UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2018
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: 001-33678
NOVABAY PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware |
|
68-0454536 |
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
2000 Powell Street, Suite 1150, Emeryville, CA 94608
(Address of principal executive offices) (Zip Code)
Registrant’s Telephone Number, Including Area Code: (510) 899-8800
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 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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. (Check one):
Large accelerated filer |
☐ |
Accelerated filer |
☐ |
Emerging growth company |
☐ |
Non-accelerated filer (Do not check if a smaller reporting company) |
☐ |
Smaller reporting 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 Exchange Act). Yes ☐ No ☒
As of August 3, 2018, there were 17,089,304 shares of the registrant’s common stock outstanding.
NOVABAY PHARMACEUTICALS, INC.
TABLE OF CONTENTS
PART I |
|||
FINANCIAL INFORMATION |
|||
|
|
|
|
Item 1. |
|
Financial Statements |
1 |
|
|
|
|
|
1. |
Consolidated Balance Sheets: June 30, 2018 (unaudited) and December 31, 2017 |
1 |
|
|
|
|
|
2. |
Consolidated Statements of Operations and Comprehensive Loss (unaudited): Three and six months ended June 30, 2018 and 2017 |
2 |
|
|
|
|
|
3. |
Consolidated Statements of Cash Flows (unaudited): Six months ended June 30, 2018 and 2017 |
3 |
|
|
|
|
|
4. |
Notes to Consolidated Financial Statements (unaudited) |
4 |
|
|
|
|
Item 2. |
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
27 |
|
|
|
|
Item 3. |
|
Quantitative and Qualitative Disclosures About Market Risk |
35 |
|
|
|
|
Item 4. |
|
Controls and Procedures |
35 |
|
|
|
|
PART II |
|||
OTHER INFORMATION |
|||
|
|
|
|
Item 1A. |
|
Risk Factors |
36 |
|
|
|
|
Item 6. |
|
Exhibits |
50 |
|
|
|
|
SIGNATURES |
54 |
Unless the context requires otherwise, all references in this report to “we,” “our,” “us,” the “Company” and “NovaBay” refer to NovaBay Pharmaceuticals, Inc.
NovaBay®, NovaBay Pharma®, Avenova®, NeutroPhase®, CelleRx®, intelli-Case™, AgaNase®, Aganocide®, AgaDerm®, Neutrox® and Going Beyond Antibiotics® are trademarks of NovaBay Pharmaceuticals, Inc. All other trademarks and trade names are the property of their respective owners.
I
PART I
FINANCIAL INFORMATION
ITEM 1. |
FINANCIAL STATEMENTS |
NOVABAY PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)
June 30, |
December 31, |
|||||||
2018 |
2017 |
|||||||
(Unaudited) |
See Note 2 |
|||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 6,833 | $ | 3,199 | ||||
Accounts receivable, net of allowance for doubtful accounts ($11 and $13 at June 30, 2018 and December 31, 2017, respectively) |
2,024 | 3,629 | ||||||
Inventory, net of allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments of $138 and $140 at June 30, 2018 and December 31, 2017, respectively |
317 | 504 | ||||||
Prepaid expenses and other current assets |
1,598 | 1,663 | ||||||
Total current assets |
10,772 | 8,995 | ||||||
Property and equipment, net |
351 | 471 | ||||||
Other assets |
582 | 613 | ||||||
TOTAL ASSETS |
$ | 11,705 | $ | 10,079 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY |
||||||||
Liabilities: |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 329 | $ | 466 | ||||
Accrued liabilities |
2,665 | 1,672 | ||||||
Deferred revenue |
62 | 2,841 | ||||||
Total current liabilities |
3,056 | 4,979 | ||||||
Deferred revenues - non-current |
- | 534 | ||||||
Deferred rent |
237 | 286 | ||||||
Warrant liability |
785 | 1,489 | ||||||
Other liabilities |
198 | 197 | ||||||
Total liabilities |
4,276 | 7,485 | ||||||
Stockholders' equity: |
||||||||
Preferred stock: 5,000 shares authorized; none outstanding at June 30, 2018 and December 31, 2017 |
— | — | ||||||
Common stock, $0.01 par value; 50,000 and 240,000 shares authorized at June 30, 2018 and December 31, 2017, respectively; 17,089 and 15,385 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively |
171 | 154 | ||||||
Additional paid-in capital |
119,433 | 113,514 | ||||||
Accumulated deficit |
(112,175 |
) |
(111,074 |
) |
||||
Total stockholders' equity |
7,429 | 2,594 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |
$ | 11,705 | $ | 10,079 |
As the Company adopted the requirements of Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) as of January 1, 2018, using the modified retrospective method, there is a lack of comparability to the prior periods presented. See Note 8.
The accompanying notes are an integral part of these consolidated financial statements.
NOVABAY PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(In thousands, except per share data)
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2018 |
2017 |
2018 |
2017 |
|||||||||||||
Sales: |
||||||||||||||||
Product revenue, net |
$ | 2,794 | $ | 4,094 | $ | 5,728 | $ | 7,788 | ||||||||
Other revenue, net |
- | 28 | 13 | 35 | ||||||||||||
Total net sales |
2,794 | 4,122 | 5,741 | 7,823 | ||||||||||||
Product cost of goods sold |
479 | 698 | 730 | 1,286 | ||||||||||||
Gross profit |
2,315 | 3,424 | 5,011 | 6,537 | ||||||||||||
Research and development |
61 | 70 | 107 | 132 | ||||||||||||
Sales and marketing |
2,977 | 3,376 | 6,373 | 7,116 | ||||||||||||
General and administrative |
1,360 | 1,735 | 2,982 | 4,823 | ||||||||||||
Total operating expenses |
4,398 | 5,181 | 9,462 | 12,071 | ||||||||||||
Operating Loss |
(2,083 |
) |
(1,757 |
) |
(4,451 |
) |
(5,534 |
) |
||||||||
Non-cash gain (loss) on changes in fair value of warrant liability |
490 | 15 | 704 | (220 |
) |
|||||||||||
Other income (expense), net |
5 | 4 | 9 | 6 | ||||||||||||
Loss before provision for income taxes |
(1,588 |
) |
(1,738 |
) |
(3,738 |
) |
(5,748 |
) |
||||||||
Provision for income tax |
(1 |
) |
- | (1 |
) |
(1 |
) |
|||||||||
Net loss and comprehensive loss |
$ | (1,589 |
) |
$ | (1,738 |
) |
$ | (3,739 |
) |
$ | (5,749 |
) |
||||
Net loss per share attributable to common stockholders, basic |
$ | (0.09 |
) |
$ | (0.11 |
) |
$ | (0.22 | ) | $ | (0.38 | ) | ||||
Net loss per share attributable to common stockholders, diluted |
$ | (0.12 |
) |
$ | (0.11 |
) |
$ | (0.26 | ) | $ | (0.38 | ) | ||||
Weighted-average shares of common stock outstanding used in computing net loss per share of common stock | ||||||||||||||||
Basic | 17,089 | 15,308 | 16,750 | 15,296 | ||||||||||||
Diluted | 17,292 | 15,308 | 16,985 | 15,296 |
As the Company adopted the requirements of Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) as of January 1, 2018, using the modified retrospective method, there is a lack of comparability to the prior periods presented. See Note 8.
The accompanying notes are an integral part of these consolidated financial statements.
NOVABAY PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended |
||||||||
2018 |
2017 |
|||||||
Operating activities: |
||||||||
Net loss |
$ | (3,739 |
) |
$ | (5,749 |
) |
||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation and amortization |
127 | 36 | ||||||
Stock-based compensation expense for options and stock issued to employees and directors |
250 | 1,600 | ||||||
Stock-based compensation expense for options and stock issued to non-employees |
13 | 89 | ||||||
Stock option modification expense |
77 | - | ||||||
Non-cash (gain) loss on change in fair value of warrant liability |
(704 |
) |
220 | |||||
Changes in operating assets and liabilities: |
||||||||
Decrease (Increase) in Accounts receivable |
2,134 | (1,480 |
) |
|||||
Decrease in Inventory |
160 | 200 | ||||||
Decrease in Prepaid expenses and other assets |
64 | 1,004 | ||||||
Decrease (Increase) in Other assets long-term |
33 | (101 |
) |
|||||
(Decrease) Increase in Accounts payable and accrued liabilities |
(327 |
) |
390 | |||||
(Decrease) Increase in Deferred rent |
(32 |
) |
48 | |||||
Increase (Decrease) in Deferred revenue |
(13 |
) |
118 | |||||
Net cash used in operating activities |
(1,957 |
) |
(3,625 |
) |
||||
Investing activities: |
||||||||
Purchases of property and equipment |
(5 |
) |
(155 |
) |
||||
Net cash used in investing activities |
(5 |
) |
(155 |
) |
||||
Financing activities: |
||||||||
Proceeds from common stock issuances, net |
5,585 | - | ||||||
Proceeds from exercise of options, net |
11 | - | ||||||
Proceeds from stock options & RSUs for taxes |
1 | - | ||||||
Settlement of restricted stock for tax withholding |
- | (48 |
) |
|||||
Exercise of warrants, net |
- | 38 | ||||||
Net cash provided by (used in) financing activities |
5,597 | (10 |
) |
|||||
Net increase (decrease) in cash and cash equivalents |
3,635 | (3,790 |
) |
|||||
Cash, cash equivalents and restricted cash, beginning of period |
3,673 | 9,986 | ||||||
Cash, cash equivalents and restricted cash, end of period |
7,308 | 6,196 |
Six Months Ended |
||||||||
2018 |
2017 |
|||||||
Supplemental disclosure of non cash information |
||||||||
Cumulative effect of adoption of new accounting standard |
$ | 2,638 | $ | - | ||||
Stock issued to consultants for services, included in accounts payable and accrued liabilities |
$ | - | $ | 1 | ||||
Fixed asset purchases, included in accounts payable and accrued liabilities |
$ | 1 | $ | (28 |
) |
|||
Severance paid in RSUs to non-employee |
$ | - | $ | 69 | ||||
Equity transferred to warrant liability |
$ | - | $ | 58 | ||||
Proceeds from stock options and restricted stock for taxes, in accounts payable and accrued liabilities |
$ | 1 | $ | - |
As the Company adopted the requirements of Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) as of January 1, 2018, using the modified retrospective method, there is a lack of comparability to the prior periods presented. See Note 8.
The accompanying notes are an integral part of these consolidated financial statements.
NOTE 1. ORGANIZATION
NovaBay Pharmaceuticals, Inc. is a biopharmaceutical company focusing on commercializing and developing its non-antibiotic anti-infective products to address the unmet therapeutic needs of the global, topical anti-infective market with its two distinct product categories: the NEUTROX® family of products and the AGANOCIDE® compounds. The Neutrox family of products includes AVENOVA® for the eye care market, NEUTROPHASE® for wound care market, and CELLERX® for the aesthetic dermatology market. The Aganocide compounds, still under development, have target applications in the dermatology and urology markets.
The Company was incorporated under the laws of the State of California on January 19, 2000, as NovaCal Pharmaceuticals, Inc. It had no operations until July 1, 2002, on which date it acquired all of the operating assets of NovaCal Pharmaceuticals, LLC, a California limited liability company. In February 2007, it changed its name from NovaCal Pharmaceuticals, Inc. to NovaBay Pharmaceuticals, Inc. In June 2010, the Company changed the state in which it is incorporated (the “Reincorporation”) and is now incorporated under the laws of the State of Delaware. All references to “the Company” herein refer to the California corporation prior to the date of the Reincorporation and to the Delaware corporation on and after the date of the Reincorporation. The Company has minimized research and development and is now focused primarily on commercializing prescription Avenova for the domestic eyecare market.
Effective December 18, 2015, the Company effected a 1-for-25 reverse split of its outstanding common stock (the “Reverse Stock Split”) (See Note 11). The accompanying financial statements and related notes give retroactive effect to the Reverse Stock Split.
Liquidity
Based primarily on the funds available at June 30, 2018, the Company believes these resources will be sufficient to fund its operations into April 2019. The Company has sustained operating losses for the majority of its corporate history and expects that its 2018 expenses will exceed its 2018 revenues, as the Company continues to re-invest in its Avenova commercialization efforts. The Company expects to continue incurring operating losses and negative cash flows until revenues reach a level sufficient to support ongoing growth and operations. Accordingly, the Company’s planned operations raise substantial doubt about its ability to continue as a going concern. The Company’s liquidity needs will be largely determined by the success of operations in regard to the commercialization of Avenova. The Company also may consider other plans to fund operations including: (1) out-licensing rights to certain of its products or product candidates, pursuant to which the Company would receive cash milestones or an upfront fee; (2) raising additional capital through debt and equity financings or from other sources; (3) reducing spending on one or more of its sales and marketing programs; and/or (4) restructuring operations to change its overhead structure. The Company may issue securities, including common stock and warrants through private placement transactions or registered public offerings, which would require the filing of a Form S-1 or Form S-3 registration statement with the Securities and Exchange Commission (“SEC”). An extended delay or cessation of the Company’s continuing product development efforts will have a material adverse effect on the Company’s financial condition and results of operations. In the absence of the Company’s completion of one or more of such transactions, there will be substantial doubt about the Company’s ability to continue as a going concern within one year after the date these financial statements are issued, and the Company will be required to scale back or terminate operations and/or seek protection under applicable bankruptcy laws. The accompanying financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts of liabilities that may result from uncertainty related to its ability to continue as a going concern.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and are expressed in U.S. dollars.
Reclassifications
Prior period amounts in the accompanying consolidated balance sheets have been reclassified to conform to current period presentation. Prior period amounts in the accompanying consolidated statements of operations and comprehensive loss have also been reclassified to conform to current period presentation. The reclassifications did not change the net loss or loss per share.
Additionally, prior period amounts in the accompanying consolidated statements of cash flow have also been reclassified to conform to current period presentation. The reclassifications did not change net cash used in operating activities, net cash used in investing activities, or net cash provided by financing activities.
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates include useful lives for property and equipment and related depreciation calculations, estimated amortization periods for payments received from product development and license agreements as they relate to revenue recognition, assumptions for valuing options and warrants, and income taxes. Actual results could differ from those estimates.
