2017

 

4,058,134

 

$

4.70

 

6.72

 

$

12,074

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercisable - June 30, 2017

 

2,696,450

 

$

4.16

 

5.71

 

$

9,359

 

 

 

 

 

 

 

 

 

 

 

 

 

Options vested and expected to vest - June 30, 2017

 

3,926,337

 

$

4.67

 

6.65

 

$

11,794

 

All outstanding stock options under the Corium Plans as of June 30, 2017 have an exercise price between $2.12 and $14.12 per share.

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The weighted-average fair value of the stock options granted for the nine months ended June 30, 2017 were estimated using the Black-Scholes option-pricing model with the following assumptions:

 

 

 

 

 

 

 

 

 

Nine Months Ended 

 

 

June 30, 2017

Expected term (in years)

 

5.27

 

-

6.77

 

Risk-free interest rate

 

2.00

%

-

2.31

%

Expected volatility

 

76

%

-

79

%

Expected dividend rate

 

 

 

0

%

 

Expected Term — The expected term represents the period that the stock-based awards are expected to be outstanding before exercise or cancellation. As the Company's historical share exercise experience has not yet provided a reasonable basis upon which to estimate expected term because of a lack of sufficient data points, the Company estimated the expected term by using the midpoint between the vesting commencement date and the contractual expiration period of the stock-based awards.

Risk-Free Interest Rate — The risk-free interest rate is based on the constant maturity yields of U.S. Treasury notes with remaining maturities similar to the expected term.

Expected Volatility — Because the Company has limited information on the volatility of its common stock due to limited historical data regarding the volatility of its common stock, the expected volatility used is based on the volatility of a group of comparable publicly-traded companies. In evaluating comparability, the Company considered factors such as industry, stage of life cycle and size. The Company will continue to analyze the historical stock price volatility and term assumptions as more historical data for the Company's common stock becomes available.

Expected Dividend Rate — The Company has never paid any dividends, does not plan to pay dividends in the foreseeable future, and, therefore, uses an expected dividend rate of zero in the valuation model.

Restricted Stock Unit Awards

The fair value of restricted stock unit awards is determined on the grant date based on the fair market value of the Company’s common stock on the date of the grant. The restricted stock unit awards granted under the 2014 Plan have a maximum term of ten years and typically vest over a four-year period.

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A summary of restricted stock unit award activity under the Corium Plans during the nine months ended June 30, 2017 is as follows:

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

Average

 

 

Number of

 

Grant Date

 

 

Shares

 

Fair Value

Nonvested - September 30, 2016

 

30,000

 

$

7.94

Granted

 

80,000

 

 

4.59

Vested and released

 

(7,500)

 

 

7.94

Forfeited

 

 —

 

 

 —

Nonvested - June 30, 2017

 

102,500

 

$

5.33

2014 Employee Stock Purchase Plan

On March 19, 2014, the Company's board of directors approved the adoption of the 2014 Employee Stock Purchase Plan (the "2014 ESPP"), with 310,000 shares initially reserved for issuance. The 2014 ESPP is intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code of 1986 with the purpose of providing employees with an opportunity to purchase the Company's common stock through accumulated payroll deductions.

On January 1 of each year during the ten-year term of the plan, the number of shares issuable under the 2014 ESPP can be increased by up to 1% of the number of shares of common stock and common stock equivalents outstanding as of the preceding December 31, or a lesser number agreed to by the Company’s board of directors. On January 10, 2017 and January 11, 2016, the Company’s board of directors reserved an additional 267,565 and 257,631 shares of common stock for issuance pursuant to the 2014 ESPP. No more than 4.0 million shares may be issued over the ten-year term of the 2014 ESPP without the consent of the Company's stockholders. As of June 30, 2017 and September 30, 2016, there were 636,399 and 503,689 shares of common stock available for issuance pursuant to the 2014 ESPP.

For the three and nine months ended June 30, 2017, the Company recorded stock-based compensation expense related to the 2014 ESPP of $60,000 and $224,000, compared to $79,000 and $217,000 for the corresponding periods in 2016. For the nine months ended June 30, 2017 and 2016, the Company issued 134,855 and 126,471 shares of common stock to employees related to the 2014 ESPP.

