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

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with (i) our condensed consolidated financial statements and the notes thereto included elsewhere in this quarterly report on Form 10-Q and (ii) our audited consolidated financial statements and related notes and management’s discussion and analysis of financial condition and results of operations included in our annual report on Form 10-K for the year ended December 31, 2018 filed with the SEC on February 28, 2019. This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Exchange Act. These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “will,” “would” or the negative or plural of these words or similar expressions or variations. Such forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those referred in the section titled “Risk Factors,” set forth in Part II, Item 1A of this quarterly report on Form 10-Q, if any, and in our other SEC filings. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. These statements, like all statements in this report, speak only as of the date of this quarterly report on Form 10-Q (unless another date is indicated), and, except as required by law, we undertake no obligation to update or revise these statements in light of future developments.

Company Overview

We are a late clinical-stage specialty pharmaceutical company focused on developing and commercializing our proprietary, innovative and differentiated topical drug candidates for dermatological therapy. Our lead product candidate, FMX101 (4% minocycline foam), is being developed for the treatment of moderate-to-severe acne vulgaris, and our second product candidate, FMX103 (1.5% minocycline foam), is being developed for the treatment of moderate-to-severe papulopustular rosacea. Both product candidates were developed using our Molecule Stabilizing Technology (MST™), a proprietary foam platform designed to optimize the topical delivery of minocycline, an active pharmaceutical ingredient, or API, that is currently available only in oral form.

A main component of our corporate strategy is to develop and solidify a commercial presence in dermatology by obtaining FDA approval for, and launching our lead product candidates, FMX101 and FMX103, in the United States. We may also enter into partnerships with third parties to reach other geographic territories or therapeutic fields through their respective sales forces and infrastructure. Following the anticipated product launches of FMX101 and FMX103, we intend to expand our business into other dermatological indications and to diversify our product and commercial development beyond minocycline and the tetracycline class of antibiotics. We are currently developing additional foam and other topical products for acne, rosacea and other dermatological indications in vehicle platforms designed to enhance delivery of their respective APIs. We are also evaluating diversifying into synergistic technologies and specialties either on our own or through partnerships.

FMX101 is a product candidate containing micronized minocycline hydrochloride, an antibiotic in the tetracycline class, in a 4% concentration for the treatment of moderate-to-severe acne vulgaris. The active pharmaceutical ingredient is suspended in our Molecule Stabilizing Technology foam vehicle, an elegant, light-feeling topical foam that is easily spread across wide areas of the skin. In September 2018, we announced our third Phase III clinical trial of FMX101 (Study FX2017-22) met both of its co-primary endpoints, demonstrating a statistically significant reduction in the number of inflammatory lesions and a statistically significant improvement in treatment success, as measured by Investigator’s Global Assessment, or IGA, scores, a metric commonly used to measure efficacy in acne trials. These positive results followed the results from our initial two Phase III clinical trials of FMX101 that we announced in 2017, where both co-primary endpoints were met in one trial (Study FX2014-05) and one of the two co-primary endpoints showed statistical significance in the other trial (Study FX2014-04). We embarked on our third Phase III trial (Study FX2017-22) following a Type B meeting with the FDA in which the FDA confirmed that replicating the results of Study FX2014-05 would support an efficacy claim for FMX101. In addition to the positive Study FX2017-22 efficacy results, very few adverse events (and no treatment-related serious adverse events) were observed both in Study FX2017-22 and in the 40-week open label safety portion of Studies FX2014-04 and FX2014-05 that we concluded in January 2018.

On March 7, 2019, we announced that the FDA accepted for review our NDA for FMX101 and set October 20, 2019 as the targeted PDUFA action date. In April 2019, the FDA conducted a pre-approval inspection of our U.S. offices in conjunction with its review of our NDA for FMX101 and made some minor inspectional observations that have been addressed. We do not believe these minor observations will adversely impact the FDA’s review of our NDA for FMX101. We are seeking approval of FMX101 for the treatment of inflammatory lesions of non-nodular moderate-to-severe acne vulgaris in patients nine years of age and older. Our NDA submission includes the previously communicated results from our two Phase III pivotal trials, Studies FX2014-05 and FX2017-22, and also incorporates information on chemistry manufacturing and controls, and data from non-clinical toxicology studies on FMX101.

