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 December 31, 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 February 8, 2018, there were approximately 36,123,945 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 

 

19

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 

 

32

ITEM 4. CONTROLS AND PROCEDURES 

 

33

 

 

 

PART II. OTHER INFORMATION 

 

34

 

 

 

ITEM 1. LEGAL PROCEEDINGS 

 

34

ITEM 1A. RISK FACTORS 

 

34

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

 

70

ITEM 3. DEFAULTS UPON SENIOR SECURITIES 

 

71

ITEM 4. MINE SAFETY DISCLOSURES 

 

71

ITEM 5. OTHER INFORMATION 

 

71

ITEM 6. EXHIBITS 

 

71

SIGNATURES 

 

72

 

 

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PART I

ITEM 1.FINANCIAL STATEMENTS

CORIUM INTERNATIONAL, INC.

CONDENSED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

As of December 31,

 

As of September 30,

 

 

    

2017

    

2017

    

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

45,230

 

$

57,466

 

Accounts receivable

 

 

4,856

 

 

4,641

 

Unbilled accounts receivable

 

 

407

 

 

169

 

Inventories

 

 

2,526

 

 

2,300

 

Prepaid expenses and other current assets

 

 

1,263

 

 

982

 

Total current assets

 

 

54,282

 

 

65,558

 

Property and equipment, net

 

 

12,922

 

 

12,176

 

Intangible assets, net

 

 

7,149

 

 

7,117

 

TOTAL ASSETS

 

$

74,353

 

$

84,851

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

7,712

 

$

3,978

 

Accrued expenses and other current liabilities

 

 

4,132

 

 

6,411

 

Long-term debt, current portion

 

 

26,298

 

 

13,172

 

Recall liability, current portion

 

 

221

 

 

114

 

Deferred contract revenues, current portion

 

 

390

 

 

626

 

Total current liabilities

 

 

38,753

 

 

24,301

 

Long-term debt, net of current portion

 

 

25,994

 

 

39,027

 

Recall liability, net of current portion

 

 

1,698

 

 

1,811

 

Deferred contract revenues, net of current portion

 

 

3,500

 

 

3,500

 

Total liabilities

 

 

69,945

 

 

68,639

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, par value of $0.001 per share, 150,000,000 shares authorized; 36,117,913 and 36,004,602 shares issued and outstanding as of December 31, 2017 and September 30, 2017

 

 

36

 

 

36

 

Additional paid-in capital

 

 

232,945

 

 

231,457

 

Accumulated deficit

 

 

(228,573)

 

 

(215,281)

 

Total stockholders’ equity

 

 

4,408

 

 

16,212

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

74,353

 

$

84,851

 

 

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 December 31,

 

 

 

    

2017

    

2016

    

    

Revenues:

 

 

 

 

 

 

 

 

Product revenues

 

$

5,921

 

$

5,738

 

 

Contract research and development revenues

 

 

3,154

 

 

963

 

 

Other revenues

 

 

240

 

 

267

 

 

Total revenues

 

 

9,315

 

 

6,968

 

 

Costs and operating expenses:

 

 

 

 

 

 

 

 

Cost of product revenues

 

 

3,284

 

 

4,081

 

 

Cost of contract research and development revenues

 

 

3,605

 

 

2,120

 

 

Research and development expenses

 

 

10,238

 

 

5,998

 

 

General and administrative expenses

 

 

3,300

 

 

3,005

 

 

Amortization of intangible assets

 

 

177

 

 

177

 

 

Total costs and operating expenses

 

 

20,604

 

 

15,381

 

 

Loss from operations

 

 

(11,289)

 

 

(8,413)

 

 

Interest income

 

 

122

 

 

28

 

 

Interest expense

 

 

(2,123)

 

 

(2,042)

 

 

Loss before income taxes

 

 

(13,290)

 

 

(10,427)

 

 

Income tax expense

 

 

 2

 

 

 2

 

 

Net loss and comprehensive loss

 

$

(13,292)

 

$

(10,429)

 

 

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

 

$

(0.37)

 

$

(0.46)

 

 

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

 

 

36,073,008

 

 

