NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
1.
|
RESTATEMENT OF PREVIOUSLY REPORTED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
In our Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 filed with the Securities and Exchange Commission on August 9, 2018, we underestimated the
amount of royalty revenue from Endo by approximately $750,000 because we did not have sufficient controls in place and Endo’s sales materially exceeded our estimates based on available historical data for the relevant period. Consequently, we have
corrected that amount for the relevant period in this Quarterly Report on Form 10-Q. We have requested that Endo provide this interim data consistently going forward and, they have provided it to us for this quarter
ended September 30, 2018
. As we continue to refine our estimation process and controls around that process, we will need this data to make reasonable estimates.
The “As Reported” amounts in the tables below represent the amounts reported in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2018.
The nature of the restatement adjustments and the impact of the adjustments to June 30, 2018 are shown in the following tables:
|
|
June 30, 2018
Condensed Consolidated Balance Sheet
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
Restated
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Accounts Receivable
|
|
$
|
12,893,893
|
|
|
$
|
754,365
|
|
|
$
|
13,648,258
|
|
Total Current Assets
|
|
|
81,402,261
|
|
|
|
754,365
|
|
|
|
82,156,626
|
|
Total Assets
|
|
|
89,330,315
|
|
|
|
754,365
|
|
|
|
90,084,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
AP and Accrued Liabilities
|
|
|
1,591,707
|
|
|
|
58,740
|
|
|
|
1,650,447
|
|
Income Tax Payable
|
|
|
801,800
|
|
|
|
148,361
|
|
|
|
950,161
|
|
Total Current Liabilities
|
|
|
2,393,507
|
|
|
|
207,101
|
|
|
|
2,600,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings
|
|
|
60,402,721
|
|
|
|
547,264
|
|
|
|
60,949,985
|
|
Total Stockholders' Equity
|
|
|
86,936,808
|
|
|
|
547,264
|
|
|
|
87,484,072
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
89,330,315
|
|
|
$
|
754,365
|
|
|
$
|
90,084,680
|
|
|
|
Condensed Consolidated Income Statements
|
|
|
|
Three months ended June 30, 2018
|
|
|
Six months ended June 30, 2018
|
|
|
|
As
Reported
|
|
|
Adjustments
|
|
|
Restated
|
|
|
As
Reported
|
|
|
Adjustments
|
|
|
Restated
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalties
|
|
$
|
7,061,139
|
|
|
$
|
754,365
|
|
|
$
|
7,815,504
|
|
|
$
|
14,146,139
|
|
|
$
|
754,365
|
|
|
$
|
14,900,504
|
|
Total Revenues
|
|
|
7,096,409
|
|
|
|
754,365
|
|
|
|
7,850,774
|
|
|
|
14,185,818
|
|
|
|
754,365
|
|
|
|
14,940,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
1,985,212
|
|
|
|
58,740
|
|
|
|
2,043,952
|
|
|
|
4,054,845
|
|
|
|
58,740
|
|
|
|
4,113,585
|
|
Total cost and expenses
|
|
|
2,197,008
|
|
|
|
58,740
|
|
|
|
2,255,748
|
|
|
|
4,461,868
|
|
|
|
58,740
|
|
|
|
4,520,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
4,899,401
|
|
|
|
695,625
|
|
|
|
5,595,026
|
|
|
|
9,723,950
|
|
|
|
695,625
|
|
|
|
10,419,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
5,255,132
|
|
|
|
695,625
|
|
|
|
5,950,757
|
|
|
|
10,312,310
|
|
|
|
695,625
|
|
|
|
11,007,935
|
|
Provision for income tax expense
|
|
|
(954,465
|
)
|
|
|
(148,361
|
)
|
|
|
(1,102,826
|
)
|
|
|
(2,033,039
|
)
|
|
|
(148,361
|
)
|
|
|
(2,181,400
|
)
|
Net income
|
|
$
|
4,300,667
|
|
|
$
|
547,264
|
|
|
$
|
4,847,931
|
|
|
$
|
8,279,271
|
|
|
$
|
547,264
|
|
|
$
|
8,826,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.60
|
|
|
|
|
|
|
$
|
0.67
|
|
|
$
|
1.15
|
|
|
|
|
|
|
$
|
1.23
|
|
Diluted net income per share
|
|
$
|
0.59
|
|
|
|
|
|
|
$
|
0.66
|
|
|
$
|
1.13
|
|
|
|
|
|
|
$
|
1.21
|
|
|
|
Condensed Consolidated Statement of Cash Flow
Six months ended June 30, 2018
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
Restated
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
8,279,271
|
|
|
$
|
547,264
|
|
|
$
|
8,826,535
|
|
Changes in Operating Assets and Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts Receivable
|
|
|
(684,061
|
)
|
|
|
(754,365
|
)
|
|
|
(1,438,426
|
)
|
Income tax receivable
|
|
|
(666,874
|
)
|
|
|
148,361
|
|
|
|
(518,513
|
)
|
Accounts payable and accrued expenses
|
|
|
118,696
|
|
|
|
58,740
|
|
|
|
177,436
|
|
2.
|
ORGANIZATION AND DESCRIPTION OF BUSINESS
|
We are a biopharmaceutical company involved in the development of an injectable collagenase clostridium histolyticum for multiple indications. We currently
have a development and license agreement with Endo Global Ventures, a Bermuda unlimited liability company (
“
Endo Global Ventures
”
), an affiliate of Endo International plc (
“
Endo
”
), for injectable collagenase for
marketed indications and indications in development. Endo assumed this agreement when Endo acquired Auxilium Pharmaceuticals, Inc. (
“
Auxilium
”
) on January 29, 2015 (the
“
Acquisition
”
). Injectable
collagenase clostridium histolyticum is marketed as XIAFLEX
®
(or Xiapex
®
in Europe).
