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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x        Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2014

 

OR

 

o           Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from                to               .

 

Commission File Number: 001-36375

 

Corium International, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware		38-3230774
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

 

Corium International, Inc.
235 Constitution Drive
Menlo Park, California 94025

(Address of principal executive offices and zip code)

 

(650) 298-8255

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes o No  x

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o		Accelerated filer o
Non-accelerated filer x (Do not check if a smaller reporting company)		Smaller reporting company o

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  o No x

 

As of May 7, 2014, there were approximately 17,617,615 shares of the Registrant’s Common Stock outstanding.

 

 

Table of Contents

 

TABLE OF CON TENTS

 

	Page
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS	1
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	26
ITEM 4. CONTROLS AND PROCEDURES	26
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS	27
ITEM 1A. RISK FACTORS	27
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	54
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	55
ITEM 4. MINE SAFETY DISCLOSURES	55
ITEM 5. OTHER INFORMATION	55
ITEM 6. EXHIBITS	56
SIGNATURES	57

 

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PART I

 

ITEM 1.                                                 FINANCIAL STATEMENTS

 

CORIUM INTERNATIONAL, INC.

CONDENSED BALANCE SHEETS

(unaudited, in thousands)

 

		As of March 31,			As of September
		2014			30, 2013
ASSETS
Current assets:
Cash and cash equivalents		$	5,333		$	13,581
Accounts receivable, net		4,257			3,129
Unbilled accounts receivable		2,343			1,495
Inventories, net		3,040			4,508
Prepaid expenses and other current assets		2,415			1,038
Total current assets		17,388			23,751
Property and equipment, net		12,104			12,622
Debt financing costs, net		731			902
Intangible assets, net		6,694			6,647
Notes receivable — related parties		—			100
TOTAL ASSETS		$	36,917		$	44,022
LIABILITIES, CONVERTIBLE PREFERRED STOCK, REDEEMABLE COMMON STOCK AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable		$	1,791		$	2,748
Accrued expenses and other current liabilities		4,072			3,374
Bank lines of credit		2,658			3,873
Long-term debt, current portion		38			457
Capital lease obligations, current portion		895			1,029
Preferred stock warrant liability		834			560
Recall liability, current portion		774			1,004
Deferred contract revenues, current portion		2,324			2,112
Total current liabilities		13,386			15,157
Long-term interest payable		12,413			11,590
Long-term debt, net of current portion		37,584			36,956
Convertible notes		9,475			9,399
Subordinated note		16,199			13,000
Subordinated note embedded derivative liability		—			7,367
Capital lease obligations, net of current portion		1,274			1,652
Recall liability, net of current portion		3,431			3,828
Deferred contract revenues, net of current portion		3,562			3,688
Total liabilities		97,324			102,637
Convertible preferred stock		57,261			57,261
Redeemable common stock		3,224			3,224
Stockholders’ deficit:
Common stock		2			2
Additional paid-in capital		(29,907		)	(26,679		)
Accumulated deficit		(90,987		)	(92,423		)
Total stockholders’ deficit		(120,892		)	(119,100		)
TOTAL LIABILITIES, CONVERTIBLE PREFERRED STOCK, REDEEMABLE COMMON STOCK AND STOCKHOLDERS’ DEFICIT		$	36,917		$	44,022

 

See accompanying notes to condensed financial statements

 

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CORIUM INTERNATIONAL, INC.

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(unaudited)

(in thousands, except share and per share data)

 

		Three Months Ended March 31,						Six Months Ended March 31,
		2014			2013			2014			2013
Revenues:
Product revenues		$	7,240		$	10,218		$	15,340		$	20,190
Contract research and development revenues		3,173			2,174			5,237			4,762
Other revenues		304			144			608			208
Total revenues		10,717			12,536			21,185			25,160
Costs and operating expenses:
Cost of product revenues		4,998			6,583			10,227			12,816
Cost of contract research and development revenues		3,911			2,820			7,448			5,942
Research and development expenses		1,267			1,520			2,128			2,572
General and administrative expenses		1,236			1,606			3,046			3,398
Amortization of intangible assets		131			133			261			264
Gain on disposal and sale and leaseback of equipment		(32		)	(48		)	(69		)	(91		)
Total costs and operating expenses		11,511			12,614			23,041			24,901
Income (loss) from operations		(794		)	(78		)	(1,856		)	259
Interest income		1			2			3			5
Interest expense		(1,780		)	(1,923		)	(3,804		)	(3,696		)
Change in fair value of preferred stock warrant liability		(231		)	—			(274		)	—
Change in fair value of subordinated note embedded derivative liability		6,338			—			7,367			—
Income (loss) before income taxes		3,534			(1,999		)	1,436			(3,432		)
Income tax benefit (expense)		—			—			—			—
Net Income (loss) and comprehensive income (loss)		$	3,534		$	(1,999	)	$	1,436		$	(3,432	)
Net Income (loss) per share attributable to common stockholders, basic		$	0.50		$	(0.90	)	$	0.03		$	(1.55	)
Net Income (loss) per share attributable to common stockholders, diluted		$	0.33		$	(0.90	)	$	0.02		$	(1.55	)
Weighted average shares used in computing net income (loss) per share attributable to common stockholders, basic		2,232,300			2,225,742			2,231,049			2,218,801
Weighted average shares used in computing net income (loss) per share attributable to common stockholders, diluted		5,930,309			2,225,742			3,482,956			2,218,801

 

See accompanying notes to condensed financial statements

 