The fair value of the purchase rights granted under the 2014 ESPP for each of the two year offering periods beginning May 20, 2016, November 20, 2016 and May 20, 2017 were estimated by applying the Black-Scholes option-pricing model to each of the four purchase periods in the offering period using the following assumptions:

 

 

 

 

 

 

 

 

 

 

    

As of

 

 

June 30, 2017

Fair value of common stock

 

$

3.79

 

$

6.54

 

Grant price

 

$

3.22

 

$

5.56

 

Expected term (in years)

 

 

0.50

 

 

2.00

 

Expected volatility

 

 

70

%

 

98

%

Risk-free interest rate

 

 

0.77

%

 

1.28

%

Expected dividend rate

 

 

 

 

0

%

 

 

Fair Value of Common Stock — The fair market value of the Company’s common stock on the first day of each offering period, or $3.79, $4.82 and $6.54 for the offering periods commencing May 20, 2016, November 20, 2016 and May 20, 2017.

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Grant Price — 85% of the fair market value of the Company’s common stock on the first day of each two year offering period, or $3.22, $4.10 and $5.56 for the offering periods commencing May 20, 2016, November 20, 2016 and May 20, 2017.

Expected Term — The expected term is based on the end dates of the four purchase periods of each two year offering period, which are six, twelve, eighteen or twenty-four months from the commencement of each new offering period.

Expected Volatility — The expected volatility is based on the historical volatility of the Company’s common stock over each of the expected terms.

Risk-Free Interest Rate — The risk-free interest rate is based on the constant maturity yields of U.S. Treasury notes with remaining maturities similar to each expected term.

Expected Dividend Rate — The Company has never paid any dividends, does not plan to pay dividends in the foreseeable future, and, therefore, uses an expected dividend rate of zero in the valuation model.

Stock-Based Compensation Expense

Employee stock-based compensation expense for the three and nine months ended June 30, 2017 and 2016 is classified in the condensed statements of operations and comprehensive loss as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Nine Months Ended June 30,

 

 

 

    

2017

    

2016

    

2017

    

2016

    

 

Cost of product revenues

 

$

93

 

$

92

 

$

300

 

$

255

 

 

Cost of contract research and development revenues

 

 

61

 

 

54

 

 

169

 

 

146

 

 

Research and development

 

 

174

 

 

177

 

 

501

 

 

517

 

 

General and administrative

 

 

592

 

 

569

 

 

1,741

 

 

1,622

 

 

Total stock-based compensation

 

$

920

 

$

892

 

$

2,711

 

$

2,540

 

 

As of June 30, 2017, there was a total of $5.3 million of unrecognized employee stock-based compensation expense, net of estimated forfeitures, related to unvested stock-based awards under the Corium Plans, which is expected to be recognized on a straight-line basis over a weighted-average period of approximately 2.3 years.

10.  Product Recall Liability

In fiscal 2008 and fiscal 2010, Allergan, plc, formerly known as Actavis, Inc. (“Actavis”) issued two voluntary recalls of certain lots and strengths of Fentanyl TDS manufactured by the Company and sold and distributed at that time by Actavis in the United States. The Company and Actavis negotiated financial settlements for these two recalls, and the Company accrued amounts related to these settlements in fiscal 2009 and 2011. These recall liabilities were subsequently reduced through various mechanisms per the terms of the settlement agreements.

In October 2012, the Company reached a revised settlement related to the two recalls, which provided for a total and combined remaining liability of $5.0 million as of the settlement date. The revised liability will be repaid through quarterly payments in arrears based on a percentage of the average of the total net revenues recorded by the Company in those prior periods related to Fentanyl TDS, and may be pre-paid by the Company in its discretion. These quarterly payments have been paid to Actavis since July 1, 2013. In April 2017, the Company and Actavis mutually agreed to extend the provision for quarterly payments through April 1, 2019, and agreed that, to the extent that the revised settlement liability has not been fully repaid as of April 30, 2019, the remaining liability, if any, will be converted into the most recent form of capital stock issued by the Company in connection with a financing, at the price per share of that financing. The revised liability does not accrue interest.