FMX103 is a product candidate also containing micronized minocycline hydrochloride suspended in our Molecule Stabilizing Technology vehicle, at a lower 1.5% concentration, for the treatment of moderate-to-severe papulopustular rosacea. In November 2018, we announced that both of our Phase III clinical trials for FMX103 (Studies FX2016-11 and FX2016-12) met each of their co-primary endpoints, demonstrating a statistically significant reduction in inflammatory lesion counts and approximately 50% of patients experienced treatment success as assessed by IGA scores. There were very few reported adverse events and no treatment-related serious adverse events observed in these Phase III clinical trials, as well as in the 40-week open label safety extension (Study FX2016-13) that was completed in February 2019.

In addition, we have other proprietary delivery technologies in development that enable topical delivery of other APIs, each having unique pharmacological features and characteristics designed to keep the API stable when delivered and directed to the target site. We believe our foam and other topical delivery platforms may offer significant advantages over alternative delivery options and are suitable for multiple application sites across a range of conditions.

In addition to our in-house development projects, we have entered into development and license agreements relating to our technology with various pharmaceutical companies, most notably with LEO Pharma A/S, or LEO, who assumed a license agreement we initially entered into with Bayer HealthCare AG, or Bayer.  In 2015, Bayer received FDA approval for Finacea ® Foam (15% azelaic acid), or Finacea, a prescription foam product for the treatment of rosacea, which utilizes an emulsion-based proprietary foam platform that we licensed to them that is different from our surfactant-free foam platform that supports our lead product candidates. Bayer began selling Finacea in the United States in the third quarter of 2015, and in September 2018, LEO acquired Finacea from Bayer and assumed all rights and responsibilities under our initial license agreement with Bayer. Together with LEO, we are litigating against several generic pharmaceutical companies for alleged infringement of certain of our patents following the generic companies’ submission of abbreviated new drug applications with the FDA, seeking approval to manufacture and sell generic versions of Finacea. We recently settled our litigation against Perrigo FINCO UK Limited Partnership, or Perrigo, but our litigation against two other companies, Teva Pharmaceuticals USA, Inc. and Taro Pharmaceutical Industries, Ltd. and its affiliates, remains ongoing.

We have also out-licensed other foam technology platforms to other third parties to develop branded pharmaceutical products containing different APIs for potential commercialization that are in the early stages of development.

We continue to be an “emerging growth company,” as defined in Section 2(a) of the Securities Act and as modified by the JOBS Act. As such, we are eligible to, and take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not “emerging growth companies,” such as not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002. We will remain an emerging growth company until the earliest of: (i) the last day of our fiscal year during which we have total annual gross revenues of at least $1.07 billion; (ii) the last day of our fiscal year following the fifth anniversary of the closing of our initial public offering, specifically, December 31, 2019; (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iv) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act with at least $700 million of equity securities held by non-affiliates. In connection with (ii) above, as of the year ending December 31, 2019, we will cease to be an “emerging growth company.” As a result, beginning with our Annual Report on Form 10-K for the year ending December 31, 2019, we will be subject to Section 404(b) of the Sarbanes-Oxley Act of 2002, which requires that our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting.

We are also currently a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act.  In the event we are still a smaller reporting company when we cease being an emerging growth company, we will be able to continue to take advantage of certain reduced or scaled disclosure requirements, for as long as we continue to have smaller reporting company status.

Key Developments

Below is a summary of selected key developments affecting our business that have occurred since March 31, 2019:

As consideration for the Credit Agreement, we issued, on the closing date of the Term Loan, a warrant to purchase Ordinary Shares to each of Perceptive and OrbiMed Partners Master Fund Limited, LP, or the Warrants. The Warrants have an exercise price of $2.09 per share, which is equal to the trailing 5-day volume weighted average price of our Ordinary Shares on the trading day immediately prior to the closing date.  The Warrants are exercisable for a total of 1,100,000 Ordinary Shares and have an expiration date of July 29, 2026.