On February 1, 2016, we entered into with Endo the First Amendment (the
“
First
Amendment
”
) to the Second Amended and Restated Development and Licensing Agreement (the
“
Auxilium Agreement
”
), by and between us and Auxilium, now a wholly-owned subsidiary of Endo, to amend certain provisions of the Auxilium Agreement (as amended by the First Amendment, the
“
License Agreement
”
). The effective date of the First Amendment was January 1, 2016. Pursuant to the First
Amendment, we and Endo mutually agreed that in exchange for a $8.25 million lump sum payment, we will not receive future additional mark-up on cost of goods sold for sales by non-affiliated sublicensees of Endo outside of the U.S.; provided,
however, that Endo will still be required to pay a mark-up on cost of goods sold for sales made in the
“
Endo Territory,
”
which includes sales made in the U.S. and sales made in any other country where Endo sells the product directly or through affiliated sublicensees.
Additionally, we agreed that Endo may opt-in early to indications, prior to our submission of a clinical trial report, with our consent, such consent not
to be unreasonably withheld. For early opt-ins, Endo will be required to make an opt-in payment of $0.5 million on a per indication basis. For regular opt-ins, following our submission of a clinical trial report, Endo will be required to make an
opt-in payment of $0.75 million on a per indication basis.
The two marketed indications involving our injectable collagenase are Dupuytren
’
s
contracture and Peyronie
’
s disease. Prior to the Acquisition, Auxilium had, and after the Acquisition, Endo has, opted-in to the following indications: frozen shoulder,
cellulite, canine lipoma, lateral hip fat, plantar fibromatosis and human lipoma. Endo exercised, with our consent, an early opt-in for lateral hip fat and plantar fibromatosis in November 2015. Endo opted-in for human lipoma in July 2016. We
manage the development of XIAFLEX for uterine fibroids and initiate the development of XIAFLEX in new potential indications, not licensed by Endo.
On November 8, 2016, following a change in Endo management, Endo announced that a commercial review is
ongoing of the XIAFLEX exercised but non-marketed indications, including frozen shoulder, cellulite, lateral hip fat, plantar fibromatosis and human lipoma, so that Endo can best prioritize its R&D efforts and determine clinical trial
timelines moving forward.
On February 6, 2018, Endo initiated two identical Phase 3 RELEASE clinical trials of XIAFLEX for the treatment of cellulite. On November 7, 2018, Endo released positive results from the multicenter, randomized,
double-blind, placebo-controlled RELEASE studies, which evaluated the safety and efficacy of XIAFLEX in reducing the appearance of cellulite.
(
For more a more detailed discussion
of the results see
Note 7
–
Subsequent Events.
)
Endo is currently selling XIAFLEX in the U.S. for the treatment of Dupuytren
’
s
contracture and Peyronie
’
s disease and has an agreement with Swedish Orphan Biovitrum AB (
“
Sobi
”
), pursuant to which Sobi has marketing rights for Xiapex for Dupuytren
’
s contracture and Peyronie
’
s disease in Europe and certain Eurasian countries. Sobi is currently selling Xiapex in Europe and certain Eurasian countries for the treatment of Dupuytren
’
s contracture and Peyronie
’
s disease. In addition, Endo has an agreement with Asahi Kasei Pharma Corporation (
“
Asahi
”
) pursuant to which Asahi has the right to commercialize XIAFLEX for the treatment of Dupuytren
’
s contracture and Peyronie
’
s disease in Japan. Asahi is selling XIAFLEX for the treatment of Dupuytren
’
s contracture in Japan.
Endo is currently distributing XIAFLEX in Canada through Paladin Labs Inc.,
an operating company of Endo
. In December 2016, Endo entered into a new out-licensing
agreement with Actelion Pharmaceuticals Ltd. (“Actelion”), pursuant to which Actelion obtained marketing and commercial rights for XIAFLEX in Australia and New Zealand.
3.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Except as detailed below, there have been no material changes to the Company’s significant accounting policies during the nine months ended September 30,
2018, as compared to the significant accounting policies disclosed in Note 2 of the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited, but include all adjustments (consisting only of normal, recurring adjustments)
which we consider necessary for a fair presentation of our financial position at such dates and the operating results and cash flows for those periods. Although we believe that the disclosures in our financial statements are adequate to make the
information presented not misleading, certain information normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) has been condensed or omitted pursuant to the rules and
regulations of the SEC for quarterly reporting.
The information included in this Report should be read in conjunction with the risk factors discussed in Part I, Item 1A. Risk Factors in our Annual Report
on Form 10-K for the year ended December 31, 2017 filed with the SEC on March 14, 2018 and in Item 1A of Part 2 of our Quarterly Reports on Form 10-Q for the quarter end March 31, 2018 and June 30, 2018 filed with the SEC on May 10, 2018 and August
9, 2018, respectively.
Principles of Consolidation
The condensed
consolidated financial statements include the
accounts of the Company and its subsidiary, Advance Biofactures Corp. All intercompany balances and transactions have been eliminated.
Critical Accounting Policies, Estimates and Assumptions
The preparation of condensed
consolidated financial statements in conformity
with U.S. GAAP requires the use of management’s estimates and assumptions that affect the amounts reported in the condensed
consolidated financial statements
and accompanying notes. The Company makes certain assumptions and estimates for its revenues, deferred tax assets, third party royalties and deferred royalty buy-down.
We base our
estimates on historical experience, and other relevant data including interim data provided by Endo and on various other assumptions that we believe are reasonable, the results of which form the basis for making judgments about the carrying
values of assets, liabilities and the amount of revenues and expenses. Actual results may differ from these estimates under different assumptions or conditions.
For further details, see notes “Revenue Recognition”, “Provision for Income
Taxes” and “Third-Party Royalties and Royalty Buy-Down.” Actual results may differ from those estimates.
