Quarterly Report (10-q)

Date : 11/07/2019 @ 10:03PM
Source : Edgar (US Regulatory)
Stock : Aclaris Therapeutics Inc (ACRS)
Quote : 1.35  -0.03 (-2.17%) @ 12:59AM
After Hours
Last Trade
Last $ 1.35 ◊ 0.00 (0.00%)

Quarterly Report (10-q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

 


 

 

 

(Mark one)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

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 001-37581


Aclaris Therapeutics, Inc.

(Exact Name of Registrant as Specified in Its Charter)


Delaware
(State or Other Jurisdiction of
Incorporation or Organization)

46-0571712
(I.R.S. Employer
Identification No.)

640 Lee Road, Suite 200
Wayne, PA
(Address of principal executive offices)

19087
(Zip Code)

 

Registrant’s telephone number, including area code: (484) 324‑7933

 

N/A

 

(Former name, former address and former fiscal year, if changed since last report)


Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

 

 

 

Title of Each Class:

 

Trading Symbol(s)

 

Name of Each Exchange on which Registered

Common Stock, $0.00001 par value

 

ACRS

 

The Nasdaq Stock Market, LLC

 

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 every Interactive Data File required to be submitted 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 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 Securities Exchange Act of 1934:

 

 

 

 

Large accelerated filer  ☐

 

Accelerated filer  ☒

 

 

 

Non-accelerated filer  ☐

 

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 Securities Exchange Act of 1934).   Yes ☐    No ☒

The number of outstanding shares of the registrant’s common stock, par value $0.00001 per share, as of the close of business on November 7, 2019 was 41,388,432.

 

 

 

 

ACLARIS THERAPEUTICS, INC.

 

INDEX TO FORM 10-Q

 

 

 

 

 

 

    

PAGE

 

 

 

PART I. FINANCIAL INFORMATION 

 

 

 

 

 

Item 1. Financial Statements 

 

2

 

 

 

Unaudited Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018 

 

2

 

 

 

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2019 and 2018 

 

3

 

 

 

Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September  30, 2019 and 2018 

 

4

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September  30, 2019 and 2018 

 

5

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements 

 

6

 

 

 

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

 

30

 

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk 

 

52

 

 

 

Item 4. Controls and Procedures 

 

52

 

 

 

PART II. OTHER INFORMATION 

 

 

 

 

 

Item 1. Legal Proceedings 

 

53

 

 

 

Item 1A. Risk Factors 

 

54

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

 

94

 

 

 

Item 6. Exhibits 

 

94

 

 

 

Signatures 

 

95

 

 

 

 

 

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

ACLARIS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

    

September 30, 

 

December 31, 

 

 

    

2019

    

2018

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

29,898

 

$

57,019

 

Marketable securities

 

 

61,530

 

 

110,953

 

Accounts receivable, net

 

 

673

 

 

563

 

Inventory

 

 

 —

 

 

 —

 

Prepaid expenses and other current assets

 

 

2,089

 

 

4,802

 

Discontinued operations - current assets

 

 

51,180

 

 

6,162

 

Total current assets

 

 

145,370

 

 

179,499

 

Property and equipment, net

 

 

2,854

 

 

2,287

 

Intangible assets

 

 

7,217

 

 

7,273

 

Goodwill

 

 

 —

 

 

18,504

 

Other assets

 

 

4,975

 

 

332

 

Discontinued operations - non-current assets

 

 

 —

 

 

67,671

 

Total assets

 

$

160,416

 

$

275,566

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

17,780

 

$

14,755

 

Accrued expenses

 

 

6,066

 

 

8,090

 

Current portion of lease liabilities

 

 

642

 

 

142

 

Discontinued operations - current liabilities

 

 

14,501

 

 

4,355

 

Total current liabilities

 

 

38,989

 

 

27,342

 

Other liabilities

 

 

4,005

 

 

476

 

Long-term debt

 

 

29,930

 

 

29,914

 

Contingent consideration

 

 

1,668

 

 

934

 

Deferred tax liability

 

 

549

 

 

549

 

Discontinued operations - non-current liabilities

 

 

 —

 

 

1,227

 

Total liabilities

 

 

75,141

 

 

60,442

 

Stockholders’ Equity:

 

 

 

 

 

 

 

Preferred stock, $0.00001 par value; 10,000,000 shares authorized and no shares issued or outstanding at September 30, 2019 and December 31, 2018

 

 

 —

 

 

 —

 

Common stock, $0.00001 par value; 100,000,000 shares authorized at September 30, 2019 and December 31, 2018; 41,380,811 and 41,210,725 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively