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During the three and nine months ended June 30, 2017, the Company made settlement payments to Actavis of $0.1 million and $0.3 million compared to $0.2 million and $0.6 million for the corresponding periods in 2016. The outstanding balance of the recall liability was $2.0 million and $2.3 million as of June 30, 2017 and September 30, 2016.

11.  Net Loss and Net Loss per Share Attributable to Common Stockholders

The following table sets forth the computation of the Company's basic and diluted net loss per share attributable to common stockholders during the three months ended June 30, 2017 and 2016 (in thousands, except share and per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended 

 

 

 

June 30,

 

June 30,

 

 

    

2017

    

2016

    

2017

    

2016

 

Basic and diluted net loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders, basic and diluted

 

$

(13,384)

 

$

(7,492)

 

$

(34,850)

 

$

(27,376)

 

Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted

 

 

31,457,702

 

 

22,321,581

 

 

26,784,678

 

 

22,254,849

 

Net loss per share attributable to common stockholders, basic and diluted

 

$

(0.43)

 

$

(0.34)

 

$

(1.30)

 

$

(1.23)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended 

 

 

 

 

June 30,

 

June 30,

 

 

 

    

2017

    

2016

    

2017

    

2016

 

 

Stock options to purchase common stock

 

4,058,134

 

3,375,820

 

4,058,134

 

3,375,820

 

 

Unvested restricted stock unit awards

 

102,500

 

30,000

 

102,500

 

30,000

 

 

Shares authorized under the 2014 ESPP

 

636,399

 

503,689

 

636,399

 

503,689

 

 

Common stock warrants

 

51,386

 

51,386

 

51,386

 

51,386

 

 

 

 

12.  Income Taxes

The Company did not record a provision for Federal income taxes for the nine months ended June 30, 2017 because it expects to generate a net operating loss for the year ending September 30, 2017. The income tax expense of $2,000 and $3,000 for the nine months ended June 30, 2017 and 2016 represents minimum statutory payments due in the states in which the Company is subject to taxation. The Company’s deferred tax assets continue to be fully offset by a valuation allowance.

13.  Segment and Enterprise-Wide Information

The Company’s chief operating decision maker is its President and Chief Executive Officer. The President and Chief Executive Officer reviews the Company’s operating results on an aggregate basis for purposes of allocating resources and evaluating financial performance. The Company has one business activity and there are no segment managers who are held accountable for operations or operating results for levels or components.  Accordingly, the Company has a single reporting segment and operating unit structure.

All of the Company’s revenues are derived from partners conducting their business involving the Company’s products and services primarily in North America and all long-lived assets are located in the United States.

 

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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the (1) unaudited condensed financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and (2) the audited financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended September 30, 2016 included in the Annual Report on Form 10-K for the year ended September 30, 2016, and filed with SEC on December 20, 2016. This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). These statements are often identified by the use of words such as “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect,” “seek” and similar expressions or variations. Such forward‑looking statements may include, but are not limited to, our plans and strategy for our business, and are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward‑looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors”, set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q and in our other SEC filings. We disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Our fiscal year ends September 30. Throughout this discussion and analysis, references to “fiscal,” “fiscal year” or “fiscal years” refer to years ended September 30.

Company Overview

We are a commercial-stage biopharmaceutical company focused on the development, manufacture and commercialization of specialty pharmaceutical products that leverage our broad experience with advanced transdermal and transmucosal delivery systems. We have multiple proprietary programs in preclinical and clinical development focusing primarily on the treatment of neurological disorders, with two lead programs in Alzheimer’s disease. We have developed and are the sole commercial manufacturer of seven prescription drug and consumer products for our marketing partners. We have two proprietary transdermal platforms: Corplex™ for small molecules and MicroCor®, a biodegradable microstructure technology for small molecules and biologics, including vaccines, peptides and proteins.  In addition to our proprietary Alzheimer’s program, our late-stage pipeline includes a contraceptive patch co-developed with Agile Therapeutics, or Agile, and additional transdermal products that are being developed with other partners.