Unaudited Interim Financial Information
The accompanying interim condensed consolidated financial statements and related disclosures are unaudited, have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for a fair statement of the results of operations for the periods presented.
The year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. The condensed consolidated results of operations for any interim period are not necessarily indicative of the results to be expected for the full year or for any other future year or interim period.
Cash, Cash Equivalents, and Restricted Cash
The Company considers all highly-liquid instruments with a stated maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are stated at cost, which approximates fair value. As of June 30, 2018, and December 31, 2017, the Company’s cash and cash equivalents were held in two highly-rated, major financial institutions in the United States.
Beginning fiscal 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires the statement of cash flows to explain the change during the period relating to total cash, cash equivalents, and restricted cash. The Company adopted this standard using the retrospective transition method by restating its consolidated statements of cash flows to include restricted cash of $474 thousand in beginning and ending cash, cash equivalents, and restricted cash for the period ended December 31, 2017, and $475 thousand in the beginning and ending cash, cash equivalents, and restricted cash balances for the period ended June 30, 2018. Net cash flows for the six months ended June 30, 2018 and 2017, did not change as a result of including restricted cash with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts presented on the statements of cash flows.
The following table provides a reconciliation of the cash, cash equivalents, and restricted cash reported in the consolidated balance sheet that sum to the total of the same reported in the consolidated statement of cash flows:
June 30, 2018 |
December 31, 2017 |
|||||||
Cash and cash equivalents |
$ | 6,833 | $ | 3,199 | ||||
Restricted cash included in Other assets |
475 | 474 | ||||||
Total cash, cash equivalents, and restricted cash in the statement of cash flows |
$ | 7,308 | $ | 3,673 |
The restricted cash amount included in Other assets on the consolidated balance sheet represents amounts held as certificate of deposit for long-term financing and lease arrangements as contractually required by our financial institution and landlord.
Concentrations of Credit Risk and Major Partners
Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains deposits of cash and cash equivalents with two highly-rated, major financial institutions in the United States.
Deposits in these banks may exceed the amount of federal insurance provided on such deposits. The Company does not believe it is exposed to significant credit risk due to the financial position of the financial institutions in which these deposits are held.
During the six months ended June 30, 2018 and 2017, revenues were derived primarily from sales of Avenova directly to doctors through the Company’s webstore and to three major distribution partners.
During the six months ended June 30, 2018 and 2017, revenues from our major distribution partners greater than 10% were as follows:
Three Months Ended |
Six Months Ended |
|||||||||||||||
June 30, |
June 30, |
|||||||||||||||
Major distribution or collaboration partner |
2018 |
2017 |
2018 |
2017 |
||||||||||||
Distributor A |
21 |
% |
23 | % | 21 |
% |
23 | % | ||||||||
Distributor B |
23 |
% |
25 | % | 24 |
% |
25 | % | ||||||||
Distributor C |
24 |
% |
18 | % | 25 |
% |
20 | % | ||||||||
Collaborator D |
10 |
% |
* | 10 |
% |
* |
*Not greater than 10%
As of June 30, 2018 and December 31, 2017, accounts receivable from our major distribution or collaboration partners greater than 10% were as follows:
Major distribution or collaboration partner |
June 30, 2018 |
December 31, 2017 |
||||||
Distributor A |
26 |
% |
25 |
% |
||||
Distributor B |
33 |
% |
23 |
% |
||||
Distributor C |
24 |
% |
22 |
% |
||||
Collaborator D |
* | 20 |
% |
*Not greater than 10%
The Company relies on two contract sole source manufacturers to produce its finished goods. The Company does not have any manufacturing facilities and intends to continue to rely on third parties for the supply of finished goods. Third party manufacturers may not be able to meet the Company’s needs with respect to timing, quantity or quality.
Fair Value of Financial Assets and Liabilities
Financial instruments, including cash, cash equivalents and restricted cash, accounts receivable, accounts payable and accrued liabilities are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments. Our warrant liability is carried at fair value.
The Company measures the fair value of financial assets and liabilities based on U.S. GAAP guidance, which defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements.
Under U.S. GAAP, fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy is also established, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
Level 1 – quoted prices in active markets for identical assets or liabilities;
Level 2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable; and
Level 3 – inputs that are unobservable (for example, cash flow modeling inputs based on assumptions).
Allowance for Doubtful Accounts
The Company charges bad debt expense and records an allowance for doubtful accounts when management believes it to be unlikely that specific invoices will be collected. Management identifies amounts due that are in dispute and it believes are unlikely to be collected. As of June 30, 2018 and December 31, 2017, management reserved $11 thousand and $13 thousand, respectively, primarily based on specific amounts that were in dispute or were over 120 days past due.
Inventory
Inventory is comprised of (1) raw materials and supplies, such as bottles, packaging materials, labels, boxes, and pumps; (2) goods in progress, which are normally unlabeled bottles; and (3) finished goods. We utilize contract manufacturers to produce our products and the cost associated with manufacturing is included in inventory. At June 30, 2018 and December 31, 2017, management had recorded an allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments of $138 thousand and $140 thousand, respectively.
Inventory is stated at the lower of cost or estimated net realizable value determined by the first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets of five to seven years for office and laboratory equipment, three years for computer equipment and software and seven years for furniture and fixtures. Leasehold improvements are amortized over the shorter of seven years or the lease term.
The costs of normal maintenance, repairs, and minor replacements are charged to operations when incurred.
Impairment of Long-Lived Assets
The Company accounts for long-lived assets in accordance with U.S. GAAP, which requires that companies consider whether events or changes in facts and circumstances, both internally and externally, may indicate that an impairment of long-lived assets held for use are present. Management periodically evaluates the carrying value of long-lived assets. There were no impairment charges during the six months ended June 30, 2018 and June 30, 2017. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the asset, the assets are written down to their estimated fair values and the loss is recognized in the statements of operations.
Comprehensive Income (Loss)
Accounting Standards Codification (“ASC”) 220, Comprehensive Income requires that an entity’s change in equity or net assets during a period from transactions and other events from non-owner sources be reported. The Company reports unrealized gains and losses on its available-for-sale securities as other comprehensive income (loss).
Revenue Recognition
Beginning January 1, 2018, the Company has followed the provisions of ASC Topic 606, Revenue from Contracts with Customers. The guidance provides a unified model to determine how revenue is recognized.
The Company generates product revenue through product sales to its major distribution partners, a limited number of other distributors and via its webstore. Product supply is the only performance obligation contained in these arrangements, and the Company recognizes product revenue upon transfer of control to its major distribution partners at the amount of consideration that the Company expects to be entitled to, generally upon shipment to the distributor on a “sell-in” basis.
Other revenue is primarily generated through commercial partner agreements with strategic partners for the development and commercialization of the Company’s product candidates. The terms of the agreements typically include more than one performance obligation and generally contain non-refundable upfront fees, payments based upon achievement of certain milestones and royalties on net product sales.
In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under its agreements, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC Topic 606. The Company’s performance obligations include:
● |
Product supply |
● |
Exclusive distribution rights in the product territory |
● |
Regulatory submission and approval services |
● |
Development services |
● |
Sample supply |
● |
Incremental discounts and product supply prepayments considered material rights to the customer |
The Company has optional additional items in contracts, which are considered marketing offers and are accounted for as separate contracts when the customer elects such options. Arrangements that include a promise for future commercial product supply and optional research and development services at the customer’s or the Company’s discretion are generally considered options. The Company assesses if these options provide a material right to the licensee and if so, such material rights are accounted for as separate performance obligations.
Transaction Price
The Company has both fixed and variable consideration. Under the Company’s license arrangements, non-refundable upfront fees are considered fixed, while milestone payments are identified as variable consideration when determining the transaction price. Product supply selling prices are identified as variable consideration subject to the constraint on variable consideration for estimated discounts, rebates, chargebacks and product returns. Funding of research and development activities are considered variable payments until such costs are reimbursed, at which point they are considered fixed. The Company allocates the total transaction price to each performance obligation based on the relative estimated standalone selling prices of the promised goods or services for each performance obligation.
For product supply under the Company’s distribution arrangements, contract liabilities are recorded for invoiced amounts that are subject to significant reversal, including product revenue allowances for cash consideration paid to customers for services, discounts, rebate programs, chargebacks, and product returns. Because the Company doesn’t have sufficient historical data to compute its own return rate, the return rate used to estimate the constraint on variable consideration for product returns is based on an average of peer and competitor company historical return rates. The Company updates the return rate assumption quarterly and applies it to the inventory balance that is held at the distributor and has not yet been sold through to the end customer. Payment for product supply is typically due 30 days after control transfers to the customer. At any point in time there is generally one month of inventory in the sales channel, therefore uncertainty surrounding constraints on variable consideration is generally resolved one month from when control is transferred.
At the inception of each arrangement that includes milestone payments, the Company evaluates whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, and achievement is in the control of the Company (such as a regulatory submission by the Company), the value of the associated milestone is included in the transaction price. Milestone payments that are not within the control of the Company, such as approvals from regulators, are not considered probable of being achieved until those approvals are received.
For arrangements that include sales-based royalties and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (a) when the related sales occur, or (b) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).
Allocation of Consideration
As part of the accounting for arrangements that contain multiple performance obligations, the Company must develop assumptions that require judgment to determine the stand-alone selling price of each performance obligation identified in the contract. When a contract contains more than one performance obligation, the Company uses key assumptions to determine the stand-alone selling price of each performance obligation. The estimated stand-alone selling prices for distribution rights and material rights for incremental discounts on product supply are calculated using an income approach discounted cash flow model and can include the following key assumptions: forecasted commercial partner sales, product life cycle estimates, costs of product sales, commercialization expenses, annual growth rates and margins, discount rates and probabilities of technical and regulatory success. For all other performance obligations, the Company uses a cost-plus margin approach. The Company allocates the total transaction price to each performance obligation based on the estimated relative stand-alone selling prices of the promised goods or services underlying each performance obligation.
Timing of Recognition
Significant management judgment is required to determine the level of effort required under an arrangement and the period over which the Company expects to complete its performance obligations under the arrangement. If the Company cannot reasonably estimate when its performance obligations either are completed or become inconsequential, then revenue recognition is deferred until the Company can reasonably make such estimates. Revenue is then recognized over the remaining estimated period of performance using the cumulative catch-up method. Revenue is recognized for products at a point in time and for licenses of functional intellectual property at the point in time the customer can use and benefit from the license. For performance obligations that are services, revenue is recognized over time proportionate to the costs that the Company has incurred to perform the services using the cost-to-cost input method.
The Company’s intellectual property in the form of distribution rights are determined to be distinct from the other performance obligations identified in the arrangements and considered “right to use” licenses which the customer can benefit from at a point in time. The Company recognizes revenues from non-refundable, up-front fees allocated to the license when the license is transferred to the customer, and the customer can use and benefit from the license.
Cost of Goods Sold
Cost of goods sold includes third party manufacturing costs, shipping costs, and other costs of goods sold. Cost of goods sold also includes any necessary allowance for excess and obsolete inventory along with lower of cost and estimated net realizable value.
Research and Development Costs
The Company charges research and development costs to expense as incurred. These costs include salaries and benefits for research and development personnel, costs associated with clinical trials managed by contract research organizations, and other costs associated with research, development and regulatory activities. Research and development costs may vary depending on the type of item or service incurred, location of performance or production, level of availability of the item or service, and specificity required in production for certain compounds. The Company uses external service providers to conduct clinical trials, to manufacture supplies of product candidates and to provide various other research and development-related products and services. The Company’s research, clinical and development activities are often performed under agreements it enters into with external service providers. The Company estimates and accrues the costs incurred under these agreements based on factors such as milestones achieved, patient enrollment, estimates of work performed, and historical data for similar arrangements. As actual costs are incurred, the Company adjusts its accruals. Historically, the Company’s accruals have been consistent with management’s estimates and no material adjustments to research and development expenses have been recognized. Subsequent changes in estimates may result in a material change in the Company’s expenses, which could also materially affect its results of operations.
Patent Costs
Patent costs, including legal expenses, are expensed in the period in which they are incurred. Patent expenses are included in general and administrative expenses in the consolidated statements of operations and comprehensive loss.
Stock-Based Compensation
The Company accounts for stock-based compensation under the provisions of ASU No. 2014-12, Compensation-Stock Compensation (Topic 718). Under the fair value recognition provisions, stock-based compensation expense is measured at the grant date for all stock-based awards to employees and directors and is recognized as expense over the requisite service period, which is generally the vesting period. Non-employee stock-based compensation charges are amortized over the vesting period on a straight-line basis. For stock options granted, the fair value of the stock options is estimated using a Black-Scholes-Merton option pricing model. See Note 12 for further information regarding stock-based compensation expense and the assumptions used in estimating that expense. The Company accounts for restricted stock unit awards issued to employees and non-employees (consultants and advisory board members) based on the fair market value of the Company’s common stock as of the date of issuance.
Income Taxes
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion or the entire deferred tax asset will not be recognized.
Common Stock Warrant Liability
For warrants that are newly issued or modified and there is a deemed possibility that the Company may have to settle them in cash, or for warrants it issues or modifies that contain an exercise price adjustment feature, the Company records the fair value of the issued or modified warrants as a liability at each balance sheet date and records changes in the estimated fair value as a non-cash gain or loss in the consolidated statements of operations and comprehensive loss. The fair values of these warrants have been determined using the Binomial Lattice (“Lattice”) valuation model. The Lattice model provides for assumptions regarding volatility, call and put features and risk-free interest rates within the total period to maturity. These values are subject to a significant degree of our judgment.
Net (Loss) per Share
The Company computes net (loss) per share by presenting both basic and diluted (loss) per share (“EPS”).
Basic EPS is computed by dividing net (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period, including stock options and warrants, using the treasury stock method, using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Potentially dilutive common share equivalents are excluded from the diluted EPS computation in net loss periods since their effect would be anti-dilutive.