 

 

 —

 

 

 —

 

Additional paidin capital

 

 

520,209

 

 

507,366

 

Accumulated other comprehensive loss

 

 

(1)

 

 

(69)

 

Accumulated deficit

 

 

(434,933)

 

 

(292,173)

 

Total stockholders’ equity

 

 

85,275

 

 

215,124

 

Total liabilities and stockholders’ equity

 

$

160,416

 

$

275,566

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

2

 

ACLARIS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

 

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2019

    

2018

    

2019

    

2018

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales, net

    

$

 —

    

$

 —

    

$

 —

    

$

 —

 

Contract research

 

 

983

 

 

1,118

 

 

3,132

 

 

3,379

 

Other revenue

 

 

 —

 

 

 —

 

 

 —

 

 

1,000

 

Total revenue, net

 

 

983

 

 

1,118

 

 

3,132

 

 

4,379

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

826

 

 

1,067

 

 

3,028

 

 

3,063

 

Research and development

 

 

16,183

 

 

15,189

 

 

53,334

 

 

41,482

 

Sales and marketing

 

 

112

 

 

63

 

 

629

 

 

89

 

General and administrative

 

 

6,726

 

 

6,141

 

 

21,142

 

 

20,481

 

Goodwill impairment

 

 

 —

 

 

 —

 

 

18,504

 

 

 —

 

Amortization of definite-lived intangible

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total costs and expenses

 

 

23,847

 

 

22,460

 

 

96,637

 

 

65,115

 

Loss from operations

 

 

(22,864)

 

 

(21,342)

 

 

(93,505)

 

 

(60,736)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

 

(274)

 

 

710

 

 

(589)

 

 

2,189

 

Loss from continuing operations

 

 

(23,138)

 

 

(20,632)

 

 

(94,094)

 

 

(58,547)

 

Loss from discontinued operations

 

 

(32,181)

 

 

(12,108)

 

 

(48,666)

 

 

(35,640)

 

Net loss

 

$

(55,319)

 

$

(32,740)

 

$

(142,760)

 

$

(94,187)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share, basic and diluted

 

$

(1.34)

 

$

(1.06)

 

$

(3.46)

 

$

(3.04)

 

Weighted average common shares outstanding, basic and diluted

 

 

41,364,387

 

 

30,982,192

 

 

41,296,377

 

 

30,938,026

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on marketable securities, net of tax of $0

 

$

(23)

 

$

65

 

$

41

 

$

111

 

Foreign currency translation adjustments

 

 

14

 

 

 7

 

 

27

 

 

19

 

Total other comprehensive income (loss)

 

 

(9)

 

 

72

 

 

68

 

 

130

 

Comprehensive loss

 

$

(55,328)

 

$

(32,668)

 

$

(142,692)

 

$

(94,057)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

ACLARIS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF

STOCKHOLDERS’ EQUITY

(Unaudited)

 

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Common Stock

 

Additional

 

Other

 

 

 

Total

 

 

 

 

 

Par

 

Paid‑in

 

Comprehensive

 

Accumulated

 

Stockholders’

 

 

  

  Shares 

  

Value

  

Capital

  

Gain (Loss)

  

Deficit

  

Equity

 

Balance at December 31, 2018

 

41,210,725

 

$

 —

 

$

507,366

 

$

(69)

 

$

(292,173)

 

$

215,124

 

Vesting of RSUs

 

58,918

 

 

 —

 

 

(188)

 

 

 —

 

 

 —

 

 

(188)

 

Unrealized gain on marketable securities

 

 —

 

 

 —

 

 

 —

 

 

34

 

 

 —

 

 

34

 

Foreign currency translation adjustment

 

 —

 

 

 —

 

 

 —

 

 

(14)

 

 

 —

 

 

(14)

 

Stock-based compensation expense

 

 —

 

 

 —

 

 

4,862

 

 

 —

 

 

 —

 

 

4,862

 

Net loss 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(37,565)

 

 

(37,565)

 

Balance at March 31, 2019

 

41,269,643

 

 

 —

 

 

512,040

 

 

(49)

 

 

(329,738)

 

 

182,253

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options and vesting of RSUs

 

8,927

 

 

 —

 

 

(18)

 

 

 —

 

 

 —

 

 

(18)

 

Unrealized gain on marketable securities

 

 —

 

 

 —

 

 

 —

 

 

30

 

 

 —

 

 

30

 

Foreign currency translation adjustment

 

 —

 

 

 —

 

 

 —

 

 

27

 

 

 —

 

 

27

 