Revenue Recognition
Beginning in 2014, Financial Accounting Standards Board (“FASB”) issued several Accounting Standards Updates establishing Accounting Standards
Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” (“ASC 606”). ASC 606 requires retrospective implementation, and replaces most industry-specific revenue recognition guidance in U.S. GAAP with a new principles-based,
five-step revenue recognition model. The Company adopted ASC 606 effective January 1, 2018. Under ASC 606, we recognize revenues when our customer obtains control of promised goods or services, in an amount that reflects the consideration which
we expect to receive in exchange for those goods or services. We recognize revenues following the five step model prescribed under ASC 606: (i) identify 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 revenues when (or as) we satisfy the performance obligation(s).
Revenues, and their respective treatment for financial reporting purposes under ASC 606 and our license agreement with Endo, are as follows:
Royalty / Mark-Up on Cost of Goods Sold
We receive royalty revenues on net sales and mark-up on cost of goods sold revenue in the U.S. under our License Agreement with Endo. These are presented in
“Royalties” in our condensed consolidated statements of income. We do not have future performance obligations under this revenue stream. In accordance with ASC 606, we record these revenues based on estimates of the net sales that occurred
during the relevant period. The relevant period estimates of these royalties are based on interim data provided by Endo and analysis of historical royalties and mark-up on cost of goods sold revenue that have been paid to us, adjusted for any
changes in facts and circumstances, as appropriate. Differences between actual and estimated royalty revenues are adjusted for in the period in which they become known, typically the following quarter. The royalties payable by Endo to us are
subject to set-off for certain patent costs.
Licensing Revenue
We include revenue recognized from upfront licensing, sublicensing and milestone payments in “License Revenues” in our condensed consolidated statements
of income.
The Company recognizes licensing revenues generated through development and/or commercialization agreements. The terms of these agreements typically
include payment to the Company of one or more of the following: nonrefundable, upfront license fees; sublicensing; development and commercial milestone payments; development activities; and royalties on net sales of licensed products. Each of
these types of payments results in licensing revenues except for revenues from royalties on net sales of licensed products and the mark-up of cost of goods sold revenues which are classified as royalty revenues. Revenue is recognized upon
satisfaction of a performance obligation by transferring control of a good or service to the customer.
For each development and/or commercialization agreement that result in revenues, the Company identifies all performance obligations, aside from those
that are immaterial, which may include a license to intellectual property and know-how, development activities and/or transition activities. In order to determine the transaction price, in addition to any upfront payment, the Company estimates
the amount of variable consideration at the outset of the contract either utilizing the expected value or most likely amount method, depending on the facts and circumstances relative to the contract. The Company constrains (reduces) the estimates
of variable consideration such that it is probable that a significant reversal of previously recognized revenue will not occur throughout the life of the contract. When determining if variable consideration should be constrained, management
considers whether there are factors outside the Company’s control that could result in a significant reversal of revenue. In making these assessments, the Company considers the likelihood and magnitude of a potential reversal of revenue. These
estimates are re-assessed each reporting period as required.
If a license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement,
the Company recognizes revenues from nonrefundable, upfront license fees based on the relative standalone selling price prescribed to the license compared to the total value of the arrangement. The revenue is recognized when the license is
transferred to the collaborator and the collaborator is able to use and benefit from the license. For licenses that are not distinct from other obligations identified in the arrangement, the Company utilizes judgment to assess the nature of the
combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time. If the combined performance obligation is satisfied over time, the Company applies an appropriate method of
measuring progress for purposes of recognizing revenue from nonrefundable, upfront license fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue
recognition.
Development and Regulatory Milestone Payments
Depending on facts and circumstances, the Company may conclude that it is appropriate to include the milestone, representing variable consideration, in
the estimated total transaction price, or that it is appropriate to fully constrain the milestone. The Company may include revenues from certain milestones in the total transaction price in a reporting period before the milestone is achieved if
the Company concludes that achievement of the milestone is probable and that recognition of revenue related to the milestone will not result in a significant reversal in amounts recognized in future periods. The Company records a corresponding
contract asset when this conclusion is reached. Milestone payments that have not been included in the transaction price to date are fully constrained. The Company re-evaluates the probability of achievement of such development milestones and any
related constraint each reporting period. The Company adjusts its estimate of the total transaction price, including the amount of revenue that it has recorded, if necessary.
RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Pronouncements Adopted
Effective January 1, 2018, the Company adopted ASC 606, which provides principles for recognizing revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The Company adopted ASC 606 on a modified retrospective basis through a cumulative adjustment to
equity. See Note 3 –
Significant Accounting Policies
–
Revenue
Recognition.
The adoption of ASC 606 as of January 1, 2018, applying the modified-retrospective method,
changed the timing of our recognition of
royalty and mark-up cost of goods sold revenue.
Beginning in 2018, we recorded these royalty revenues based on estimates of the net
sales and mark-up cost of goods sold that occurred during the relevant period thereby eliminating the one quarter lag.
Previously, these amounts were not recognized until they were fixed and determinable. In addition, deferred revenue
associated with the prepayment of foreign mark-up on cost of goods sold
revenue will no longer be r
ecognized over time based on sales by non-affiliated sublicensees of Endo
outside of the U.S. and, under ASC 606,
would have been recognized when the transaction occurred in 2016.
