Quarterly Report (10-q)

Date : 11/05/2019 @ 9:04PM
Source : Edgar (US Regulatory)
Stock : Dermira Inc (DERM)
Quote : 18.75  0.0 (0.00%) @ 1:00AM

Quarterly Report (10-q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended 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 001-36668

 

DERMIRA, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

27-3267680

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

275 Middlefield Road, Suite 150

Menlo Park, CA 94025

(Address of principal executive offices) (Zip Code)

(650) 421-7200

(Registrant’s telephone number, including area code)

 

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

Title of each class

 

Common Stock, $0.001 par value

Trading symbol

 

DERM

Name of each exchange on which registered

 

The Nasdaq Global Select Market

 

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 Exchange Act.

 

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 Act).    Yes     No 

As of October 31, 2019, the registrant had 54,521,180 shares of common stock outstanding.

 

 

 


Table of Contents

 

Dermira, Inc.

Quarterly Report on Form 10-Q

Index

 

 

Page

No.

PART I

FINANCIAL INFORMATION

 

 

 

 

ITEM 1:

Financial Statements

3

 

Condensed Consolidated Balance Sheets

3

 

Condensed Consolidated Statements of Operations

4

 

Condensed Consolidated Statements of Comprehensive Loss

5

 

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

6

 

Condensed Consolidated Statements of Cash Flows

8

 

Notes to Condensed Consolidated Financial Statements

9

ITEM 2:

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

ITEM 3:

Quantitative and Qualitative Disclosures About Market Risk

32

ITEM 4:

Controls and Procedures

33

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

ITEM 1:

Legal Proceedings

34

ITEM 1A:

Risk Factors

34

ITEM 2:

Unregistered Sales of Equity Securities and Use of Proceeds

73

ITEM 3:

Defaults Upon Senior Securities

73

ITEM 4:

Mine Safety Disclosures

73

ITEM 5:

Other Information

73

ITEM 6:

Exhibits

74

 

 

 

Signatures

75

 

 

2


Table of Contents

 

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

DERMIRA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

74,903

 

 

$

104,976

 

Short-term investments

 

 

283,231

 

 

 

208,064

 

Trade and other receivables, net

 

 

11,057

 

 

 

5,724

 

Inventory

 

 

23,508

 

 

 

8,370

 

Prepaid expenses and other current assets

 

 

19,820

 

 

 

8,275

 

Total current assets

 

 

412,519

 

 

 

335,409

 

Property and equipment, net

 

 

828

 

 

 

1,180

 

Long-term investments

 

 

2,029

 

 

 

2,962

 

Operating lease right-of-use asset

 

 

12,290

 

 

 

 

Intangible assets

 

 

879

 

 

 

952

 

Goodwill

 

 

771

 

 

 

771

 

Restricted cash

 

 

655

 

 

 

802

 

Other assets

 

 

6,270

 

 

 

2,245

 

Total assets

 

$

436,241

 

 

$

344,321

 

Liabilities and stockholders’ equity (deficit)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

11,247

 

 

$

15,948

 

Accrued liabilities

 

 

23,026

 

 

 

22,608

 

Lease liability, current

 

 

4,255

 

 

 

 

Deferred revenue, current

 

 

20,110

 

 

 

 

Total current liabilities

 

 

58,638

 

 

 

38,556

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Term loan

 

 

71,808

 

 

 

32,566

 

Convertible notes, net

 

 

282,607

 

 

 

281,223

 

Lease liability, non-current

 

 

8,708

 

 

 

 

Other long-term liabilities

 

 

 

 

 

1,015

 

Total liabilities

 

 

421,761

 

 

 

353,360

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

 

Common stock

 

 

55

 

 

 

42

 

Additional paid-in capital

 

 

899,750

 

 

 

736,095

 

Accumulated other comprehensive income (loss)

 

 

128

 

 

 

(138

)

Accumulated deficit

 

 

(885,453

)

 

 

(745,038

)

Total stockholders’ equity (deficit)

 

 

14,480

 

 

 

(9,039

)

Total liabilities and stockholders’ equity (deficit)