Stock-based compensation expense

 

 —

 

 

 —

 

 

4,814

 

 

 —

 

 

 —

 

 

4,814

 

Net loss 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(49,876)

 

 

(49,876)

 

Balance at June 30, 2019

 

41,278,570

 

 

 —

 

 

516,836

 

 

 8

 

 

(379,614)

 

 

137,230

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options and vesting of RSUs

 

102,241

 

 

 —

 

 

53

 

 

 —

 

 

 —

 

 

53

 

Unrealized loss on marketable securities

 

 —

 

 

 —

 

 

 —

 

 

(23)

 

 

 —

 

 

(23)

 

Foreign currency translation adjustment

 

 —

 

 

 —

 

 

 —

 

 

14

 

 

 —

 

 

14

 

Stock-based compensation expense

 

 —

 

 

 —

 

 

3,320

 

 

 —

 

 

 —

 

 

3,320

 

Net loss 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(55,319)

 

 

(55,319)

 

Balance at September 30, 2019

 

41,380,811

 

$

 —

 

$

520,209

 

$

(1)

 

$

(434,933)

 

$

85,275

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Common Stock

 

Additional

 

Other

 

 

 

Total

 

 

 

 

Par

 

Paid‑in

 

Comprehensive

 

Accumulated

 

Stockholders’

 

  

  Shares 

  

Value

  

Capital

  

Loss

  

Deficit

  

Equity

Balance at December 31, 2017

 

30,856,505

 

$

 —

 

$

384,943

 

$

(246)

 

$

(159,435)

 

$

225,262

Exercise of stock options and vesting of RSUs

 

49,124

 

 

 —

 

 

378

 

 

 —

 

 

 —

 

 

378

Unrealized loss on marketable securities

 

 —

 

 

 —

 

 

 —

 

 

(65)

 

 

 —

 

 

(65)

Foreign currency translation adjustment

 

 —

 

 

 —

 

 

 —

 

 

(17)

 

 

 —

 

 

(17)

Stock-based compensation expense

 

 —

 

 

 —

 

 

5,143

 

 

 —

 

 

 —

 

 

5,143

Net loss 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(30,229)

 

 

(30,229)

Balance at March 31, 2018

 

30,905,629

 

 

 —

 

 

390,464

 

 

(328)

 

 

(189,664)

 

 

200,472

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options and vesting of RSUs

 

59,667

 

 

 —

 

 

(440)

 

 

 —

 

 

 —

 

 

(440)

Unrealized gain on marketable securities

 

 —

 

 

 —

 

 

 —

 

 

111

 

 

 —

 

 

111

Foreign currency translation adjustment

 

 —

 

 

 —

 

 

 —

 

 

29

 

 

 —

 

 

29

Stock-based compensation expense

 

 —

 

 

 —

 

 

5,249

 

 

 —

 

 

 —

 

 

5,249

Net loss 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(31,218)

 

 

(31,218)

Balance at June 30, 2018

 

30,965,296

 

 

 —

 

 

395,273

 

 

(188)

 

 

(220,882)

 

 

174,203

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options and vesting of RSUs

 

25,764

 

 

 —

 

 

86

 

 

 —

 

 

 —

 

 

86

Unrealized gain on marketable securities

 

 —

 

 

 —

 

 

 —

 

 

65

 

 

 —

 

 

65

Foreign currency translation adjustment

 

 —

 

 

 —

 

 

 —

 

 

 7

 

 

 —

 

 

 7

Stock-based compensation expense

 

 —

 

 

 —

 

 

4,707

 

 

 —

 

 

 —

 

 

4,707

Net loss 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(32,740)

 

 

(32,740)

Balance at September 30, 2018

 

30,991,060

 

$

 —

 

$

400,066

 

$

(116)

 

$

(253,622)

 

$

146,328

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

ACLARIS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 

 

 

    

2019

    

2018

 

Cash flows from operating activities:

    

 

    

    

 

    

 

Net loss

 

$

(142,760)

 

$

(94,187)

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

6,089

 

 

921

 

Stock-based compensation expense

 

 

12,996

 

 

15,099

 

Change in fair value of contingent consideration

 

 

734

 

 

866

 

Goodwill impairment charge

 

 

18,504

 

 

 —

 

Intangible asset impairment charge

 

 

27,638

 

 

 —

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

  Accounts receivable

 

 

(13,003)

 

 

(552)

 

  Inventory

 

 

602

 

 

(1,044)

 

Prepaid expenses and other assets

 

 

3,278

 

 

(3,461)

 

Accounts payable

 

 