22,453,172

 

 

 

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, 2017

 

36,004,602

 

$

36

 

$

231,457

 

$

(215,281)

 

$

16,212

Issuance of common stock under Employee Stock Purchase Plan

 

64,547

 

 

 —

 

 

213

 

 

 —

 

 

213

Issuance of common stock upon exercise of stock options

 

48,764

 

 

 —

 

 

140

 

 

 —

 

 

140

Stock-based compensation expense

 

 —

 

 

 —

 

 

1,135

 

 

 —

 

 

1,135

Net loss and comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

(13,292)

 

 

(13,292)

Balance - December 31, 2017

 

36,117,913

 

$

36

 

$

232,945

 

$

(228,573)

 

$

4,408

 

See accompanying notes to condensed financial statements.

 

 

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CORIUM INTERNATIONAL, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended December 31,

 

 

    

2017

    

2016

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net loss and comprehensive loss

 

$

(13,292)

 

$

(10,429)

 

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

 

 

 

 

 

 

 

Depreciation and amortization of property and equipment

 

 

225

 

 

318

 

Amortization of intangible assets

 

 

177

 

 

177

 

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

 

 

100

 

 

68

 

Noncash amortized discount on long-term debt and capital leases

 

 

 4

 

 

 4

 

Stock-based compensation expense

 

 

1,135

 

 

870

 

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

 

 

 —

 

 

458

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(215)

 

 

2,172

 

Unbilled accounts receivable

 

 

(238)

 

 

(211)

 

Inventories

 

 

(226)

 

 

492

 

Prepaid expenses and other current assets

 

 

(281)

 

 

(94)

 

Accounts payable

 

 

3,415

 

 

1,053

 

Accrued expenses and other current liabilities

 

 

(2,279)

 

 

(742)

 

Deferred contract revenues

 

 

(236)

 

 

(67)

 

Recall liability

 

 

(6)

 

 

(144)

 

Net cash used by operating activities

 

 

(11,717)

 

 

(6,075)

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(652)

 

 

(827)

 

Payments for patents and licensing rights

 

 

(209)

 

 

(212)

 

Net cash used by investing activities

 

 

(861)

 

 

(1,039)

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Principal payments on long-term debt

 

 

(11)

 

 

(19)

 

Principal payments on capital lease obligations

 

 

 —

 

 

(73)

 

Proceeds from exercise of stock options

 

 

140

 

 

222

 

Proceeds from issuance of common stock under Employee Stock Purchase Plan

 

 

213

 

 

226

 

Net cash provided by financing activities

 

 

342

 

 

356

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

 

(12,236)

 

 

(6,758)

 

CASH AND CASH EQUIVALENTS — Beginning of period

 

 

57,466

 

 

39,833

 

CASH AND CASH EQUIVALENTS — End of period

 

$

45,230

 

$

33,075

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

Cash paid for interest

 

$

2,020

 

$

1,512

 

Cash paid for income taxes

 

$

 —

 

$

 1

 

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Property and equipment purchases included in accounts payable

 

$

349

 

$

219

 

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 December 31, 2017, statements of operations and comprehensive loss for the three months ended December 31, 2017 and 2016, statement of stockholders’ equity for the three months ended December 31, 2017, and statements of cash flows for the three months ended December 31, 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 December 31, 2017, its results of operations for the three months ended December 31, 2017 and 2016, and its cash flows for the three months ended December 31, 2017 and 2016. The financial data and the other financial information contained in these notes to the financial statements related to the three-month periods are also unaudited. The results of operations for the three months ended December 31, 2017 are not necessarily indicative of the results to be expected for the year ending September 30, 2018 or for any future annual or interim period. The balance sheet as of September 30, 2017 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, 2017 included in the Company’s Annual Report on Form 10-K, which was filed with the SEC on December 29, 2017.

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, 2017.

