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, 2018

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 7, 2018, there were approximately 36,250,261 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 

 

21

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 

 

36

ITEM 4. CONTROLS AND PROCEDURES 

 

36

 

 

 

PART II. OTHER INFORMATION 

 

37

 

 

 

ITEM 1. LEGAL PROCEEDINGS 

 

37

ITEM 1A. RISK FACTORS 

 

37

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

 

79

ITEM 3. DEFAULTS UPON SENIOR SECURITIES 

 

79

ITEM 4. MINE SAFETY DISCLOSURES 

 

79

ITEM 5. OTHER INFORMATION 

 

79

ITEM 6. EXHIBITS 

 

80

SIGNATURES 

 

81

 

 

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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,

 

 

    

2018

    

2017

    

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

82,523

 

$

57,466

 

Accounts receivable

 

 

3,556

 

 

4,641

 

Unbilled accounts receivable

 

 

228

 

 

169

 

Inventories

 

 

1,686

 

 

2,300

 

Prepaid expenses and other current assets

 

 

924

 

 

982

 

Total current assets

 

 

88,917

 

 

65,558

 

Property and equipment, net

 

 

15,810

 

 

12,176

 

Intangible assets, net

 

 

7,404

 

 

7,117

 

TOTAL ASSETS

 

$

112,131

 

$

84,851

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

4,519

 

$

3,978

 

Accrued expenses and other current liabilities

 

 

6,860

 

 

6,411

 

Long-term debt, current portion

 

 

49

 

 

13,172

 

Recall liability, current portion

 

 

119

 

 

114

 

Deferred contract revenues, current portion

 

 

137

 

 

626

 

Total current liabilities

 

 

11,684

 

 

24,301

 

Convertible notes, net

 

 

70,021

 

 

 —

 

Long-term debt, net of current portion

 

 

337

 

 

39,027

 

Recall liability, net of current portion

 

 

1,697

 

 

1,811

 

Deferred contract revenues, net of current portion

 

 

3,500

 

 

3,500

 

Total liabilities

 

 

87,239

 

 

68,639

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, par value of $0.001 per share, 150,000,000 shares authorized; 36,244,074 and 36,004,602 shares issued and outstanding as of June 30, 2018 and September 30, 2017

 

 

36

 

 

36

 

Additional paid-in capital

 

 

283,826

 

 

231,457

 

Accumulated deficit

 

 

(258,970)

 

 

(215,281)

 

Total stockholders’ equity

 

 

24,892

 

 

16,212

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

112,131

 

$

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 June 30,

 

Nine Months Ended June 30,

 

 

    

2018

    

2017

    

2018

    

2017

    

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenues

 

$

5,901

 

$

5,906

 

$

18,512

 

$

16,301

 

Contract research and development revenues

 

 

1,529

 

 

1,936

 

 

7,813

 

 

5,320

 

Other revenues

 

 

240

 

 

267

 

 

720

 

 

801

 

Total revenues

 

 

7,670

 

 

8,109

 

 

27,045

 

 

22,422

 

Costs and operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product revenues

 

 

3,507

 

 

3,935

 

 

10,806

 

 

10,892

 

Cost of contract research and development revenues

 

 

2,339

 

 

2,977

 

 

9,238

 

 

7,891

 

Research and development expenses

 

 

8,305

 

 

9,122

 

 

30,511

 

 

22,650

 

General and administrative expenses

 

 

3,325

 

 

3,284

 

 

10,728

 

 

9,288

 

Amortization of intangible assets

 

 

183

 

 

159

 

 

541

 

 

514

 

Loss on disposal of equipment

 

 

 4

 

 

 6

 

 

 4

 

 

 6

 

Total costs and operating expenses

 

 

17,663

 

 

19,483

 

 

61,828

 

 

51,241

 

Loss from operations

 

 

(9,993)

 

 

(11,374)

 

 

(34,783)

 

 

(28,819)

 

Interest income

 

 

332

 

 

77

 

 

617

 

 

149

 

Interest expense

 

 

(3,370)

 

 

(2,087)

 

 

(7,903)

 

 

(6,178)

