SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
☐ 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 001-37880
(Exact name of registrant as specified in its charter)
|(State or other jurisdiction of|
incorporation or organization)
| || |
|4020 Stirrup Creek Drive, Suite 110|
|(Address of principal executive offices)||(Zip Code)|
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|Title of Each Class||Trading Symbol(s)|
Name of Each Exchange on Which Registered
|Common Stock, $0.0001 par value||NOVN||The Nasdaq Stock Market LLC|
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|Large accelerated filer||☐|| ||Accelerated filer||☐|
|Non-accelerated filer||☒||Smaller reporting company||☒|
| ||Emerging growth company||☐|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 4, 2022, there were 24,462,228 shares of the registrant’s Common Stock outstanding.
Table of Contents
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)
| ||September 30, 2022||December 31, 2021|
|ASSETS|| || |
|Current assets:|| || |
|Cash and cash equivalents||$||14,903 ||$||47,085 |
|Accounts receivable, net||14,882 ||4,473 |
|Inventory, net||1,178 ||— |
|Prepaid expenses and other current assets||3,664 ||2,572 |
|Total current assets||34,627 ||54,130 |
|Restricted cash||583 ||583 |
|Property and equipment, net||13,921 ||12,201 |
|Intangible assets, net||27,963 ||75 |
|Other assets||259 ||278 |
|Right-of-use lease assets||1,794 ||1,693 |
|Goodwill||4,123 ||— |
|Total assets||$||83,270 ||$||68,960 |
|LIABILITIES AND STOCKHOLDERS’ EQUITY|| || |
|Current liabilities:|| || |
|Accounts payable||$||4,074 ||$||2,170 |
|Accrued expenses||27,626 ||4,988 |
|Deferred revenue, current portion||2,586 ||2,586 |
|Research and development service obligation liability, current portion||649 ||1,406 |
|Contingent consideration liability, current portion||438 ||— |
|Operating lease liabilities, current portion||254 ||— |
|Total current liabilities||35,627 ||11,150 |
|Deferred revenue, net of current portion||8,726 ||10,665 |
|Operating lease liabilities, net of current portion||3,801 ||3,613 |
|Research and development service obligation liability, net of current portion||48 ||142 |
|Research and development funding arrangement liability||25,000 ||25,000 |
|Contingent consideration liability, net of current portion||2,942 ||— |
|Other long-term liabilities||366 ||71 |
|Total liabilities||76,510 ||50,641 |
|Commitments and contingencies (Note 10)|
|Stockholders’ equity|| || |
Common stock $0.0001 par value; 200,000,000 shares authorized as of September 30, 2022 and December 31, 2021; 24,463,178 and 18,816,842 shares issued as of September 30, 2022 and December 31, 2021, respectively; 24,462,228 and 18,815,892 shares outstanding as of September 30, 2022 and December 31, 2021, respectively
|2 ||2 |
|Additional paid-in capital||314,170 ||297,441 |
Treasury stock at cost, 950 shares as of September 30, 2022 and December 31, 2021
|Total stockholders’ equity||6,760 ||18,319 |
|Total liabilities and stockholders’ equity||$||83,270 ||$||68,960 |
The accompanying notes are an integral part of these condensed consolidated financial statements
Condensed Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except share and per share amounts)
| ||Three Months Ended September 30,||Nine Months Ended September 30,|
|Net product revenues||$||4,605 ||$||— ||$||11,131 ||$||— |
|License and collaboration revenues||492 ||680 ||2,010 ||2,174 |
|Government research contracts and grants revenue||18 ||57 ||60 ||129 |
|Total revenue||5,115 ||737 ||13,201 ||2,303 |
|Product cost of goods sold||1,440 ||— ||4,259 ||— |
|Research and development||4,288 ||4,251 ||12,265 ||15,926 |
|Selling, general and administrative||8,562 ||2,969 ||27,151 ||8,086 |
|Amortization of intangible assets||443 ||— ||1,112 ||— |
|Change in fair value of contingent consideration||186 ||— ||(268)||— |
|Impairment loss on long-lived assets||— ||— ||— ||114 |
|Total operating expenses||14,919 ||7,220 ||44,519 ||24,126 |
|Other income (expense), net:|
|Interest income||38 ||4 ||56 ||10 |
|Interest expense||(635)||— ||(1,375)||— |
|Gain on debt extinguishment||4,340 ||— ||4,340 ||956 |
|Other income (expense)||31 ||(5)||9 ||(602)|
|Total other income (expense), net||3,774 ||(1)||3,030 ||364 |
|Net loss and comprehensive loss||$||(6,030)||$||(6,484)||$||(28,288)||$||(21,459)|
|Net loss per share, basic and diluted||$||(0.25)||$||(0.34)||$||(1.33)||$||(1.30)|
Weighted-average common shares outstanding, basic and diluted
|24,462,228 ||18,813,653 ||21,189,799 ||16,476,235 |
The accompanying notes are an integral part of these condensed consolidated financial statements
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except share amounts)
|Nine Months Ended September 30, 2022|
| || |
| ||Common Stock||Accumulated|| |
|Balance as of December 31, 2021||18,815,892 ||$||2 ||$||297,441 ||$||(155)||$||(278,969)||$||18,319 |
|Stock-based compensation||— ||— ||381 ||— ||— ||381 |
|Common stock issued pursuant to equity distribution agreement (at-the-market facility)||164,230 ||— ||562 ||— ||— ||562 |