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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 $228.6 million as of December 31, 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. Additionally, the Company anticipates that these revenues will not be sufficient to maintain compliance with 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 December 31, 2017, the prepayment premium was 7.5% and the additional fee was 1.0%. Effective January 1, 2018, the prepayment premium was 3.25%. 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 December 31, 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 December 31, 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 months ended December 31, 2017, three partners accounted for 98% of the Company’s revenues and three partners accounted for 97% of accounts receivable as of December 31, 2017. For the three months ended December 31, 2016, three partners accounted for 93% of the Company’s revenues. As of September 30, 2017, three partners accounted for 88% of accounts receivable.

Comprehensive Income (Loss)

For the three months ended December 31, 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.

Recent Accounting Pronouncements 

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers, (Topic 606)” (“ASU 2014-09”). This ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards. The guidance in this ASU supersedes the revenue recognition requirements in Topic 605, Revenue Recognition and most industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also includes a set of disclosure requirements that will provide users of financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a reporting organization’s contracts with customers.  In August 2015, the Financial Accounting Standards Board issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which defers the effective date of ASU 2014-09 by one year. This ASU is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2017 for public companies and permits the use of either the retrospective or modified retrospective method, with early adoption permitted as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within those annual periods. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” which further clarifies guidance related to identifying performance obligations and licensing implementation guidance contained in ASU 2014-09. In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” which addresses narrow-scope improvements to the guidance on collectibility, noncash consideration, and completed contracts at transition and provides a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. In December 2016, the FASB issued ASU No. 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” which clarifies areas for correction or improvement in the Codification.

The Company anticipates adopting the new revenue recognition standard on the effective date of October 1, 2018, utilizing the modified retrospective method. The Company is in the process of evaluating the impact the adoption of this standard will have on its financial statements and has performed an initial review of its major contracts with partners.  Based on the initial reviews, the Company believes the adoption of the new standard will not have a significant quantitative impact on product revenues, as the timing of revenue recognition for product sales, profit sharing and royalties is not expected to significantly change.  For the Company’s collaboration and partner arrangements, the consideration the Company is eligible to receive under these arrangements typically consists of nonrefundable upfront payments, reimbursement of research and development costs and milestone payments.  The Company believes the adoption of the new standard will not have a significant quantitative impact on the revenue recognition of the reimbursement of research and development costs as the timing of the revenue recognition is not expected to

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significantly change.  The Company continues to review the impact that this new standard will have on the timing of recognition for nonrefundable upfront payments and milestone payments as well as on its financial statement disclosures and has not made a determination on the impact to its financial statements. The Company is evaluating changes to its accounting processes, internal controls and disclosures to support the new standard. 

In July 2015, the Financial Accounting Standards Board issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory.” This ASU applies to inventory that is measured using first-in, first-out or average cost.  Inventory within the scope of this update is required to be recorded at the lower of cost or net realizable value, which is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation.  This ASU is effective prospectively for annual reporting periods beginning after December 15, 2016, and interim periods thereafter; early adoption is permitted.  The Company adopted the provision of this ASU effective October 1, 2017 and the adoption of this ASU did not have a material impact on the Company’s financial position, results of operations or cash flows.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"), which supersedes existing guidance on accounting for leases in "Leases (Topic 840)" and generally requires all leases to be recognized in the statement of financial position. The provisions of ASU 2016-02 are effective for annual reporting periods beginning after December 15, 2018; early adoption is permitted. The provisions of this ASU are to be applied using a modified retrospective approach. The Company is evaluating the effect that this ASU will have on the Company’s future financial position, results of operations or cash flows.

In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). ASU 2016-09 modifies U.S. GAAP by requiring, among other things, the following: (1) all excess tax benefits and tax deficiencies are to be recognized as income tax expense or benefit on the income statement (excess tax benefits are recognized regardless of whether the benefit reduces taxes payable in the current period); (2) excess tax benefits are to be classified along with other income tax cash flows as an operating activity in the statement of cash flows; (3) an entity can still follow the current U.S. GAAP practice of making an entity-wide accounting policy election to estimate the number of awards that are expected to vest or may instead account for forfeitures when they occur; and (4) classification of cash paid by an employer to the taxing authorities when directly withholding shares for tax withholding purposes as a financing activity in the statement of cash flows. The Company adopted the provisions of this ASU effective October 1, 2017. The Company has elected to continue to estimate expected forfeitures and the adoption of the remaining provisions in the ASU did not have a material impact on the Company’s financial position, results of operations or cash flows.