The cumulative effect of applying the new guidance of ASC 606 to our License Agreement with Endo as of January 1, 2018 was recorded as an adjustment to
retained earnings as of the adoption date. As a result of applying the modified retrospective method to adopt the new revenue guidance, the following adjustments were made to accounts on the Condensed Consolidated Balance Sheet as of January 1,
2018:
The Company recorded the following cumulative effect as of January 1, 2018, itemized here (in millions):
|
|
As reported
December 31, 2017
|
|
|
Adjustments
|
|
|
Adjusted
January 1, 2018
|
|
Accounts receivable
|
|
$
|
4.7
|
|
|
$
|
7.6
|
(1)
|
|
$
|
12.3
|
|
Deferred revenue
|
|
|
(6.4
|
)
|
|
|
6.3
|
(2)
|
|
|
(0.1
|
)
|
Deferred royalty buy-down
|
|
|
(2.5
|
)
|
|
|
(0.4
|
)
(3)
|
|
|
(2.9
|
)
|
Accounts payable and accrued expenses
-third party royalties
|
|
|
(0.4
|
)
|
|
|
(0.5
|
)
(3)
|
|
|
(0.9
|
)
|
Deferred tax assets, net
|
|
|
1.7
|
|
|
|
(1.3
|
)
(4)
|
|
|
0.4
|
|
Income tax payable
|
|
|
-
|
|
|
|
(1.4
|
)
(5)
|
|
|
(1.4
|
)
|
Retained earnings adjustment
|
|
$
|
(2.9
|
)
|
|
$
|
10.3
|
|
|
$
|
7.4
|
|
(1)
|
This adjustment represents the elimination of the one quarter lag by recognizing royalty revenues based on of XIALFLEX net sales and mark-up on cost of goods sold
revenues reported to us by Endo for the fourth quarter of 2017.
|
(2)
|
Represents
the remaining deferred revenue balance
of the prepaid mark-up on cost of goods sold
based on sales by non-affiliated sublicensees of Endo outside of the U.S.
|
(3)
|
Represents the amortization of the royalty buy-down and third party royalties expense associated royalty revenues based on XIALFLEX net sales reported to us by Endo for
the fourth quarter of 2017.
|
(4)
|
To reverse a deferred tax asset associated with the
deferred revenue balance
of the prepaid mark-up on cost of goods sold
by non-affiliated sublicensees of Endo outside of the U.S.
|
(5)
|
To create a tax liability associated the elimination of the one quarter lag by recognizing royalty revenues based on of XIALFLEX net sales and mark-up on cost of goods
sold revenues reported to us by Endo for the fourth quarter of 2017.
|
At September 30, 2018, contract assets of $8.2 million for which there’s an unconditional right to receive payment were included in accounts receivable on
the condensed consolidated balance sheet.
In accordance with the new revenue standard requirements, the
impact of adoption on our condensed consolidated balance sheet was as follows
(in millions)
:
|
|
September 30, 2018
|
|
|
|
As Reported
|
|
|
Balances Without
Adoption of New
Revenue Standard
|
|
|
Effect of Change
Higher / (Lower)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
14.5
|
|
|
$
|
6.3
|
|
|
$
|
8.2
|
|
Deferred royalty buy-down
|
|
|
0.6
|
|
|
|
0.7
|
|
|
|
(0.1
|
)
|
Deferred tax assets
|
|
|
0.3
|
|
|
|
1.5
|
|
|
|
(1.2
|
)
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
1.1
|
|
|
|
0.5
|
|
|
|
0.6
|
|
Deferred revenue
|
|
|
-
|
|
|
|
1.0
|
|
|
|
(1.0
|
)
|
Income tax payable
|
|
|
0.7
|
|
|
|
(0.6
|
)
|
|
|
1.3
|
|
Deferred revenue, long term
|
|
|
-
|
|
|
|
4.5
|
|
|
|
(4.5
|
)
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
66.0
|
|
|
|
55.5
|
|
|
|
10.5
|
|
In accordance with the new revenue standard requirements, the impact of adoption on our condensed consolidated statement
of operations for the three and nine months ended September 30, 2018 was as follows (in millions):
|
|
Three Months Ended September 30, 2018
|
|
|
|
|
|
|
Balances Without
Adoption of New
Revenue Standard
|
|
|
Effect of Change
Higher / (Lower)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
Nine Months Ended September 30, 2018
|
|
|
|
|
|
|
Balances Without
Adoption of New
Revenue Standard
|
|
|
Effect of Change
Higher / (Lower)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In January 2016, the FASB issued new guidance on recognition and measurement of financial assets and financial liabilities. The new guidance will impact
the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. All equity investments in unconsolidated entities (other than those accounted for
under the equity method of accounting) will generally be measured at fair value with changes in fair value recognized through earnings. There will no longer be an available-for-sale classification (changes in fair value reported in other
comprehensive income (loss) for equity securities with readily determinable fair values). In addition, the FASB clarified the need for a valuation allowance on deferred tax assets resulting from unrealized losses on available-for-sale debt
securities. In general, the new guidance will require modified retrospective application to all outstanding instruments, with a cumulative effect adjustment recorded to opening retained earnings. The adoption of the new standard as of January 1,
2018 had no impact on our consolidated financial statements and related disclosure as we do not currently have any available-for-sale equity investments.
Accounting Pronouncements Not Yet Adopted
In February 2016, FASB issued Accounting Standards Update (“ASU”) No.
2016-02,
Leases (Topic 842)
(“ASU 2016-02”)
.
Under the new
guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the lease commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease,
measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged.
Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and ASC 606. The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must
recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years (i.e., January 1, 2019, for a calendar year entity). Early application is permitted. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating
leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not
require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach.
We do not expect the standard will have a material
impact on our consolidated financial statements due to the short term nature of our leases.
In June 2016, FASB issued ASU 2016-13,
Financial Instruments - Credit
Losses
. The amendment revises the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses on financial instruments,
including, but not limited to, available for sale debt securities and accounts receivable. The Company is required to adopt this standard starting in the first quarter of fiscal year 2021. Early adoption is permitted. We are currently evaluating
the impact of the adoption of this standard on our consolidated financial statements and related disclosures.
Cash, Cash Equivalents and Investments
Cash equivalents include only securities having a maturity of 90 days or less at the time of purchase. Investments are stated on an amortized cost basis.