 

$

436,241

 

 

$

344,321

 

 

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

 

3


Table of Contents

 

DERMIRA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

$

10,228

 

 

$

717

 

 

$

20,740

 

 

$

717

 

Collaboration and license revenue

 

 

1,305

 

 

 

 

 

 

59,890

 

 

 

39,379

 

Total revenue

 

 

11,533

 

 

 

717

 

 

 

80,630

 

 

 

40,096

 

Costs and operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

1,932

 

 

 

237

 

 

 

4,193

 

 

 

237

 

Research and development

 

 

18,416

 

 

 

16,292

 

 

 

52,270

 

 

 

61,428

 

Selling, general and administrative

 

 

46,356

 

 

 

49,510

 

 

 

158,362

 

 

 

120,790

 

Impairment of intangible assets

 

 

 

 

 

 

 

 

 

 

 

1,126

 

Total costs and operating expenses

 

 

66,704

 

 

 

66,039

 

 

 

214,825

 

 

 

183,581

 

Loss from operations

 

 

(55,171

)

 

 

(65,322

)

 

 

(134,195

)

 

 

(143,485

)

Interest and other income, net

 

 

1,948

 

 

 

2,198

 

 

 

5,469

 

 

 

5,969

 

Interest expense

 

 

(4,398

)

 

 

(3,420

)

 

 

(11,689

)

 

 

(12,408

)

Loss before taxes

 

 

(57,621

)

 

 

(66,544

)

 

 

(140,415

)

 

 

(149,924

)

Benefit for income taxes

 

 

 

 

 

 

 

 

 

 

 

194

 

Net loss

 

$

(57,621

)

 

$

(66,544

)

 

$

(140,415

)

 

$

(149,730

)

Net loss per share, basic and diluted

 

$

(1.06

)

 

$

(1.58

)

 

$

(2.77

)

 

$

(3.57

)

Weighted-average common shares used to compute net loss per share, basic and diluted

 

 

54,460

 

 

 

42,066

 

 

 

50,733

 

 

 

41,939

 

 

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

 

 

4


Table of Contents

 

DERMIRA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net loss

 

$

(57,621

)

 

$

(66,544

)

 

$

(140,415

)

 

$

(149,730

)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on available-for-sale securities

 

 

15

 

 

 

19

 

 

 

266

 

 

 

64

 

Total comprehensive loss

 

$

(57,606

)

 

$

(66,525

)

 

$

(140,149

)

 

$

(149,666

)

 

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

 

 

5


Table of Contents

 

DERMIRA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(in thousands)

(unaudited)

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

Equity

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

 

 

Gain (Loss)

 

 

Deficit

 

 

(Deficit)

 

Balance at December 31, 2018

 

 

42,328

 

 

$

42

 

 

$

736,095

 

 

 

 

$

(138

)

 

$

(745,038

)

 

$

(9,039

)

Issuance of common stock in connection with public offering, net of underwriting discounts, commissions and issuance costs of $9,318

 

 

11,283

 

 

 

12

 

 

 

140,171

 

 

 

 

 

 

 

 

 

 

 

140,183

 

Issuance of common stock upon restricted stock unit settlement, net of shares withheld for taxes

 

 

9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

 

13

 

 

 

 

 

 

23

 

 

 

 

 

 

 

 

 

 

 

23

 

Stock-based compensation

 

 

 

 

 

 

 

 

8,090

 

 

 

 

 

 

 

 

 

 

 

8,090

 

Unrealized gain on investments

 

 

 

 

 

 

 

 

 

 

 

 

 

169

 

 

 

 

 

 

169

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(64,832

)

 

 

(64,832

)

Balance at March 31, 2019

 

 

53,633

 

 

 

54

 

 

 

884,379

 

 

 

 

 

31

 

 

 

(809,870

)

 

 

74,594

 

Issuance of common stock upon restricted stock unit settlement, net of shares withheld for taxes

 

 

503

 

 

 

 

 

 

(490

)

 

 

 

 

 

 

 

 

 

 

(490

)

Exercise of stock options

 

 

96

 

 

 