 

Loss on extinguishment of long-term debt

 

 

 —

 

 

 —

 

 

(2,258)

 

 

 —

 

Other income

 

 

640

 

 

 —

 

 

640

 

 

 —

 

Loss before income taxes

 

 

(12,391)

 

 

(13,384)

 

 

(43,687)

 

 

(34,848)

 

Income tax expense

 

 

 —

 

 

 —

 

 

 2

 

 

 2

 

Net loss and comprehensive loss

 

$

(12,391)

 

$

(13,384)

 

$

(43,689)

 

$

(34,850)

 

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

 

$

(0.34)

 

$

(0.43)

 

$

(1.21)

 

$

(1.30)

 

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

 

 

36,214,740

 

 

31,457,702

 

 

36,144,746

 

 

26,784,678

 

 

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

 

126,298

 

 

 —

 

 

427

 

 

 —

 

 

427

Issuance of common stock upon exercise of stock options

 

108,705

 

 

 —

 

 

377

 

 

 —

 

 

377

Issuance of common stock upon net exercise of common stock warrants

 

4,469

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Equity component of convertible notes, net of issuance costs of $2.5 million

 

 —

 

 

 —

 

 

46,154

 

 

 —

 

 

46,154

Warrant issued in connection with the convertible note offering

 

 —

 

 

 —

 

 

1,792

 

 

 —

 

 

1,792

Stock-based compensation expense

 

 —

 

 

 —

 

 

3,619

 

 

 —

 

 

3,619

Net loss and comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

(43,689)

 

 

(43,689)

Balance - June 30, 2018

 

36,244,074

 

$

36

 

$

283,826

 

$

(258,970)

 

$

24,892

 

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,

 

 

    

2018

    

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net loss and comprehensive loss

 

$

(43,689)

 

$

(34,850)

 

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

 

 

 

 

 

 

 

Depreciation and amortization of property and equipment

 

 

703

 

 

801

 

Loss on disposal of equipment

 

 

 4

 

 

 6

 

Amortization of intangible assets

 

 

541

 

 

514

 

Noncash amortized debt discount and issuance costs on convertible notes

 

 

2,379

 

 

 —

 

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

 

 

172

 

 

285

 

Stock-based compensation expense

 

 

3,619

 

 

2,711

 

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

 

 

 —

 

 

1,369

 

Loss on extinguishment of long-term debt

 

 

2,258

 

 

 —

 

Other income

 

 

(640)

 

 

 —

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

1,085

 

 

(241)

 

Unbilled accounts receivable

 

 

(59)

 

 

86

 

Inventories

 

 

614

 

 

(97)

 

Prepaid expenses and other current assets

 

 

58

 

 

208

 

Accounts payable

 

 

199

 

 

2,530

 

Accrued expenses and other current liabilities

 

 

974

 

 

110

 

Deferred contract revenues

 

 

(489)

 

 

(234)

 

Recall liability

 

 

(109)

 

 

(351)

 

Net cash used by operating activities

 

 

(32,380)

 

 

(27,153)

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(3,999)

 

 

(1,974)

 

Payments for patents and licensing rights

 

 

(828)

 

 

(813)

 

Net cash used by investing activities

 

 

(4,827)

 

 

(2,787)

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Proceeds from the issuance of convertible notes

 

 

120,000

 

 

 —

 

Payments for convertible notes issuance costs

 

 

(3,772)

 

 

 —

 

Proceeds from issuance of common stock, net of issuance costs

 

 

 —

 

 

56,136

 

Principal payments on long-term debt

 

 

(52,537)

 

 

(58)

 

Payments for long-term debt extinguishment costs

 

 

(2,231)

 

 

 —

 

Principal payments on capital lease obligations

 

 

 —

 

 

(73)

 

Proceeds from exercise of stock options

 

 

377

 

 

229

 

Proceeds from issuance of common stock under Employee Stock Purchase Plan

 

 

427

 

 

436

 

Net cash provided by financing activities

 

 

62,264

 

 

56,670

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

 

25,057

 

 

26,730

 

CASH AND CASH EQUIVALENTS — Beginning of period

 