In May 2017, the FASB issued ASU No. 2017-09, “Compensation-Stock Compensation (Topic 718) – Scope of Modification Accounting”.  This ASU clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification, and provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless all three of the following conditions are met:

(1) The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification.

(2) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified.

(3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified.

This ASU is effective for annual periods beginning after December 15, 2017. The adoption of this standard is not expected to have a material impact on the Company’s future financial position, results of operations or cash flows.

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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 that 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.

The Company did not have any transfers between Levels I, II and III of the fair value hierarchy during the three months ended December 31, 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 December 31, 2017

 

 

    

Level I

    

Level II

    

Level III

    

Total

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds 

 

$

45,424

 

$

 —

 

$

 —

 

$

45,424

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2017

 

 

    

Level I

    

Level II

    

Level III

    

Total

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

57,928

 

$

 —

 

$

 —

 

$

57,928

 

The Company did not have Level III liabilities as of December 31, 2017 and September 30, 2017.

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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 which differ from their fair value as estimated by the Company based on market quotes for instruments with similar terms and remaining maturities (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

 

    

Carrying

    

Fair

    

 

 

 

 

 

Value 

 

Value 

 

Difference 

 

Long-term debt

 

$

52,292

 

$

55,350

 

$

3,058

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2017

 

 

    

Carrying

    

Fair

    

 

 

 

 

 

Value 

 

Value 

 

Difference 

 

Long-term debt

 

$

52,199

 

$

55,888

 

$

3,689

 

 

 

3.  Inventories

Inventories consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

As of December 31,

 

As of September 30,

 

 

    

2017

    

2017

    

Raw materials

 

$

1,760

 

$

1,683

 

Work in process

 

 

479

 

 

264

 

Finished goods

 

 

287

 

 

353

 

Total inventories

 

$

2,526

 

$

2,300

 

 

 

4. Long-Term Debt

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

 

 

 

 

 

 

 

 

 

 

 

As of December 31,

 

As of September 30,

 

 

 

    

2017

    

2017

    

 

Term loan agreement expiring June 30, 2019, less unamortized issuance costs of $597 and $697 and unamortized discount of $23 and $27 as of December 31, 2017 and September 30, 2017. See terms of the agreement below.

 

$

51,883

 

$

51,779

 

 

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

 

 

409

 

 

420

 

 

Total

 

 

52,292

 

 

52,199

 

 

Less current portion

 

 

26,298

 

 

13,172

 

 

Long-term portion

 

$

25,994

 

$

39,027

 

 

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 a prepayment

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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 December 31, 2017 and September 30, 2017, the Company had converted $7.5 million of interest into PIK notes, each of which added to the then-outstanding principal, and is included in the principal balances shown as of those dates. As of December 31, 2017, the principal amount outstanding under the term loan agreement, including all PIK notes, was $52.5 million. From January 1, 2018 through December 31, 2018, the prepayment premium will be equal to 3.25% of the aggregate value of the principal and PIK notes outstanding at the time of prepayment.  For prepayments on or after January 1, 2019, there is no prepayment premium.

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.

 

5.  Collaboration and Partner Arrangements

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

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended December 31,

 

 

 

    

2017

    

2016

    

 

Mayne

 

$

2,032

 

$

1,407

 

 

Par

 

 

 —

 

 

363

 

 

P&G

 

 

4,815

 

 

4,021

 

 

Agile

 

 

2,323

 

 

1,078

 

 

Other

 

 

145

 

 

99

 

 

Total revenues

 

$

9,315

 

$

6,968

 

 

Included in total revenues above is profit sharing, which totaled $0.3 million for the three months ended December 31, 2017, compared to $0.4 million for the corresponding period in fiscal 2017.

6.  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 December 31, 2017 and September 30, 2017, warrants to purchase 51,386 shares of common stock 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.

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7.  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 December 31, 2017 and September 30, 2017 with a par value of $0.001 per share. No preferred stock was outstanding as of those dates.