The Company limits its credit risk associated with cash, cash equivalents and investments by placing its investments with banks it believes are highly creditworthy and with highly rated money market funds, certificates of deposit, municipal bonds
and corporate bonds. All investments are classified as held to maturity. As of September 30, 2018 and December 31, 2017, the amortized cost of these investments was $63.6 million and $57.7 million, respectively. No unrealized gains or losses were
recorded in either period.
Fair Value Measurements
Management believes that the carrying amounts of the Company’s financial instruments, including cash, cash equivalents, held to maturity investments,
accounts receivable, accounts payable and accrued expenses approximate fair value due to the short-term nature of those instruments. As of September 30, 2018 and December 31, 2017, there were no recorded unrealized gains or losses on our
investments as they are classified as held to maturity.
As of
September 30
, 2018 and December 31, 2017, amortized cost basis of the investments approximated their fair value.
At September 30, 2018 and December 31, 2017, the amortized premium included in interest income was $361,000 and
$673,000, respectively.
The following table presents the Company’s schedule of maturities at September 30, 2018 and December 31, 2017:
|
|
Maturities as of
September 30, 2018
|
|
|
Maturities as of
December 31, 2017
|
|
|
|
1 Year or
Less
|
|
|
Greater than 1
Year
|
|
|
1 Year or
Less
|
|
|
Greater than
1 Year
|
|
Municipal bonds
|
|
$
|
4,285,175
|
|
|
$
|
100,000
|
|
|
$
|
1,002,650
|
|
|
$
|
100,000
|
|
Corporate bonds
|
|
|
49,052,966
|
|
|
|
4,819,306
|
|
|
|
48,143,495
|
|
|
|
3,155,573
|
|
Certificates of deposit
|
|
|
5,091,070
|
|
|
|
249,016
|
|
|
|
2,827,826
|
|
|
|
2,490,401
|
|
Total
|
|
$
|
58,429,211
|
|
|
$
|
5,168,322
|
|
|
$
|
51,973,971
|
|
|
$
|
5,745,974
|
|
The authoritative literature for fair value measurements established a three-tier fair value hierarchy, which prioritizes the inputs in measuring fair
value. These tiers are as follows: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than the quoted prices in active markets that are either directly or indirectly observable;
and Level 3, defined as significant unobservable inputs (entity developed assumptions) in which little or no market data exists.
As of September 30, 2018, the Company held certain investments that are required to be measured at fair value on a recurring basis. The following tables
present the Company’s fair value hierarchy for these financial assets as of September 30, 2018 and December 31, 2017:
September 30, 2018
|
Type of Instrument
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
Institutional Money Market
|
|
$
|
9,491,019
|
|
|
$
|
9,491,019
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
Corporate Bonds
|
|
|
1,300,000
|
|
|
|
1,300,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
Municipal Bonds
|
|
|
4,385,175
|
|
|
|
-
|
|
|
|
4,385,175
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
Corporate Bonds
|
|
|
53,872,272
|
|
|
|
-
|
|
|
|
53,872,272
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
Certificates of Deposit
|
|
|
5,340,086
|
|
|
|
5,340,086
|
|
|
|
-
|
|
|
|
-
|
|
December 31, 2017
|
Type of Instrument
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
Institutional Money Market
|
|
$
|
3,108,549
|
|
|
$
|
3,108,549
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
Municipal Bonds
|
|
|
800,000
|
|
|
|
-
|
|
|
|
800,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
Municipal Bonds
|
|
|
1,102,650
|
|
|
|
-
|
|
|
|
1,102,650
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
Corporate Bonds
|
|
|
51,299,068
|
|
|
|
-
|
|
|
|
51,299,068
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
Certificates of Deposit
|
|
|
5,318,227
|
|
|
|
5,318,227
|
|
|
|
-
|
|
|
|
-
|
|
Concentration of Credit Risk and Major Customers
The Company maintains bank account balances, which, at times, may exceed insured limits. The Company has not experienced any losses with these accounts and
believes that it is not exposed to any significant credit risk on cash.
The Company maintains investments in FDIC insured certificates of deposits, municipal bonds and corporate bonds.
The Company is currently dependent on one customer, Endo, who generates almost all its revenues. For the three and nine months ended September 30, 2018,
licensing, sublicensing, milestones and royalty revenues under the License Agreement with Endo were approximately $8.2 million and $23.1 million, respectively, and for the three and nine months ended September 30, 2017, the licensing, sublicensing,
milestones and royalty revenues under the License Agreement with Endo were approximately $6.5 million and $20.7 million, respectively.
At September 30, 2018 and December 31, 2017, our accounts receivable balances from Endo were $14.5 million and $4.7 million, respectively.
Treasury Stock
The Company accounts for treasury stock under the cost method and includes treasury stock as a component of stockholders’ equity. For the nine months ended
September 30, 2018
, we repurchased 43,705 shares at an average price of $58.55 as compared to the repurchase of 12,048 shares at an average price of $51.17 in the corresponding
2017 period.
Receivables and Doubtful Accounts
Trade accounts receivable are stated at the amount the Company expects to collect. We may maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. We consider the following factors when determining the collectability of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current
economic industry trends, and changes in customer payment terms. Our accounts receivable balance is typically due from
Endo,
our one large specialty pharmaceutical customer.
Endo
has historically paid timely and has been a financially stable organization. Due to
the nature of the accounts receivable balance, we believe the risk of doubtful accounts is minimal and therefore no allowance is recorded. If the financial condition of our customer were to deteriorate, adversely affecting its ability to make
payments, additional allowances would be required. We may provide for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances that remain outstanding after we have used reasonable collection
efforts are written off through a charge to the valuation allowance and a credit to accounts receivable.