 

57,466

 

 

39,833

 

CASH AND CASH EQUIVALENTS — End of period

 

$

82,523

 

$

66,563

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

Cash paid for interest

 

$

3,434

 

$

4,524

 

Cash paid for income taxes

 

$

 6

 

$

 4

 

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Property and equipment purchases included in accounts payable

 

$

372

 

$

310

 

Warrant issued in connection with convertible note offering

 

$

1,792

 

$

 —

 

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, 2018, statements of operations and comprehensive loss for the three and nine months ended June 30, 2018 and 2017, statement of stockholders’ equity for the nine months ended June 30, 2018, and statements of cash flows for the nine months ended June 30, 2018 and 2017 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, 2018, its results of operations for the three and nine months ended June 30, 2018 and 2017, and its cash flows for the nine months ended June 30, 2018 and 2017. 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, 2018 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 $259.0 million as of June 30, 2018. The Company has financed its operations primarily through the proceeds from the sale of equity securities, and various debt and capital lease financings.

During the nine months ended June 30, 2018, the Company issued $120.0 million aggregate principal amount of convertible notes (the “Convertible Notes”) due in 2025 (see Note 4). The Company used the proceeds from the issuance of the Convertible Notes to prepay in full all outstanding borrowings, fees and other amounts due under the earlier term loan agreement with CRG, a structured debt and equity investment management firm.  With the addition of the $61.5 million net proceeds arising from the issuance of the Convertible Notes and simultaneous retirement of the CRG indebtedness, the Company believes that its existing cash and cash equivalents will be sufficient to fund operations as currently planned beyond the next 12 months. Consequently, the Company believes there is no longer substantial doubt regarding its ability to continue as a going concern because the Company is no longer required to maintain compliance with covenants related to liquidity or revenues. The unaudited condensed financial statements as of June 30, 2018 have been prepared under the assumption that the Company will continue as a going concern for the next 12 months.

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.

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 both the three and nine months ended June 30, 2018, three partners accounted for 100% and 99% of the Company’s revenues and three partners accounted for 99% of accounts receivable as of June 30, 2018. For the three and nine months ended June 30, 2017, three partners accounted for 96% and 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 and nine months ended June 30, 2018 and 2017, 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.

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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. These ASUs are 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 Accounting Standards Codification.

The Company will adopt the new revenue recognition standard effective 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 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 also evaluating changes to its accounting processes, internal controls and disclosures required to support the new standard. 

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 separating leases into liability and asset components to be presented in the statement of financial position.  Certain qualitative disclosures are also required to enable users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases. 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. 

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In May 2017, the FASB issued ASU No. 2017-09, “Compensation-Stock Compensation (Topic 718) – Scope of Modification Accounting (Topic 718)”. 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 and the Company will adopt the standard effective October 1, 2018. 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.

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 and nine months ended June 30, 2018.  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.

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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, 2018

 

 

    

Level I

    

Level II

    

Level III

    

Total

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds 

 

$

83,012

 

$

 —

 

$

 —

 

$

83,012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 any Level III liabilities as of September 30, 2017.

In March 2018, the Company issued $120.0 million aggregate principal amount of Convertible Notes due 2025 with embedded conversion features.  The Company estimated the fair value of the liability component at issuance based on a hypothetical non-convertible debt instrument with a seven-year term, but with a fair market value interest rate derived from a Monte Carlo simulation of the coupon and conversion option outcomes of the Convertible Notes. The Company recorded $71.3 million as the gross fair value of the liability at issuance on March 5, 2018, with the balance of $48.7 million recorded to equity as additional paid-in capital, before issuance costs. The fair value of the liability component is based on unobservable inputs and is, therefore, a Level III liability. As of June 30, 2018, the carrying value of the Convertible Notes liability approximates the fair value, net of issuance costs allocated to it.