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CORIUM INTERNATIONAL, INC.
Condensed Statements of Convertible Preferred Stock, Redeemable Common Stock and Stockholders’ Deficit
(Unaudited)
(in thousands, except share and per share data)

 

		Convertible Preferred Stock						Redeemable Common Stock						Common Stock					Additional Paid-in			Accumulated			Total Stockholders’
		Shares		Amount				Shares		Amount				Shares		Amount			Capital			Deficit			Deficit
Balance — September 30, 2013		36,034,900		$	57,261			347,945		$	3,224			1,881,177		$	2		$	(26,679	)	$	(92,423	)	$	(119,100	)
Decrease in equity associated with modification of subordinated debt		—		—				—		—				—		—			(3,485		)	—			(3,485		)
Issuance of common stock upon exercise of stock options		—		—				—		—				3,211		—			7			—			7
Stock-based compensation expense		—		—				—		—				—		—			250			—			250
Aggregate fractional shares cancelled in connection with reverse stock split		—		—				—		—				(26	)	—			—			—			—
Net income and comprehensive income		—		—				—		—				—		—			—			1,436			1,436
Balance — March 31, 2014		36,034,900		$	57,261			347,945		$	3,224			1,884,362		$	2		$	(29,907	)	$	(90,987	)	$	(120,892	)

 

See accompanying notes to condensed financial statements

 

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CORIUM INTERNATIONAL, INC.

CONDENSED STATEMENTS CASH FLOWS

(unaudited)

(in thousands)

 

		Six Months Ended March 31,
		2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) and comprehensive income (loss)		$	1,436		$	(3,432	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization of property and equipment		1,054			998
Gain on disposal and sale and leaseback of equipment		(69		)	(91		)
Amortization of premium on modification of subordinated note		(286		)	—
Change in fair value of preferred stock warrant liability		274			—
Change in fair value of subordinated debt embedded derivative liability		(7,367		)	—
Amortization of intangible assets		261			264
Noncash amortized debt issue costs on long-term debt		171			164
Noncash amortized debt discount		104			91
Stock compensation expense		250			213
Changes in operating assets and liabilities:
Accounts receivable, net		(1,128		)	(1,367		)
Unbilled accounts receivable		(848		)	(981		)
Inventories, net		1,469			(639		)
Prepaid expenses and other current assets		454			326
Accounts payable		144			(170		)
Accrued expenses and other liabilities		1,412			(137		)
Deferred contract revenues		86			886
Recall liability		(627		)	—
Long-term interest payable		823			822
Net cash used by operating activities		(2,387		)	(3,053		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(1,648		)	(5,788		)
Proceeds from sale of equipment		12			2
Proceeds from repayment of notes receivable — related parties		100			—
Payments for patents and licensing rights		(308		)	(353		)
Net cash used by investing activities		(1,844		)	(6,139		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt		—			6,600
Payment of transaction costs associated with issuance of common stock and long-term debt		(1,832		)	(65		)
Principal payments on long-term debt		(452		)	(574		)
Principal payments on capital lease obligations		(525		)	(304		)
Borrowings on bank lines of credit		1,298			1,500
Payments on bank lines of credit		(2,513		)	(1,572		)
Proceeds from exercise of stock options		7			7
Net cash provided (used) by financing activities		(4,017		)	5,592
NET DECREASE IN CASH AND CASH EQUIVALENTS		(8,248		)	(3,600		)
CASH AND CASH EQUIVALENTS — Beginning of period		13,581			12,245
CASH AND CASH EQUIVALENTS — End of period		$	5,333		$	8,645
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest		$	2,996		$	3,112
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock warrants in connection with debt financing and equipment lease financing		$	—		$	23
Property and equipment purchases included in accounts payable and accrued liabilities		$	38		$	265
Issuance of payment-in-kind notes in lieu of cash interest payments		$	647		$	589
Transaction costs associated with Initial Public Offering included in accrued liabilities		$	1,161		$	—

 

See accompanying notes to condensed consolidated financial statements

 

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CORIUM INTERNATIONAL, INC.

 

Notes to the Condensed Financial Statements

 

1.  Organization, Description of Business, and Summary of Significant Accounting Policies

 

Organization

 

Corium International, Inc., a Delaware corporation (the “Company”), is a commercial stage biopharmaceutical company focused on the development, manufacture and commercialization of specialty pharmaceutical products that leverage its broad experience in transdermal and transmucosal delivery systems.

 

In the normal course of business, the Company enters into collaborative agreements with partners to develop and manufacture products based on the Company’s drug delivery technologies. Revenues consist of net sales of products manufactured, royalties and profit-sharing payments based on sales of such products by partners, and product development fees for research and development activities under collaborative agreements with strategic partners. The Company is also engaged in the research and development of its own proprietary transdermal drug delivery products using its proprietary technologies.

 

Basis of Presentation

 

The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and following the requirements of the Securities and Exchange Commission (the “SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. These financial statements have been prepared on the same basis as the Company’s annual financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments that are necessary for a fair statement of the Company’s financial information. The results of operations for the three and six months ended March 31, 2014 are not necessarily indicative of the results to be expected for the year ending September 30, 2014 or for any future period. The balance sheet as of September 30, 2013 has been derived from the audited financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements.

 

The accompanying condensed financial statements and related financial information should be read in conjunction with the audited financial statements and the related notes thereto for the year ended September 30, 2013 included in the Company’s Prospectus filed pursuant to Rule 424(b)(4) on April 3, 2014 with the SEC (the “Prospectus”).

 

There have been no material changes to the significant accounting policies previously disclosed in the Prospectus.