 

 

 

382

 

 

 

 

 

 

 

 

 

 

 

382

 

Purchases under employee stock purchase plan

 

 

166

 

 

 

 

 

 

1,371

 

 

 

 

 

 

 

 

 

 

 

1,371

 

Stock-based compensation

 

 

 

 

 

 

 

 

7,579

 

 

 

 

 

 

 

 

 

 

 

7,579

 

Unrealized gain on investments

 

 

 

 

 

 

 

 

 

 

 

 

 

82

 

 

 

 

 

 

82

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(17,962

)

 

 

(17,962

)

Balance at June 30, 2019

 

 

54,398

 

 

 

54

 

 

 

893,221

 

 

 

 

 

113

 

 

 

(827,832

)

 

 

65,556

 

Issuance of common stock upon restricted stock unit settlement, net of shares withheld for taxes

 

 

106

 

 

 

1

 

 

 

(214

)

 

 

 

 

 

 

 

 

 

 

(213

)

Exercise of stock options

 

 

17

 

 

 

 

 

 

48

 

 

 

 

 

 

 

 

 

 

 

48

 

Stock-based compensation

 

 

 

 

 

 

 

 

6,695

 

 

 

 

 

 

 

 

 

 

 

6,695

 

Unrealized gain on investments

 

 

 

 

 

 

 

 

 

 

 

 

 

15

 

 

 

 

 

 

15

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(57,621

)

 

 

(57,621

)

Balance at September 30, 2019

 

 

54,521

 

 

$

55

 

 

$

899,750

 

 

 

 

$

128

 

 

$

(885,453

)

 

$

14,480

 


6


Table of Contents

 

DERMIRA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(in thousands)

(unaudited)

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

Equity

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Gain (Loss)

 

 

Deficit

 

 

(Deficit)

 

Balance at December 31, 2017

 

 

41,798

 

 

$

42

 

 

$

703,215

 

 

$

(215

)

 

$

(553,393

)

 

$

149,649

 

Issuance of common stock upon restricted stock unit settlement, net of shares withheld for taxes

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

 

44

 

 

 

 

 

 

197

 

 

 

 

 

 

 

 

 

197

 

Stock-based compensation

 

 

 

 

 

 

 

 

7,514

 

 

 

 

 

 

 

 

 

7,514

 

Unrealized loss on investments

 

 

 

 

 

 

 

 

 

 

 

(128

)

 

 

 

 

 

(128

)

Effect of adoption of the ASC 606

 

 

 

 

 

 

 

 

 

 

 

 

 

 

29,895

 

 

 

29,895

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(59,254

)

 

 

(59,254

)

Balance at March 31, 2018

 

 

41,848

 

 

 

42

 

 

 

710,926

 

 

 

(343

)

 

 

(582,752

)

 

 

127,873

 

Issuance of common stock upon restricted stock unit settlement, net of shares withheld for taxes

 

 

21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

 

37

 

 

 

 

 

 

73

 

 

 

 

 

 

 

 

 

73

 

Purchases under employee stock purchase plan

 

 

97

 

 

 

 

 

 

954

 

 

 

 

 

 

 

 

 

954

 

Stock-based compensation

 

 

 

 

 

 

 

 

7,306

 

 

 

 

 

 

 

 

 

7,306

 

Unrealized gain on investments

 

 

 

 

 

 

 

 

 

 

 

173

 

 

 

 

 

 

173

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(23,932

)

 

 

(23,932

)

Balance at June 30, 2018

 

 

42,003

 

 

 

42

 

 

 

719,259

 

 

 

(170

)

 

 

(606,684

)

 

 

112,447

 

Issuance of common stock upon restricted stock unit settlement, net of shares withheld for taxes

 

 

88

 

 

 

 

 

 

(149

)

 

 

 

 

 

 

 

 

(149

)

Exercise of stock options

 

 

23

 

 

 

 

 

 

105

 

 

 

 

 

 

 

 

 

105

 

Stock-based compensation

 

 

 

 

 

 

 

 

7,969

 

 

 

 

 

 

 

 

 

7,969

 