Common Stock

The Company was authorized to issue up to 150.0 million shares of common stock as of December 31, 2017 and September 30, 2017 with a par value of $0.001 per share. As of December 31, 2017, there were 36,117,913 shares of common stock outstanding and as of September 30, 2017, there were 36,004,602 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.

8.  Stock-Based Compensation

Equity Incentive Plans

As of December 31, 2017 and September 30, 2017, 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 can grant new awards. 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 November 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 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 December 31, 2017 and September 30, 2017, the Company had reserved 5,012,065 and 5,060,829 shares of common stock for issuance pursuant to the 2014 Plan. As of December 31, 2017 and September 30, 2017, the Company had 258,964 and 1,129,232 shares of common stock available for issuance pursuant to the 2014 Plan.

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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 three months ended December 31, 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, 2017

 

3,787,222

 

$

4.85

 

6.84

 

$

23,819

 

Options granted

 

803,650

 

$

11.59

 

 

 

 

 

 

Options exercised

 

(48,764)

 

$

2.87

 

 

 

 

 

 

Options forfeited / cancelled

 

(2,937)

 

$

5.02

 

 

 

 

 

 

Options expired

 

(445)

 

$

2.22

 

 

 

 

 

 

Balance - December 31, 2017

 

4,538,726

 

$

6.06

 

7.23

 

$

18,060

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercisable - December 31, 2017

 

2,739,351

 

$

4.54

 

6.04

 

$

14,137

 

 

 

 

 

 

 

 

 

 

 

 

 

Options vested and expected to vest - December 31, 2017

 

4,362,537

 

$

5.96

 

7.15

 

$

17,690

 

All outstanding stock options under the Corium Plans as of December 31, 2017 have an exercise price between $2.12 and $14.12 per share.

The weighted-average fair value of the stock options granted for the three months ended December 31, 2017 were estimated using the Black-Scholes option-pricing model with the following assumptions:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

December 31, 2017

 

 

Expected term (in years)

 

5.27

 

-

6.57

 

 

 

Risk-free interest rate

 

2.08

%

-

2.24

%

 

 

Expected volatility

 

68

%

-

73

%

 

 

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 insufficient 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.

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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.

A summary of restricted stock unit award activity under the Corium Plans during the three months ended December 31, 2017 is as follows:

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

Average

 

 

Number of

 

Grant Date

 

 

Shares

 

Fair Value

Nonvested - September 30, 2017

 

144,375

 

$

6.44

Granted

 

70,000

 

$

11.59

Vested and released

 

 —

 

$

 —

Forfeited

 

 —

 

$

 —

Nonvested - December 31, 2017

 

214,375

 

$

8.12

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 will be automatically increased by 1% of the number of shares of common stock and common stock equivalents 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 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. Shares subject to purchase rights granted under the Company’s 2014 ESPP that terminate without having been exercised in full will not reduce the number of shares available for issuance under the Company’s 2014 ESPP. As of December 31, 2017 and September 30, 2017, there were 571,852 and 636,399 shares of common stock available for issuance pursuant to the 2014 ESPP.

For the three months ended December 31, 2017, the Company recorded stock-based compensation expense related to the 2014 ESPP of $46,000, compared to $94,000 for the corresponding period in fiscal 2017. For the three months ended December 31, 2017 and 2016, the Company issued 64,547 and 69,886 shares of common stock to employees pursuant to the 2014 ESPP.

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The fair value of the purchase rights granted under the 2014 ESPP for the offering periods beginning May 20, 2016, November 20, 2016, May 20, 2017 and November 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

 

 

December 31, 2017

Fair value of common stock

 

$

3.79

 

$

10.95

 

Grant price

 

$

3.22

 

$

9.31

 

Expected term (in years)

 

 

0.50

 

 

2.00

 

Expected volatility

 

 

56

%

 

87

%

Risk-free interest rate

 

 

0.89

%

 

1.77

%

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, $6.54, and $10.95 for the offering periods commencing May 20, 2016, November 20, 2016, May 20, 2017 and November 20, 2017.