We have built significant know-how and experience in the development, scale-up and manufacture of complex specialty products, and have formed relationships with our partners that include both the development of new product formulations and our manufacture of the resulting products. Our partners include Mayne Pharma Inc., or Mayne, The Procter & Gamble Company, or P&G, Agile, and Aequus Pharmaceuticals, Inc., or Aequus, as well as several other multinational pharmaceutical companies. All of our current commercial products are distributed, promoted and marketed by our partners.

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The following table identifies: (1) products we have developed that are marketed by our partners, (2) products we have developed with our partners that are in clinical trials and that our partners have permitted us to disclose, (3) products in our proprietary pipeline, and (4) products currently awaiting Food and Drug Administration, or FDA, approval.

 

 

 

 

 

 

 

Partner

 

Product/Candidate

 

Application

 

Status

Mayne

 

Clonidine TDS

 

Hypertension

 

Marketed

Mayne

 

Fentanyl TDS

 

Pain

 

Marketed

P&G

 

Crest Whitestrips (5 Products)

 

Teeth Whitening

 

Marketed

Agile

 

Twirla

 

Contraception

 

NDA Filed

Self-funded

 

Donepezil TDS

 

Alzheimer's

 

Pilot Bioequivalence

Self-funded

 

MicroCor hPTH(1-34)

 

Osteoporosis

 

Phase 2a Completed

Self-funded

 

Memantine TDS

 

Alzheimer's

 

Phase 1

Aequus

 

Aripiprazole TDS

 

Psychiatric Disorders

 

Phase 1

Self-funded

 

Ropinirole TDS

 

Parkinson's

 

Preclinical

Self-funded

 

MicroCor Zolmitriptan

 

Migraine

 

Preclinical

Mayne

 

ANDA

 

Motion Sickness

 

ANDA Filed

In August 2016, Mayne acquired the commercial rights to the Clonidine Transdermal Delivery System, or Clonidine TDS, and the product-related agreements from Teva Pharmaceuticals USA, Inc., or Teva, as a result of a Federal Trade Commission, or FTC, consent order in which Teva agreed to divest the product in connection with Teva’s acquisition of the generic business of Allergan, plc, or Allergan. Mayne currently sells Clonidine TDS throughout the United States. The product was originally developed in 2004, with Barr Laboratories, Inc., or Barr, and was commercially launched in 2010 by Barr’s successor, Teva.

In March 2017, Mayne acquired the commercial rights to Fentanyl TDS from Par Pharmaceuticals, or Par. Par had originally acquired the product as a result of an FTC-mandated divestiture of Fentanyl TDS from Actavis Inc., or Actavis, in connection with the merger of Actavis with Watson Pharmaceuticals, Inc. Mayne currently sells Fentanyl TDS throughout the United States. We began the development of Fentanyl TDS with Abrika LLLP in May 2002, and Abrika was subsequently acquired by Actavis in 2007. Actavis commercially launched Fentanyl TDS in 2007.

Our partnership with P&G began in 2005 with the development of the various products under the Crest® Whitestrips label, the first of which P&G commercially launched in 2009. P&G currently sells Crest Whitestrips products in North America and internationally.

In addition to commercialized products, we have a number of product candidates in late stages of development. One of these products is Twirla, which is an investigational combination hormonal contraceptive transdermal patch designed to deliver two hormones, ethinyl estradiol and levonorgestrel, at levels comparable to low-dose oral contraceptives over seven days. In January 2017, Agile announced top-line data from a completed Phase 3 clinical trial that it had initiated after receipt of a Complete Response Letter from the FDA in connection with its previous New Drug Application, or NDA, filing. In June 2017, Agile resubmitted its NDA and the FDA has notified Agile of its acceptance of the resubmitted NDA for review.  Agile has reported that the Prescription Drug User Fee Act, or PDUFA, goal date for the NDA is December 26, 2017. We are the exclusive manufacturer of this product for Agile.