During the three and six months ended June 30, 2018, the basic EPS was a net loss of $0.09 and $0.22, respectively, per share and the diluted EPS was a net loss of $0.12 and $0.26, respectively, per share due to the gain on changes in fair value of warrant liability. During the three and six months ended June 30, 2017, there was no difference between basic and diluted EPS due to the Company’s net losses.
The following table sets forth the calculation of basic EPS and diluted EPS:
Three Months Ended |
Six Months Ended |
|||||||||||||||
June 30, |
June 30, |
|||||||||||||||
2018 |
2017 |
2018 |
2017 |
|||||||||||||
Numerator | ||||||||||||||||
Net loss |
$ | (1,589 | ) | $ | (1,738 | ) | $ | (3,739 | ) | $ | (5,749 | ) | ||||
Less gain on changes in fair value of warrant liability |
(490 | ) | - | (704 | ) | - | ||||||||||
Net loss, diluted |
$ | (2,079 | ) | $ | (1,738 | ) | $ | (4,443 | ) | $ | (5,749 | ) | ||||
Denominator |
||||||||||||||||
Weighted average shares outstanding, basic |
17,089 | 15,308 | 16,750 | 15,296 | ||||||||||||
Net loss per share, basic |
$ | (0.09 | ) | $ | (0.11 | ) | $ | (0.22 | ) | $ | (0.38 | ) | ||||
Weighted average shares outstanding, basic |
17,089 | 15,308 | 16,750 | 15,296 | ||||||||||||
Effect of dilutive warrants |
203 | - | 235 | - | ||||||||||||
Weighted average shares outstanding, diluted |
17,292 | 15,308 | 16,985 | 15,296 | ||||||||||||
Net loss per share, diluted |
$ | (0.12 | ) | $ | (0.11 | ) | $ | (0.26 | ) | $ | (0.38 | ) |
The following outstanding stock options and stock warrants were excluded from the diluted net loss per share computation, as their effect would have been anti-dilutive:
As of June 30, |
||||||||
(in thousands) |
2018 |
2017 |
||||||
Period end stock options to purchase common stock |
3,189 | 2,828 | ||||||
Period end common stock warrants |
- | 544 | ||||||
3,189 | 3,372 |
Recent Accounting Pronouncements
In 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). In 2015 and 2016, the FASB issued additional amendments to the new revenue guidance relating to reporting revenue on a gross versus net basis, identifying performance obligations, licensing arrangements, collectability, noncash consideration, presentation of sales tax, transition, and clarifying examples. Collectively, these are referred to as ASC Topic 606, which replaces all legacy U.S. GAAP guidance on revenue recognition and eliminates all industry-specific guidance. The new revenue recognition guidance provides a unified model to determine how revenue is recognized. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying Topic 606, companies need to use more judgment and make more estimates than under the legacy guidance. This includes identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, allocating the transaction price to each distinct performance obligation, the level of effort required to satisfy performance obligations, and the period over which we expect to complete our performance obligations under the arrangement. As a result, the timing of recognition of revenue has more variability under the new revenue standard due to significant estimates involved in the new accounting. Topic 606, as amended, is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted one year earlier.
On January 1, 2018, the Company adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. In addition, the Company has accounted for all contract modifications retrospectively for contracts in transition at the date of adoption by electing the contract modification practical expedient. Contract consideration has not been adjusted for the effects of a significant financing component if the time between the transfer of the good or service and payment timing is one year or less. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historical accounting under Topic 605. See Note 8 for further information.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, to address the diversity in the classification and presentation of changes in restricted cash in the statement of cash flows by requiring entities to combine the changes in cash and cash equivalents and restricted cash in one line. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash in the statement of cash flows. Additionally, if more than one-line item is recorded on the balance sheet for cash and cash equivalents and restricted cash, a reconciliation between the statement of cash flows and balance sheet is required. The Company adopted the standard effective January 1, 2018 using the retrospective transition method. The impact of the adoption was not material to the consolidated statement of cash flows.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the lease accounting requirements in Leases (Topic 840). ASU 2016-02 requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset, and for operating leases, the lessee would recognize a straight-line total lease expense. The guidance also requires qualitative and specific quantitative disclosures to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities, including significant judgments and changes in judgments. This guidance is effective beginning in the first quarter of fiscal year 2019. While the Company is currently evaluating the impact of the adoption of this standard on its financial statements, the Company anticipates the recognition of additional assets and corresponding liabilities on its condensed consolidated balance sheet related to leases.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Part I applies to entities that issue financial instruments such as warrants, convertible debt or convertible preferred stock that contain down round features. Part II simply replaces the indefinite deferral for certain mandatorily redeemable noncontrolling interests and mandatorily redeemable financial instruments of nonpublic entities contained within Accounting Standards Codification (ASC) Topic 480 with a scope exception and does not impact the accounting for these mandatorily redeemable instruments. This ASU is effective for public companies for the annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted. The Company is currently evaluating the effects of the adoption of ASU 2017-11 to its consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (Topic 718), that expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for certain specified exemptions. The guidance is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company is currently evaluating the effects of the adoption of ASU 2018-07 to its consolidated financial statements.
NOTE 3. FAIR VALUE MEASUREMENTS
The Company measures the fair value of financial assets and liabilities based on authoritative guidance which defines fair value, establishes a framework consisting of three levels for measuring fair value, and requires disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The Company’s warrant liability is classified within Level 3 of the fair value hierarchy because the value is calculated using significant judgment based on the Company’s own assumptions in the valuation of this liability.
The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2018:
Fair Value Measurements Using |
||||||||||||||||
(in thousands) |
Balance at June 30, 2018 |
Quoted Prices in Active Markets for Identical Items (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||
Assets |
||||||||||||||||
Cash equivalents |
$ | 102 | $ | 102 | $ | — | $ | — | ||||||||
Restricted cash held as a certificate of deposit |
324 | 324 | — | — | ||||||||||||
Deposit held as a certificate of deposit |
151 | 151 | — | — | ||||||||||||
Total assets |
$ | 577 | $ | 577 | $ | — | $ | — | ||||||||
Liabilities |
||||||||||||||||
Warrant liability |
$ | 785 | $ | — | $ | — | $ | 785 | ||||||||
Total liabilities |
$ | 785 | $ | — | $ | — | $ | 785 |
The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2017:
Fair Value Measurements Using |
||||||||||||||||
(in thousands) |
Balance at December 31, 2017 |
Quoted Prices in Active Markets for Identical Items (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||
Assets |
||||||||||||||||
Cash equivalents |
$ | 101 | $ | 101 | $ | — | $ | — | ||||||||
Restricted cash held as a certificate of deposit |
324 | 324 | — | — | ||||||||||||
Deposit held as a certificate of deposit |
150 | 150 | — | — | ||||||||||||
Total assets |
$ | 575 | $ | 575 | $ | — | $ | — | ||||||||
Liabilities |
||||||||||||||||
Warrant liability |
$ | 1,489 | $ | — | $ | — | $ | 1,489 | ||||||||
Total liabilities |
$ | 1,489 | $ | — | $ | — | $ | 1,489 |
As a result of the fair value adjustment of the warrant liability, the Company recorded a non-cash gain of $490 thousand for the three-month period ended June 30, 2018 on a decrease in the fair value of the warrants. See Note 10 for further discussion of the calculation of the fair value of the warrant liability.
(in thousands) |
Warrant liability |
|||
Fair value of warrant liability at December 31, 2017 |
$ | 1,489 | ||
Decrease in fair value at March 31, 2018 |
(214 |
) |
||
Fair value of warrant liability at March 31, 2018 |
1,275 | |||
Decrease in fair value at June 30, 2018 |
(490 |
) |
||
Fair value of warrant liability at June 30, 2018 |
$ | 785 |
NOTE 4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following:
(in thousands) |
June 30, 2018 |
December 31, 2017 |
||||||
Prepaid employees’ benefits |
$ | 112 | $ | 112 | ||||
Prepaid sales rebate |
945 | 923 | ||||||
Prepaid rent |
- | 123 | ||||||
Rent receivable |
101 | 86 | ||||||
Prepaid insurance |
57 | 27 | ||||||
Prepaid fleet leasing costs |
75 | 61 | ||||||
Prepaid dues and subscriptions |
93 | 117 | ||||||
Other |
215 | 214 | ||||||
Total prepaid expenses and other current assets |
$ | 1,598 | $ | 1,663 |
NOTE 5. INVENTORY
Inventory consisted of the following:
(in thousands) |
June 30, 2018 |
December 31, 2017 |
||||||
Raw materials and supplies |
$ | 270 | $ | 298 | ||||
Finished goods |
185 | 346 | ||||||
Less allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments |
(138 |
) |
(140 |
) |
||||
Total inventory, net |
$ | 317 | $ | 504 |
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
(in thousands) |
June 30, 2018 |
December 31, 2017 |
||||||
Office and laboratory equipment |
$ | 24 | $ | 24 | ||||
Furniture and fixtures |
157 | 157 | ||||||
Computer equipment and software |
359 | 354 | ||||||
Production equipment |
105 | 105 | ||||||
Leasehold improvements |
76 | 74 | ||||||
Total property and equipment, at cost |
721 | 714 | ||||||
Less: accumulated depreciation and amortization |
(370 |
) |
(243 |
) |
||||
Total property and equipment, net |
$ | 351 | $ | 471 |
Depreciation and amortization expense was $86 thousand and $18 thousand for the three months ended June 30, 2018 and 2017, respectively, and $127 thousand and $36 thousand for the six months ended June 30, 2018 and 2017, respectively.
NOTE 7. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
(in thousands) |
June 30, 2018 |
December 31, 2017 |
||||||
Employee payroll and benefits |
$ | 781 | $ | 761 | ||||
Severance/retirement pay |
171 | 347 | ||||||
Distributor fees and discounts |
- | 185 | ||||||
Sales rebates |
- | 106 | ||||||
Avenova contract liabilities (see Note 8) |
1,487 | - | ||||||
Deferred rent |
85 | 69 | ||||||
Other |
141 | 204 | ||||||
Total accrued liabilities |
$ | 2,665 | $ | 1,672 |
NOTE 8. ADOPTION OF ASC TOPIC 606, “REVENUE FROM CONTRACTS WITH CUSTOMERS”
On January 1, 2018, the Company adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. In addition, the Company has accounted for all contract modifications retrospectively for contracts in transition at the date of adoption by electing the contract modification practical expedient. Contract consideration has not been adjusted for the effects of a significant financing component if the time between the transfer of the good or service and payment timing is one year or less. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historical accounting under Topic 605.
Transactions under the Company’s major distribution agreements, which under prior guidance were recognized upon shipment from its distributors to the final customers, are now recognized upon transfer of control to its major distribution partners at the amount of consideration that the Company expects to be entitled to. As a result, the Company now records contract liabilities for the invoiced amounts that are estimated to be subject to significant reversal, including product revenue allowances for cash consideration paid to customers for services, discounts, rebate programs, chargebacks, and product returns. The constraint on variable consideration for product returns is a new estimation resulting from the earlier recognition under the new guidance. Based on this change, the entire deferred revenue and deferred cost of goods sold balances related to its distribution agreements were allocated to either contract liabilities and other liabilities associated with invoicing in periods prior to adoption or included in the cumulative adjustment to retained earnings upon adoption.
Milestone payments, which under the prior milestone recognition methodology were not recognized until they are substantively achieved, are included in the estimated transaction price when they are considered probable of being achieved. This may result in earlier recognition of revenue for the portion of milestone payments deemed probable which are allocated to performance obligations that are satisfied before the milestones are achieved. For license and collaboration revenue for which contract deliverables were previously accounted for as a combined unit of accounting because products or services were not separable, the Company has identified that under the new guidance the separate performance obligations are capable of being distinct. As a result, the transaction price under these arrangements, including upfront fees and milestone payments, are allocated differently to each performance obligation and may be recognized at earlier points in time or with a different pattern of performance over time.
The following table shows the reconciliation of assets and liabilities disclosed in the Form 10-K for the year ended December 31, 2017, as adjusted, due to the modified retrospective adoption of Topic 606 on January 1, 2018 (in thousands):
As Reported Under Topic 605 |
Effect of Change |
As Adjusted Under Topic 606 |
||||||||||
Accounts receivable |
$ | 3,629 | $ | 530 | $ | 4,159 | ||||||
Inventory |
$ | 504 | $ | (25 |
) |
$ | 479 | |||||
Accrued liabilities |
$ | 1,672 | $ | 1,166 | $ | 2,838 | ||||||
Deferred revenue |
$ | 2,841 | $ | (2,766 |
) |
$ | 75 | |||||
Deferred revenue, non-current |
$ | 534 | $ | (534 |
) |
$ | - | |||||
Accumulated deficit |
$ | (111,074 |
) |
$ | 2,639 | $ | (108,435 |
) |
As a result of adopting Topic 606 using the modified retrospective approach, the following table shows the financial statement line items for the six months ended June 30, 2018, as if revenue from contracts with customers had been accounted for under Topic 605 (in thousands, except per share data):
As Reported Under Topic 606 |
Effect of Change |
As Revised Under Topic 605 |
||||||||||
Consolidated Balance Sheet: |
||||||||||||
Accounts receivable |
$ | 2,024 | $ | (315 |
) |
$ | 1,709 | |||||
Inventory |
$ | 317 | $ | 19 | $ | 336 | ||||||
Accrued liabilities |
$ | 2,665 | $ | (1,267 |
) |
$ | 1,398 | |||||
Deferred revenue |
$ | 62 | $ | 2,829 | $ | 2,891 | ||||||
Deferred revenue, non-current |
$ | - | $ | 581 | $ | 581 | ||||||
Accumulated deficit |
$ | (112,175 |
) |
$ | (2,439 |
) |
$ | (114,614 |
) |
|||
Total net sales |
$ | 5,741 | $ | 205 | $ | 5,946 | ||||||
Cost of product sales |
$ | 730 | $ | 6 | $ | 736 | ||||||
Loss from operations |
$ | (4,451 |
) |
$ | 199 | $ | (4,252 |
) |
||||
Net loss |
$ | (3,739 |
) |
$ | 199 | $ | (3,540 |
) |
||||
Basic net loss per share |
$ | (0.22 |
) |
$ | 0.01 | $ | (0.21 |
) |
||||
Diluted net loss per share |
$ | (0.26 |
) |
$ | 0.01 | $ | (0.25 |
) |
||||
Consolidated Statement of Cash Flows: |
||||||||||||
Net loss |
$ | (3,739 |
) |
$ | 199 | $ | (3,540 |
) |
||||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||||||
Accounts receivable |
$ | 2,134 | $ | (215 |
) |
$ | 1,919 | |||||
Inventory |
$ | 160 | $ | 6 | $ | 166 | ||||||
Accounts payable and accrued liabilities |
$ | (327 |
) |
$ | (132 |
) |
$ | (459 |
) |
|||
Deferred revenue |
$ | (13 |
) |
$ | 141 | $ | 128 |
At June 30, 2018, approximately $62,000 of the transaction price is allocated to unsatisfied performance obligations which the Company expects to be recognized during 2018.