Grant Price — 85% of the fair market value of the Company’s common stock on the first day of the offering period, or $3.22, $4.10, $5.56, and $9.31 for the offering periods commencing May 20, 2016, November 20, 2016, May 20, 2017 and November 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 months ended December 31, 2017 and 2016 is classified in the condensed statements of operations and comprehensive loss as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended December 31,

 

 

 

 

    

2017

    

2016

    

    

 

Cost of product revenues

 

$

109

 

$

102

 

 

 

Cost of contract research and development revenues

 

 

81

 

 

51

 

 

 

Research and development

 

 

220

 

 

151

 

 

 

General and administrative

 

 

725

 

 

566

 

 

 

Total stock-based compensation

 

$

1,135

 

$

870

 

 

 

As of December 31, 2017, there was a total of $9.8 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 2.9 years.

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9.  Product Recall Liability

In fiscal 2008 and fiscal 2010, 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.

During the three months ended December 31, 2017, the Company made an immaterial amount of settlement payments to Actavis compared to $0.1 million for the corresponding period in fiscal 2017. The outstanding balance of the recall liability was $1.9 million as of December 31, 2017 and September 30, 2017.

10.  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 December 31, 2017 and 2016 (in thousands, except share and per share data):

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

    

2017

    

2016

    

Basic and diluted net loss per share

 

 

 

 

 

 

 

Net loss attributable to common stockholders, basic and diluted

 

$

(13,292)

 

$

(10,429)

 

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

 

 

36,073,008

 

 

22,453,172

 

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

 

$

(0.37)

 

$

(0.46)

 

The following outstanding shares of common stock equivalents 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

 

 

 

 

 

December 31,

 

 

 

 

    

2017

    

2016

    

 

 

Stock options to purchase common stock

 

4,538,726

 

4,037,737

 

 

 

Unvested restricted stock unit awards

 

214,375

 

110,000

 

 

 

Shares authorized under the 2014 ESPP

 

571,852

 

433,803

 

 

 

Common stock warrants

 

51,386

 

51,386

 

 

 

 

 

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11.  Income Taxes

The Company did not record a provision for Federal income taxes for the three months ended December 31, 2017 because it expects to generate a net operating loss for the year ending September 30, 2018. The income tax expense of $2,000 for both the three months ended December 31, 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.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”).  The Tax Act makes broad and complex changes to the U.S. tax code and will affect the Company’s fiscal year ending September 31, 2018, including, but not limited to reducing the U.S. federal corporate tax rate from 35 percent to 21 percent and limitations on net operating losses (“NOLs”) generated after December 31, 2017. Section 15 of the Internal Revenue Code stipulates that the Company’s fiscal year ending September 31, 2018 will have a blended corporate tax rate of 24.53 percent, which is based on the applicable tax rates before and after the Tax Act and the number of days in the year.

 

The SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. 

 

The Company’s analysis of the impact of the Tax Act is incomplete, and the Company was not able to make reasonable estimates of the effects as of December 31, 2017.  Therefore, the Company has not recorded any provisional adjustments.  The Company expects the Tax Act will result in a decline in deferred tax assets as a result of the lower U.S. corporate tax rate, however, due to the existence of a full valuation allowance the impact on income tax expense will likely be immaterial.

12.  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.

13. Subsequent Events

On January 16, 2018, pursuant to the provisions of the 2014 Plan and the ESPP Plan, the board of directors authorized and approved the registration of 1,444,716 additional shares of the Company’s common stock subject to issuance by the Company under the 2014 Plan and 409,224 additional shares of the Company’s common stock subject to issuance by the Company under the 2014 ESPP.

 

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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, 2017 included in the Annual Report on Form 10-K filed with SEC on December 29, 2017. 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, or 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 other 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) publicly disclosed clinical stage Central Nervous System, or CNS, 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

 

Pivotal Bioequivalence

Self-funded

 

Memantine TDS

 

Alzheimer's

 

Phase 1

Aequus

 

Aripiprazole TDS

 

Psychiatric Disorders

 

Phase 1

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. Development of the product commenced in 2004, and it was commercially launched in 2010 by Teva.