We are developing several additional products utilizing our proprietary technologies that we advanced into human clinical trials during 2015 and 2016. Our two lead central nervous system product candidates are for the transdermal treatment of Alzheimer’s disease and incorporate the two most commonly-prescribed drugs already approved by the FDA for this disease: donepezil and memantine.

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Our donepezil and memantine product candidates first entered into Phase 1 clinical trials in the fourth fiscal quarter of 2015, and we announced positive results for several donepezil and memantine clinical trials in fiscal 2016. In April 2016, we received positive feedback from the FDA on our pre-Investigational New Drug, or pre-IND, submission that outlined our proposed 505(b)(2) regulatory pathway for Corplex Donepezil based on a demonstration of bioequivalence. Specifically, the FDA advised us that if we can adequately demonstrate bioequivalence between Corplex Donepezil and oral Aricept in our planned bioequivalence studies, additional clinical efficacy studies would not be required. Bioequivalence clinical studies are designed to assess the biological equivalence of pharmaceutical products based on their pharmacokinetic, or PK, profiles, and are generally performed in healthy subjects. These studies are relatively short in duration and provide a development path that is generally less costly and more streamlined than typical clinical development programs, which require studies demonstrating safety and efficacy.

Additionally, in August 2016, after review of our pre-IND submission of Corplex Memantine, the FDA concurred with our development plans for this product, including our proposal for a pivotal study based on the demonstration of bioequivalence between the Corplex Memantine and oral Namenda XR® extended release capsules.

In late fiscal 2016, we initiated our pilot bioequivalence study for Corplex Donepezil, and we completed the study in April 2017. The pilot bioequivalence study was a six-month, three-period, randomized crossover study comparing the steady-state pharmacokinetic profiles of once-daily oral Aricept with two Corplex Donepezil transdermal patches that differed only in size. Based on the results of our earlier one-week Phase 1 PK study comparing Corplex Donepezil with oral Aricept, we projected that at steady state, the maximum plasma concentration and the area under the curve of plasma concentration of donepezil with the Corplex patch over the course of a week would be similar to the same measurements of oral Aricept. Data from the pilot study indicated that the smaller of the two Corplex Donepezil product candidates successfully met the statistical criteria for bioequivalence to oral Aricept using the primary PK parameters of maximum plasma concentration, or Cmax, and area under the curve, or AUC, previously established with the FDA. Both Corplex transdermal treatments were well tolerated, with favorable adhesion, skin safety and gastrointestinal side effect profiles after application of over 500 patches in the course of the study. For example, the incidence of nausea in subjects on the smaller patch was more than four-fold lower than the incidence of nausea with oral Aricept. Data from the pilot trial was used to establish the final parameters of the pivotal study, including the number of subjects required and the final patch size, which we are initiating in the third calendar quarter of 2017. Topline results from this trial are expected in the first calendar quarter of 2018, which would keep us on track to file a Section 505(b)(2) NDA for this product candidate in the second half of calendar 2018.

We are currently focusing our resources and clinical development efforts on Corplex Donepezil, the highest priority of our proprietary programs, and plan to defer the next stage of clinical trials for our other proprietary programs, including Corplex Memantine, pending further progress on our donepezil program. We anticipate following the same bioequivalence-based development pathway for Corplex Memantine that we are following for Corplex Donepezil.

Our proprietary pipeline also includes Corplex Ropinirole for the treatment of Parkinson’s disease. Parkinson’s disease is the second most common neurodegenerative disorder after Alzheimer’s disease and many Parkinson’s patients have trouble swallowing pills. We have performed the preclinical development work on a transdermal formulation of ropinirole, a proven and FDA-approved dopamine agonist for treating Parkinson’s disease. We anticipate developing this patch under a 505(b)(2) regulatory pathway, which we believe will allow for reduced nonclinical and clinical study cost and time.