 

Reverse Stock Split

 

On March 20, 2014, the Company effected a 1-for-10.1 reverse stock split of the Company’s outstanding common stock resulting in a reduction of the Company’s total common stock issued and outstanding from 19,032,056 shares to 1,884,362 shares. The reverse stock split affected all stockholders of the Company’s common stock uniformly, and did not materially affect any stockholder’s percentage of ownership interest. The par value of the Company’s common stock remained unchanged at $0.001 per share and the number of authorized shares of common stock remained the same after the reverse stock split.

 

As the par value per share of the Company’s common stock remained unchanged at $0.001 per share, a total of $17,148 was reclassified from common stock to additional paid-in capital. In connection with this reverse stock split, the number of shares of common stock reserved for issuance under the Company’s equity incentive, stock option and employee stock purchase plans (see Note 4) as well as the shares of common stock underlying outstanding stock options, restricted stock units and warrants were also proportionately reduced while the exercise prices of such stock options and warrants were proportionately increased. All references to shares of common stock and per share data for all periods presented in the accompanying financial statements and notes thereto have been adjusted to reflect the reverse stock split on a retroactive basis.

 

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Initial Public Offering

 

On April 2, 2014, the Company’s registration statements on Form S-1 (File No. 333-195002 and File No. 333-195002) relating to the Initial Public Offering (the “IPO”) of its common stock were declared effective by the SEC. The IPO closed on April 8, 2014 at which time the Company sold 6,500,000 shares of its common stock at a price of $8.00 per share. Corium also granted the underwriters a 30-day option to purchase up to 975,000 additional shares of common stock at the IPO price. The underwriters exercised this option to purchase 374,997 shares on May 2, 2014.  The Company received cash proceeds of $48.5 million from the IPO, including proceeds from the partial exercise of the underwriters’ option, net of underwriting discounts and commissions and estimated expenses paid by the Company.

 

On April 8, 2014, immediately prior to the closing of the IPO, all outstanding shares of convertible preferred stock converted into 3,567,807 shares of common stock, and the related carrying value of $57.3 million was reclassified to common stock and additional paid-in capital. In addition, certain warrants to purchase convertible preferred stock and common stock were also converted and net exercised into 971,440 shares of common stock. Upon the consummation of the IPO, Corium also repurchased 1,077,809 shares of common stock for an aggregate purchase price of $5.2 million from its founders.

 

Following the filing of the Restated Certificate of Incorporation of the Company on April 8, 2014, the number of shares of capital stock the Company is authorized to issue is 155,000,000 shares, of which 150,000,000 shares may be common stock and 5,000,000 shares may be preferred stock. Both the common stock and preferred stock have a par value of $0.001 per share.

 

Use of Estimates

 

Estimates and assumptions are required to be used by management in the preparation of financial statements in conformity with U.S. GAAP that affect the reported amounts of assets, liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of operating revenues and operating expenses during the reporting period.  Those estimates and assumptions affect revenue recognition and deferred revenues, impairment of long-lived assets, determination of fair value of stock-based awards and other debt and equity related instruments, and accounting for income taxes.  As future events and their effects cannot be determined with precision, actual results could differ from those estimates.

 

Concentration of Credit Risk

 

Four partners accounted for 92% and 94% of the Company’s revenues for the three and six months ended March 31, 2014, compared to 99% and 99% for the corresponding periods in 2013.  These same partners accounted for 98% and 100% of accounts receivable as of March 31, 2014 and September 30, 2013.

 

Revenue Recognition

 

The Company generates revenues from agreements for the development and commercialization of its products.  The terms of the agreements may include nonrefundable upfront payments, partial or complete reimbursement of research and development costs, milestone payments, product sales and royalties and profit sharing on product sales derived from partner agreements.  The Company recognizes revenues when the following criteria are met: persuasive evidence of a sales arrangement exists; delivery has occurred; the price is fixed or determinable; and collectability is reasonably assured.

 

Revenue related to multiple element arrangements are analyzed to determine whether the deliverables can be separated or whether they must be accounted for as a single unit of accounting.  This determination is generally based on whether any deliverable has stand-alone value to the partner.  This analysis also establishes a selling price hierarchy for determining how to allocate arrangement consideration to identified units of accounting.  The selling price used for each unit of accounting is based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific nor third-party evidence is available.  Typically, the Company has not granted licenses to partners at the beginning of its arrangements and thus there are no delivered items separate from the research and development services provided.  As such, upfront payments are recorded as deferred revenues in the balance sheet and are recognized as contract research and development revenues over the estimated period of performance that is consistent with the terms of the research and development obligations contained in the agreement.  The Company periodically reviews the estimated period of performance based on the progress made under each arrangement.

 

Amounts related to research and development funding are generally recognized as the related services or activities are performed, in accordance with the contract terms.  To the extent that agreements specify services are to be performed on a cost-plus basis, revenues are recognized as services are rendered.  Such work is generally billed on a monthly basis for time incurred at specified rates in the agreements.  To the extent that agreements specify services to be performed on a fixed-price basis, revenues are recognized consistent with the pattern of the work performed.  Generally, all of the agreements provide for reimbursement of third-party expenses, and such reimbursable expenses are billed as revenues as incurred.