For additional detail on the Company’s accounting policy regarding revenue recognition, refer to Note 2 above.
The following table presents changes in the Company’s contract assets and liabilities for the six months ended June 30, 2018:
Balance at Beginning of the Period |
Additions |
Deductions |
Balance at the end of the Period |
|||||||||||||
(in thousands) |
||||||||||||||||
Contract Liabilities: Deferred Revenue |
$ | 75 | $ | - | $ | (13 |
) |
$ | 62 | |||||||
Contract Liabilities: Accrued Liabilities |
$ | 1,458 | $ | 6,516 | $ | (6,396 |
) |
$ | 1,578 | |||||||
Total |
$ | 1,533 | $ | 6,516 | $ | (6,409 |
) |
$ | 1,640 |
During the six months ended June 30, 2018, the Company recognized the following revenue (in thousands):
Revenue recognized in the period from: |
||||
Amounts included in contract liabilities at the beginning of the period: |
||||
Performance obligations satisfied |
$ | 1,426 | ||
New activities in the period: |
||||
Performance obligations satisfied |
$ | 4,315 | ||
Total revenue |
$ | 5,741 |
License Collaboration and Distribution Agreements
In January 2012, the Company entered into a distribution agreement with China Pioneer, a Shanghai-based company that markets high-end pharmaceutical products into China and an affiliate of Pioneer Singapore, for the commercialization of NeutroPhase in this territory. Under the terms of the agreement, NovaBay received an upfront payment of $312,500. NovaBay also received $312,500 in January 2013 related to the submission of the first marketing approval for the product to the Chinese Food and Drug Administration (“CFDA”). The deferred revenue was recognized as the purchase discounts were earned, with the remaining deferred revenue recognized ratably over the product distribution period. During the year ended December 31, 2014, NovaBay received $625,000 upon receipt of a marketing approval of the product from the CFDA.
In September 2012, the Company entered into two agreements with China Pioneer: (1) an international distribution agreement (“Distribution Agreement”) and (2) a unit purchase agreement (“Purchase Agreement”). These agreements were combined and accounted for as one arrangement with one unit of accounting for revenue recognition purposes.
Pursuant to the terms of the Distribution Agreement, China Pioneer has the right to distribute NeutroPhase, upon a marketing approval from a Regulatory Authority, in certain territories in Asia (other than China). Upon execution of the Distribution Agreement, the Company received an upfront payment, which was recorded as deferred revenue. China Pioneer is also obligated to make certain additional payments to the Company upon receipt of the marketing approval. The Distribution Agreement further provides that China Pioneer is entitled to a cumulative purchase discount not to exceed $500,000 upon the purchase of NeutroPhase product, payable in NovaBay unregistered restricted common stock.
Pursuant to the Purchase Agreement, the Company also received $2.5 million from China Pioneer for the purchase of restricted units (with each restricted unit comprising one share of common stock and a warrant for the purchase of one share of common stock). The unit purchase was completed in two tranches: (1) 800,000 units in September 2012; and (2) 1,200,000 units in October 2012, with both tranches at a purchase price of $1.25 per unit. The fair value of the total units sold was $3.5 million, based upon the trading price of our common stock on the dates the units were purchased and the fair value of the warrants based on the Black-Scholes Merton option pricing model. Because the aggregate fair value of the units on the dates of purchase exceeded the $2.5 million in proceeds received from the unit purchase by approximately $1 million, we reallocated $600,000 from deferred revenue to stockholders’ equity as consideration for the purchase of the units.
In December 2013, the Company announced it had expanded its NeutroPhase commercial partnership agreement with China Pioneer. The expanded agreement includes licensing rights to Avenova and CelleRx, which were developed internally by NovaBay. The expanded partnership agreement covers the commercialization and distribution of these products in China and 11 countries in Southeast Asia.
On February 7, 2012, the Company entered into a distribution agreement with Integrated Healing Technologies, LLC (“IHT”) to distribute NeutroPhase. NovaBay received an upfront payment of $750,000.
In April 2013, the Company entered into a collaboration and license agreement with Virbac. Under this agreement, Virbac acquired exclusive worldwide rights to develop the Company’s proprietary compound, auriclosene (NVC-422), for global veterinary markets for companion animals. The Company received an upfront payment of $250,000.
On June 1, 2013, the Company entered into a distribution agreement with Principal Business Enterprise Inc. (“PBE”) to distribute NeutroPhase. NovaBay received an upfront payment of $200,000.
Revenue has been recognized under these agreements as follows:
Three Months Ended |
Six Months Ended |
|||||||||||||||
June 30, |
June 30, |
|||||||||||||||
(in thousands) |
2018 |
2017 |
2018 |
2017 |
||||||||||||
Amortization of upfront technology access fee |
$ | - | $ | 28 | $ | 13 | $ | 35 | ||||||||
Product revenue |
121 | 289 | 121 | 362 | ||||||||||||
Total revenue recognized |
$ | 121 | $ | 317 | $ | 134 | $ | 397 |
The Company had a deferred revenue balance of $2.0 million at December 31, 2017, related to these agreements, which consisted of the unamortized balances from upfront technology and access fees. Upon the adoption of ASC Topic 606, deferred revenue decreased by $1.96 million and was recorded as part of the cumulative adjustment to the accumulated deficit. The decrease in deferred revenue related primarily to the identification of the licenses as “right of use” licenses under the current guidance for which control transferred to the customer at the onset of each contract. At June 30, 2018, the Company had deferred revenue of $62 thousand which relates to unsatisfied performance obligations of sample supply due to Pioneer China and PBE and an incremental discount on future product sales due to Pioneer China.
Avenova Distribution Agreements
In November 2014, the Company signed a nationwide distribution agreement for its Avenova product with McKesson Corporation (“McKesson”) as part of the Company’s commercialization strategy. McKesson makes Avenova widely available in local pharmacies and major retail chains across the U.S., such as Wal-Mart, Costco, CVS and Target. In January 2015, the Company signed a nationwide distribution agreement with Cardinal Health. In April 2015, the Company also signed a distribution agreement with AmerisourceBergen to distribute Avenova nationwide.
During the three months ended June 30, 2018 and 2017, the Company earned $2.3 million and $3.0 million, respectively, and $4.9 million and $5.8 million, respectively, for the six months ended June 30, 2018 and 2017, in sales revenue for its Avenova product from its distribution agreements.
The Company had a deferred revenue balance of $1.3 million at December 31, 2017 related to these agreements, which consisted of product sales that our customers had not resold to end users (sell-through approach). Upon the adoption of ASC Topic 606, deferred revenue decreased by $1.3 million, with a portion associated with the constraint on variable consideration related to service fees/chargebacks, prompt payment discounts, rebates and returns in the amount of $0.6 million being reclassified as a contract liability. The remaining $0.7 million, including the net effect of deferred cost of goods sold, was recorded as part of the cumulative adjustment to the accumulated deficit. With the adoption of Topic 606, we recognize product sales as revenue when our products are sold to our customers.
At June 30, 2018, under the Avenova product distribution arrangements, the Company has a contract liability balance of $1.6 million. The contract liability is included in accounts payable and accrued liabilities in the balance sheet (see Note 7).
NOTE 9. COMMITMENTS AND CONTINGENCIES
Operating Leases
Facility Leases
On August 24, 2016, we entered into an Office Lease (the “Lease”), pursuant to which we leased approximately 7,799 rentable square feet of real property located on the eleventh floor (Suite 1150) at 2000 Powell Street, Emeryville, California 94608 from KBSIII Towers at Emeryville, LLC (the “Landlord”), for our new principal executive offices. The expiration date of the Lease is February 28, 2022, unless earlier terminated pursuant to any provision of the Lease. The Company has the option to extend the term of the Lease for one five (5)-year period upon written notice to the Landlord due no earlier than twelve (12) months and no later than nine (9) months prior to the expiration of the Lease.
The Company still has a lease commitment for the laboratory facilities and office space at Suite 550, EmeryStation North Building, 5980 Horton Street, Emeryville, California (“EmeryStation”) under an operating lease which will expire on October 31, 2020. On July 11, 2016, the Company entered into a Sublease Agreement to sublease all 16,465 rentable square feet of real property at EmeryStation (the “Sublease Agreement”). The commencement date under the Sublease Agreement was September 8, 2016. The expiration date of the Sublease Agreement is October 21, 2020, as amended (while the expiration date of the Company’s master lease for the EmeryStation premises is October 31, 2020), unless earlier terminated pursuant to the Company terminating its master lease for EmeryStation or the Sublease Agreement.
Rent expense, net for the above two facility leases was approximately $96 thousand and $97 thousand net for the three months ended June 30, 2018 and 2017, respectively, and $193 thousand and $196 thousand, net for the six months ended June 30, 2018 and 2017, respectively.
The Company’s monthly rent payments fluctuate under the various leases and sublease agreements. In accordance with U.S. GAAP, the Company recognizes rent expense on a straight-line basis. The Company records deferred rent and sublease future minimum payments receivable for the difference between the amounts paid and recorded as expense.
Vehicle Fleet Leases
During the six months ended June 30, 2018, the Company leased 54 vehicles under a master fleet lease agreement. Each lease is for a period of 36 months, which commenced upon the delivery of the vehicle. As of June 30, 2018, the aggregate monthly lease payment for all 54 vehicles is $14 thousand, including a management fee of $15 per vehicle. In addition, the Company made an initial payment of $3 thousand per vehicle, which it is amortizing over the 36-month lease period.
Lease expense, net, for the vehicle fleet was approximately $31 thousand and $39 thousand for the three months ended June 30, 2018 and 2017, respectively, and $62 thousand and $56 thousand for the six months ended June 30, 2018 and 2017, respectively.
Directors and Officers Indemnification
As permitted under Delaware law and in accordance with its bylaws, the Company indemnifies its officers and directors for certain events or occurrences while the officer or director is or was serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum amount of potential future indemnification is unlimited; however, the Company has a director and officer insurance policy that limits its exposure and may enable it to recover a portion of any future payments. The Company believes the fair value of these indemnification agreements is minimal. Accordingly, it has not recorded any liabilities for these agreements as of June 30, 2018.
In the normal course of business, the Company provides indemnification of varying scope under its agreements with other companies, typically its clinical research organizations, investigators, clinical sites, suppliers and others. Pursuant to these agreements, it generally indemnifies, holds harmless, and agrees to reimburse the indemnified parties for losses suffered or incurred by the indemnified parties in connection with use or testing of its products or product candidates or with any U.S. patent or any copyright or other intellectual property infringement claims by any third party with respect to its products. The term of these indemnification agreements is generally perpetual. The potential future payments the Company could be required to make under these indemnification agreements is unlimited. Historically, costs related to these indemnification provisions have been immaterial. The Company also maintains various liability insurance policies that limit its exposure. As a result, it believes the fair value of these indemnification agreements is minimal. Accordingly, the Company has not recorded any liabilities for these agreements as of June 30, 2018.
Legal Matters
From time to time, the Company may be involved in various legal proceedings arising in the ordinary course of business. There are no matters as of June 30, 2018, that, in the opinion of management, would ultimately result in liability that would have a material adverse effect on the Company’s financial position, results of operations or cash flows.
NOTE 10. WARRANT LIABILITY
In July 2011, the Company sold common stock and warrants in a registered direct financing. As part of this transaction, 139,520 warrants were issued with an exercise price of $33.25 and were exercisable from January 1, 2012 to July 5, 2016. The terms of the warrants require registered shares to be delivered upon each warrant’s exercise and also require possible cash payments to the warrant holders (in lieu of the warrant’s exercise) upon specified fundamental transactions involving the Company’s common stock, such as in an acquisition of the Company. Under ASC 480, Distinguishing Liabilities from Equity, the Company’s ability to deliver registered shares upon an exercise of the warrants and the Company’s potential obligation to cash-settle the warrants if specified fundamental transactions occur are deemed to be beyond the Company’s control. The warrants contain a provision according to which the warrant holder would have the option to receive cash, equal to the Black Scholes fair value of the remaining unexercised portion of the warrant, as cash settlement in the event that there is a fundamental transaction (contractually defined to include various merger, acquisition or stock transfer activities). Due to this provision, ASC 480 requires that these warrants be classified as liabilities. The fair values of these warrants have been determined using the Lattice valuation model, and the changes in the fair value are recorded in the consolidated statement of operations and comprehensive loss. The Lattice model provides for assumptions regarding volatility and risk-free interest rates within the total period to maturity. In addition, after January 5, 2012, and if the closing bid price per share of the common stock in the principal market equals or exceeds $66.50 for any ten trading days (which do not have to be consecutive) in a period of fifteen consecutive trading days, the Company has the right to require the exercise of one-third of the warrants then held by the warrant holders.