Unrealized gain on investments

 

 

 

 

 

 

 

 

 

 

 

19

 

 

 

 

 

 

19

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(66,544

)

 

 

(66,544

)

Balance at September 30, 2018

 

 

42,114

 

 

$

42

 

 

$

727,184

 

 

$

(151

)

 

$

(673,228

)

 

$

53,847

 

 

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

 

7


Table of Contents

 

DERMIRA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(140,415

)

 

$

(149,730

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

436

 

 

 

398

 

Stock-based compensation

 

 

22,143

 

 

 

22,709

 

Amortization of discount for payments related to acquired in-process research and development

 

 

 

 

 

4,566

 

Net (accretion) amortization of premiums on available-for-sale securities

 

 

(2,009

)

 

 

44

 

Amortization of debt discount and issuance costs

 

 

1,686

 

 

 

1,375

 

Amortization of operating lease right-of-use assets

 

 

2,498

 

 

 

 

Impairment of intangible assets

 

 

 

 

 

1,126

 

Loss on disposal of assets

 

 

101

 

 

 

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Trade and other receivables, net

 

 

(5,333

)

 

 

(2,062

)

Inventory

 

 

(14,917

)

 

 

(1,973

)

Prepaid expenses and other current assets

 

 

(11,131

)

 

 

(2,614

)

Other assets

 

 

(4,025

)

 

 

(2,011

)

Accounts payable

 

 

(4,617

)

 

 

(2,053

)

Accrued liabilities

 

 

1,176

 

 

 

5,881

 

Refund liability

 

 

 

 

 

(10,000

)

Other long-term liabilities

 

 

 

 

 

117

 

Lease liabilities

 

 

(2,577

)

 

 

 

Deferred revenue

 

 

20,110

 

 

 

(379

)

Deferred taxes

 

 

 

 

 

(194

)

Net cash used in operating activities

 

 

(136,874

)

 

 

(134,800

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of available-for-sale securities

 

 

(345,956

)

 

 

(258,116

)

Maturities of available-for-sale securities

 

 

273,186

 

 

 

267,385

 

Acquisition of in-process research and development

 

 

 

 

 

(26,000

)

Purchase of property and equipment

 

 

(112

)

 

 

(595

)

Net cash used in investing activities

 

 

(72,882

)

 

 

(17,326

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Net proceeds from issuance of common stock in connection with equity financing

 

 

140,171

 

 

 

 

Net proceeds from term loan

 

 

38,940

 

 

 

 

Payments for debt issuance cost

 

 

(708

)

 

 

 

Net proceeds from issuance of common stock in connection with equity awards

 

 

1,133

 

 

 

1,180

 

Net cash provided by financing activities

 

 

179,536

 

 

 

1,180

 

Net decrease in cash and cash equivalents and restricted cash

 

 

(30,220

)

 

 

(150,946

)

Cash and cash equivalents and restricted cash at beginning of year

 

 

105,778

 

 

 

296,723

 

Cash and cash equivalents and restricted cash at end of period

 

$

75,558

 

 

$

145,777

 

 

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

 

 

8


Table of Contents

 

DERMIRA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1. Organization

We are a biopharmaceutical company dedicated to bringing biotech ingenuity to medical dermatology by delivering differentiated, new therapies to the millions of patients living with chronic skin conditions. We are committed to understanding the needs of both patients and physicians and using our insight to identify, develop and commercialize leading-edge medical dermatology products. Our approved treatment, QBREXZA® (glycopyrronium) cloth (“QBREXZA”), is indicated for adult and pediatric patients (ages nine and older) with primary axillary hyperhidrosis (excessive underarm sweating). We are evaluating lebrikizumab in a Phase 3 clinical development program for the treatment of moderate-to-severe atopic dermatitis (a severe form of eczema) and have early-stage research and development programs in other areas of dermatology. We are headquartered in Menlo Park, California.