In addition, on July 29, 2019, we entered into a Securities Purchase Agreement, or the Purchase Agreement, with an affiliate of Perceptive, pursuant to which we agreed to issue and sell to such affiliate of Perceptive, in a registered offering, an aggregate of 6,542,057 of our Ordinary Shares, or the Shares, at a purchase price of $2.14 per share, representing the closing share price on the last trading day prior to signing, for aggregate gross proceeds of approximately $14 million, before deducting offering expenses. Under the terms of the Purchase Agreement, the Shares were offered pursuant to our effective Registration Statement on Form S-3 (File No. 333-224084).  Perceptive agreed to a lock-up period for 60 days from the date of the Purchase Agreement, during which time Perceptive agreed not to sell the Shares, enter into any derivative transactions with respect to the Shares or publicly disclose the intention to do any of the foregoing, in each case without our prior written consent.

Revenues

To date, we have not generated any revenues from sales of FMX101, FMX103 or any of our other product candidates. We will not commercially launch FMX101 or our other product candidates in the United States or generate any revenues from sales of any of our product candidates until after obtaining marketing approval, which we do not expect before the end of 2019. Our ability to generate revenues from sales will depend on the successful commercialization of FMX101, FMX103 and our other product candidates.

Cost of Revenues

There was no cost of revenues recorded for the three and six months ended June 30, 2019 and 2018, as revenues consist almost entirely of royalties, which do not bear related cost of revenue.

We do not expect substantial changes in cost of revenue unless and until we obtain regulatory approval for our lead product candidates and begin serial production of such products, whether internally or through third party manufacturers, at which point we expect our cost of revenues to grow along with the growth of our sales and inventory needs.

Operating Expenses

Research and development expenses

Research and development activities are, and will continue to be, central to our business. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect to incur significant research and development costs in the foreseeable future assuming our pipeline products progress into clinical trials. However, we do not believe that it is possible at this time to accurately project total program-specific expenses to reach commercialization. There are numerous factors associated with the successful commercialization of any of our product candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will affect our clinical development programs and plans.

Our research and development expenses relate primarily to the development of FMX101 and FMX103. From January 1, 2007 until June 30, 2019, we cumulatively spent approximately $192.8 million on research and development of FMX101, FMX103 and our other product candidates. Our total research and development expenses for the three-month periods ended June 30, 2019 and 2018 were approximately $12.6 and $16.8 million, respectively. Our total research and development expenses for the six-month periods ended June 30, 2019 and 2018 were approximately $23.4 and $39.7 million, respectively. We charge all research and development expenses to operations as they are incurred. We expect research and development expenses to lessen in the near term due to the completion of our Phase III clinical trials for FMX101 and FMX103.

The successful development of our product candidates is highly uncertain. While we have filed  NDAs for FMX101 and FMX103, we cannot provide any assurances or predict with any certainty the schedule on which we will, if at all, receive approval from the FDA with respect to either of FMX101 and FMX103. As such, at this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of our technology for additional indications. This uncertainty is due to numerous risks and variables associated with developing products, including the uncertainty of:

 

 

 

 

 

A change in the outcome of any of these variables with respect to the development of our product candidates could result in a significant change in the costs and timing associated with their development. For example, if the FDA or foreign regulatory authority were to require us to conduct preclinical studies and clinical trials beyond those which we currently anticipate for the completion of clinical development of our product candidates, or if we experience significant delays in enrollment in any clinical trials, we could be required to expend significant additional time and financial resources on the completion of the clinical development.