The carrying value of the Company’s long-term debt as of September 30, 2017 reflects the principal amount, adjusted for any unamortized debt issuance costs and discount. The long-term debt liability as of September 30, 2017 includes $51.8 million of adjusted debt principal relating to the then-outstanding term loan with CRG (see Note 4). The fair value of certain debt liabilities have been estimated by the Company based on market quotes for instruments with similar terms and remaining maturities.  The following table lists both the carrying and fair values for such liabilities (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2018

 

 

    

Carrying

    

Fair

    

 

 

 

 

 

Value 

 

Value 

 

Difference 

 

Long-term debt

 

$

386

 

$

386

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 June 30,

 

As of September 30,

 

 

    

2018

    

2017

    

Raw materials

 

$

1,076

 

$

1,683

 

Work in process

 

 

386

 

 

264

 

Finished goods

 

 

224

 

 

353

 

Total inventories

 

$

1,686

 

$

2,300

 

 

 

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4. Debt

Long-Term Debt

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

 

 

 

 

 

 

 

 

 

 

 

As of June 30,

 

As of September 30,

 

 

 

    

2018

    

2017

    

 

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

 

$

 —

 

$

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

 

 

386

 

 

420

 

 

Total

 

 

386

 

 

52,199

 

 

Less current portion

 

 

49

 

 

13,172

 

 

Long-term portion

 

$

337

 

$

39,027

 

 

Term Loan

Since 2012, the Company had borrowed $45.0 million from CRG, a structured debt and equity investment management firm, pursuant to a term loan agreement and subsequent amendments to such agreement. The amended agreement provided for a maximum borrowing of $45.0 million, excluding payment-in-kind (“PIK”) notes. The amended agreement required interest to be paid quarterly at a simple annual rate of 15%, and that all outstanding principal be repaid in four equal quarterly payments beginning on September 30, 2018, with interest continuing to accrue on the unpaid principal at a simple annual rate of 15%. In addition, the amended agreement contained a provision whereby the Company could, 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 PIK notes. Since inception of the amended agreement, the Company converted $7.5 million of interest into PIK notes, each of which were added to the then-outstanding principal. Amounts outstanding under the term loan agreement were collateralized by all of the Company’s assets.

The amended agreement also provided for a prepayment premium, the amount of which varied with the date on which prepayment was made if the Company chose to repay principal prior to December 31, 2018, or upon other specified events, including a change of control. For the period January 1, 2018 through December 31, 2018, the prepayment premium was equal to 3.25% of the aggregate value of the principal and PIK notes outstanding at the time of prepayment.  An additional fee of 1.0% of the aggregate value of the principal and PIK notes outstanding was due at the time of repayment of the loan, whether paid early or upon the maturity date.

On March 5, 2018, the Company terminated the term loan agreement with CRG, as amended, and prepaid in full all outstanding borrowings, fees and other amounts due thereunder, in an aggregate amount of approximately $54.8 million plus accrued interest. This amount included total prepayment fees equal to 4.25% of the principal amount then outstanding.  The loss on extinguishment of the debt was $2.3 million and is included in the Statement of Operations and Comprehensive Loss for the nine months ended June 30, 2018. The Company was in continuous compliance with the financial covenants from inception through termination of the loan.

Convertible Notes

In March 2018, the Company issued $120.0 million aggregate principal amount of Convertible Notes due 2025, which aggregate principal amount included the exercise in full by the initial purchaser of the Convertible Notes of an option to purchase $20.0 million of such Convertible Notes.  The Convertible Notes are senior, unsecured obligations and accrue interest at an interest rate of 5.00% per year, payable in cash semi-annually in arrears on March 15 and September 15 of each year, beginning on September 15, 2018.  The Convertible Notes have a maturity date of March 15, 2025, unless earlier converted or repurchased in accordance with their terms.  The Company received $116.2 million in net proceeds from the sale of the Convertible Notes, after deducting payments for offering fees and expenses of $3.8 million.

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The Convertible Notes were issued pursuant to an indenture, dated as of March 5, 2018, by and between the Company and U.S. Bank National Association, as trustee (the “Indenture”).  Pursuant to their terms, the Convertible Notes will be convertible into cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock, at the Company’s election, as discussed in more detail below. The Convertible Notes have an initial conversion rate of 58.0552 shares of common stock per $1,000 principal amount, which is equivalent to an initial conversion price of approximately $17.22 per share of common stock. The conversion rate and the corresponding conversion price will be subject to adjustment upon the occurrence of certain events, including, but not limited to, stock splits and dividends, rights offerings, cash dividends, or a make-whole fundamental change (as described in the Indenture).