 

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The arrangements may include contractual milestones, which relate to the achievement of pre-specified research, development, regulatory and commercialization events.  The milestone events contained in the Company’s arrangements coincide with the progression of the Company’s product candidates from research and development, to regulatory approval and through to commercialization.  The process of successfully developing a new product, having it approved from a regulatory perspective and ultimately sold for a profit is highly uncertain.  As such, the milestone payments that the Company may earn from its partners involve a significant degree of risk to achieve.  Research and development milestones in the Company’s collaboration agreements may include the following types of events: completion of pre-clinical research and development work, completion of certain development events and initiation or completion of clinical trials.  Regulatory milestones may include the following types of events: filing of regulatory applications with the Food and Drug Administration and approval of the regulatory applications by the Food and Drug Administration.  Commercialization milestones may include product launch.  The Company recognizes each milestone payment in its entirety in the period in which the milestone is achieved.

 

Upon commercialization, revenues are generated from product sales, royalties and profit sharing.  Product sales are generally recognized as products are shipped and title and risk of loss pass to the partner.  Royalties and profit sharing are generally recognized when the Company’s partners sell the product to their customers and are based on a percentage of the Company’s partners’ gross sales or net profits for products subject to the Company’s agreements with its partners.  Royalties and profit sharing totaled $1.1 million and $3.0 million for the three and six months ended March 31, 2014, compared to $2.3 million and $4.3 million for the corresponding periods in 2013.

 

Other revenues consist primarily of income derived from the Company’s arrangements with its partners, whereby a portion of the revenues received under these agreements relates to rental income from embedded leases associated with these relationships, as well as revenues associated with licenses granted to a third party for intellectual property related to thin film dressings.

 

2.  Fair Value Measurements

 

Except as noted below, the carrying values of the Company’s financial instruments, including cash equivalents, accounts receivable, and accounts payable, approximated their fair values due to the short period of time to maturity or repayment.

 

The Company’s financial instruments that are measured at fair value on a recurring basis as of September 30, 2013 and as of March 31, 2014, by level within the fair value hierarchy, are as follows (in thousands):

 

		As of March 31, 2014
		Level I			Level II			Level III			Total
Preferred stock warrant liability		$	—		$	—		$	834		$	834
Total financial liabilities		$	—		$	—		$	834		$	834

 

		As of September 30, 2013
		Level I			Level II			Level III			Total
Preferred stock warrant liability		$	—		$	—		$	560		$	560
Subordinated note embedded derivative liability		—			—			7,367			7,367
Total financial liabilities		$	—		$	—		$	7,927		$	7,927

 

The Company’s Level III liabilities consist of a preferred stock warrant liability (see Note 6) and subordinated note embedded derivative liability (Note 4).  The following table sets forth a summary of the changes in the fair value of the Company’s Level III financial liabilities, which are measured on a recurring basis (in thousands):

 

Balance as of September 30, 2013		$	7,927
Change in fair value of preferred stock warrants		274
Change in fair value of subordinated note embedded derivative liability		(7,367		)
Balance as of March 31, 2014		$	834

 

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The following financial instruments have carrying values which differ from their fair value as estimated by the Company based on market quotes for instruments with similar terms and remaining maturities (Level III valuation technique) (in thousands):

 

		As of March 31, 2014
		Carrying Value			Fair Value			Difference
Long-term debt		$	37,622		$	37,622		$	—
Convertible notes		9,475			15,047			5,572
Subordinated note		16,199			16,445			246
Total		$	63,296		$	69,114		$	5,818

 

		As of September 30, 2013
		Carrying Value			Fair Value			Difference
Long-term debt		$	37,413		$	37,413		$	—
Convertible notes		9,399			14,316			4,917
Subordinated note		13,000			9,508			(3,492		)
Total		$	59,812		$	61,237		$	1,425

 

3.  Inventories

 

Inventories consist of the following (in thousands):

 

		As of March 31, 2014			As of September  30, 2013
Raw materials		$	1,698		$	2,410
Work in process		761			1,546
Finished goods		789			667
Total inventories, cost		3,248			4,623
Less inventory reserves		(208		)	(115		)
Total inventories, net		$	3,040		$	4,508

 

4.  Debt

 

The Company’s outstanding debt as of September 30, 2013 and March 31, 2014 consist of a bank line of credit, amounts outstanding under a term loan agreement classified as long-term debt, convertible notes and a subordinated note as follows (in thousands):

 

		As of March 31, 2014			As of September 30, 2013
Bank line of credit		$	2,658		$	3,873
Long-term debt		37,622			37,413
Convertible notes		9,475			9,399
Subordinated note		16,199			13,000
Total		65,954			63,685
Less current portion, consisting of bank line of credit and long-term debt		2,696			4,330
Long-term portion		$	63,258		$	59,355

 

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Bank Line of Credit

 

The Company entered into a line of credit on August 31, 2012 which provides for borrowings up to $6.0 million, expires on August 31, 2014, and is collateralized by a first security interest in cash, accounts receivable, and inventory, as well as a secondary interest in all other assets of the Company.  Advances under the line of credit are based on 80% of eligible accounts receivable.  The line of credit bears interest at 0.25%, plus the bank’s prime rate (an effective rate of 4.25% as of September 30, 2013 and March 31, 2014), and provides for a minimum monthly interest charge of $5,000.  In addition, the line of credit required a $60,000 facility fee which was paid in August 2013.  The line of credit contains a minimum monthly liquidity covenant of $2.0 million of net cash on deposit with the commercial bank.  The Company was in compliance with such covenant as of September 30, 2013 and March 31, 2014.