In October 2015, the holders of all warrants issued pursuant to the Company’s securities purchase agreement dated March 3, 2015 (the “2015 Securities Purchase Agreement”) agreed to reduce the length of notice required to such investors prior to the Company’s issuance of new securities from twenty business days to two business days, for the remainder of such investors’ pre-emptive right period (which expired March 3, 2016). The Company entered into these agreements to enable it to expeditiously raise capital in the October 2015 Offering (as described below) and future offerings. As consideration for these agreements, the Company amended certain provisions of both the warrants with a 15-month term (the “Short-Term Warrants”) and warrants with a five-year term (the “Long-Term Warrants”) issued pursuant to the 2015 Securities Purchase Agreement (together, the “March 2015 Warrants”) and the warrants issued pursuant to the placement agent agreement dated June 29, 2011 (the “July 2011 Warrants”). Specifically, the amendments decreased the exercise price for both the March 2015 Warrants and the July 2011 Warrants to $5.00 per share. In addition, the amendments extended the exercise expiration date for the Short-Term Warrants and the July 2011 Warrants to March 6, 2020. A price protection provision also was added to both the July 2011 Warrants and March 2015 Warrants, such that if the Company subsequently sells or otherwise disposes of Company common stock at a lower price per share than $5.00 or any securities exchangeable for common stock with a lower exercise price than $5.00, the exercise price of such warrants will be reduced to that lower price.
In October 2015, the Company also entered into an underwriting agreement with Roth Capital Partners, LLC, relating to the public offering and sale of up to (i) 492,000 shares of the Company’s common stock; and (ii) warrants to purchase up to 442,802 shares of the Company’s common stock (the “October 2015 Warrants”) with an exercise price of $5.00 per share (the “October 2015 Offering”). The shares of common stock and warrants were issued separately. Each warrant was exercisable immediately upon issuance and will expire 60 months from the date of issuance. The price to the public in the October 2015 Offering was $5.00 per share of common stock and related warrant. The net proceeds to the Company were approximately $2.1 million after deducting underwriting discounts and commissions and offering expenses.
In February 2016, the strike price of the July 2011, March 2015 and October 2015 warrants was reduced to $1.81 per share, pursuant to the price protection provisions in such warrants, because the Company sold common stock to Mr. Jian Ping Fu at that price.
The key assumptions used to value the July 2011 Warrants as of June 30, 2018 and December 31, 2017 were as follows:
As of |
||||||||
Assumption |
June 30, 2018 |
December 31, 2017 |
||||||
Expected price volatility |
66.00 |
% |
91.00 |
% |
||||
Expected term (in years) |
1.68 | 2.18 | ||||||
Risk-free interest rate |
2.46 |
% |
1.91 |
% |
||||
Dividend yield |
0.00 |
% |
0.00 |
% |
||||
Weighted-average fair value of warrants |
$ | 1.42 | $ | 2.72 |
In March 2015, the Company issued both the Short-Term Warrants ($15.00 per share exercise price) and the Long-Term Warrants ($16.25 per share exercise price). At that time, the Company determined that these warrants qualified for equity accounting and did not contain embedded derivatives that required bifurcation. After the Company’s agreement to modify the terms of the March 2015 Warrants and July 2011 Warrants in October 2015, the Company evaluated the change in terms of the March 2015 Warrants and noted that the change in terms resulted in liability classification of both the Short-Term and Long-Term Warrants. The March 2015 Warrants were re-issued and valued as of October 27, 2015 at a total of $1.8 million with the new terms, and a modification expense was recorded as the difference between the fair value of the warrants on their new terms after modification as of October 27, 2015 and the fair value of the warrants on their original terms prior to modification as of October 27, 2015. The fair values of these warrants have been determined using the Lattice valuation model, and the changes in the fair value are recorded in the consolidated statement of operations and comprehensive loss.
The key assumptions used to value the Short-Term Warrants as of June 30, 2018 and December 31, 2017 were as follows:
As of |
||||||||
Assumption |
June 30, 2018 |
December 31, 2017 |
||||||
Expected price volatility |
66.00 |
% |
91.00 |
% |
||||
Expected term (in years) |
1.68 | 2.18 | ||||||
Risk-free interest rate |
2.46 |
% |
1.91 |
% |
||||
Dividend yield |
0.00 |
% |
0.00 |
% |
||||
Weighted-average fair value of warrants |
$ | 1.13 | $ | 2.42 |
The key assumptions used to value the Long-Term Warrants as of June 30, 2018 and December 31, 2017 were as follows:
As of |
||||||||
Assumption |
June 30, 2018 |
December 31, 2017 |
||||||
Expected price volatility |
66.00 |
% |
91.00 |
% |
||||
Expected term (in years) |
1.68 | 2.18 | ||||||
Risk-free interest rate |
2.46 |
% |
1.91 |
% |
||||
Dividend yield |
0.00 |
% |
0.00 |
% |
||||
Weighted-average fair value of warrants |
$ | 1.42 | $ | 2.72 |
As noted above, the Company issued warrants in connection with the October 2015 Offering. The Company evaluated the terms of the October 2015 Warrants and noted that under ASC 480, the Company’s potential obligation to cash-settle the warrants if specified fundamental transactions occur are deemed to be beyond the Company’s control. Due to this provision, ASC 480 requires that these warrants be classified as liabilities. The fair values of these warrants have been determined using the Lattice valuation model, and the changes in the fair value are recorded in the consolidated statement of operations and comprehensive loss. The fair value of the warrants at issuance on October 27, 2015 was $1.3 million.
The key assumptions used to value the October 2015 warrants as of June 30, 2018 and December 31, 2017 were as follows:
As of |
||||||||
Assumption |
June 30, 2018 |
December 31, 2017 |
||||||
Expected price volatility |
73.00 |
% |
90.00 |
% |
||||
Expected term (in years) |
2.33 | 2.83 | ||||||
Risk-free interest rate |
2.56 |
% |
1.96 |
% |
||||
Dividend yield |
0.00 |
% |
0.00 |
% |
||||
Weighted-average fair value of warrants |
$ | 1.58 | $ | 2.86 |
During the third quarter of 2016, a total of 3,613,284 warrants to purchase 3,613,284 shares of common stock were exercised related to warrants issued during July 2011, March 2015 and October 2015, resulting in gross proceeds of $6.9 million. Upon exercise, the warrant liability associated with these warrants was adjusted to its fair value as of the date of exercise of $1.6 million, with any change in fair value recorded in the consolidated statement of operations and comprehensive loss. The $1.6 million fair value was subsequently transferred to equity as of the date of exercise.
During the fourth quarter of 2016, a total of 363,523 warrants to purchase 363,523 shares of common stock were exercised related to the October 2015, November 2015 and December 2015 warrants resulting in gross proceeds of $0.9 million. Upon exercise, the warrant liability associated with these warrants was adjusted to its fair value as of the date of exercise of $0.5 million, with any change in fair value recorded in the consolidated income statement and comprehensive loss. The $0.5 million fair value was subsequently transferred to equity as of the date of exercise.
During the second quarter of 2017, a total of 21,000 warrants to purchase 21,000 shares of common stock were exercised related to the March 2015 Short-Term and Long-Term warrants resulting in gross proceeds of $38 thousand. Upon exercise, the warrant liability associated with these warrants was adjusted to its fair value as of the date of exercise of $58 thousand, with any change in fair value recorded in the consolidated income statement and comprehensive loss. The $58 thousand fair value was subsequently transferred to equity as of the date of exercise.
The details of the outstanding warrant liability as of June 30, 2018, were as follows:
Shares and dollars in thousands |
Shares |
Warrant Liability |
||||||
July 2011 Warrants |
49 | $ | 70 | |||||
Long-Term Warrants |
96 | 136 | ||||||
Short-Term Warrants |
115 | 130 | ||||||
October 2015 Warrants |
284 | 449 | ||||||
544 | $ | 785 |
NOTE 11. STOCKHOLDERS’ EQUITY (DEFICIT)
Amendments to Articles of Incorporation—Reverse Stock Split
Effective December 18, 2015, the Company amended its Certificate of Incorporation to affect a 1-for-25 reverse split of its outstanding common stock (the “Reverse Stock Split”). The Reverse Stock Split was approved by the Company’s stockholders on December 11, 2015. The accompanying financial statements and related notes give retroactive effect to this Reverse Stock Split.
After approval by the Company’s stockholders, the Company decreased the number of authorized shares from 240 million to 50 million effective June 4, 2018.
Preferred Stock
Under the Company’s amended articles of incorporation, the Company is authorized to issue up to 5,000,000 shares of preferred stock in such series and with such rights and preferences as may be approved by the Board of Directors. As of June 30, 2018 and December 31, 2017, there were no shares of Company preferred stock outstanding.
Common Stock
In February 2016, the Company entered into three securities purchase agreements (the “Purchase Agreements”) for the sale of an aggregate of 1,518,567 shares of the Company’s common stock (the “Common Stock”) to accredited investors for a total of $2.8 million. The Company entered into the first purchase agreement with Mr. Jian Ping Fu (the “Fu Agreement”), pursuant to which the Company agreed to issue and sell to Mr. Fu 696,590 shares of Common Stock, at a per share price of $1.81, which was a five percent (5%) discount to the closing price of the Common Stock on February 16, 2016, the date of the Fu Agreement. The Company entered into the second purchase agreement with Pioneer Singapore (the “Pioneer Agreement”), pursuant to which the Company agreed to issue and sell to Pioneer Singapore 696,590 shares of Common Stock, at a per share price of $1.91, which was the closing price of the Common Stock on February 16, 2016 with no discount. The Company entered into a third purchase agreement with Mark M. Sieczkarek (the “Sieczkarek Agreement”), pursuant to which the Company agreed to issue and sell to Mr. Sieczkarek 125,387 shares of Common Stock, at a per share price of $1.91, which was the closing price of the Common Stock on February 16, 2016 with no discount. The Common Stock issued by the Company pursuant to the Purchase Agreements has not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
China Kington Asset Management Co. Ltd. served as placement agent in exchange for a commission equal to six percent (6%) of the gross proceeds received by the Company upon closing pursuant to the purchases by Pioneer Singapore and Mr. Fu. The amount of such commission was approximately $155 thousand.
On April 4, 2016, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) for the sale of an aggregate 6,173,299 shares of Common Stock, par value $0.01 per share and warrants (the “April 2016 Warrants”) exercisable for 3,086,651 Shares to accredited investors for an aggregate purchase price of $11.8 million (the “Private Placement”). The warrants have a 4-year term and an exercise price of $1.91, callable by the Company if the closing price of the Common Stock, as reported on the NYSE American, is $4.00 or greater for five sequential trading days. The Private Placement closed in two tranches, the first of which closed on May 5, 2016, resulting in proceeds to the Company of $7.8 million (the “Primary Closing”), and the second of which closed on August 1, 2016, resulting in proceeds of $4.0 million to the Company (the “Secondary Closing”). In the Primary Closing, the Company issued 4,079,058 shares of Common Stock and April 2016 Warrants exercisable for 2,039,530 shares of Common Stock. In the Secondary Closing, the Company issued 2,094,241 shares of Common Stock and April 2016 Warrants exercisable for 1,047,121 shares of Common Stock. Both the Primary Closing and the Secondary Closing were subject to the same terms, containing customary representations, warranties and agreements by the Company, customary conditions to closing, indemnification obligations of the Company and the purchasers and other obligations of the parties and termination provisions.
China Kington Asset Management Co. Ltd. served as placement agent in exchange for a commission equal to six percent (6%) of the gross proceeds received by the Company upon closing pursuant to the purchases by certain investors. The amount of such commission was approximately $618 thousand.
Also on April 4, 2016, the Company entered into a separate registration rights agreement (the “Registration Rights Agreement”) with Messrs. Andros and Geckler, Dr. Rider, and the Children’s Brain Disease Foundation (the “Participating Purchasers”), pursuant to which the Company agreed to file as many registration statements with the SEC as may be necessary to cover the resale of the shares and the April 2016 Warrants held by the Participating Purchasers, to use its commercially reasonable efforts to have all such registration statements declared effective within the time frames set forth in the Securities Purchase Agreement and the Registration Rights Agreement, and to keep such registration statements effective for the terms defined therein. The Company filed such Registration Statement to cover the resale of the shares and April 2016 Warrants held by the Participating Purchasers with the SEC on June 9, 2016 and received effectiveness of such Registration Statement on June 20, 2016 (Registration Number 333-211943).
During the third quarter of 2016, the Company recorded $6.6 million in net proceeds upon the exercise of 3,613,284 of the Company’s warrants for 3,613,284 shares of the Company’s Common Stock, including all of the warrants issued in May 2016 and August 2016. As consideration for the facilitation of the exercise of certain of these warrants held by non-U.S. citizens domiciled outside of the United States, China Kington received a six percent (6%) commission on the aggregate proceeds to the Company pursuant to such exercises. The amount of such commission was approximately $338 thousand.
During the fourth quarter of 2016, the Company recorded $0.9 million in net proceeds upon the exercise of 363,523 of the Company’s warrants for 363,523 shares of the Company’s Common Stock. As consideration for the facilitation of the exercise of certain of these warrants held by non-U.S. citizens domiciled outside of the United States, China Kington received a six percent (6%) commission on the aggregate proceeds to the Company pursuant to such exercises. The amount of such commission was approximately $32 thousand.
During the first quarter of 2018, we entered into a share purchase agreement with OP Financial Investments Limited for the sale of an aggregate of 1,700,000 shares of the Company’s common stock, par value $0.01 per share, for an aggregate purchase price of $5,984,000 (the “OP Private Placement”). The OP Private Placement closed on February 8, 2018. OP Financial Investments Limited is an investment firm based in Hong Kong focused on cross-border investment opportunities and listed on the Hong Kong Stock Exchange. China Kington served as placement agent in exchange for a commission equal to six percent (6%) of the gross proceeds, totaling $359,040. The Company also paid $34 thousand to NYSE American for the listing of the additional shares.
Stock Warrants
In February 2016, the strike prices of the July 2011, March 2015 Short-Term Warrants and Long-Term Warrants, and October 2015 warrants were reduced to $1.81 per share, pursuant to the price protection provisions in such warrants, because the Company sold common stock to Mr. Jian Ping Fu at that price.
In May 2016, the Company issued 2,039,530 warrants at the Primary Closing pursuant to the Securities Purchase Agreement. Please see the preceding subsection, “Common Stock,” for further details.
In August 2016, the Company issued 1,047,121 warrants at the Secondary Closing pursuant to the Securities Purchase Agreement. Please see the preceding subsection, “Common Stock,” for further details.