Research and development expenses consist primarily of:

 

 

 

 

 

 

 

Selling, general and administrative expenses

Our selling, general and administrative expenses consist principally of:

 

 

 

 

 

 

 

As part of our growth strategy, we have begun building up our dedicated U.S. commercial and business development team and infrastructure, and we intend to further increase such U.S. infrastructure, as well as expand our commercial efforts in new markets. We therefore expect selling and marketing expenses to increase in absolute terms as a percentage of our revenues. Our total selling, general and administrative expenses for the three months ended June 30, 2019 and 2018 were approximately $6.8 and $2.9 million, respectively, and for the six months ended June 30, 2019 and 2018 were approximately $12.1 and $6.7 million, respectively.

Our ability to commercialize FMX101 and FMX103 successfully, if approved, is highly uncertain and depends on a number of factors, including market adoption of our product candidates by physicians and patients, market access uncertainty, our ability to scale to the market opportunity and the existence of existing and future products that may compete with ours. As such, at this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary for successful commercialization of our product candidates, if approved.

Financial Income

Financial income consists primarily of gains from interest earned from our bank deposits and financial income on our marketable securities.

Taxes on Income

We have yet to generate taxable income in Israel, as we have historically incurred operating losses resulting in carry forward tax losses totaling approximately $146.7 million as of December 31, 2018. During 2018, we incurred a carry forward tax loss in our U.S. subsidiary, Foamix Pharmaceuticals Inc., of $0.4 million. We anticipate that we will be able to carry forward these tax losses to future tax years. Accordingly, we do not expect to pay taxes in the applicable jurisdiction until we have taxable income after the full utilization of our carry-forward tax losses in that jurisdiction. We provided a full valuation allowance with respect to the deferred tax assets related to these carry-forward losses.

Comparison of the Three-Month Periods Ended June 30, 2019 and 2018

Revenues

Cost of revenues

There was no cost of revenues for the three-month period ended June 30, 2019 as we had no revenues during this period. During the three-month period ended June 30, 2018 our revenues consisted entirely of royalties, which bear no related costs.

Research and development expenses

Selling, general and administrative expenses

Our selling, general and administrative expenses for the three months ended June 30, 2019 were $6.8 million, representing an increase of $3.9 million, or 134%, compared to $2.9 million for the three months ended June 30, 2018. The increase in selling, general and administrative expenses resulted primarily from an increase of $2.5 million in expenses mostly related to pre-commercialization activities and market research, in addition to an increase of $1.4 million in payroll and payroll-related expenses due to increase in headcount.

Operating loss

Our operating loss for the three-month period ended June 30, 2019 was $19.4 million, compared to an operating loss of $18.8 million for the three-month period ended June 30, 2018, representing an increase of $0.6 million, or 3%.

Finance income

In the three-month periods ended June 30, 2019 and 2018, our financial income included mostly gains from marketable securities and interest earned on our bank deposits.

The finance expenses (income) by cash and non-cash components are as follows:

Taxes on income

  During the three-month period ended June 30, 2019 we had no tax expense, as compared to expenses of $0.1 million during the three-month period ended June 30, 2018.

Net Loss

Comparison of the Six-Month Periods Ended June 30, 2019 and 2018

Revenues

Cost of revenues

There was no cost of revenues for the six-month periods ended June 30, 2019 and 2018, as revenues consisted almost entirely of royalties, which bear no related cost of revenue.

Research and development expenses

Selling, general and administrative expenses

Our selling, general and administrative expenses for the six months ended June 30, 2019 were $12.1 million, representing an increase of $5.4 million, or 81%, compared to $6.7 million for the six months ended June 30, 2018. The increase in selling, general and administrative expenses resulted primarily from an increase of $3.9 million in expenses mostly related to pre-commercialization activities and market research in addition to an increase of $1.5 million in payroll and payroll-related expenses due to increase in headcount.

Operating loss

Our operating loss for the six-month period ended June 30, 2019 was $35.2 million, compared to an operating loss of $44.5 million for the six-month period ended June 30, 2018, representing a decrease of $9.3 million, or 21%.

Finance income

In the six-month periods ended June 30, 2019 and 2018, our financial income included mostly gains from marketable securities and interest earned on our bank deposits.