The Company may not redeem the Convertible Notes prior to March 15, 2022.  The Company may redeem for cash all or any portion of the Convertible Notes, at its option, on or after March 15, 2022 if certain conditions are met, including, but not limited to, if the last reported sales price per share of the Company’s common stock has exceeded 130% of the conversion price for each of at least 20 trading days during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter.

Noteholders may convert their Convertible Notes at their option only in the following circumstances:

·

at any time during a calendar quarter after June 30, 2018, if the last reported sales price per share of the Company’s common stock exceeds 130% of the conversion price for each of at least 20 trading days during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter;

·

during the five consecutive business days immediately after any five consecutive trading day period (such five consecutive trading day period, referred to as the measurement period) in which the trading price per $1,000 principal amount of Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of the Company’s common stock on such trading day and the conversion rate on such trading day;

·

upon the occurrence of certain corporate events or distributions on the Company’s common stock;

·

the Company calls the Convertible Notes for redemption; and

·

at any time from, and including, September 15, 2024 until the close of business on the scheduled trading day immediately before the maturity date.

The Convertible Notes are considered convertible debt with a cash conversion feature.  The Company has separated the carrying value of the convertible debt into liability and equity components.  The $71.3 million initial carrying amount of the liability component is based on the calculated fair value of a hypothetical non-convertible debt instrument with a seven-year term, but with a fair market value interest rate derived from a Monte Carlo simulation of the coupon and conversion option outcomes of the Convertible Notes.  The $48.7 million gross carrying value of the equity component, which amount is also recorded as the initial debt discount, represents the standalone value of the conversion option, and was determined by Monte Carlo simulation.  The carrying value of the Convertible Notes equals the aggregate par value of the Convertible Notes less the unamortized debt discount and unamortized debt issuance costs.  The debt discount and debt issuance costs are being amortized to interest expense over the seven-year term of the Convertible Notes, using the effective interest rate method.  The equity component will not be re-measured as long as it continues to meet the conditions for equity classification.  The $46.2 million equity component of the Convertible Notes, which is net of $2.5 million in issuance costs allocated to it, is included in additional paid-in capital.

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In connection with the issuance of the Convertible Notes, the Company incurred $6.2 million of total debt issuance costs, primarily consisting of underwriting, legal and other professional fees, including a $2.4 million estimate of the fair value of a warrant issued to the initial purchaser (see Note 6), and allocated these costs to the liability and equity components in proportion to their respective carrying values.  Of the total debt issuance costs, $3.7 million was allocated to the liability component and is recorded as a reduction of the Convertible Notes carrying value in the balance sheet, while the remaining $2.5 million was allocated to the equity component.

Debt discount and issuance costs totaling $52.4 million are being amortized to interest expense over the seven-year life of the Convertible Notes using the effective interest rate method.  As of June 30, 2018, the interest rate was 5.00%, and the effective interest rate was 11.21%.  Interest expense related to the Convertible Notes for the three and nine months ended June 30, 2018 was $3.4 million and $4.3 million, including $1.9 million and $2.4 million related to the amortization of the debt discount and issuance costs.

The table below summarizes the carrying value of the Convertible Notes as of June 30, 2018 (in thousands):

 

 

 

 

Gross proceeds

 

$

120,000

Portion of proceeds allocated to equity component (additional paid-in capital)

 

 

(48,671)

Debt issuance costs

 

 

(6,204)

Portion of issuance costs allocated to equity component (additional paid-in capital)

 

 

2,517

Amortization of debt discount and debt issuance costs

 

 

2,379

Carrying value of Convertible Notes

 

$

70,021

 

 

5.  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,

 

 

    

2018

    

2017

    

2018

    

2017

 

Mayne

 

$

1,572

 

$

2,207

 

$

6,261

 

$

4,411

 

Par

 

 

 —

 

 

 —

 

 