 

Long-term Debt

 

Long-term debt was as follows (in thousands):

 

		As of March 31, 2014			As of September 30, 2013
Term loan agreement expiring June 30, 2017. See terms of the agreement below. Less discount of $103 and $89 as of September 30, 2013 and March 31, 2014		$	36,953		$	36,293
Notes payable to lessor for tenant improvements. The note calls for monthly payments of principal and interest of $3 at an interest rate of 7% and is due April 2015		111			124
Notes payable to lessor for tenant improvements. The note calls for monthly payments of principal and interest of $6 at an interest rate of 7% and is due November 2024		558			575
Notes payable to finance Company insurance premiums. The note calls for monthly payments of principal and interest of $71 at an interest rate of 2.192% and is due March 2014		—			421
Total		37,622			37,413
Less current portion		38			457
Long-term portion		$	37,584		$	36,956

 

On July 13, 2012, the Company completed a $35.0 million term loan agreement with a financial investment fund.  In August 2012 and December 2012, the Company drew down $29.0 million and $6.0 million under this agreement.  The agreement requires interest to be paid quarterly at a simple annual rate of 15%, and that all outstanding principal be repaid in four equal quarterly payments beginning September 30, 2016.  The facility also contains a provision whereby the Company can choose to defer cash payment of 3.5% interest on the original outstanding principal from the first 11 quarterly interest payments by converting that portion of the interest otherwise due into additional notes under the agreement.  As of September 30, 2013 and March 31, 2014, the Company has converted $1.4 million and $2.0 million, respectively, of interest into additional notes (payment-in-kind notes).  Amounts outstanding under the term loan agreement are collateralized by all of the Company’s assets and the agreement contains a 1% fee on all draws and provides for a prepayment penalty on the outstanding principal if the Company chooses to repay principal prior to maturity, or upon other specified events, including a change of control.  The term loan agreement provides for financial covenants for minimum revenues and minimum liquidity, with which the Company was in compliance as of September 30, 2013 and March 31, 2014.

 

Convertible Notes

 

In 2008 and 2009, the Company issued convertible bridge notes (the “Convertible Notes”) and warrant purchase agreements to several of the existing Series C preferred stock investors, whereby the Company raised a total of $20.0 million.  As originally issued, the Convertible Notes accrued interest at 10% per year and mature on the earliest of July 31, 2009, the consummation of a significant sale of assets of the Company outside the normal course of business, or upon an uncured event of default.  Subsequently, the maturities of the Convertible Notes were initially extended to October 31, 2009, after which they became due.  In connection with the closing of the $35.0 million term loan agreement in July 2012, the Company further extended the maturity date of the Convertible Notes to July 1, 2017.   Interest has not been paid on the Convertible Notes since inception, and is therefore presented as long-term accrued interest.

 

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The Convertible Notes are convertible into preferred stock of the Company.  Upon completion of the Company’s next preferred stock equity financing, the Convertible Notes will convert automatically into the series of preferred stock issued in that financing, at a conversion price equal to the price per share for such financing.  The Convertible Notes are secured by all assets of the Company, with such security interest being subordinated to the security interest granted by the Company to its commercial bank and the $35.0 million term loan agreement.  Pursuant to an intercreditor agreement the Company entered into in July 2012, the Company is not permitted to pay interest on these notes until maturity.

 

The Convertible Notes also provide for an amendment of the voting agreement between the Company and the majority of its stockholders, pursuant to which the major investor has the right to increase the maximum size of the board of directors to 11 and the major investor also has the right to appoint up to 6 of the directors.  As of March 31, 2014 the major investor had not exercised either of these rights.

 

In connection with the Convertible Notes, the Company also issued common stock warrants exercisable for a number of shares equal to 60% of the principal amount of the Convertible Notes, divided by the conversion price of the Convertible Notes, which is, initially, the original issue price of the Series C preferred stock.  The warrants are only exercisable following conversion of the Convertible Notes into preferred stock and will be exercisable for shares of common stock of the Company.

 

Subordinated Note

 

In 2009, the Company issued a subordinated note (the “Subordinated Note”) to one of the existing Series C preferred stock investors raising a total of $13.0 million.  The Subordinated Note accrues simple interest at 5% per year and had an original maturity of the earliest of March 31, 2010, the consummation of a significant sale of assets of the Company outside the normal course of business, or upon an uncured event of default.  In connection with the closing of the term loan agreement during the year ended September 30, 2012, the maturity of the Subordinated Note was extended to July 1, 2017, and, as a result, the Subordinated Note is classified as a long-term obligation as of September 30, 2013 and March 31, 2014.  Interest has not been paid on the Subordinated Note since inception and is therefore, presented as long-term accrued interest.

 

The Subordinated Note is secured by all assets of the Company, with such security interest subordinated to the security interest granted by the Company to both its commercial bank and the term loan agreement.  Pursuant to an intercreditor agreement the Company entered into in July 2012, the Company is not permitted to pay interest on these notes until maturity.

 

If the Company consummates a merger of the Company or a sale of all or substantially all of the Company’s assets, or a significant asset sale prior to the full repayment of the Subordinated Note, then, at the written election of the subordinated note holder, the holder of the Subordinated Note will be entitled to be repaid the entire outstanding balance under the Subordinated Note plus an additional amount equal to the outstanding principal under the Subordinated Note, plus all accrued interest.  The Company has determined that this feature is an embedded derivative requiring bifurcation and separate accounting.  The fair value of this embedded derivative liability was $7.4 million as of September 30, 2013, but as of March 31, 2014 the Company has determined that, due to the proximity of the Company’s IPO as of that date (see Note 1), the probability of scenarios that would trigger the payment of the additional amount was negligible and, as a result, the embedded derivative has no value.  The change in fair value was recorded to change in fair value of Subordinated Note embedded derivative liability.