3,050

 

 

5,932

 

Accrued expenses

 

 

6,817

 

 

2,863

 

Net cash used in operating activities

 

 

(76,055)

 

 

(73,563)

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,347)

 

 

(1,210)

 

Purchases of marketable securities

 

 

(121,303)

 

 

(112,344)

 

Proceeds from sales and maturities of marketable securities

 

 

171,891

 

 

193,427

 

Net cash provided by investing activities

 

 

49,241

 

 

79,873

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Finance lease payments

 

 

(392)

 

 

(499)

 

Proceeds from the exercise of employee stock options

 

 

85

 

 

577

 

Net cash (used in) provided by financing activities

 

 

(307)

 

 

78

 

Net increase (decrease) in cash and cash equivalents

 

 

(27,121)

 

 

6,388

 

Cash and cash equivalents at beginning of period

 

 

57,019

 

 

20,202

 

Cash and cash equivalents at end of period

 

$

29,898

 

$

26,590

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

Additions to property and equipment included in accounts payable

 

$

207

 

$

102

 

Property and equipment obtained pursuant to capital lease financing arrangements

 

$

 —

 

$

2,076

 

Offering costs included in accounts payable

 

$

 —

 

$

20

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

ACLARIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(Amounts in thousands, except share and per share data)

 

1. Organization and Nature of Business

 

Overview

 

Aclaris Therapeutics, Inc. was incorporated under the laws of the State of Delaware in 2012.  In July 2015, Aclaris Therapeutics International Limited (“ATIL”) was established under the laws of the United Kingdom as a wholly-owned subsidiary of Aclaris Therapeutics, Inc.  In March 2016, Vixen Pharmaceuticals, Inc. (“Vixen”) became a wholly-owned subsidiary of Aclaris Therapeutics, Inc., and in September 2018, Vixen was dissolved.  In August 2017, Confluence Life Sciences, Inc. (now known as Aclaris Life Sciences, Inc.) (“Confluence”) was acquired by Aclaris Therapeutics, Inc. and became a wholly-owned subsidiary thereof.  Aclaris Therapeutics, Inc., ATIL, Vixen and Confluence are referred to collectively as the “Company.”  The Company is a physician-led biopharmaceutical company focused on immuno-inflammatory diseases. The Company currently has one commercial product and a diverse pipeline of drug candidates, including one late-stage investigational drug candidate.  In October 2019, the Company sold the worldwide rights to one of its commercial products, RHOFADE (oxymetazoline hydrochloride) cream, 1% (“RHOFADE”), which includes the assignment of certain licenses for related intellectual property assets (see Note 19).  The Company’s other commercial product, ESKATA (hydrogen peroxide) topical solution, 40% (w/w) (“ESKATA”), is a proprietary formulation of high concentration  hydrogen peroxide which was approved by the U.S. Food and Drug Administration (“FDA”) as an office-based prescription treatment for raised seborrheic keratosis (“SK”), a common non-malignant skin tumor. In August 2019, the Company voluntarily discontinued the commercialization of ESKATA in the United States and withdrew the marketing authorizations it had previously received for the product in all countries outside of the United States. The Company continues to maintain the New Drug Application (“NDA”) for ESKATA in the United States. The Company is currently seeking a strategic partner to commercialize ESKATA worldwide.

 

Liquidity

 

The Company’s condensed consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities in the ordinary course of business.  At September 30, 2019, the Company had cash, cash equivalents and marketable securities of $91,428 and an accumulated deficit of $434,933.   Since inception, the Company has incurred net losses and negative cash flows from its operations.  Prior to the acquisition of Confluence in August 2017, the Company had never generated any revenue.  There can be no assurance that profitable operations will ever be achieved, and, if achieved, will be sustained on a continuing basis. In addition, research and development activities, including preclinical and clinical testing of the Company’s drug candidates will require significant additional financing.  The future viability of the Company is dependent on its ability to successfully develop its drug candidates and generate revenue from identifying and consummating transactions with potential third-party partners to further develop, obtain marketing approval for and/or commercialize its development assets or to raise additional capital to finance its operations.  The Company’s failure to raise capital as and when needed could have a negative impact on its financial condition and ability to pursue its business strategies. 

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).  The condensed consolidated financial statements of the Company include the accounts of the operating parent company, Aclaris Therapeutics, Inc., and its wholly-owned subsidiaries, ATIL, Confluence and Vixen.  All significant intercompany transactions have been

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eliminated.  Based upon the revenue from contract research services, the Company believes that gross profit does not provide a meaningful measure of profitability and, therefore, has not included a line item for gross profit on the condensed consolidated statement of operations. 