Effective September 29, 2016, the Company modified the exercise price of all warrants issued pursuant to the securities purchase agreement, dated May 18, 2015, from $19.50 to $3.15 per share, which reflected a discount of approximately sixteen percent (16%) to the closing price of the Company’s Common Stock on September 27, 2016. The Company has estimated the value of warrant modification as of the date of the modification by applying the Black-Scholes-Merton option pricing model using the single-option valuation approach. As a result of this modification, the Company recorded a non-cash loss of $270 thousand in general and administrative expense in the consolidated statement of operation and comprehensive loss.
The details of all outstanding warrants as of June 30, 2018, were as follows:
(in thousands, except for exercise price) |
Warrants |
Weighted- Average Exercise Price |
||||||
Warrants outstanding December 31, 2017 |
544 | $ | 1.81 | |||||
Warrants granted |
— | — | ||||||
Warrants exercised |
— | — | ||||||
Warrants expired |
— | — | ||||||
Warrants outstanding June 30, 2018 |
544 | $ | 1.81 |
NOTE 12. EQUITY-BASED COMPENSATION
Equity Compensation Plans
In October 2007, the Company adopted the 2007 Omnibus Incentive Plan (the “2007 Plan”) to provide for the granting of equity awards, such as stock options, unrestricted and restricted common stock, stock units, dividend equivalent rights, and stock appreciation rights to employees, directors and outside consultants, as determined by the Board of Directors. At the inception of the 2007 Plan, 40,000 shares were reserved for awards under the 2007 Plan.
For the years from 2009 to 2012, the number of shares of common stock authorized for awards under the 2007 Plan increased annually in an amount equal to the lesser of (a) 40,000 shares; (b) 4% of the number of shares of the Company’s common stock outstanding on the last day of the preceding year; or (c) such lesser number as determined by the Board. Accordingly, an additional 40,000, 37,427, and 37,207 shares of common stock were authorized for awards under the 2007 Plan in January 2012, 2011 and 2010, respectively. Beginning in 2013, the shareholders voted to remove the 40,000-share cap and the 2007 Plan’s shares authorized for awards increased annually by 4% of the number of shares of the Company’s common stock outstanding on the last day of the preceding year. Accordingly, an additional 32,646 and 59,157 shares of common stock were authorized for awards under the 2007 Plan in January 2014 and 2013, respectively. On March 30, 2015, the Company filed a registration statement to add an additional 82,461 shares to the 2007 Plan’s shares authorized for awards. In January 2016, the Company added 139,449 shares to the 2007 Plan’s shares authorized for awards, per the 2007 Plan’s evergreen provision. On May 26, 2016, the stockholders of the Company approved an amendment to the 2007 Plan to increase the number of shares of Company common stock authorized for awards thereunder by 1,124,826 shares. In January 2017, the Company added 610,774 shares to the 2007 Plan’s shares authorized for awards, per the 2007 Plan’s evergreen provision. As a result of the foregoing, the aggregate number of shares authorized for awards under the 2007 Plan was 2,318,486 shares, prior to its expiration on March 15, 2017 (after taking into account prior awards under the 2007 Plan).
Upon expiration of the 2007 Plan, new awards cannot be issued pursuant to the 2007 Plan, but awards outstanding as of its March 15, 2017 plan expiration date will continue to be governed by its terms. Under the terms of the 2007 Plan, the exercise price of incentive stock options may not be less than 100% of the fair market value of the common stock on the date of grant and, if granted to an owner of more than 10% of the Company’s stock, then not less than 110% of the fair market value of the common stock on the date of grant. Stock options granted under the 2007 Plan expire no later than ten years from the date of grant. Stock options granted to employees generally vest over four years, while options granted to directors and consultants typically vest over a shorter period, subject to continued service.
In March 2017, the Company adopted the 2017 Omnibus Incentive Plan (the “2017 Plan”), which was approved by shareholders on June 2, 2017, to provide for the granting of equity awards, such as nonqualified stock options (“NQSOs”), incentive stock options (“ISOs”), restricted stock, performance shares, stock appreciation rights (“SARs”), restricted stock units (“RSUs”) and other share-based awards to employees, directors, and consultants, as determined by the Board of Directors. The new 2017 Plan will not affect awards previously granted under the 2007 Plan. The 2017 Plan allows for awards of up to 2,318,486 shares of the Company’s common stock, plus an automatic annual increase in the number of shares authorized for awards on the first day of each of the Company’s fiscal years beginning January 1, 2018 through January 1, 2027 equal to (i) four percent of the number of shares of Common Stock outstanding on the last day of the immediately preceding fiscal year or (ii) such lesser number of shares of Common Stock than provided for in Section 4(a)(i) of the 2017 Plan as determined by the Board. Accordingly, in January 2018, the Company filed a registration statement to add 615,392 shares to the 2017 Plan’s shares authorized for awards, per the 2017 Plan’s evergreen provision. As of June 30, 2018, there were 1,383,470 shares available for future awards under the 2017 Plan.
Under the terms of the 2017 Plan, the exercise price of NQSOs, ISOs and SARs may not be less than 100% of the fair market value of the common stock on the date of grant and, if ISOs are granted to an owner of more than 10% of the Company’s stock, then not less than 110% of the fair market value of the common stock on the date of grant. The term of awards will not be longer than ten years, or in the case of ISOs, not longer than five years with respect to holders of more than ten percent of the Company’s stock. Stock options granted to employees generally vest over four years, while options granted to directors and consultants typically vest over a shorter period, subject to continued service. The Company issues new shares to satisfy option exercises under the 2007 and 2017 plans.
Stock Option Summary
The following table summarizes information about the Company’s stock options outstanding at June 30, 2018, and activity during the six-month period then ended:
(in thousands, except years and per share data) |
Options |
Weighted- Average Exercise Price |
Weighted- Average Remaining Contractual Life (years) |
Aggregate Intrinsic Value |
||||||||||||
Outstanding at December 31, 2017 |
2,960 | $ | 5.16 | 8.6 | $ | 2,586 | ||||||||||
Options granted |
814 | $ | 2.21 | |||||||||||||
Restricted stock units granted |
12 | $ | — | |||||||||||||
Options exercised |
(4 | ) | $ | 2.35 | ||||||||||||
Restricted stock units vested |
- | $ | — | |||||||||||||
Options forfeited/cancelled |
(593 | ) | $ | 5.18 | ||||||||||||
Restricted stock units cancelled |
- | $ | — | |||||||||||||
Outstanding at June 30, 2018 |
3,189 | $ | 4.39 | 8.6 | $ | 412 | ||||||||||
Vested and expected to vest at June 30, 2018 |
2,829 | $ | 4.62 | 8.6 | $ | 362 | ||||||||||
Vested at June 30, 2018 |
1,524 | $ | 6.42 | 7.7 | $ | — | ||||||||||
Exercisable at June 30, 2018 |
1,524 | $ | 6.42 | 7.7 | $ | — |
For options that have a quoted market price in excess of the exercise price (“in-the-money options”), the aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock option awards and the closing market price of the Company’s common stock as reported on the NYSE American as of June 30, 2018. There were no stock option awards exercised for the three months ended June 30, 2018. There were 4 thousand stock option awards exercised during the six months ended June 30, 2018 for which the Company received cash payments of $11 thousand. The aggregate intrinsic value of stock option awards exercised was $1 thousand for the six months ended June 30, 2018. There were no stock options exercised during the three and six months ended June 30, 2017. Accordingly, the Company received no cash payments for the exercise of stock options during the three and six months ended June 30, 2017.
As of June 30, 2018, total unrecognized compensation cost related to unvested stock options and restricted stock units was approximately $2.3 million. This amount is expected to be recognized as stock-based compensation expense in the Company’s consolidated statements of operations and comprehensive loss over the remaining weighted average vesting period of 3.17 years.
Stock Option Awards to Employees and Directors
The Company grants options to purchase common stock to its employees and directors at prices equal to or greater than the market value of the stock on the dates the options are granted. The Company has estimated the value of stock option awards as of the date of grant by applying the Black-Scholes-Merton option pricing model using the single-option valuation approach. The application of this valuation model involves assumptions that are judgmental and subjective in nature. See Note 2 for a description of the accounting policies that the Company applies to value its stock-based awards.
During the six months ended June 30, 2018 and 2017, the Company granted options to purchase an aggregate of 809 thousand and 1,292 thousand shares of common stock, respectively, to employees and directors.
The weighted-average assumptions used in determining the value of options are as follows:
Six Months Ended June 30, |
||||||||
Assumption |
2018 |
2017 |
||||||
Expected price volatility |
88.86 | % | 87.72 | % | ||||
Expected term (in years) |
5.97 | 6.90 | ||||||
Risk-free interest rate |
2.71 | % | 2.11 | % | ||||
Dividend yield |
0.00 | % | 0.00 | % | ||||
Weighted-average fair value of options granted during the period |
$ | 1.64 | $ | 2.25 |
Expected Price Volatility—This is a measure of the amount by which the stock price has fluctuated or is expected to fluctuate. The computation of expected volatility was based on the historical volatility of our own stock and comparable companies from a representative peer group selected based on industry and market capitalization data.
Expected Term—This is the period of time over which the options granted are expected to remain outstanding. The expected life assumption is based on the Company’s historical data.
Risk-Free Interest Rate—This is the U.S. Treasury rate for the week of the grant having a term approximating the expected life of the option.
Dividend Yield—We have not made any dividend payments nor do we have plans to pay dividends in the foreseeable future.
Forfeitures are estimated at the time of grant and reduce compensation expense ratably over the vesting period. This estimate is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.
Additionally, during the six months ended June 30, 2018, the Company issued 12 thousand shares of restricted stock to employees. During the six months ended June 30, 2017, the Company did not grant restricted stock to employees.
For the three months ended June 30, 2018 and 2017, the Company recognized stock-based compensation expense of $148 thousand and $442 thousand, respectively, for stock-based awards to employees and directors. For the six months ended June 30, 2018 and 2017, the Company recognized stock-based compensation expense of $327 thousand and $1,600 thousand, respectively, for stock-based awards to employees and directors.
In March 2018, the Company modified stock options held by Mr. Liu, who resigned as a director of the Company, effective March 21, 2018. The option exercise period for Mr. Liu was extended from three months to three years, calculated from his date of resignation. In connection with the stock option modification, the Company recognized stock-based compensation expense of $26 thousand.
Stock-Based Awards to Non-Employees
During the six months ended June 30, 2018 and 2017, the Company granted options to purchase an aggregate of 5 thousand and 85 thousand shares of common stock, respectively, to non-employees in exchange for advisory and consulting services.
The stock options are recorded at their fair value on the measurement date and recognized over the respective service or vesting period. The fair value of the stock options granted was calculated using the Black-Scholes-Merton option pricing model based upon the following assumptions:
Six Months Ended June 30, |
||||||||
Assumption |
2018 |
2017 |
||||||
Expected price volatility |
84.83 | % | 87.42 | % | ||||
Expected term (in years) |
10.0 | 10.00 | ||||||
Risk-free interest rate |
2.81 | % | 2.27 | % | ||||
Dividend yield |
0.00 | % | 0.00 | % | ||||
Weighted-average fair value of options granted during the period |
$ | 1.86 | $ | 2.38 |
The Company granted 31 thousand shares of fully vested registered stock to non-employee Dr. Ron Najafi in the six months ended June 30, 2017, as part of his settlement agreement, as described below.
For the three months ended June 30, 2018 and 2017, the Company recognized stock-based compensation expense of $6 thousand and $53 thousand, respectively, related to non-employee consultant stock and option grants. For the six months ended June 30, 2018 and 2017, the Company recognized stock-based compensation expense of $13 thousand and $89 thousand, respectively, related to non-employee consultant stock and option grants.
In November 2015, Dr. Ron Najafi resigned from his position as President and CEO of the Company. As part of his separation agreement, in December 2016, the Company paid him a portion of the amount due under the agreement via a combination of registered shares and cash during fiscal year 2016. The expense related to this separation agreement was accrued for and expensed in the year ended December 31, 2015, and the shares were issued to him via fully vested registered stock in December 2016. In January 2017, the remaining portion of the amount due under the agreement was paid via a combination of registered shares and cash.
Summary of Stock-Based Compensation Expense
A summary of the stock-based compensation expense included in results of operations for the option and stock awards discussed above is as follows:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
(in thousands) |
2018 |
2017 |
2018 |
2017 |
||||||||||||
Research and development |
$ | 12 | $ | 28 | $ | 19 | $ | 49 | ||||||||
Sales and Marketing |
45 | 57 | 79 | 94 | ||||||||||||
General and administrative |
97 | 411 | 242 | 1,546 | ||||||||||||
Total stock-based compensation expense |
$ | 154 | $ | 496 | $ | 340 | $ | 1,689 |
Since the Company has operating losses and net operating loss carryforwards, there are no tax benefits associated with stock-based compensation expense.
NOTE 13. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan covering all eligible employees. The Company is not required to contribute to the plan and made no contributions during the six months ended June 30, 2018.
NOTE 14. RELATED PARTY TRANSACTIONS
Related Party Financing
See Note 11, “Stockholders’ Equity (Deficit)” – “Common Stock” for a description of the February 2016 Purchase Agreements and April 2016 Securities Purchase Agreement. The following related parties participated in both transactions: Mr. Sieczkarek, Chairman of the Board, President and Chief Executive Officer of the Company; and Pioneer Singapore and Mr. Fu, the Company’s two largest stockholders.
Related Party Revenue
The Company recognized related party revenues from product sales and license and collaboration fees of zero and $9 thousand for the three months ended June 30, 2018 and 2017, respectively, and $13 thousand and $15 thousand for the six months ended June 30, 2018 and 2017, respectively. There were no related party accounts receivable as of June 30, 2018 and December 31, 2017. See Note 8, “Adoption of ASC Topic 606, “Revenue from contracts with customers”, for additional information regarding the Company’s distribution agreements with Pioneer, which is an affiliate of Pioneer Singapore, the Company’s largest stockholder.