 

Recapitalization

 

In December 2013, the Company entered into an amendment and conversion agreement with Essex Woodlands pursuant to which the Company and Essex Woodlands (i) amended the Convertible Notes held by Essex Woodlands and other investors to provide that they will automatically convert either into 2,036,555 shares of the Company’s common stock immediately prior to the closing of an initial public offering of the Company’s common stock or into 2,036,555 shares of the Company’s Series C preferred stock immediately prior to the first closing of a qualified equity financing that occurs prior to the closing of an initial public offering of the Company’s common stock, and the Convertible Notes will be terminated; (ii) amended the terms of the Subordinated Note to provide that it will automatically convert either into 3,387,146 shares of the Company’s common stock immediately prior to the closing of an initial public offering of the Company’s common stock or into 3,387,146 shares of a new series of the Company’s preferred stock (with identical rights, preferences and privileges as the Company’s Series C preferred stock, but with a liquidation preference of one times its original issue price) immediately prior to the first closing of a qualified equity financing that occurs prior to the closing of an initial public offering of the Company’s common stock, and the Subordinated Note will be terminated; and (iii) requires Essex Woodlands to effect the automatic conversion of all outstanding shares of the Company’s preferred stock in connection with the completion of an initial public offering of the Company’s common stock.

 

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Simultaneously, the Company also entered into a repurchase agreement pursuant to which the Company agreed to repurchase 1,077,809 shares of the Company’s common stock for an aggregate repurchase price of $5.2 million from two of the Company’s founders.  These repurchases will occur immediately prior to the earlier of the consummation of an initial public offering of the Company’s common stock and the first closing of a qualified equity financing, and these repurchases will satisfy in full all of the Company’s remaining obligations under the repurchase agreements which are discussed in Note 7.

 

On April 8, 2014, in connection with the closing of the IPO, the Convertible Notes and Subordinated Note were converted and terminated, and the Company repurchased 1,077,809 shares of common stock from the founders as described above.

 

5.  Collaboration and Partner Arrangements

 

The Company has recognized the following revenues from its collaboration and partner agreements during the three and six months ended March 31, 2013 and 2014 (in thousands):

 

		Three Months Ended March 31,						Six Months Ended March 31,
		2014			2013			2014			2013
P&G		$	2,811		$	2,533		$	5,762		$	5,262
Teva		2,784			3,973			6,487			8,394
Actavis/Par		3,405			4,667			6,528			8,563
Agile		851			1,287			1,217			2,603
Other		866			76			1,191			338
Total revenues		$	10,717		$	12,536		$	21,185		$	25,160

 

6.  Warrants

 

The Company issued warrants to purchase shares of the Company’s stock as part of several transactions from 2008 through 2013.  The warrants have been recorded as either equity instruments or liability instruments based on the terms of the warrants.

 

Preferred Stock Warrants

 

The Company issued warrants to purchase Series C preferred stock, which comprise the only warrants to purchase preferred stock issued by the Company as of March 31, 2014.

 

All of the Series C preferred stock warrants are exercisable for a period of five years from issuance except certain warrants to purchase 163,522 shares of Series C preferred stock that expire upon the earlier of five years and the closing of an IPO.  The warrants are exercisable in cash or through a cashless exercise provision.  Under the cashless exercise provision, the holder may, in lieu of payment of the exercise price in cash, surrender the warrant and receive a net amount of shares based on the fair market value of the Series C preferred stock at the time of exercise of the warrant after deducting the aggregate exercise price.  In the event that all outstanding shares of the Series C convertible preferred stock are converted into common stock, the warrants will be exercisable for the same number of shares of common stock.

 

As of September 30, 2013 and March 31, 2014, warrants to purchase 1,739,992 and 1,380,241 shares of Series C preferred stock were outstanding with a weighted average exercise price of $0.90 per share.  Of this amount, warrants to purchase 1,380,241 shares of Series C preferred stock contain antidilution protection.  Therefore, the Company evaluated these warrants as derivative instruments, and accordingly recorded the warrants as liabilities at fair value at the time of issuance, with the fair value then adjusted at each subsequent balance sheet date.  The Company will continue to adjust the preferred stock warrant liabilities for changes in the fair value of the warrants until the earlier of (i) the exercise of the warrants, (ii) the conversion of the underlying preferred stock into common stock, at which time, the liability will be reclassified to stockholders’ equity, and (iii) the expiration of the warrants.

 

The fair value of the outstanding convertible preferred stock warrants containing antidilution protection was remeasured as of September 30, 2013 and March 31, 2014 using the Probability-Weighted Expected Return Model.  The Company uses a number of assumptions to estimate the fair value including the likelihood of various scenarios, the expected volatility and the fair value of the underlying stock under each scenario.  These assumptions are:

 

		As of March 31, 2014		As of September 30, 2013
Remaining contractual term (in years)		4.80 – 7.70		5.07 - 8.24
Risk-free interest rate		1.73 – 2.30%		1.39 - 2.02%
Expected volatility		70 - 75%		68 - 77%
Expected dividend rate		0%		0%

 

The fair value of these warrants totaled $0.6 million and $0.8 million as of September 30, 2013 and March 31, 2014.

 

On April 8, 2014, in connection with the closing of the IPO, certain warrants to purchase Series C convertible preferred stock were converted and net exercised into 971,440 shares of common stock, and the remainder of the outstanding warrants to purchase Series C convertible preferred stock were all converted into warrants to purchase common stock.

 

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Common Stock Warrants

 

As of September 30, 2013 and March 31, 2014, warrants to purchase 1,294,613 shares of common stock were outstanding with a weighted average exercise price of $1.95 per share.  All of the common stock warrants are exercisable at the earlier of a period of five years from issuance and the closing of an initial public offering of common stock.  The fair value of these warrants was recorded in stockholders’ deficit upon issuance.