 

Discontinued Operations

 

On September 5, 2019, the Company announced the completion of a strategic review and its decision to refocus its resources on its immuno-inflammatory development programs and to actively seek partners for its commercial products.  The Company also announced a plan to terminate 86 employees (see Note 16). 

 

The accompanying condensed consolidated financial statements have been recast for all periods presented to reflect the assets, liabilities, revenue and expenses related to the Company’s commercial products as discontinued operations (see Note 15).  The accompanying condensed consolidated financial statements are generally presented in conformity with the Company’s historical format, even in situations where reclassifications to discontinued operations have resulted in $0 values being presented.  The Company believes this format provides comparability with its previously filed financial statements. 

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting periods.  Significant estimates and assumptions reflected in these financial statements include, but are not limited to, variable consideration included in product sales, net, research and development expenses, contingent consideration and the valuation of stock-based awards.  Estimates are periodically reviewed in light of changes in circumstances, facts and experience.  Actual results could differ from the Company’s estimates. 

 

Unaudited Interim Financial Information

 

The accompanying condensed consolidated balance sheet as of September 30, 2019, the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2019 and 2018, the condensed consolidated statement of stockholders’ equity for the three and nine months ended September 30, 2019 and 2018, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2019 and 2018 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited annual financial statements contained in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 18, 2019 and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments necessary for the fair statement of the Company’s financial position as of September 30, 2019, the results of its operations and comprehensive loss for the three and nine months ended September 30, 2019 and 2018, its changes in stockholders’ equity for the three and nine months ended September 30, 2019 and 2018 and its cash flows for the nine months ended September 30, 2019 and 2018.  The condensed consolidated balance sheet data as of December 31, 2018 was derived from audited financial statements but does not include all disclosures required by GAAP.  The financial data and other information disclosed in these notes related to the three and nine months ended September 30, 2019 and 2018 are unaudited. The results for the three and nine months ended September 30, 2019 are not necessarily indicative of results to be expected for the year ending December 31, 2019, any other interim periods, or any future year or period.  The unaudited interim financial statements of the Company included herein have been prepared, pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2018 included in the Company’s annual report on Form 10-K filed with the SEC on March 18, 2019.

 

7

 

Significant Accounting Policies

 

The Company’s significant accounting policies are disclosed in the audited consolidated financial statements for the year ended December 31, 2018 included in the Company’s annual report on Form 10-K filed with the SEC on March 18, 2019.  Since the date of such financial statements, there have been no changes to the Company’s significant accounting policies. 

 

Revenue Recognition

 

The Company accounts for revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers.  Under ASC Topic 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. 

 

To determine revenue recognition in accordance with ASC Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) performance obligations are satisfied.  At contract inception, the Company assesses the goods or services promised within a contract with a customer to identify the performance obligations, and to determine if they are distinct.  The Company recognizes the revenue that is allocated to each distinct performance obligation when (or as) that performance obligation is satisfied.  The Company only recognizes revenue when collection of the consideration it is entitled to under a contract with a customer is probable. 

 

Product Sales, net

 

The Company sold RHOFADE during the nine months ended September 30, 2019 and sold ESKATA during the nine months ended September 30, 2019 and 2018 to a limited number of wholesalers in the United States (collectively, its “Customers”).  These Customers subsequently resold the Company’s products to pharmacies and health care providers.  In addition to distribution agreements with Customers, the Company entered into arrangements with third-party payors, including pharmacy benefit managers and government agencies, and group purchasing organizations (“GPOs”), which provided for government mandated or privately negotiated rebates, chargebacks, and discounts with respect to the purchase of the Company’s commercial products.  The Company discontinued selling ESKATA in August 2019.  The Company sold the worldwide rights to RHOFADE in October 2019 (see Note 19).  Product sales, net has been reclassified to discontinued operations for all periods presented.

 

The Company recognizes revenue from product sales at the point the Customer obtains control of the product, which generally occurs upon delivery, and includes estimates of variable consideration in the same period revenue is recognized.  Components of variable consideration include trade discounts and allowances, product returns, government rebates, discounts and rebates, other incentives such as patient co-pay assistance, and other fee for service amounts.  Variable consideration is recorded on the condensed consolidated balance sheet as either a reduction of accounts receivable, if payable to a Customer, or as a current liability, if payable to a third party other than a Customer.  The Company considers all relevant information when estimating variable consideration such as current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns.  The amount of net revenue the Company can recognize is constrained by estimates of variable consideration which are included in the transaction price.  Payment terms with Customers do not exceed one year and, therefore, the Company does not account for a financing component in its arrangements.  The Company expenses incremental costs of obtaining a contract with a Customer, including sales commissions, when incurred as the period of benefit is less than one year. Shipping and handling costs for product shipments to Customers are recorded as sales and marketing expenses in the condensed consolidated statement of operations. 