At
September
30, 2018
and December 31, 2017
our
accounts receivable balance was $14.5 million and $4.7 million, respectively, and was from one customer, Endo. With the adoption of ASC 606 as of January 1, 2018,
using the modified-retrospective adoption method
,
we recorded an adjustment to our accounts receivable balance of $7.6 million related to royalties
associated with the net sales of XIAFLEX that occurred during the fourth quarter of 2017 thereby eliminating the one quarter lag
.
(
For more a more detailed
discussion regarding ASC 606 see
Note 3
-
Summary of Significant Accounting Policies – Recent Accounting Pronouncements
-
Accounting
Pronouncements Adopted.
)
Deferred Revenue
With the adoption of ASC 606 using the modified retrospective adoption method as of January 1, 2018, the remaining deferred revenue balance associated
with the mark-up on cost of goods sold for sales by non-affiliated sublicensees of Endo outside of the U.S. as of December 31, 2017 of $6.3 million
was recorded as an adjustment to
our retained earnings. Additionally,
approximately $35,000 related to nonrefundable upfront product license fees for product candidates for which we have no remaining
performance
obligations
was recognized during the second quarter of 2018. Finally, during the second quarter of 2018 we determined that the $100,000 related to a milestone payment withheld by Endo due to a foreign tax withholding was uncollectable
and have reduced this amount to zero. As of September 30, 2018 and December 31, 2017, deferred revenue was zero and $6.4 million, respectively.
(
For more a
more detailed discussion regarding ASC 606 see
Note 3
-
Summary of Significant Accounting Policies – Recent Accounting Pronouncements
-
Accounting
Pronouncements Adopted.
)
Reimbursable Third-Party Patent Costs
We accrue patent costs that are reimbursable to Endo by us under the License Agreement. We capitalize certain patent costs related to patent prosecution
and maintenance and expense others. As of September 30, 2018
and December 31, 2017,
our net reimbursable third party patent expense was $40,000 and zero, respectively.
Third-Party Royalties
We have entered into licensing and royalty agreements with third parties and agreed to pay certain royalties on net sales of products for specific
indications. The royalty rates differ from agreement to agreement and, in certain cases, have been redacted with the permission of the SEC. No assumptions should be made that any disclosed royalty rate payable to a particular third party is the
same or similar with respect to any royalty rate payable to any other third parties. We accrue third-party royalty expenses on net sales reported to us by Endo. Third-party royalty costs are generally expensed under general and administrative in
the quarter that the net sales have occurred. For the three and nine month periods ended September 30, 2018, third-party royalty expenses were $0.6 million and $1.7 million, respectively. For the three and nine month periods ended September 30,
2017, third-party royalty expenses were $0.4 million and $1.4 million, respectively. With the adoption of ASC 606 as of January 1, 2018
using the modified-retrospective adoption
method
,
we recorded an adjustment to our retained earnings for third party royalties expense of $0.5 million associated with the net sales of XIAFLEX that occurred during
the fourth quarter of 2017 thereby eliminating the one quarter lag
. Our third-party royalty expense under general and administrative expenses may increase if net sales by Endo and its partners for XIAFLEX and Xiapex increase and
potential new indications for XIAFLEX and Xiapex are approved, marketed and sold.
(
For more a more detailed discussion regarding ASC 606 see
Note 3
-
Summary
of Significant Accounting Policies – Recent Accounting Pronouncements
-
Accounting Pronouncements Adopted.
)
Royalty Buy-Down
On March 31, 2012, we entered into an amendment to our existing agreement with Dr. Martin K. Gelbard, dated August 27, 2008, related to our future
royalty obligations in connection with Peyronie’s disease. The amendment enables us to buy down a portion of our future royalty obligations in exchange for an initial cash payment of $1.5 million and five additional cash payments of $600,000, all
of which have been paid as of January 1, 2018. Royalty obligations terminate five years after first commercial sale which occurred in January 2014. The Company amortizes long-term contracts with finite lives in a manner that reflects the pattern
in which the economic benefits of the assets are consumed or otherwise used up. Dr. Gelbard’s agreement is amortized based on an income forecast method by estimating sales of XIAFLEX and Xiapex for Peyronie’s disease on an annual basis as
measured by the proportion of the total estimated sales over the five year period. For the three and nine months ended September 30, 2018, we amortized approximately $0.6 million and $1.6 million related to this agreement and $0.4 million and
$1.1 million for the three and nine months ended September 30, 2017. With the adoption of ASC 606 as of January 1, 2018
using the modified-retrospective adoption method
,
we recorded an adjustment to our capitalized balance of $0.4 million related to royalties associated with the net sales of XIAFLEX that occurred during the fourth quarter of 2017 thereby
eliminating the one quarter lag
. As of September 30, 2018 and December 31, 2017, the remaining capitalized balances were approximately $0.6 million and $2.5 million, respectively. We perform an evaluation of the recoverability of the
carrying value to determine if facts and circumstances indicate that the carrying value of the assets may be impaired and if any adjustment is warranted. As of September 30, 2018, there was no indicator that an impairment existed.
(
For more a more detailed discussion regarding ASC 606 see
Note 3
-
Summary of Significant Accounting Policies – Recent Accounting Pronouncements
-
Accounting Pronouncements Adopted.
)
Research and Development Expenses
R&D expenses
include, but are not limited to, internal costs, such as salaries
and benefits, costs of materials, lab expense, facility costs and overhead. R&D expenses also consist of third party costs, such as medical professional fees, product costs used in clinical trials, consulting fees and costs associated with
clinical study arrangements. We may fund R&D at medical research institutions under agreements that are generally cancelable. All of these costs are charged to R&D as incurred, which may be measured by percentage of completion, contract
milestones, patient enrollment, or the passage of time.