The finance expenses (income) by cash and non-cash components are as follows:

Taxes on income

During the six-month periods ended June 30, 2019 and 2018, we incurred tax income of $0.2 million and tax expenses of $0.5 million, respectively. The tax income recognized during the six months ended June 30, 2019 related to the reversal of a provision for uncertain tax positions.

Net Loss

Our net loss for the six months ended June 30, 2019 was $34.2 million, compared to $44.6 million for the six months ended June 30, 2018, representing a decrease of $10.4 million, or 23%.

Sources of liquidity

Since inception, we have incurred losses from operations and negative cash flows from our operations. For the six months ended June 30, 2019, we incurred a net loss of $34.2 million, which included $29.4 million used for operating activities. For the six months ended June 30, 2018, we incurred a net loss of $44.6 million, which included $36.5 million used for operating activities.

As of June 30, 2019 and June 30, 2018, we had a working capital surplus of $57.7 million and $41.1 million, respectively, and an accumulated deficit of $249.6 million and $185.9 million, respectively.

Our principal source of liquidity as of June 30, 2019 consisted of cash and investments of $70.0 million.

On April 13, 2018, we entered into a Securities Purchase Agreement with OrbiMed Partners Master Fund Limited, or OrbiMed, pursuant to which we agreed to issue and sell, in a registered offering under an effective shelf registration statement, an aggregate of 2,940,000 Ordinary Shares, at a purchase price equivalent to $5.50 per share, for aggregate net proceeds of approximately $16.1 million, after deducting offering expenses. The closing of the issuance and sale of these securities took place on April 16, 2018.

On September 18, 2018, we completed an additional follow-on offering under our effective shelf registration statement in which we sold 11,670,000 Ordinary Shares at a price of $6.0 per share, raising net proceeds, after expenses and underwriter commissions, of approximately $65.6 million. After the closing of the offering, the underwriters exercised an option to purchase 1,750,500 additional Ordinary Shares at the per share price of the offering. The proceeds from the exercise of the option, net of expenses and underwriter commissions, were approximately $9.8 million, bringing the total net proceeds from the offering to approximately $75.4 million.

On July 29, 2019, we entered into a Credit Agreement with several parties including Perceptive as administrative agent, that provides us with a senior secured delayed draw term loan facility in an aggregate principal amount of up to $50.0 million in several tranches and subject to our achievement of certain conditions, milestones and revenue targets. For further details see “Key Developments” above.

In addition, on July 29, 2019 we entered into a Purchase Agreement with an affiliate of Perceptive, pursuant to which we agreed to issue and sell to an affiliate of Perceptive, in a registered offering, an aggregate of 6,542,057 of our Ordinary Shares at a purchase price of $2.14 per share for aggregate gross proceeds of approximately $14 million, before deducting offering expenses. For further details see “Key Developments” above.

We anticipate that our existing cash and investments, along with the funding raised in July 2019, we will be able to fund our planned operating expenses and capital expenditure requirements through the third quarter of 2020. These planned expenses include: (a) pre-commercialization and launch preparations for FMX101 and FMX103, assuming we receive regulatory approval, (b) certain pipeline development activities, and (c) other general corporate expenses. We expect we will need additional funding to support our operating expenses and capital requirements during the fourth quarter of 2020 and beyond, including with regard to the commercialization of any of our product candidates if they are granted regulatory approval, and to fund our internal and external research and development efforts. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect.

Capital Resources

Overview

To date, we have financed our operations through private and public placements of our Ordinary Shares, convertible loans and through fees, cost reimbursements and royalties received from our licensees.

From inception through June 30, 2019 we have received net cash proceeds of approximately $280.1 million from the issuance of Ordinary Shares, preferred shares, exercise of options and warrants and from convertible loans.

Cash flows

The following table summarizes our statement of cash flows for the six-month periods ended June 30, 2019 and 2018:

Net cash used in operating activities

The use of cash in all periods resulted primarily from our net losses adjusted for non-cash charges and measurements and changes in components of working capital. Adjustments to net income for non-cash items mainly include depreciation and amortization and share-based compensation.