In March 2017, Mayne acquired the commercial rights to the 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 in May 2002, and the product was commercially launched 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 globally.

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. Twirla incorporates the proprietary SkinFusion® adhesive technology designed by Agile. We are the exclusive manufacturer of this product for Agile.

In January 2017, Agile announced top-line data from a completed Phase 3 clinical trial. Agile had initiated this trial after receipt of a Complete Response Letter, or CRL, from the FDA in February 2013 in response to Agile’s previous New Drug Application, or NDA, filing in April 2012. As recommended by the FDA in the February 2013 CRL, Agile conducted a third Phase 3 clinical trial which was completed in 2016. In June 2017, Agile resubmitted its NDA with the results of the additional Phase 3 clinical trial and, in July 2017, the FDA notified Agile of its acceptance of the resubmitted NDA for review.  Agile’s Prescription Drug User Fee Act, or PDUFA, goal date for this resubmission was December 26, 2017.  On December 22, 2017, Agile disclosed that the FDA had issued a CRL in response to the resubmission of their NDA, which stated that the FDA could not approve Agile’s NDA in its current form. Agile further disclosed that the CRL identified deficiencies relating to quality adhesion test methods, the need for Agile to address whether the in vivo adhesion properties of Twirla may have contributed to the SECURE Phase 3 clinical trial results, and also stated that observations noted during an FDA inspection of our facility must be resolved.  The CRL also recommended that Agile address the implications of clinical trial subject patch compliance and the withdrawal and dropout rates. Agile disclosed that they had submitted an amendment to their NDA on December 1, 2017 in response to an information request from the FDA on the issues related to the quality adhesion test methods cited in the CRL, and further disclosed that while the CRL acknowledged receipt of the Agile NDA amendment, the FDA stated that the amendment had not been reviewed prior to the FDA's issuance of the CRL.  In addition, on November 20, 2017 and December 1, 2017, we provided responses to the FDA addressing each of the observations made during the FDA's facility inspection.

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Agile has also disclosed that it intends to request a meeting with the FDA as soon as possible to discuss the points raised in the CRL and to establish a path to approval for Twirla. We are working closely with Agile to address the non-clinical issues raised in the CRL as quickly as possible.

In addition to our partnered products, we are developing several Corium-funded products utilizing our Corplex technology, some of which 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.

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, or BE, 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 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 in patients with the disease.

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 the fourth calendar quarter of 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 the maximum plasma concentration, or Cmax, and the area under the curve, or AUC, of plasma concentration of donepezil with the Corplex patch over the course of a week, at steady state, would be similar to the same measurements of oral Aricept. Data from the pilot BE study demonstrated that the smaller of the two Corplex Donepezil product candidates successfully met the statistical criteria for bioequivalence to oral Aricept based on the primary PK parameters of Cmax at steady state and AUC at steady state that has been 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 treatment-related nausea in subjects on the smaller patch was more than six-fold lower than the incidence of nausea with oral Aricept®. In August 2017, we held an end of Phase 2 meeting with the FDA in which we reviewed the results from the pilot BE study. The FDA confirmed the choice of PK parameters and statistical testing approaches for the BE study and also confirmed our design of the planned supportive studies and other requirements for product registration. The FDA also indicated that it would consider whether the pilot study could serve as the pivotal study and we have provided additional data requested by the FDA for this purpose. However, since we are uncertain as to the length or outcome of that review, we initiated dosing of our pivotal BE study for Corplex Donepezil in October 2017.  The design of the pivotal BE study is similar to the pilot study and is a single center, randomized, multiple dose, two-way crossover study in healthy volunteers, conducted at the same site as the pilot BE study.  Dosing in the first treatment period was completed in December 2017 and dosing in the second treatment period commenced in January 2018, with topline results expected in the second quarter of calendar 2018.  We are targeting submission of a Section 505(b)(2) NDA for this product candidate in the fourth quarter 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. In addition, we continue to perform preclinical development work on other proprietary pipeline products with a primary focus on developing innovative products for treatment of central nervous system diseases.

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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 routinely enter into other feasibility and development agreements with pharmaceutical and biotechnology companies involving our Corplex and MicroCor technologies.