Clinical Trial Expenses
Our cost accruals for clinical trials are based on estimates of the services received and efforts expended pursuant to contracts with various clinical
trial centers and clinical research consultants. In the normal course of business, we contract with third parties to perform various clinical trial activities in the ongoing development of potential drugs. The financial terms of these agreements
are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Payments under the contracts depend on factors such as the achievement of certain events, the successful enrollment of patients, the completion of
portions of the clinical trial, or similar conditions. The objective of our accrual policy is to match the recording of expenses in our financial statements to the actual cost of services received and efforts expended. As such, expenses related to
each patient enrolled in a clinical trial are recognized ratably beginning upon entry into the trial and over the course of the patient’s continued participation in the trial. In the event of early termination of a clinical trial, we accrue an
amount based on our estimate of the remaining non-cancelable obligations associated with the winding down of the clinical trial. Our estimates and assumptions could differ significantly from the amounts that may actually be incurred.
Stock-Based Compensation
The Company has one stock-based compensation plan in effect. ASC 718,
Compensation
- Stock Compensation
(“ASC 718”), requires the recognition of compensation expense, using a fair-value based method, for costs related to all stock options including stock options and common stock issued to our employees and directors
under our stock plans. ASC 718 requires companies to estimate the fair value of stock option awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as
expense on a straight-line basis over the requisite service periods in our condensed
consolidated statements of operations.
Under ASC 718, we estimate the fair value of our employee stock option awards at the date of grant using the Black-Scholes option-pricing model, which
requires the use of certain subjective assumptions. The most significant of these assumptions are our estimates of the expected volatility of the market price of our stock and the expected term of an award. When establishing an estimate of the
expected term of an option award, we consider the vesting period for the award, our recent historical experience of employee stock option exercises (including forfeitures) and the expected volatility of our common stock. As required under the
accounting rules, we review our estimates at each grant date and, as a result, the valuation assumptions that we use to value employee stock-based awards granted in future periods may change. For the nine months ended September 30, 2018, we
granted a total of 31,500 stock options with a weighted average grant date fair value of $18.00 per share.
The assumptions used in the valuation of stock options granted
during the nine months ended September 30, 2018 were as follows:
|
|
Nine Months Ended
September 30, 2018
|
|
Risk-free interest rate
|
|
2.62% to 2.81%
|
|
Expected term of option
|
|
6.25 years
|
|
Expected stock price volatility
|
|
39.6% to 39.7%
|
|
Expected dividend yield
|
|
$
|
0.0
|
|
Further, ASC 718 requires that employee stock-based compensation costs be recognized over the requisite service period, or the vesting period, in a
manner similar to all other forms of compensation paid to employees. The allocation of employee stock-based compensation costs to each operating expense line are estimated based on specific employee headcount information at each grant date and
estimated stock option forfeiture rates and revised, if necessary, in future periods if actual employee headcount information or forfeitures differ materially from those estimates. As a result, the amount of employee stock-based compensation
costs we recognize in each operating expense category in future periods may differ significantly from what we have recorded in the current period.
Stock-based compensation expense recognized in general and administrative expenses was approximately $64,000 and $160,000 for the three and nine month
periods ended September 30, 2018 and approximately $33,000 and $100,000 for the three and nine months ended September 30, 2017, respectively.
Stock Option Activity
A summary of our stock option activity during the nine months ended September 30, 2018 is presented below:
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2017
|
|
|
232,000
|
|
|
$
|
21.56
|
|
|
|
2.52
|
|
|
$
|
5,050,990
|
|
Grants
|
|
|
31,500
|
|
|
|
41.79
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(138,000
|
)
|
|
|
18.63
|
|
|
|
-
|
|
|
|
3,720,149
|
|
Forfeitures or expirations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at September 30, 2018
|
|
|
125,500
|
|
|
$
|
29.86
|
|
|
|
5.16
|
|
|
$
|
3,593,430
|
|
Exercisable at September 30, 2018
|
|
|
86,500
|
|
|
$
|
24.84
|
|
|
|
3.47
|
|
|
$
|
2,910,945
|
|
During the nine months ended September 30, 2018 and 2017, the Company received approximately $2.6 million and $258,000, respectively, from stock options
exercised by option holders.
Aggregate intrinsic value represents the total pre-tax intrinsic value based on the closing price of our common stock of $58.49 on September 28, 2018,
which would have been received by the option holders had all option holders exercised their options as of that date. We have approximately $548,000 in unrecognized compensation cost related to stock options outstanding as of September 30, 2018,
which we expect to recognize over the next 3.17 years.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation. Machinery and equipment, furniture and fixtures, and autos are depreciated on a
straight-line basis over their estimated useful lives of five to ten years. Leasehold improvements are amortized over the lesser of their estimated useful lives or the remaining life of the lease. At each of September 30, 2018 and December 31,
2017, property and equipment were fully depreciated.
Comprehensive Income
For each of the three and nine month periods ended September 30, 2018 and 2017, we had no components of other comprehensive income other than net income
itself.
Provision for Income Taxes
Deferred tax assets and liabilities are recognized based on the expected future tax consequences, using current tax rates, of temporary differences between
the financial statement carrying amounts and the income tax basis of assets and liabilities. A valuation allowance is applied against any net deferred tax asset if, based on the weighted available evidence, it is more likely than not that some or
all of the deferred tax assets will not be realized.
We use the asset and liability method of accounting for income taxes, as set forth in ASC
740-10-25-2. Under this method, deferred income taxes, when required, are provided on the basis of the difference between the financial reporting and income tax basis of assets and liabilities at the statutory rates enacted for future periods.
In
accordance with
ASC
740-10-45-25,
Income Statement Classification of Interest and Penalties
,
we classify interest associated with income taxes under interest expense and tax penalties under other.
The Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on
examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such position are measured based on the largest benefit that has a greater than 50%
likelihood of being realized upon the ultimate settlement. As of September 30, 2018 and December 31, 2017, the Company has not recorded any unrecognized tax benefits.