Net cash used in operating activities was $29.4 million in the six months ended June 30, 2019, compared to $36.5 million in the six months ended June 30, 2018. The decrease was attributable to the decrease in activity related to clinical trials.

Net cash provided by investing activities

Net cash provided by investing activities was $40.5 million in the six months ended June 30, 2019, compared to $15.3 million in the six months ended June 30, 2018. The increase in investing activities was attributable primarily to an increase in proceeds from the sale and maturity of marketable securities and bank deposits.

Net cash provided by financing activities

There were $18,000 provided by financing activities in the six months ended June 30, 2019, compared to $17 million in the six months ended June 30, 2018. The decrease was attributable to the occurrence of the OrbiMed offering in April 2018.

Cash and funding sources

The table below summarizes our main sources of financing for the six-month periods ended June 30, 2019 and 2018:

Our sources of financing in the six months ended June 30, 2018 totaled approximately $18.8 million and consisted primarily of $16.1 million of net proceeds from our April 2018 Securities Purchase Agreement with OrbiMed and $1.8 million of payments from licensees.

We have no ongoing material financial commitments (such as lines of credit) that may affect our liquidity over the next five years other than our commitments under the Credit Agreement.

Funding requirements

Our present and future funding requirements will depend on many factors, including, inter alia:

 

 

 

 

 

 

Our operating plan may change as a result of many factors currently unknown to us, and any such change may affect our funding requirements. We have never before launched a product commercially, and the costs involved in such commercial launch may exceed our expectations. We may therefore need to seek additional capital sooner than planned, through public or private equity or debt financings or other sources, such as strategic collaborations or additional license arrangements. Such financings may result in dilution to shareholders, imposition of debt covenants and repayment obligations or other restrictions that may affect our business.

For more information as to the risks associated with our future funding needs, see “Part I, Item 1A—Risk Factors—Risks Related to Our Business and Industry—We will require substantial additional financing to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our product development, other operations or commercialization efforts” in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on February 28, 2019.

Our capital expenditures for the six-month periods ended June 30, 2019 and 2018 amounted to $0.5 million and $0.3 million, respectively. During the six months ended June 30, 2019, these expenditures were primarily related to laboratory equipment and leasehold improvements.

Off-Balance Sheet Arrangements

As of June 30, 2019, we did not have any off-balance sheet arrangements.

Critical Accounting Policies and Significant Judgments and Estimates

We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the United States. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

While our significant accounting policies are more fully described in Note 2–“Significant Accounting Policies,” to the consolidated financial statements included in “Item 8—Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on February 28, 2019, and in Note 2, “Significant Accounting Policies,” in the accompanying notes to our unaudited condensed consolidated financial statements, we believe that the following accounting policies are the most critical to assist shareholders and investors reading the consolidated financial statements in fully understanding and evaluating our financial condition and results of operations. These policies relate to the more significant areas involving management’s judgments and estimates and they require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Clinical trial accruals

Clinical trial costs are charged to research and development expense as incurred. We accrue for expenses resulting from obligations under contracts with clinical research organizations, or CROs. The financial terms of these contracts are subject to negotiations, which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided. Our objective is to reflect the appropriate trial expense in the consolidated financial statements by matching the appropriate expenses with the period in which services and efforts are expended. In the event advance payments are made to a CRO, the payments will be recorded as other assets, which will be recognized as expenses as services are rendered. The CRO contracts generally include pass-through fees including, but not limited to, regulatory expenses, investigator fees, travel costs and other miscellaneous costs. We estimate our clinical accruals based on reports from and discussion with clinical personnel and the CRO as to the progress or state of completion of the trials. We estimate accrued expenses as of each balance sheet date in the consolidated financial statements based on the facts and circumstances known at that time. Our clinical trial accrual is dependent, in part, upon the receipt of timely and accurate reporting from the CROs.

Recently Issued Accounting Pronouncements

For a discussion of certain recently issued accounting pronouncements, refer to Note 2, “Significant Accounting Policies,” in the accompanying notes to the condensed consolidated financial statements.