 

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Trade Discounts and Allowances - The Company provided Customers with trade discounts, rebates, allowances and other incentives.  The Company records an estimate for these items as a reduction of revenue in the same period the revenue is recognized. 

 

Government and Payor Rebates - The Company contracted with certain third-party payors, including pharmacy benefit managers and government agencies, for the payment of rebates with respect to utilization of its commercial products.  The Company also entered into agreements with GPOs that provided for administrative fees and discounted pricing in the form of volume-based rebates.  The Company is also subject to discount and rebate obligations under state Medicaid programs and Medicare.  The Company records an estimate for these discounts and rebates as a reduction of revenue in the same period the revenue is recognized. 

 

Other Incentives - Other incentives include the Company’s co-pay assistance program which is intended to provide financial assistance to qualified commercially-insured patients with prescription drug co-payments required by third-party payors.  The Company estimates and records an accrual for these incentives as a reduction of revenue in the period the revenue is recognized.   The Company estimates amounts for co-pay assistance based upon the number of claims and the cost per claim that the Company expects to receive associated with product that has been sold to Customers but remains in the distribution channel at the end of each reporting period. 

 

Product Returns - Consistent with industry practice, the Company has a product returns policy that provides Customers a right of return for product purchased within a specified period prior to and subsequent to the product’s expiration date. The right of return lapses upon shipment of the product to a patient.  The Company records an estimate for the amount of its products which may be returned as a reduction of revenue in the period the related revenue is recognized. The Company’s estimate for product returns are based upon available industry data and its own sales information, including its visibility into the inventory remaining in the distribution channel.  There is no returns liability associated with sales of ESKATA as the Company has a no returns policy for this product. 

 

Contract Research

 

The Company earns contract research revenue from the provision of laboratory services to clients through Confluence, its wholly-owned subsidiary.  Contract research revenue is generally evidenced by contracts with clients which are on an agreed upon fixed-price, fee-for-service basis and are generally billed on a monthly basis in arrears for services rendered.  Revenue related to these contracts is generally recognized as the laboratory services are performed, based upon the rates specified in the contracts.  Under ASC Topic 606, the Company elected to apply the “right to invoice” practical expedient when recognizing contract research revenue.  The Company recognizes contract research revenue in the amount to which it has the right to invoice. 

 

The Company has also received revenue from grants under the Small Business Innovation Research program of the National Institutes of Health (“NIH”).  During the nine months ended September 30, 2018, the Company had two active grants from NIH which were related to early-stage research.  There are no remaining funds available to the Company under the grants.  The Company recognizes revenue related to grants as amounts become reimbursable under each grant, which is generally when research is performed, and the related costs are incurred. 

 

Other Revenue

 

Licenses of Intellectual Property – The Company recognizes revenue received from non-refundable, upfront fees related to the licensing of intellectual property when the intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the license has been transferred to the customer, and the customer is able to use and benefit from the license. 

 

 

 

9

Milestone Payments - At the inception of each arrangement that includes milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method.  If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the amount allocated to the license of intellectual property.  Milestone payments that are not within the control of the Company or the customer, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. 

 

Inventory

 

Inventory includes the third-party cost of manufacturing and assembly of finished product, quality control and other overhead costs.  Inventory is stated at the lower of cost or net realizable value.  Inventory is adjusted for short-dated, unmarketable inventory equal to the difference between the cost of inventory and the estimated value based upon assumptions about future demand and market conditions.  The Company had $189 and $791 of inventory as of September 30, 2019 and December 31, 2018, respectively, which was comprised primarily of finished goods and has been reclassified to discontinued operations for all periods presented. 

 

Intangible Assets

 

Intangible assets include both definite-lived and indefinite-lived assets.  Definite-lived intangible assets are amortized over their estimated useful life based on the pattern over which the intangible assets are consumed or otherwise used up.  If that pattern cannot be reliably determined, the straight-line method of amortization is used.  Definite-lived intangible assets consist of a research technology platform the Company acquired through the acquisition of Confluence and the intellectual property rights related to RHOFADE.  Indefinite-lived intangible assets consist of an in-process research and development (“IPR&D”) drug candidate acquired through the acquisition of Confluence.  IPR&D assets are considered indefinite-lived until the completion or abandonment of the associated research and development efforts.  The cost of IPR&D assets is either amortized over their estimated useful life beginning when the underlying drug candidate is approved and launched commercially, or expensed immediately if development of the drug candidate is abandoned. 