Commitments and Contingencies
On September 14, 2018, the Company entered into an agreement with the Landlord, dated August 14, 2018, to extend the term of the lease to the Headquarters
for an additional one year period (the “Extended Lease Agreement”). The one year extension will end on November 30, 2019. Pursuant to the Extended Lease Agreement, the base rent is $11,500 per month and the Company may cancel the lease with three
months’ prior written notice to the Landlord at any time during the term.
In accordance with
ASC
260,
Earnings Per Share
, basic net income per share amount is computed using the weighted-average number of shares of common stock outstanding during the periods presented, while diluted net income per share is
computed using the sum of the weighted-average number of common and common equivalent shares outstanding. Common equivalent shares used in the computation of diluted earnings per share result from the assumed exercise of stock options using the
treasury stock method.
The following table summarizes the number of common equivalent shares that were excluded for the calculation of diluted net income per share reported in
the condensed
consolidated statement of operations.
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Stock options
|
|
|
-
|
|
|
|
20,000
|
|
|
|
-
|
|
|
|
20,000
|
|
For the three and nine months ended September 30, 2017, the Company had 20,000 options, which have an exercise price of $29.21, and would have vested upon
the achievement of certain performance criteria, which were not met. These options would have expired on December 2, 2019. On October 25, 2017, these 20,000 options were cancelled due to a change in status of a certain consultant.
5.
|
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
|
Accounts payable and accrued expenses consisted of the following:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Trade accounts payable
|
|
$
|
122,485
|
|
|
$
|
152,542
|
|
Accrued legal and other professional fees
|
|
|
200,116
|
|
|
|
150,691
|
|
Accrued payroll and related costs
|
|
|
183,435
|
|
|
|
215,322
|
|
Third party royalties
|
|
|
589,274
|
|
|
|
329,211
|
|
Other accruals
|
|
|
21,153
|
|
|
|
86,232
|
|
Total
|
|
$
|
1,116,463
|
|
|
$
|
933,998
|
|
We amortize intangible assets with definite lives on a straight-line basis over their remaining estimated useful lives, ranging from two to ten years, and
review for impairment on a quarterly basis and when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We analyze our intangible assets, specifically, capitalized patent costs, on an annual
basis for any indicator that an impairment exists.
For the nine months ended September 30, 2018, we increased our capitalized patent costs based on reports provided to us by Endo. Patent costs may be
creditable against future royalty revenues. For each period presented below, net patent costs consisted of:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Patents
|
|
|
1,020,416
|
|
|
$
|
925,016
|
|
Accumulated amortization
|
|
|
(580,524
|
)
|
|
|
(527,023
|
)
|
|
|
$
|
439,892
|
|
|
$
|
397,993
|
|
The amortization expense for patents for the three and nine months ended September 30, 2018 was approximately $19,000 and $54,000, respectively and for the
three and nine months ended September 30, 2017 was approximately $10,000 and $31,000, respectively. The estimated aggregate amortization expense for the remaining three months of 2018 and each of the years below is approximately as follows:
October 1, 2018 - December 31, 2018
|
|
$
|
19,400
|
|
2019
|
|
|
72,700
|
|
2020
|
|
|
|
|
2021
|
|
|
|
|
2022
|
|
|
|
|
Thereafter
|
|
|
214,200
|
|
7.
|
PROVISION FOR INCOME TAXES
|
Our deferred tax liabilities and deferred tax assets are impacted by events and transactions arising in the ordinary course of business, R&D
activities, vesting of nonqualified options and other items. The provision for income taxes is based on an estimated effective tax rate derived from our consolidated earnings before taxes, adjusted for nondeductible expenses and other permanent
differences for the fiscal year. For the three and nine months ended September 30, 2018, the provision for income taxes was $1.1 million and $3.3 million, respectively. As of September 30, 2018 and December 31, 2017, our remaining deferred tax
assets were approximately $0.3 million and $1.7 million, respectively.
For the three and nine months ended September 30, 2017, the provision for income taxes was $1.5 million and $4.7 million, respectively.
The estimated effective tax rate for the three and nine months ended September 30, 2018 was 18.1% and 19.1%, respectively, of pre-tax income reported in
the period, calculated based on the estimated annual effective rate anticipated for the year ending December 31, 2018 plus the effects of certain discrete items occurring in 2018. Our effective tax rate for the nine months ended September 30, 2018
was impacted primarily by the Tax Cuts and Jobs Act of 2017, which was enacted on December 22, 2017 and lowered the U.S. corporate tax rate from 35% to 21%, beginning in 2018. Our effective tax rate was also impacted by the discrete impact of
current period stock option exercises which impacts the effective rate in the period in which it occurs. The effective tax rate for the nine months ended September 30, 2017 was 35% of pre-tax income reported in the period, calculated based on the
estimated annual effective rate anticipated for the year ending December 31, 2017 plus the effects of certain material discrete items that occurred in 2017.
As of September 30, 2018, the Company has no unrecognized tax benefits or related interest and penalties. Management does not believe that there is any tax
position which it is reasonably possible that will result in unrecognized tax benefit within the next 12 months.
On November 7, 2018, Endo announced positive results from two
identical Phase 3
R
andomized
E
va
L
uation of C
E
llulite Reduction by Coll
A
gena
SE
Clostridium Histolyticum
(“
RELEASE”) studies of CCH for the treatment of cellulite in the buttocks. Subjects receiving CCH showed highly statistically significant
levels of improvement in the appearance of cellulite with treatment, as measured by the trial's primary endpoint (RELEASE-1, p=0.006 & RELEASE-2, p=0.002), which was at least a 2-level composite improvement in cellulite severity in the
target buttock at Day 71 as compared to subjects receiving placebo. In addition, RELEASE-1 passed 8 out of 8 key secondary endpoints and RELEASE-2 passed 7 out of 8 key secondary endpoints. CCH was well-tolerated in the actively-treated
subjects with most adverse events (AEs) being mild to moderate in severity and primarily limited to the local injection area.