Related Party Expenses
The Company recognized no related party commission fees for the three months ended June 30, 2018 and 2017, and recognized $359 thousand and zero for the six months ended June 30, 2018 and 2017, respectively. These fees were paid to China Kington representing the commission on its sale of the Company’s common stock. See Note 11, “Stockholders’ Equity (Deficit)” – “Common Stock” for additional information regarding such commissions.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included in Part I, Item 1 of this report, and with our 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, 2017, which was filed with the Securities and Exchange Commission (the “SEC”) on March 21, 2018. This discussion contains forward-looking statements that involve risks and uncertainties. Words such as “expects,” “anticipated,” “will,” “may,” “goals,” “plans,” “believes,” “estimates,” variations of these words, and similar expressions are intended to identify these forward-looking statements. As a result of many factors, such as those set forth under the section entitled “Risk Factors” in Part II, Item 1A and elsewhere in this report, our actual results may differ materially from those anticipated in these forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions based upon assumptions made that we believed to be reasonable at the time, and are subject to risks and uncertainties. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements.
Overview
We are a medical device company predominantly focused on eye care. We are currently focused primarily on commercializing Avenova®, a prescription product sold in the United States for cleansing and removing foreign material including microorganisms and debris from skin around the eye, including the eyelid.
Avenova is an eye care product formulated with our proprietary, stable and pure form of hypochlorous acid. Avenova has proven in laboratory testing to have broad antimicrobial properties as a preservative in solution as it removes foreign material including microorganisms and debris from the skin on the eyelids and lashes without burning or stinging. Our business strategy remains the same since November 2015, when we restructured our business to focus our resources on growing sales of Avenova in the United States. Our current three-part business strategy is comprised of: (1) focusing our resources on growing the U.S. commercial sales of Avenova, including implementation of a sales and marketing strategy intended to increase product margin and profitability; (2) maintaining low expenses and continuing to optimize sales force efficiency, including expansion of geographical reach and efforts directed to maintain and increase insurance reimbursement for Avenova; and (3) seeking additional sources of revenue through partnering, divesting and/or other means of monetizing non-core assets in urology, dermatology, and wound care.
Pursuant to our business strategy, we have developed additional products containing our proprietary, stable and pure form of hypochlorous acid, including NeutroPhase® for the wound care market and CelleRx® for the dermatology market. Since the launch of NeutroPhase in 2013, we have established a U.S. distribution partner and an international distribution partner in China. We currently do not sell or distribute CelleRx.
Avenova, NeutroPhase, and CelleRx are medical devices cleared by the FDA under the Food and Drug Administration Act Section 510(k). The products are intended for use under the supervision of healthcare professionals for the cleansing and removal of foreign material, including microorganisms and debris. For wound treatment, NeutroPhase® is also intended for use under the supervision of healthcare professionals for moistening absorbent wound dressings and cleansing minor cuts, minor burns, superficial abrasions and minor irritations of the skin. It is also intended for moistening and debriding acute and chronic dermal lesions.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. In preparing these consolidated financial statements, management has made its best estimates and judgments of certain amounts, giving due consideration to materiality. On an ongoing basis, we evaluate our estimates and judgments related to revenue recognition, research and development costs, patent costs, stock-based compensation, income taxes and other contingencies. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates.
While our significant accounting policies are more fully described in Note 2 of the Notes to Consolidated Financial Statements (Summary of Significant Accounting Policies), included in Part I, Item 1 of this report, we believe that the following accounting policies are most critical to fully understanding and evaluating our reported financial results.
Allowance for Doubtful Accounts
We charge “Bad Debt” expense and set up an “Allowance for Doubtful Accounts” when management identifies amounts due that are in dispute and believes it unlikely a specific invoice will be collected. At June 30, 2018 and December 31, 2017, management had reserved $11 thousand and $13 thousand, respectively, primarily based on specific amounts that were in dispute or were over 120 days past due as of those dates.
Inventory
Inventory is comprised of (1) raw materials and supplies, such as bottles, packaging materials, labels, boxes and pumps; (2) goods in progress, which are normally unlabeled bottles; and (3) finished goods. We utilize contract manufacturers to produce our products and the cost associated with manufacturing is included in inventory. At June 30, 2018 and December 31, 2017, management had recorded an allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments of $138 thousand and $140 thousand, respectively.
Inventory is stated at the lower of cost or estimated net realizable value determined by the first-in, first-out method.
Revenue Recognition
Beginning January 1, 2018, we have followed the provisions of ASC Topic 606, Revenue from Contracts with Customers. The guidance provides a unified model to determine how revenue is recognized.
We generate product revenue through product sales to our major distribution partners, a limited number of distributors and via our webstore. Product supply is the only performance obligation contained in these arrangements and we recognize product revenue upon transfer of control to our major distribution partners at the amount of consideration that we expect to be entitled to, generally upon shipment to the distributor on a “sell-in” basis.
Other revenue is primarily generated through commercial partner agreements with strategic partners for the development and commercialization of our product candidates. The terms of the agreements typically include more than one performance obligation and generally contain non-refundable upfront fees, payments based upon achievement of certain milestones and royalties on net product sales.
In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under these agreements, we perform the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) we satisfy each performance obligation.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC Topic 606. Our performance obligations include:
● |
Product supply |
● |
Exclusive distribution rights in the product territory |
● |
Regulatory submission and approval services |
● |
Development services |
● |
Sample supply |
● |
Incremental discounts and product supply prepayments considered material rights to the customer |
We have optional additional items in our contracts, which are considered marketing offers and are accounted for as separate contracts when the customer elects such options. Arrangements that include a promise for future commercial product supply and optional research and development services at the customer’s or our discretion are generally considered options. We assess if these options provide a material right to the licensee and if so, such material rights are accounted for as separate performance obligations.
Transaction Price
We have both fixed and variable consideration. Under our license arrangements, non-refundable upfront fees are considered fixed, while milestone payments are identified as variable consideration when determining the transaction price. Product supply selling prices are identified as variable consideration subject to the constraint on variable consideration for estimated discounts, rebates, chargebacks and product returns. Funding of research and development activities are considered variable payments until such costs are reimbursed at which point they are considered fixed. We allocate the total transaction price to each performance obligation based on the relative estimated standalone selling prices of the promised goods or services for each performance obligation.
For product supply under our distribution arrangements, contract liabilities are recorded for invoiced amounts that are subject to significant reversal, including product revenue allowances for cash consideration paid to customers for services, discounts, rebate programs, chargebacks, and product returns. Because we do not have sufficient historical data to compute our own return rate, the return rate used to estimate the constraint on variable consideration for product returns is based on an average of peer and competitor company historical return rates. We update the return rate assumption quarterly and apply it to the inventory balance that is held at the distributor and has not yet been sold through to the end customer. Payment for product supply is typically due 30 days after control transfers to the customer. At any point in time there is generally one month of inventory in the sales channel, therefore uncertainty surrounding constraints on variable consideration is generally resolved after one month from when control is transferred.
The following table summarizes the activity in the accounts related to product revenue allowances (in thousands):
Wholesaler/ Pharmacy fees |
Cash discounts |
Rebate |
Returns |
Total |
||||||||||||||||
Balance at December 31, 2017 |
$ | (530 |
) |
$ | (31 |
) |
$ | 818 | $ | - | $ | 257 | ||||||||
Effect of ASC Topic 606 Adoption |
(27 |
) |
35 | (573 |
) |
(42 |
) |
(607 |
) |
|||||||||||
Current provision related to sales made during current period |
(1,222 |
) |
(194 |
) |
(4,796 |
) |
(304 |
) |
(6,516 |
) |
||||||||||
Payments |
1,278 | 156 | 4,733 | 66 | 6,233 | |||||||||||||||
Balance at June 30, 2018 |
$ | (501 |
) |
$ | (34 |
) |
$ | 182 |
|
$ | (280 | ) | $ | (633 |
) |
At the inception of each arrangement that includes milestone payments, we evaluate whether the milestones are considered probable of being achieved and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, and achievement is in our control (such as a regulatory submission by us), the value of the associated milestone is included in the transaction price. Milestone payments that are not within our control, such as approvals from regulators, are not considered probable of being achieved until those approvals are received.
For arrangements that include sales-based royalties and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (a) when the related sales occur, or (b) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).
Allocation of Consideration
As part of the accounting for arrangements that contain multiple performance obligations, we must develop assumptions that require judgment to determine the stand-alone selling price of each performance obligation identified in the contract. When a contract contains more than one performance obligation, we use key assumptions to determine the stand-alone selling price of each performance obligation. The estimated stand-alone selling prices for distribution rights and material rights for incremental discounts on product supply are calculated using an income approach discounted cash flow model and can include the following key assumptions: forecasted commercial partner sales, product life cycle estimates, costs of product sales, commercialization expenses, annual growth rates and margins, discount rates and probabilities of technical and regulatory success. For all other performance obligations, we use a cost-plus margin approach. We allocate the total transaction price to each performance obligation based on the estimated relative stand-alone selling prices of the promised goods or service underlying each performance obligation.
Timing of Recognition
Significant management judgment is required to determine the level of effort required under an arrangement and the period over which we expect to complete our performance obligations under each arrangement. If we cannot reasonably estimate when its performance obligations either are completed or become inconsequential, then revenue recognition is deferred until we can reasonably make such estimates. Revenue is then recognized over the remaining estimated period of performance using the cumulative catch-up method. Revenue is recognized for products at a point in time and for licenses of functional intellectual property at the point in time the customer can use and benefit from the license. For performance obligations that are services, revenue is recognized over time proportionate to the costs that we have incurred to perform the services using the cost-to-cost input method.
Our intellectual property in the form of distribution rights is determined to be distinct from the other performance obligations identified in the arrangements and considered “right to use” licenses which the customer can benefit from at a point in time. We recognize revenues from non-refundable, up-front fees allocated to the license when the license is transferred to the customer, and the customer can use and benefit from the license.
Cost of Goods Sold
Cost of goods sold includes third party manufacturing costs, shipping costs, and other costs of goods sold. Cost of goods sold also includes any necessary allowances for excess and obsolete inventory, along with lower of cost or estimated net realizable value.
Research and Development Costs
We charge research and development costs to expense as incurred. These costs include salaries and benefits for research and development personnel, costs associated with clinical trials managed by contract research organizations, and other costs associated with research, development and regulatory activities. Research and development costs may vary depending on the type of item or service incurred, location of performance or production, or lack of availability of the item or service, and specificity required in production for certain compounds. We use external service providers to conduct clinical trials, to manufacture supplies of product candidates and to provide various other research and development-related products and services. Our research, clinical and development activities are often performed under agreements we enter into with external service providers. We estimate and accrue the costs incurred under these agreements based on factors such as milestones achieved, patient enrollment, estimates of work performed, and historical data for similar arrangements. As actual costs are incurred, we adjust our accruals. Historically, our accruals have been consistent with management’s estimates, and no material adjustments to research and development expenses have been recognized. Subsequent changes in estimates may result in a material change in our expenses, which could also materially affect our results of operations.
Stock-Based Compensation
Stock-based compensation expense is measured at the grant date for all stock-based awards to employees and directors and is recognized as expense over the requisite service period, which is generally the vesting period. Forfeitures are estimated at the time of grant and reduce compensation expense ratably over the vesting period. This estimate is adjusted periodically based on the extent to which actual forfeitures (Equity-Based Compensation) differ, or are expected to differ, from the previous estimate. See Note 12 of the Notes to Consolidated Financial Statements for further information regarding stock-based compensation expense and the assumptions used in estimating that expense. For stock options granted to employees, the fair value of the stock options is estimated using a Black-Scholes-Merton option pricing model.
Stock-based compensation arrangements with non-employees are recorded at their fair value on the measurement date. The measurement of stock-based compensation is subject to periodic adjustment as the underlying equity instruments vest. Non-employee stock-based compensation charges are amortized over the vesting period on a straight-line basis. For stock options granted to non-employees, the fair value of the stock options is estimated using a Black-Scholes-Merton option pricing model.
Income Taxes
We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion or the entire deferred tax asset will not be recognized.
Common Stock Warrant Liabilities
For warrants that are issued or modified and there is a deemed possibility that we may have to settle them in cash, or for warrants we issue or modify that contain an exercise price adjustment feature that reduces the exercise price and increases the number of shares of our common stock eligible for purchase thereunder in the event we subsequently issue equity instruments at a price lower than the exercise price of the warrants, we record the fair value of the issued or modified warrants as a liability at each balance sheet date and record changes in the estimated fair value as a non-cash gain or loss on the consolidated statements of operations and comprehensive loss. The fair values of these warrants have been determined using the Binomial Lattice (“Lattice”) valuation model, and the change in the fair value are recorded in the consolidated statements of operations and comprehensive gain or loss. The Lattice model provides for assumptions regarding volatility, call and put features and risk-free interest rates within the total period to maturity. These values are subject to a significant degree of our judgment. For additional information regarding the Company’s outstanding warrants, see Note 10 of the Notes to Consolidated Financial Statements (Warrant Liability).
Recent Accounting Pronouncements
See Note 2 of the Notes to Consolidated Financial Statements (Summary of Significant Accounting Policies) included in Part I, Item 1 of this report for information on recent accounting pronouncements.