 

Definite-lived intangible assets are tested for impairment when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.  Indefinite-lived intangible assets are tested for impairment at least annually, which the Company performs during the fourth quarter, or when indicators of an impairment are present.  The Company recognizes impairment losses when and to the extent that the estimated fair value of an indefinite-lived intangible asset is less than its carrying value. 

 

During the three months ended September 30, 2019, the Company performed an interim impairment analysis of the RHOFADE intangible asset due to its decision to discontinue commercial operations and actively seek a commercialization partner for RHOFADE.  The Company classified the RHOFADE intangible asset as held for sale, in discontinued operations, on its condensed consolidated balance sheet as of September 30, 2019.  The Company’s impairment analysis, which primarily utilized a market-participant’s indication of fair value, resulted in a fair value for the RHOFADE intangible asset which was less than its carrying value.  As a result, the Company recorded an impairment charge of $27,638 to adjust the carrying value of the RHOFADE intangible asset to its net realizable value as of September 30, 2019 (see Note 19).    

 

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Goodwill

 

Goodwill is not amortized, but rather is subject to testing for impairment at least annually, which the Company performs during the fourth quarter, or when indicators of an impairment are present.  The Company considers each of its operating segments, therapeutics and contract research, to be a reporting unit since this is the lowest level for which discrete financial information is available.  The Company attributed the full amount of the goodwill acquired with Confluence, or $18,504, to the therapeutics segment.  The annual impairment test performed by the Company is a qualitative assessment based upon current facts and circumstances related to operations of the therapeutics segment.  If the qualitative assessment indicates an impairment may be present, the Company would perform the required quantitative analysis and an impairment charge would be recognized to the extent that the estimated fair value of the reporting unit is less than its carrying amount.  However, any loss recognized would not exceed the total amount of goodwill allocated to that reporting unit. 

 

During the nine months ended September 30, 2019, the Company performed an interim impairment analysis due to the decline in its stock price, which was considered a triggering event to evaluate goodwill for impairment.  The Company’s impairment analysis, using a market approach, noted that its stock price, including a reasonable control premium, resulted in a fair value for the therapeutics reporting unit which was less than its carrying value.  As a result, the Company recorded an impairment charge of $18,504, the full balance of goodwill, in the nine months ended September 30, 2019. 

 

Leases

 

Leases represent a company’s right to use an underlying asset and a corresponding obligation to make payments to a lessor for the right to use those assets.  The Company evaluates leases at their inception to determine if they are an operating lease or a finance lease.  A lease is accounted for as a finance lease if it meets one of the following five criteria: the lease has a purchase option that is reasonably certain of being exercised, the present value of the future cash flows are substantially all of the fair market value of the underlying asset, the lease term is for a significant portion of the remaining economic life of the underlying asset, the title to the underlying asset transfers at the end of the lease term, or if the underlying asset is of such a specialized nature that it is expected to have no alternative uses to the lessor at the end of the term.  Leases that do not meet the finance lease criteria are accounted for as an operating lease. 

 

The Company recognizes assets and liabilities for leases at their inception based upon the present value of all payments due under the lease.  The Company uses an implicit interest rate to determine the present value of finance leases, and its incremental borrowing rate to determine the present value of operating leases.  The Company determines incremental borrowing rates by referencing collateralized borrowing rates for debt instruments with terms similar to the respective lease.  The Company recognizes expense for operating and finance leases on a straight-line basis over the term of each lease, and interest expense related to finance leases is recognized over the lease term based on the effective interest method.  The Company includes estimates for any residual value guarantee obligations under its leases in lease liabilities recorded on its condensed consolidated balance sheet. 

 

Right-of-use assets are included in other assets and property and equipment, net on the Company’s condensed consolidated balance sheet for operating and finance leases, respectively.  Obligations for lease payments are included in current portion of lease liabilities and other liabilities on the Company’s condensed consolidated balance sheet for both operating and finance leases. 

 

Contingent Consideration

 

The Company initially recorded the contingent consideration related to future potential payments based upon the achievement of certain development, regulatory and commercial milestones, resulting from the acquisition of Confluence, at its estimated fair value on the date of acquisition.  Changes in fair value reflect new information about the likelihood of the payment of the contingent consideration and the passage of time.  Future changes in the fair value of the contingent

11

consideration, if any, will be recorded as income or expense in the Company’s condensed consolidated statement of operations. 