MicroCor hPTH(1-34) is a clinical-stage product candidate utilizing our MicroCor technology.  In July 2015, we reported positive interim top-line results from a Phase 2a trial of this product candidate, which delivers parathyroid hormone, a peptide for treating osteoporosis that is currently available only in an injectable form that requires refrigeration. We have also conducted preclinical development on a MicroCor Zolmitriptan product candidate for the treatment of migraine headaches. Given the relatively larger opportunities represented by our Alzheimer’s programs, we currently plan to pursue development of these MicroCor-based candidates only if a partner-funded agreement is secured.

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In April 2015, we entered into an agreement with Aequus to develop new transdermal products with an initial focus on neurological and psychiatric disorders. The first project under this collaboration is a multi-day transdermal formulation of aripiprazole, a drug already approved by the FDA for the treatment of a variety of psychiatric conditions. Aequus reported positive results from a single dose Phase 1 bioavailability clinical trial in the first calendar quarter of 2016 and in April 2017 announced positive results from a follow-up repeat dose 28-day study to evaluate the bioavailability and safety of this product candidate.

We also have ongoing feasibility and development agreements with several pharmaceutical and biotechnology companies involving our Corplex and MicroCor technologies, and are currently in active discussions with other parties for additional feasibility and partnering projects.

Components of Statements of Operations

Revenues

During the nine months ended June 30, 2017 and 2016, we recognized revenues in three categories: product revenues, contract research and development revenues, and other revenues.

Product Revenues —Product revenues consist of product sales to our partners and royalties and profit sharing from products that have been sold by our partners. Clonidine TDS, Fentanyl TDS and Crest Whitestrips provided all of our product revenues during the nine months ended June 30, 2017 and 2016.

Our product revenues from Clonidine TDS consisted of revenues from the sale of products we manufactured and shipped to Teva and Mayne, along with profit sharing from the net profits earned by Teva and Mayne on their sales of the product. For the nine months ended June 30, 2017, product revenues related to Clonidine TDS decreased, compared to the same period in 2016. We expect that our product revenues from Clonidine TDS in fiscal 2017 will be lower than fiscal 2016 as a result of a decline in market pricing and the number of units Mayne expects to sell.

Our product revenues from Fentanyl TDS consisted of revenues from the sale of products we manufactured and shipped to Par, a wholly-owned subsidiary of Endo Pharmaceuticals, or Endo, and Mayne. Product revenues related to Fentanyl TDS declined for the nine months ended June 30, 2017, compared to the same period in 2016, as a result of a significant decrease in demand and the continued impact of increased competition from other generic companies. In March 2017, Mayne acquired the product from Par, and although orders and forecasts have increased since Mayne acquired the product, we expect that our product revenues from Fentanyl TDS in fiscal 2017 will be lower than fiscal 2016 as a result of this transition and increasing competition.

Product revenues from Crest Whitestrips consisted of revenues from the sale of products manufactured and shipped to P&G. Revenues increased for the nine months ended June 30, 2017, compared to the same period in 2016, as a result of increased demand for current products, the launch of a new product in fiscal 2016, and global expansion of the products. We expect product revenues from P&G to be higher in fiscal 2017, as compared to fiscal 2016, as demand for current products has increased.  We are reaching the limits of our current production capacity for Crest Whitestrips, but expect to have completed the ongoing expansion of our capacity to meet the growing demand by the second half of fiscal 2018.

Contract Research and Development Revenues —We also generate revenues from agreements with our partners for the research, development and scale-up activities of new products. The terms of our agreements with these partners may include nonrefundable upfront payments, partial or complete reimbursement of research and development costs, and milestone payments. Contract research and development revenues increased for the nine months ended June 30, 2017, compared to the same period in 2016, due primarily to our development activities related to Twirla.  We expect our revenues from contract research and development to increase in fiscal 2017, as compared to fiscal 2016.  Beyond fiscal 2017, we expect our revenues from contract research and development to decline until we enter later stages of development or initiate new product programs with partners.