Components of Statements of Operations

Revenues

During the three months ended December 31, 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 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 three months ended December 31, 2017 and 2016.

Our product revenues from Clonidine TDS consisted of revenues from the sale of products we manufactured and shipped to Mayne, along with profit sharing from the net profits earned by Mayne on their sales of the product. For the three months ended December 31, 2017, product revenues related to Clonidine TDS decreased, compared to the same period in fiscal 2017 due to increased competition resulting in fewer units shipped, and lower profit sharing earned as Mayne’s market share and pricing both declined. Although we expect that our product revenues from Clonidine TDS in fiscal 2018 will be higher than fiscal 2017 revenues, product revenues beyond 2018 could be again adversely impacted by the increased competition experienced in fiscal 2017.

Our product revenues from Fentanyl TDS consisted of revenues from the sale of products we manufactured and shipped to Mayne and Par, a wholly-owned subsidiary of Endo Pharmaceuticals, or Endo. Product revenues related to Fentanyl TDS increased for the three months ended December 31, 2017, compared to the same period in fiscal 2017, as a result of increased units shipped. 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 2018 will be lower than fiscal 2017 as a result of continued competition.

Product revenues from Crest Whitestrips consisted of revenues from the sale of products manufactured and shipped to P&G. Revenues increased for the three months ended December 31, 2017, compared to the same period in fiscal 2017, as a result of increased global demand for the current products. We expect product revenues from P&G to be higher in fiscal 2018, compared to fiscal 2017, as demand is expected to continue to increase.  We have effectively reached the limits of our current production capacity for Crest Whitestrips, but expect to complete the 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 three months ended December 31, 2017, compared to the same period in fiscal 2017, due primarily to increased development activities related to Twirla.  Given Agile’s recent guidance on the potential timeline needed to address the FDA’s concerns regarding the approval of the NDA for Twirla, we currently expect that our revenues from contract research and development in fiscal 2018 will be similar to those of fiscal 2017.  

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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 levels 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 (or 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 primarily 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 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 ExpensesGeneral 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. The majority of our interest expense associated with the CRG term loan 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. Commencing in September 2017, we began paying all of the quarterly interest due on the CRG term loan in cash. For further discussion, see “Liquidity and Capital Resources—Description of Certain Indebtedness.”

Results of Operations

Comparison of the Three Months Ended December 31, 2017 and 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months

 

 

 

 

 

 

 

 

Ended December 31,

 

Change

 

(In thousands, except percentages)

    

2017

    

2016

     

$

    

%

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Product revenues

 

$

5,921

 

$

5,738

 

$

183

 

 3

%

Contract research and development revenues

 

 

3,154

 

 

963

 

 

2,191

 

228

 

Other revenues

 

 

240

 

 

267

 

 

(27)

 

(10)

 

Total revenues

 

 

9,315

 

 

6,968

 

 

2,347

 

34

 

Costs and operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product revenues

 

 

3,284

 

 

4,081

 

 

(797)

 

(20)

 

Cost of contract research and development revenues

 

 

3,605

 

 

2,120

 

 

1,485

 

70

 

Research and development expenses

 

 

10,238

 

 

5,998

 

 

4,240

 

71

 

General and administrative expenses

 

 

3,300

 

 

3,005

 

 

295

 

10

 

Amortization of intangible assets

 

 

177

 

 

177

 

 

 —

 

 —

 

Total costs and operating expenses

 

 

20,604

 

 

15,381

 

 

5,223

 

34

 

Loss from operations

 

 

(11,289)

 

 

(8,413)

 

 

(2,876)

 

(34)

 

Interest income

 

 

122

 

 

28

 

 

94

 

336

 

Interest expense

 

 

(2,123)

 

 

(2,042)

 

 

(81)

 

(4)

 

Loss before income taxes

 

 

(13,290)

 

 

(10,427)

 

 

(2,863)

 

(27)

 

Income tax expense

 

 

 2

 

 

 2

 

 

 —

 

 —

 

Net loss and comprehensive loss

 

$

(13,292)

 

$

(10,429)

 

$

(2,863)