 —

 

 

363

 

P&G

 

 

5,149

 

 

4,406

 

 

14,942

 

 

12,519

 

Agile

 

 

949

 

 

1,154

 

 

5,605

 

 

4,014

 

Other

 

 

 —

 

 

342

 

 

237

 

 

1,115

 

Total revenues

 

$

7,670

 

$

8,109

 

$

27,045

 

$

22,422

 

Included in revenues from Mayne is profit sharing, which totaled $0.2 million and $0.6 million for the three and nine months ended June 30, 2018, compared to $0.1 million and $0.7 million for the corresponding periods 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 2018. The warrants were recorded as equity instruments at the date of their issuances based on the terms of the warrants.

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On May 14, 2018 (the “Warrant Issuance Date”), the Company issued a warrant to purchase 350,000 shares of the Company’s common stock to Cantor Fitzgerald (the “Cantor Warrant”) in connection with its role as the initial purchaser of the Company’s offering of the Convertible Notes.  The Cantor Warrant has a term of 7 years and a strike price of $17.22 per share.  The Company estimated the value of the warrant to be $2.4 million as of a measurement date of March 31, 2018, and recorded that value as an adjustment to equity, and then further adjusted this estimate to the actual fair value of the warrant at issuance, which was $1.8 million as of the Warrant Issuance Date. The change in the value of the warrant from March 31, 2018 to the Warrant Issuance Date was recorded as other income in the Statements of Operations and Comprehensive Loss for the three and nine months ended June 30, 2018. The warrant was treated as an equity instrument, with its initial estimated value of $2.4 million recorded as an additional issuance cost associated with the offering of the Convertible Notes. The total Convertible Notes issuance costs of $6.2 million includes the warrant’s initial estimated value of $2.4 million.  The Company estimated the fair value of this warrant as of May 14, 2018 using the Black-Scholes option pricing model with the following key assumptions: 

 

 

 

 

Expected term (in years)

 

7.0

 

Risk-free interest rate

 

2.96

%

Expected volatility

 

70

%

Expected dividend rate

 

0

%

 

As of June 30, 2018 and September 30, 2017, warrants to purchase 382,380 and 51,386 shares of common stock were outstanding, with a weighted average exercise price of $16.55 and $9.26 per share. These common stock warrants have terms ranging from seven to ten years and are exercisable at any time within the terms. These warrants expire at various dates between December 2020 and May 2025. The fair value of these warrants was recorded in stockholders’ equity upon issuance.

During the nine months ended June 30, 2018, warrants to purchase 19,006 shares of common stock were net exercised, resulting in the issuance of 4,469 shares of common stock.

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 June 30, 2018 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 June 30, 2018 and September 30, 2017 with a par value of $0.001 per share. As of June 30, 2018, there were 36,244,074 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 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. The offer and sale of these shares will require the filing of a new registration statement, or an amendment to an existing one, because the registration statement on Form S-3 that was filed by the Company with the SEC on May 8, 2015 (File No. 333-204025), including the related prospectus that covered the offer and sale of shares pursuant to the agreement with Cantor Fitzgerald, has expired.

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8.  Stock-Based Compensation

Equity Incentive Plans

As of June 30, 2018 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 16, 2018 and January 10, 2017, the Company’s board of directors authorized an increase of 1,444,716 and 902,298 shares to be added to the total number of shares of common stock issuable under the 2014 Plan. As of June 30, 2018 and September 30, 2017, the Company had reserved 6,396,840 and 5,060,829 shares of common stock for issuance pursuant to the 2014 Plan. As of June 30, 2018 and September 30, 2017, the Company had 1,714,127 and 1,129,232 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, 2018 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

 

811,050

 

$

11.59

 

 

 

 

 

 

Options exercised

 

(108,705)

 

$

3.47

 

 

 

 

 

 

Options forfeited / cancelled

 

(20,784)

 

$

7.48

 

 

 

 

 

 

Options expired

 

(445)

 

$

2.22

 

 

 

 

 

 

Balance - June 30, 2018

 

4,468,338

 

$

6.10

 

6.77

 