 

Concentration of Credit Risk and of Significant Customers and Suppliers

 

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents and marketable securities. The Company holds all cash, cash equivalents and marketable securities balances at one accredited financial institution, in amounts that exceed federally insured limits. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships. 

 

The Company’s top five customers represented 67% and 85% of contract research revenue for the nine months ended September 30, 2019 and 2018, respectively. 

 

The Company is dependent on third-party manufacturers to supply drug product, including all underlying components, for its research and development activities, including preclinical and clinical testing.  These activities could be adversely affected by a significant interruption in the supply of active pharmaceutical ingredients or other components. 

 

Recently Issued Accounting Pronouncements

 

In November 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606, which, among other things, provides guidance on how to assess whether certain collaborative arrangement transactions should be accounted for under Topic 606.  The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted.  The Company is evaluating the impact of ASU 2018-18 on its consolidated financial statements. 

 

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40).  ASU 2018-15 requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred.  The standard will be effective for fiscal years beginning after December 15, 2019, including interim periods within such fiscal years, with early adoption permitted.  The Company is evaluating the impact of ASU 2018-15 on its consolidated financial statements. 

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820).  The FASB developed the amendments to ASC 820 as part of its broader disclosure framework project, which aims to improve the effectiveness of disclosures in the notes to financial statements by focusing on requirements that clearly communicate the most important information to users of the financial statements.  This update eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain new information and modifies some of the existing disclosure requirements.  The standard will be effective for fiscal years beginning after December 15, 2019, including interim periods within such fiscal years, with early adoption permitted.  The Company is evaluating the impact of ASU 2018-13 on its consolidated financial statements. 

 

In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718).  The amendments in this ASU expand the scope of Topic 718 to include stock-based compensation arrangements with nonemployees except for specific guidance on option pricing model inputs and cost attribution.  ASU 2018-07 is effective for annual reporting periods beginning after December 31, 2018, including interim periods within that year.  The Company adopted the provisions of this standard on January 1, 2019, the impact of which on its consolidated financial statements was not significant. 

 

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In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).  In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, and 2018-11, Targeted Improvements, which included a number of technical corrections and improvements, including additional options for transition.  The new standard establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.  Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.  ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods.  The amendments in ASU 2016-02 must be applied to all leases existing at the date a company initially applies the standard. 

 

The Company adopted the new standard on January 1, 2019, using the effective date as the date of its initial application, and used the modified retrospective approach.  In addition, the Company elected the practical expedients permitted under the transition guidance within the new standard which, among other things, allowed the Company to carry forward the historical lease identification and classification.  The Company also elected the practical expedient to not separate lease and non-lease components, as well as the short-term lease practical expedient which allowed the Company to not capitalize leases with terms less than 12 months that do not contain a reasonably certain purchase option.  The Company’s consolidated financial statements have not been restated, and disclosures required by the new standard have not been provided, for periods before January 1, 2019. 

 

The adoption of ASU 2016-02 resulted in recording additional assets and liabilities of $2,132 and $2,317, respectively upon adoption on January 1, 2019.  The adoption of ASU 2016-02 did not have a material impact on the Company’s consolidated statement of operations or cash flows.

 

 

3. Fair Value of Financial Assets and Liabilities

 

The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

 

    

Level 1

    

Level 2

    

Level 3

    

Total

 

Assets:

    

 

    

    

 

    

    

 

    

    

 

    

 

Cash equivalents

 

$

23,567

 

$

 —

 

$

 —

 

$

23,567

 

Marketable securities

 

 

 —

 

 

61,530

 

 

 —

 

 

61,530

 

Total assets

 

$

23,567

 

$

61,530

 

$

 —

 

$

85,097

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition-related contingent consideration

 

$

 —

 

$

 —

 

$

1,668

 

$

1,668

 

Total liabilities

 

$

 —

 

$

 —

 

$

1,668

 

$

1,668

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

    

Level 1

    

Level 2

    

Level 3

    

Total

 

Assets:

    

 

    

    

 

    

    

 

    

    

 

    

 

Cash equivalents

 

$

49,766

 

$

4,992

 

$

 —

 

$

54,758

 

Marketable securities

 

 

 —

 

 

110,953

 

 

 —

 

 

110,953

 

Total assets

 

$

49,766

 

$

115,945

 

$

 —

 

$

165,711

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition-related contingent consideration

 

$

 —

 

$

 —

 

$

934

 

$

934

 

Total liabilities

 

$

 —

 

$

 —