Results of Operations
Comparison of the Three Months Ended June 30, 2018 and 2017
Three Months Ended |
||||||||||||||||
June 30, |
Dollar |
Percent |
||||||||||||||
2018 |
2017 |
Change |
Change |
|||||||||||||
(in thousands) |
||||||||||||||||
Statement of Operations |
||||||||||||||||
Sales: |
||||||||||||||||
Product revenue, net |
$ | 2,794 | $ | 4,094 | $ | (1,300 |
) |
(32 |
)% |
|||||||
Other revenue |
- | 28 | (28 |
) |
(100 |
)% |
||||||||||
Total sales, net |
2,794 | 4,122 | (1,328 |
) |
(32 |
)% |
||||||||||
Product cost of goods sold |
479 | 698 | (219 |
) |
(31 |
)% |
||||||||||
Gross profit |
2,315 | 3,424 | (1,109 |
) |
(32 |
)% |
||||||||||
Research and development |
61 | 70 | (9 |
) |
(13 |
)% |
||||||||||
Sales and marketing |
2,977 | 3,376 | (399 |
) |
(12 |
)% |
||||||||||
General and administrative |
1,360 | 1,735 | (375 |
) |
(22 |
)% |
||||||||||
Total operating expenses |
4,398 | 5,181 | (783 |
) |
(15 |
)% |
||||||||||
Operating Loss |
(2,083 |
) |
(1,757 |
) |
(326 |
) |
19 |
% |
||||||||
Non-cash gain on changes in fair value of warrant liability |
490 | 15 | 475 | 3,167 |
% |
|||||||||||
Other income, net |
5 | 4 | 1 | 25 |
% |
|||||||||||
Loss before provision for income taxes |
(1,588 |
) |
(1,738 |
) |
150 | (9 |
)% |
|||||||||
Provision for income tax |
(1 |
) |
- | (1 |
) |
- |
% |
|||||||||
Net loss and comprehensive loss |
$ | (1,589 |
) |
$ | (1,738 |
) |
$ | 149 | (9 |
)% |
Sales, Product Cost of Goods Sold and Gross Profit
Product revenue, net, decreased by $1.3 million, or 32%, to $2.8 million for the three months ended June 30, 2018 from $4.1 million for the three months ended June 30, 2017. The decrease in product revenue, net, is primarily the result of a 31% decrease in the number of Avenova units sold as well as a decrease in the net selling price of Avenova products.
Other revenue decreased by $28 thousand for the three months ended June 30, 2018, to $0 thousand from $28 thousand for the three months ended June 30, 2017.
Product cost of goods sold decreased by $0.2 million, or 31%, to $0.5 million for the three months ended June 30, 2018, from $0.7 million for the three months ended June 30, 2017. The decrease in product cost of goods sold was primarily the result of a decrease in product revenue, along with product mix.
Gross profit decreased by $1.1 million, or 32%, to $2.3 million for the three months ended June 30, 2018 from $3.4 million for the three months ended June 30, 2017. The decrease in gross profit was primarily the result of decreased product revenue, net.
Research and Development
Research and development expenses remained relatively consistent, with a decrease of $9 thousand, or 13%, to $61 thousand for the three months ended June 30, 2018, down from $70 thousand for the three months ended June 30, 2017.
Sales and marketing
Sales and marketing expenses decreased by $0.4 million, or 12%, to $3.0 million for the three months ended June 30, 2018, down from $3.4 million for the three months ended June 30, 2017. The decrease was primarily due to the decrease in sales headcount and employee related costs, along with a decrease in marketing expenses.
General and administrative
General and administrative expenses decreased by $0.3 million or 22%, to $1.4 million for the three months ended June 30, 2018, down from $1.7 million for the three months ended June 30, 2017. The decrease is primarily a result of lower stock-based compensation and other employee related costs, along with a decrease in professional services and consulting fees.
Non-cash gain on changes in fair value of warrant liability
The adjustments to the fair value of warrants resulted in a gain of $490 thousand for the three months ended June 30, 2018, compared to a gain of $15 thousand for the three months ended June 30, 2017.
In October 2015, we issued warrants and modified the terms of warrants originally issued in July 2011 and March 2015, resulting in the creation of warrant liabilities. For additional information regarding these warrants and their valuation, please see Note 10 in the Notes to Consolidated Financial Statements in Part I, Item 1 of this report. During the three months ended June 30, 2018, the Company incurred a non-cash gain resulting from the reduction in the price of the Company’s common stock price during that period. During the three months ended June 30, 2017, the Company incurred a non-cash gain resulting from a decrease in the price of the Company’s common stock during that period.
Other income, net
Other income, net, increased by $1 thousand for the three months ended June 30, 2018, to $5 thousand compared to $4 thousand for the three months ended June 30, 2017.
Comparison of the Six Months Ended June 30, 2018 and 2017
Six Months Ended |
||||||||||||||||
June 30, |
Dollar |
Percent |
||||||||||||||
2018 |
2017 |
Change |
Change |
|||||||||||||
(in thousands) |
||||||||||||||||
Statement of Operations: |
||||||||||||||||
Sales: |
||||||||||||||||
Product revenue, net |
$ | 5,728 | $ | 7,788 | $ | (2,060 |
) |
(26 |
)% |
|||||||
Other revenue |
13 | 35 | (22 |
) |
(63 |
)% |
||||||||||
Total net sales |
5,741 | 7,823 | (2,082 |
) |
(27 |
)% |
||||||||||
Product cost of goods sold |
730 | 1,286 | (556 |
) |
(43 |
)% |
||||||||||
Gross profit |
5,011 | 6,537 | (1,526 |
) |
(23 |
)% |
||||||||||
Research and development |
107 | 132 | (25 |
) |
(19 |
) % |
||||||||||
Sales and marketing |
6,373 | 7,116 | (743 |
) |
(10 |
) % |
||||||||||
General and administrative |
2,982 | 4,823 | (1,841 |
) |
(38 |
) % |
||||||||||
Total operating expenses |
9,462 | 12,071 | (2,609 |
) |
(22 |
) % |
||||||||||
Operating Loss |
(4,451 |
) |
(5,534 |
) |
1,083 | (20 |
) % |
|||||||||
Non-cash gain (loss) on changes in fair value of warrant liability |
704 | (220 |
) |
924 | (420 |
)% |
||||||||||
Other income, net |
9 | 6 | 3 | 50 |
% |
|||||||||||
Loss before provision for income taxes |
(3,738 |
) |
(5,748 |
) |
2,010 | (35 |
)% |
|||||||||
Provision for income tax |
(1 |
) |
(1 |
) |
- | - |
% |
|||||||||
Net loss and comprehensive loss |
$ | (3,739 |
) |
$ | (5,749 |
) |
$ | 2,010 | (35 |
)% |
Sales, Product Cost of Goods Sold and Gross Profit
Product revenue, net, decreased by $2.1 million, or 26%, to $5.7 million from $7.8 million for the six months ended June 30, 2018, compared to the six months ended June 30, 2017. The decrease in product revenue, net, is primarily the result of a 28% decrease in the number of Avenova units sold as well as a decrease in the net selling price of Avenova products.
Other revenue decreased by $22 thousand, or 63%, to $13 thousand from $35 thousand for the six months ended June 30, 2018, compared to the six months ended June 30, 2017, primarily due to lower non-Avenova sales.
Product cost of goods sold decreased by $0.6 million, or 43%, to $0.7 million for the six months ended June 30, 2018, from $1.3 million for the six months ended June 30, 2017. The decrease in product cost of goods sold was primarily the result of a decrease in product revenue, along with product mix.
Gross profit decreased by $1.5 million, or 23%, to $5.0 million for the six months ended June 30, 2018 from $6.5 million for the six months ended June 30, 2017. The decrease in gross profit was primarily the result of decreased product revenue, net.
Research and Development
Research and development expenses decreased by $25 thousand, or 19%, to $107 thousand for the six months ended June 30, 2018, down from $132 thousand for the six months ended June 30, 2017.
Sales and marketing
Sales and marketing expenses decreased by $0.7 million, or 10%, to $6.4 million for the six months ended June 30, 2018, down from $7.1 million for the six months ended June 30, 2017. The decrease was primarily due to a decrease in sales representative headcount, along with a decrease in consultants and marketing programs. This was partly off-set by an increase in sampling.
General and administrative
General and administrative expenses decreased by $1.8 million, or 38%, to $3.0 million for the six months ended June 30, 2018, down from $4.8 million for the six months ended June 30, 2017. The decrease is primarily a result of lower stock-based compensation and other employee related costs, along with a decrease in professional services and consulting fees.
Non-cash (loss) gain on changes in fair value of warrant liability
The adjustments to the fair value of warrant liability resulted in a gain of $0.7 million for the six months ended June 30, 2018, compared to a loss of $0.2 million for the six months ended June 30, 2017.
In October 2015, we issued warrants and modified the terms of warrants originally issued in July 2011 and March 2015, resulting in the creation of warrant liability. For additional information regarding these warrants and their valuation, please see Note 10 in the Notes to Consolidated Financial Statements in Part I, Item 1 of this report. The Company incurred a non-cash gain in the six months ended June 30, 2018 related to a change in the fair value of warrant liability that was caused by a decrease in the price of the Company’s common stock. During the six months ended June 30, 2017, non-cash loss on changes in fair value of warrant liability was caused by a reduction in the exercise price of warrants issued in July 2011, March 2015 and October 2015 pursuant to the price protection provision in such warrants, along with an increase in the price of the Company’s common stock above the warrants’ exercise prices.
Other income, net
Other income, net, increased to $9 thousand for the six months ended June 30, 2018, as compared to $6 thousand for the six months ended June 30, 2017.
Financial Condition, Liquidity and Capital Resources
As of June 30, 2018, our cash and cash equivalents were $6.8 million, compared to $3.2 million as of December 31, 2017. The Company has sustained operating losses for the majority of its corporate history and expects that its 2018 expenses will exceed its 2018 revenues, as the Company continues to re-invest in its Avenova commercialization efforts. The Company expects to continue incurring operating losses and negative cash flows until revenues reach a level sufficient to support ongoing growth and operations. Accordingly, the Company’s planned operations raise substantial doubt about its ability to continue as a going concern. The Company’s liquidity needs will be largely determined by the success of operations in regard to the commercialization of Avenova. The Company also may consider other plans to fund operations including: (1) out-licensing rights to certain of its products or product candidates, pursuant to which the Company would receive cash milestones or an upfront fee; (2) raising additional capital through debt and equity financings or from other sources; (3) reducing spending on one or more of its sales and marketing programs; and/or (4) restructuring operations to change its overhead structure. The Company may issue securities, including common stock and warrants through private placement transactions or registered public offerings, which would require the filing of a Form S-1 or Form S-3 registration statement with the Securities and Exchange Commission (“SEC”). An extended delay or cessation of the Company’s continuing product development efforts will have a material adverse effect on the Company’s financial condition and results of operations. In the absence of the Company’s completion of one or more of such transactions, there will be substantial doubt about the Company’s ability to continue as a going concern within one year after the date these financial statements are issued, and the Company will be required to scale back or terminate operations and/or seek protection under applicable bankruptcy laws. The accompanying financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts of liabilities that may result from uncertainty related to its ability to continue as a going concern.
Net Cash Used In Operating Activities
For the six months ended June 30, 2018, net cash used in operating activities was $2.0 million compared to $3.6 million for the six months ended June 30, 2017. The decrease was primarily due to the decrease of net loss by $2.0 million, favorable changes in working capital of $1.9 million and gain on change of the warrant liability fair value by $0.9 million.
Net Cash Used In Investing Activities
For the six months ended June 30, 2018, net cash used in investing activities for the purchase of property and equipment was $5 thousand, compared to $155 thousand for the six months ended June 30, 2017.
Net Cash Provided By (Used In) Financing Activities
Net cash provided by financing activities was $5.6 million for the six months ended June 30, 2018, which was mainly attributable to the net proceeds from issuance of common stock related to the share purchase agreement with OP Financial Investments Limited. Net cash used in financing activities was $10 thousand for the six months ended June 30, 2017, with $48 attributable to the settlement of restricted stock for tax withholding, offset by $38 in exercise of warrants.
Net Operating Losses and Tax Credit Carryforwards
As of December 31, 2017, we had net operating loss carryforwards for federal and state income tax purposes of $94.8 million and $78.5 million, respectively. If not utilized, the federal and state net operating loss carryforwards will begin expiring at various dates between 2024 and 2037. As of December 31, 2017, we also had tax credit carryforwards for federal income tax purposes of $1,316,000 and $282,000 for state tax purposes. If not utilized, the federal tax credits will begin expiring in 2026. The state tax credits have an indefinite carryover period.
Current federal and California tax laws include substantial restrictions on the utilization of net operating loss carryforwards in the event of an ownership change of a corporation. Accordingly, our ability to utilize net operating loss carryforwards may be limited as a result of such ownership changes. Such a limitation could result in the expiration of carryforwards before they are utilized.
Inflation
We do not believe that inflation has had a material impact on our business and operating results during the periods presented, and we do not expect it to have a material impact in the near future, although there can be no assurances that our business will not be affected by inflation in the future.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of June 30, 2018.
Seasonality
Consistent with our peers in the United States pharmaceutical industry, our business experiences seasonality with the first quarter of each year typically being the lowest revenue quarter. This annual phenomenon is due to consumers facing the need to satisfy health insurance deductibles and changes to copays as each new insurance year begins.
Contractual Obligations
Our contractual cash commitments as of June 30, 2018 were as follows (in thousands):
Contractual Obligations |
Total |
Less than 1 year |
1 - 3 years |
3 - 5 years |
More than 5 years |
|||||||||||||||
Facility leases |
$ | 3,198 | $ | 1,099 | $ | 1,804 | $ | 295 | $ | — | ||||||||||
Vehicle leases |
259 | 163 | 96 | — | — | |||||||||||||||
$ | 3,457 | $ | 1,262 | $ | 1,900 | $ | 295 | $ | — |
Our commitments as of June 30, 2018 consist of two operating facility leases: the Lease and the lease for Emery Station, and 54 operating vehicle leases.
The total commitment for the Lease as of June 30, 2018 was $1.6 million due over the lease term, compared to $1.8 million as of December 31, 2017.
The total commitment of the Emery Station lease as of June 30, 2018 was $1.6 million due over such lease term, compared to $2.0 million as of December 31, 2017. On July 11, 2016, we entered into a Sublease Agreement to sublease our former corporate headquarters. Sublease rental reimbursement is not deducted from the above table. We anticipate collecting $619 thousand, $763 thousand, and $192 thousand, in the years ending June 30, 2019, 2020 and 2021, respectively, under the Sublease for the lease of Emery Station.
Additionally, we have operating leases for a fleet of 54 vehicles, which commenced upon the delivery of the vehicles during the first quarter 2017. The total commitment for these leases as of June 30, 2018 was $259 thousand due over the lease terms, compared to $340 thousand as of December 31, 2017.
See Note 9 in the Notes to Consolidated Financial Statements in Part