 

2. Summary of Significant Accounting Policies

Basis of Presentation

Our condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules and regulations, certain footnotes or other financial information normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These condensed consolidated financial statements have been prepared on the same basis as our annual consolidated financial statements and, in the opinion of our management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of our financial information. The results of operations for the three- and nine-month periods ended September 30, 2019 are not necessarily indicative of the results to be expected for the full year ending December 31, 2019 or any other future period. The condensed consolidated balance sheet as of December 31, 2018 has been derived from audited consolidated financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements.

The accompanying condensed consolidated financial statements include the accounts of our wholly owned subsidiary, Dermira Canada. All intercompany accounts and transactions have been eliminated in consolidation.

The accompanying condensed consolidated financial statements and related financial information should be read in conjunction with our audited consolidated financial statements and the related notes thereto for the year ended December 31, 2018 included in our Annual Report on Form 10-K, filed with the SEC on February 26, 2019.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition and variable consideration, inventory, acquired in-process research and development, investments, accrued research and development expenses, goodwill, operating lease assets and liabilities, intangible assets, other long-lived assets, stock-based compensation and the valuation of deferred tax assets. We base our estimates on our historical experience and also on assumptions that we believe are reasonable; however, actual results could significantly differ from those estimates.

Restricted Cash

Restricted cash primarily consists of letters of credit collateralized by a money market account pursuant to certain lease and sublease agreements.

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Concentration of Credit Risk

Financial instruments that potentially subject us to a concentration of credit risk consist primarily of cash and cash equivalents, investments and trade and other receivables. We invest in money market funds, U.S. Treasury securities, corporate debt, repurchase agreements, U.S. Government agency securities, commercial paper and certificates of deposits. Bank deposits are held primarily by a limited number of financial institutions and these deposits may exceed insured limits. We are exposed to credit risk in the event of a default by the financial institutions holding our cash and cash equivalents and issuers of investments to the extent recorded on the consolidated balance sheets. Our investment policy limits investments to money market funds, certain types of debt securities issued by the U.S. Government and its agencies, corporate debt, repurchase agreements, commercial paper, certificates of deposit and municipal bonds and places restrictions on the credit ratings, maturities and concentration by type and issuer.

As of and for the three and nine months ended September 30, 2019, three customers (AmerisourceBergen Corporation, McKesson Corporation and Cardinal Health, Inc.) each accounted for more than 10% of our trade receivables and product sales. These three customers collectively accounted for 99.2% and 97.7% of product sales for the three and nine months ended September 30, 2019, respectively, and 99.7% of our trade receivables as of September 30, 2019.

Trade and Other Receivables

Our trade receivables consist of amounts due from the sale of QBREXZA. The trade receivables are recorded net of allowances for distribution fees and trade discounts, government rebates and chargebacks. Estimates for wholesaler chargebacks and cash discounts are based on contractual terms, historical trends and our expectations regarding the utilization rates for these programs. For the periods presented, we did not have any write-offs of trade receivables. We perform ongoing credit evaluations of our wholesalers (“Customers”) and generally do not require collateral.

Other receivables, including collaboration and license receivables, are typically unsecured. Accordingly, we may be exposed to credit risk generally associated with our collaboration and license agreements. To date, we have not experienced any losses related to these receivables.

Inventory

Inventory consists of raw materials, work-in-process and finished goods related to the production of QBREXZA. Inventory costs are determined using the lower of standard cost, which approximates the actual costs determined using the first-in, first-out basis, or net realizable value. Standard costs are reviewed and updated annually or as needed. We expense costs associated with the manufacture of our products prior to regulatory approval and capitalize the cost of inventory when there is a high probability of future economic benefit. We began capitalizing the cost of inventory related to QBREXZA in the second quarter of 2018, the period in which we received regulatory approval to market the product. We expense costs associated with the manufacture of our lebrikizumab product candidate.