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Other Revenues —Other revenues consist primarily of income derived from certain aspects of our arrangements with our partners, whereby a portion of the revenues received under these agreements is treated for accounting purposes as rental income from embedded leases associated with these relationships, and from license revenue earned primarily from our agreement with P&G, whereby we receive milestone payments upon commercial launch approval of each new product developed by us using our intellectual property. Other revenues have not been, and are not expected to be, a significant portion of our revenues.

Costs and Expenses

Cost of Product Revenues —The primary components of our cost of product revenues are materials, personnel costs, depreciation, facilities costs, other overhead costs, and infrastructure expenses associated with the manufacturing of our products. Our manufacturing overhead costs are significant, and are allocated proportionately among our products at rates consistent with then-current unit production volumes. As the number of units we manufacture increases, our overhead costs should increase less rapidly due to economies of scale, resulting in lower per-unit costs associated with higher unit production volumes. Conversely, if total unit production volumes decrease, the cost of product revenues, measured as a percentage of product revenues, may increase as we lose economies of scale, unless offset by other savings.

Cost of Contract Research and Development Revenues —We incur expenses related to our contract research and development revenues from our partner-funded and co-funded product development agreements. These expenses consist primarily of personnel costs, materials, supplies, and overhead costs. We generally expense all contract research and development costs, including costs to be subsequently reimbursed under development contracts, in the periods in which they are incurred. Our costs of contract research and development revenues will fluctuate depending on the timing and stage of our various partner programs. In certain cases, contract research and development costs exceed contract research and development revenues, either due to timing differences between expenses and revenues or due to the nature of the underlying contracts. We enter into certain research and development arrangements that we do not expect to be profitable because we expect the long-term benefits of those arrangements to outweigh the short-term costs. Furthermore, we have entered, and expect to continue to enter, into other research and development arrangements in which we will share the costs of development (co-development) with our partners, resulting in our costs significantly exceeding our revenues on such projects.

The differences between contract research and development revenues and contract research and development costs are a function of the specific project activities undertaken in any given period, as well as the proportion of the expenses that are attributable to co-funded development programs. In addition, revenue recognition policies may restrict the recognition of certain revenues, while costs continue to be recognized in full, or, in some cases, may accelerate the recognition of revenues. As a result of these revenue timing and expense composition differences, any or all of our contract research and development projects may not be profitable in certain periods, but may be profitable in other periods. This relationship between changes in revenue and changes in related costs is also impacted by changes in the activity under co-development programs where development costs are shared with our partner. For example, during periods of higher development activities, co-development programs will result in higher costs which may not be reflected to the same extent, if at all, in revenues.

Research and Development Expenses —Research and development expenses include costs incurred to develop our proprietary products using our transdermal drug delivery technologies. These costs consist of personnel costs, materials and supplies, overhead and facility costs, preclinical and nonclinical development costs, clinical trial and related clinical manufacturing costs, contract services, and other outside costs. We expense all research and development costs in the periods in which they are incurred. We expect our research and development expenses to increase in future periods based on current open purchase orders as we continue to invest in research and development activities related to clinical development of our proprietary pipeline, as well as other future development programs.  See “Results of Operations” below for more detailed discussion of research and development expenses.

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General and Administrative Expenses —General and administrative expenses consist primarily of personnel costs, including stock-based compensation, for employees in our administration, finance, business development, human resources and information technology functions. Other expenses include professional fees for accounting and legal services, and costs of consultants and other outside services. We expect that our general and administrative expenses will increase with growth in our revenues, increasing compliance activities related to the Sarbanes-Oxley Act, and the continued development of our product pipeline.

Interest Income— Interest income consists primarily of interest earned on our cash and cash equivalents balances.

Interest Expense— Interest expense consists primarily of the interest charges associated with our long-term debt and our capital lease obligations. Our interest expense is paid periodically in cash, except when an allowable portion of the interest due is converted at our election into payment-in-kind, or PIK, notes. For further discussion, see “Liquidity and Capital Resources—Description of Certain Indebtedness.”

Results of Operations

Comparison of the Three Months Ended June 30, 2017 and 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months

 

 

 

 

 

 

 

 

Ended June 30,

 

Change

 

(In thousands, except percentages)