 

On April 8, 2014, in connection with the closing of the IPO, warrants to purchase 1,286,495 shares of common stock, along with warrants to purchase 163,522 shares of Series C convertible preferred stock, were net exercised into 971,440 shares of common stock.

 

7.  Convertible Preferred Stock, Redeemable Common Stock and Stockholders’ Deficit

 

Convertible Preferred Stock

 

Convertible preferred stock as of September 30, 2013 and March 31, 2014, on an unconverted basis, consists of the following (in thousands, except for share and per share data):

 

		Shares Authorized		Original Issue Price			Shares Issued and Outstanding		Aggregate Liquidation Amount
Series A		1,114,100		$	0.220		1,114,066		$	490
Series B		7,602,200		0.875			7,602,132		6,652
Series C		57,000,000		0.917			27,318,702		50,119
Balance as of September 30, 2013 and March 31, 2014		65,716,300					36,034,900		$	57,261

 

Common Stock

 

The Company was authorized to issue up to 115,000,000 shares of common stock as of September 30, 2013 and March 31, 2014 at par value of $0.001 per share.  The Company had reserved shares of common stock, on an as-if converted basis, for issuance as follows:

 

		As of March 31, 2014		As of September 30, 2013
Issuances under stock option plans		2,050,019		1,781,846
Conversion of convertible preferred stock		3,567,807		3,567,811
Issuances upon exercise of convertible preferred stock warrants		136,653		172,276
Issuances upon exercise of common stock warrants		1,294,613		1,294,618
		7,049,092		6,816,551

 

Repurchases of Common Stock from Founders — In connection with the Series C financing, the Company, in accordance with specific stock repurchase agreements approved by the board of directors, the Company purchased from the two founders an aggregate of 215,872 shares of common stock at a purchase price of $9.26 per share.  The stock repurchase agreements also provided for the Company to repurchase an additional total of 215,872 shares of common stock held by each of the two founders at a price of $9.26 per share.  These agreements were amended in March 2008 to suspend the Company’s obligation to repurchase these shares if, in the discretion of the Company’s board of directors, any such repurchase would result in a material adverse effect on the Company’s financial condition.  As these shares are conditionally redeemable, they are classified outside of stockholders’ deficit.  As of September 30, 2013 and March 31, 2014, the remaining agreement to repurchase such shares is contingent on approval by the board of directors.  As discussed in Note 4, in December 2013, the Company entered into another agreement which would include the satisfaction in full of all of the Company’s remaining obligations under these repurchase agreements upon the earlier of the closing of an initial public offering of the Company’s common stock and the first closing of a qualified equity financing.

 

The Company completed the repurchase of 1,077,809 shares of common stock from the founders on April 8, 2014, thereby satisfying all of the Company’s obligations under the repurchase agreements.

 

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8.  Stock-Based Compensation

 

Equity Incentive Plans

 

As of September 30, 2013 and March 31, 2014, the Company has three equity incentive plans, two sponsored by the Company, and a separate stock option plan of StrataGent, Inc. StrataGent, Inc. was acquired by the Company on September 20, 2007. The unexpired, unexercised options outstanding for those employees of StrataGent who remained Company employees after the merger was effected were assumed by the Company.  Each StrataGent option became exercisable into whole shares of Corium stock based on an agreed exchange ratio and per share exercise price such that the total value of the option grant did not change.  The Company elected to make no further grants under the StrataGent Plan; however its terms continue to govern all options issued under that plan.  No additional shares available for grant were assumed by the Company, and any options that were returned to the pool subsequent to the merger were canceled and were not made available for future grants.  This wholly owned subsidiary was dissolved during 2008.

 

The Corium plans consist of the 2002 stock option plan that expired in 2012 and the 2012 equity incentive plan which was adopted in November 2012.  The exercise price of each option issued under the Corium Plan is no less than the fair value of the Company’s stock, as determined by the board of directors on the date of the grant.The maximum term of the options is ten years and the maximum vesting period is four years.

 

A summary of activity under the Corium Plan during the six months ended March 31, 2014 is as follows:

 

		Shares Available for Grant		Stock Options Outstanding		Weighted Average Exercise Price			Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
											(In thousands)
Balance — September 30, 2013		248,410		1,528,876		$	2.22		7.22		$	1,287
Additional shares authorized		272,277		—
Granted		(467,089	)	467,089		$	4.14
Exercised		—		(3,211	)	$	2.22
Forfeited		124		(124	)	$	2.22
Cancelled		2,246		(2,243	)	$	2.22
Balance — March 31, 2014		55,968		1,990,387		$	2.65		7.34		$	10,649

 

Employee stock-based compensation expense for the three and six months ended March 31, 2013 and 2014 is classified in the statements of operations as follows (in thousands):

 

		Three Months Ended March 31,						Six Months Ended March 31,
		2014			2013			2014			2013
Cost of product revenues		$	5		$	4		$	11		$	22
Cost of contract research and development revenues		5			2			9			13
Research and development		16			4			23			24
General and administrative		168			31			207			154
Total stock-based compensation		$	194		$	41		$	250		$	213

 

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As of March 31, 2014, there was a total of $3.6 million of unrecognized employee compensation cost, net of estimated forfeitures, related to non-vested stock option awards, which is expected to be recognized on a straight-line basis over a weighted-average period of approximately 2.7 years.