We review all inventory balances on a quarterly basis for impairment and recognize any reduction in value as a current period expense with a reserve provision on the condensed consolidated balance sheets. We write down inventory that is considered in excess of expected requirements or at risk of expiration. This assessment requires management to utilize judgment in formulating estimates and assumptions that we believe to be reasonable under the circumstances. Actual results may differ from those estimates and assumptions. If the conditions that caused the impairment were to be resolved in a subsequent period, the reserve provision would not be reversed until the related inventory was sold or otherwise disposed. As of September 30, 2019, the carrying value of our inventory was $23.5 million, including finished goods inventory of $5.5 million which has fixed expiration dates. In addition, we have manufacturing purchase commitments during the next 12 months of $6.1 million related to QBREXZA. During the three and nine months ended September 30, 2019, we recognized a charge of $0.7 million arising from excess inventory and excess purchase commitments.

Leases

We adopted Accounting Standards Update (“ASU”) No. 2016‑02, Leases (Topic 842) (“Topic 842”) on January 1, 2019. For our long-term operating leases, we recognized a right-of-use asset and a lease liability on our condensed consolidated balance sheets. The lease liability is determined as the present value of future lease payments using an estimated rate of interest that we would pay to borrow equivalent funds on a collateralized basis at the lease commencement date. As our leases do not provide an implicit rate, we estimated the rate of interest. In order to estimate the interest rate, we utilized the effective interest rate derived from recent debt transactions, adjusting it for factors that reflect the profile of secured borrowing over the expected term of the lease, including our credit rating. The right-of-use asset is based on the liability adjusted for any prepaid or deferred rent. We determined the lease term at the commencement date by considering whether renewal options and termination options are reasonably assured of exercise.

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We elected the practical expedients permitted under Topic 842, which allowed us to exclude from our condensed consolidated balance sheets recognition of leases having a term of 12 months or less (short-term leases) and we elected to not separate lease components and non-lease components for our long-term real-estate leases.

Rent expense for the operating lease is recognized on a straight-line basis over the lease term and is included in operating expenses on the condensed consolidated statements of operations. Variable lease payments include lease operating expenses.

Prior period amounts continue to be reported in accordance with our historic accounting under previous lease guidance, ASC 840, Leases (Topic 840) (“Topic 840”). See “―Recent Accounting Pronouncements” below, for more information about the impact of the adoption on Topic 842.

Revenue Recognition

We recognize revenue when we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. To determine revenue recognition for contracts with customers we perform 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) we satisfy the performance obligations. At contract inception, we assess the goods or services promised within each contract and assess whether each promised good or service is distinct and determine those that are performance obligations. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

Product Sales

Our product sales consist of sales of QBREXZA, which became available in pharmacies within the United States on October 1, 2018. We recognize revenue from product sales when our Customers obtain control of our product, which is generally upon delivery.

Product sales are recognized at the transaction price, net of estimates of variable consideration, including commercial rebates, discounts related to a savings card program, distribution fees, trade discounts, government rebates and chargebacks and product returns. Variable consideration amounts are estimated at contract inception using the expected-value method and updated at the end of each reporting period as additional information becomes available. The amounts of variable consideration are included in the transaction price only to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Estimates and assumptions are updated quarterly, and if actual future results vary materially from estimates, we will record an adjustment, which could impact product sales and earnings in the period of adjustment.

The following items of variable consideration are recorded at the time of revenue recognition and require significant estimates and judgment.

Commercial rebates and savings card program. We contract with certain third-party payers for the payment of rebates with respect to the utilization of QBREXZA. Rebates to these payers are based on contractual percentages applied to the amount of QBREXZA prescribed to patients who are covered by the plan or the organization with which we have contracts. We estimate and record rebates as a reduction to the transaction price in the same period the related product sales are recognized. We estimate commercial rebates based on contractual terms, estimated payer mix, industry information and other third-party data. We also have a savings card program to provide assistance to eligible patients with out-of-pocket costs, such as deductibles, co-insurance and co-payments, for the patient’s usage of QBREXZA. Reductions to product sales for the savings card program are estimated based on actual and expected program utilization.

Distribution fees and trade discounts.  We pay our Customers fees for distribution services for QBREXZA. We have determined that such distribution services are not distinct from our sales of QBREXZA and the related fees are recorded as a reduction to the transaction price in the period the related product sales are recognized. Distribution fees are recorded based on contractual terms. We also incentivize prompt payment from our Customers by providing a discount for payments made within a certain number of days.

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