$

11,990

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercisable - June 30, 2018

 

3,085,519

 

$

5.01

 

5.92

 

$

10,193

 

 

 

 

 

 

 

 

 

 

 

 

 

Options vested and expected to vest - June 30, 2018

 

4,328,101

 

$

6.02

 

6.71

 

$

11,835

 

All outstanding stock options under the Corium Plans as of June 30, 2018 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, 2018 were estimated using the Black-Scholes option-pricing model with the following assumptions:

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended 

 

 

 

 

June 30, 2018

 

 

Expected term (in years)

 

5.27

 

-

6.57

 

 

 

Risk-free interest rate

 

2.08

%

-

2.72

%

 

 

Expected volatility

 

67

%

-

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.

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 nine months ended June 30, 2018 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

 

(27,502)

 

$

5.50

Forfeited

 

 —

 

$

 —

Nonvested - June 30, 2018

 

186,873

 

$

8.51

As of June 30, 2018 and September 30, 2017, the Company had 214,375 and 144,375 restricted stock unit awards outstanding. 

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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 16, 2018 and January 10, 2017, the Company’s board of directors reserved an additional 409,224 and 267,565 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 June 30, 2018 and September 30, 2017, there were 919,325 and 636,399 shares of common stock available for issuance pursuant to the 2014 ESPP.

For the three and nine months ended June 30, 2018, the Company recorded stock-based compensation expense related to the 2014 ESPP of $73,000 and $146,000 compared to $60,000 and $224,000 for the corresponding periods in fiscal 2017. For the nine months ended June 30, 2018 and 2017, the Company issued 126,298 and 134,855 shares of common stock to employees pursuant to the 2014 ESPP.

The fair value of the purchase rights granted under the 2014 ESPP for the current offering periods 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, 2018

Fair value of common stock

 

$

4.82

 

$

8.51

 

Grant price

 

$

4.10

 

$

7.23

 

Expected term (in years)

 

 

0.5

 

 

2.0

 

Expected volatility

 

 

46

%

 

84

%

Risk-free interest rate

 

 

1.08

%

 

2.58

%

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.

Grant Price — 85% of the fair market value of the Company’s common stock on the first day of the offering period.

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.

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Stock-Based Compensation Expense

Employee stock-based compensation expense for the three and nine months ended June 30, 2018 and 2017 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,

 

 

 

    

2018

    

2017

    

2018

    

2017

    

 

Cost of product revenues

 

$

127

 

$

93

 

$

348

 

$

300

 

 

Cost of contract research and development revenues

 

 

96

 

 

61

 

 

266

 

 

169

 

 

Research and development

 

 

269

 

 

174

 

 

750

 

 

501

 

 

General and administrative

 

 

743

 

 

592

 

 

2,255

 

 

1,741

 

 

Total stock-based compensation

 

$

1,235

 

$

920

 

$

3,619

 

$

2,711

 

 

As of June 30, 2018, there was a total of $7.7 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 2.6 years.

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 and nine months ended June 30, 2018, the Company made an immaterial amount of settlement payments to Actavis compared to $0.1 million and $0.3 million for the corresponding periods in fiscal 2017. The outstanding balance of the recall liability was $1.8 million and $1.9 million as of June 30, 2018 and September 30, 2017.

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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 and nine months ended June 30, 2018 and 2017 (in thousands, except share and per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended 

 

 

 

June 30,

 

June 30,

 

 

   

2018

   

2017

   

2018

   

2017

 

Basic and diluted net loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders, basic and diluted

 

$

(12,391)

 

$

(13,384)

 

$

(43,689)

 

$

(34,850)

 

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

 

 

36,214,740

 

 

31,457,702

 

 

36,144,746

 

 

26,784,678

 

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

 

$

(0.34)

 

$

(0.43)

 

$

(1.21)

 

$

(1.30)

 

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

 

Nine Months Ended 

 

 

 

 

June 30,

 

June 30,

 

 

 

    

2018

    

2017

    

2018

    

2017

 

 

Convertible notes

 

6,968,641

 

 —

 

6,968,641

 

 —

 

 

Stock options to purchase common stock