 

On March 20, 2014, the Company approved the following new plans, which became effective in connection with the IPO:

 

·                   2014 Equity Incentive Plan.  Under the plan, the Company has reserved a total of 1.0 million shares plus the remaining unissued shares under the 2012 equity incentive plan of common stock for issuance to employees.  On January 1 of each year for the ten year term of the plan, the number of shares issuable under the plan can be increased by an amount equal to up to 4% of the number of shares of common stock outstanding as of the preceding December 31, as agreed to by the board of directors.  No shares under the plan have been issued as of March 31, 2014.

·                   2014 Employee Stock Purchase Plan.  Under the plan, the Company has reserved a total of 310,000 shares of common stock for issuance to employees.  On January 1 of each year for the ten year term of the plan, the number of shares issuable by the plan can be increased by an amount equal up to 1% of the number of shares of common stock outstanding as of the preceding December 31, as agreed to by the board of directors, however, no more than 3.0 million shares may be issued over the ten year term of the plan.  No shares under the plan have been issued as of March 31, 2014.

 

9.  Product Recall Liability

 

In fiscal 2008 and fiscal 2010, Actavis issued two voluntary recalls of certain lots and strengths of Fentanyl TDS manufactured by the Company and sold and distributed by Actavis in the United States.  The Company and Actavis negotiated financial settlements for these two recalls, and the Company accrued amounts related to these settlements in fiscal 2009 and 2011.  Such recall liabilities were subsequently reduced through various mechanisms per the terms of the settlement agreements.

 

In October 2012, the Company reached a revised settlement related to these recalls which provides for a total and combined remaining liability of $5.0 million.  The revised liability will be repaid through quarterly payments in arrears based on a percentage of the average of the total net revenues recorded by the Company related to Fentanyl TDS.  These payments to Actavis started July 1, 2013 and continue through April 1, 2017.  To the extent that the revised settlement liability is not repaid as of April 1, 2017, the remaining liability, if any, will be converted into the most recent form of capital stock issued by the Company in connection with a financing, at the price per share of that financing.  The revised liability does not accrue interest.

 

The following table summarizes the changes to the product recall liability (in thousands):

 

Balance at September 30, 2013		$	4,832
Payment of settlement liability		(627		)
Balance at March 31, 2014		$	4,205

 

10.  Net Income (Loss) Per Common Share

 

The following table sets forth the computation of the Company’s basic and diluted net income (loss) per share attributable to common stockholders during the three and six months ended March 31, 2013 and 2014 (in thousands, except share and per share data):

 

		Three Months Ended March 31,						Six Months Ended March 31,
		2014			2013			2014			2013
Basic Net income (loss) per share
Net Income (loss) attributable to common stockholders, basic and diluted		$	3,534		$	(1,999	)	$	1,436		$	(3,432	)
Less: undistributed earnings attributable to participating securities		(2,420		)	—			(1,375		)	—
Net Income (loss) attributable to common stockholders, basic		$	1,114		$	(1,999	)	$	61		$	(3,432	)
Weighted average shares used in computing net income (loss) per share attributable to common stockholders, basic		2,232,300			2,225,742			2,231,049			2,218,801
Net Income (loss) attributable to common stockholders, basic		$	0.50		$	(0.90	)	$	0.03		$	(1.55	)

 

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		Three Months Ended March 31,						Six Months Ended March 31,
		2014			2013			2014			2013
Fully Diluted Net income (loss) per share
Net Income (loss) attributable to common stockholders, basic		$	3,534		$	(1,999	)	$	1,436		$	(3,432	)
Less: undistributed earnings attributable to participating securities		(1,573		)	—			(1,358		)	—
Net Income (loss) attributable to common stockholders, diluted		$	1,961		$	(1,999	)	$	78		$	(3,432	)
Weighted average shares used in computing net income (loss) per share attributable to common stockholders, basic		2,232,300			2,225,742			2,231,049			2,218,801
Effect of potentially dilutive securities
Dilutive options		756,300			—			518,655			—
Assumed conversion of convertible notes		2,063,989			—			—			—
Common stock warrants		877,720			—			733,252			—
Weighted average shares used in computing net income (loss) per share attributable to common stockholders, diluted		5,930,309			2,225,742			3,482,956			2,218,801
Net income (loss) attributable to common stockholders, diluted		$	0.33		$	(0.90	)	$	0.02		$	(1.55	)

 

The following outstanding shares of common stock equivalents were excluded from the computation of the diluted net income (loss) per share attributable to common stockholders for the periods presented because including them would have been antidilutive:

 

		Three months ended March 31,				Six months ended March 31,
		2014		2013		2014		2013
Convertible preferred stock		3,567,807		3,567,811		3,537,807		3,567,811
Stock options to purchase common stock		—		1,489,238		37,902		1,489,238
Common stock warrants		—		1,286,499		—		1,286,499
Preferred stock warrants		170,962		172,276		136,658		172,276
Convertible notes		—		1,982,667		2,090,604		1,982,667

 

11.  Income Taxes

 

The Company did not record a provision for income taxes for the three and six months ended March 31, 2014, because it expected to generate a net operating loss for the year ending September 31, 2014.  The Company’s deferred tax assets continue to be fully offset by a valuation allowance.

 

12.                                Segment and Enterprise-wide Information

 

The Company’s chief operating decision maker is its chief executive officer.  The chief executive officer reviews its operating results on an aggregate basis for purposes of allocating resources and evaluating financial performance.  The Company has one business activity and there are no segment managers who are held accountable for operations, or operating results for levels or components.  Accordingly, the Company has a single reporting segment and operating unit structure.

 

All of the Company’s revenues are derived from partners located in the United States and all long-lived assets are located in the United States.

 

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