|Net loss||— ||— ||— ||— ||(13,380)||(13,380)|
|Balance as of March 31, 2022||18,980,122 ||$||2 ||$||298,384 ||$||(155)||$||(292,349)||$||5,882 |
|Stock-based compensation||— ||— ||453 ||— ||— ||453 |
|Common stock and pre-funded warrants issued pursuant to the June 2022 registered direct offering, net||2,080,696 ||— ||14,020 ||— ||— ||14,020 |
|Common stock issued pursuant to equity distribution agreement (at-the-market facility)||220,795 ||— ||772 ||— ||— ||772 |
|Net loss||— ||— ||— ||— ||(8,878)||(8,878)|
|Balance as of June 30, 2022||21,281,613 ||$||2 ||$||313,629 ||$||(155)||$||(301,227)||$||12,249 |
|Stock-based compensation||— ||— ||509 ||— ||— ||509 |
|Exercise of pre-funded warrants related to the June 2022 registered direct offering||3,180,615 ||— ||32 ||— ||— ||32 |
|Net loss||— ||— ||— ||— ||(6,030)||(6,030)|
|Balance as of September 30, 2022||24,462,228 ||$||2 ||$||314,170 ||$||(155)||$||(307,257)||$||6,760 |
|The accompanying notes are an integral part of these condensed consolidated financial statements|
|Condensed Consolidated Statements of Stockholders’ Equity, continued|
|(in thousands, except share amounts)|
|Nine Months Ended September 30, 2021|
| || |
|Common Stock||Accumulated|| |
|Balance as of December 31, 2020||14,570,009 ||$||1 ||$||252,408 ||$||(155)||$||(249,277)||$||2,977 |
|Stock-based compensation||— ||— ||36 ||— ||— ||36 |
|Exercise of common stock warrants||99,651 ||— ||442 ||— ||— ||442 |
|Common stock issued pursuant to common stock purchase agreement||493,163 ||1 ||6,333 ||— ||— ||6,334 |
|Exercise of stock options||2,492 ||— ||13 ||— ||— ||13 |
|Net loss||— ||— ||— ||— ||(8,952)||(8,952)|
|Balance as of March 31, 2021||15,165,315 ||$||2 ||$||259,232 ||$||(155)||$||(258,229)||$||850 |
|Stock-based compensation||— ||— ||215 ||— ||— ||215 |
|Common stock issued pursuant to public offering, net||3,636,364 ||— ||37,236 ||— ||— ||37,236 |
|Exercise of common stock warrants||3,900 ||— ||19 ||— ||— ||19 |
|Exercise of stock options||6,150 ||— ||29 ||— ||— ||29 |
|Extinguishment of fractional shares resulting from reverse stock split||(37)||— ||— ||— ||— ||— |
|Net loss||— ||— ||— ||— ||(6,023)||(6,023)|
|Balance as of June 30, 2021||18,811,692 ||$||2 ||$||296,731 ||$||(155)||$||(264,252)||$||32,326 |
|Stock-based compensation||— ||— ||327 ||— ||— ||327 |
|Exercise of stock options||3,450 ||— ||16 ||— ||— ||16 |
|Net loss||— ||— ||— ||— ||(6,484)||(6,484)|
|Balance as of September 30, 2021||18,815,142 ||$||2 ||$||297,074 ||$||(155)||$||(270,736)||$||26,185 |
The accompanying notes are an integral part of these condensed consolidated financial statements
Condensed Consolidated Statements of Cash Flows
| ||Nine Months Ended September 30,|
|Cash flow from operating activities:|| || |
|Adjustments to reconcile net loss to net cash used in operating activities:|
Depreciation and amortization of property and equipment
|812 ||242 |
|Impairment loss on long-lived assets||— ||114 |
|Amortization of intangible assets||1,112 ||— |
|Accretion of debt discount||635 ||— |
|Change in fair value of contingent consideration||(268)||— |
|Stock-based compensation||1,343 ||(84)|
|Foreign currency transaction loss||— ||676 |
|Gain on debt extinguishment||(4,340)||(956)|
|Changes in operating assets and liabilities:|
|Accounts receivable||9,674 ||4,399 |
|Inventory||122 ||— |
|Prepaid expenses and other current assets||2,600 ||2,137 |
|Accounts payable||990 ||(45)|
|Accrued expenses||(1,110)||820 |
|Research and development service obligation liabilities||(851)||93 |
|Other long-term assets and liabilities||(266)||201 |
|Net cash used in operating activities||(19,774)||(16,036)|
|Cash flow from investing activities:|
|Purchases of property and equipment||(3,209)||(4,515)|
Landlord reimbursement of tenant improvement allowance
|508 ||1,015 |
|Payment for EPI Health Acquisition||(15,093)||— |
|Net cash used in investing activities||(17,794)||(3,500)|
|Cash flow from financing activities:|
|Proceeds from issuance of common stock and issuance and exercise of pre-funded warrants, net of underwriting fees and commissions||14,252 ||37,600 |
|Proceeds from exercise of common stock warrants||— ||461 |
|Proceeds from issuance of common stock under common stock purchase agreement||— ||6,334 |
|Payment of note payable||(10,000)||— |
Proceeds from common stock issued pursuant to equity distribution agreement (at-the-market facility)
|1,334 ||— |
|Payments related to offering costs ||(200)||(364)|
|Proceeds from exercise of stock options||— ||58 |
|Net cash provided by financing activities||5,386 ||44,089 |
|Net (decrease) increase in cash, cash equivalents and restricted cash||(32,182)||24,553 |
|Cash, cash equivalents and restricted cash as of beginning of period||47,668 ||35,879 |
|Cash, cash equivalents and restricted cash as of end of period||$||15,486 ||$||60,432 |
|Supplemental disclosure for cash flow information:|
|Interest paid||$||339 ||$||— |
|Supplemental disclosure of non-cash investing and financing activities:|
|Purchases of property and equipment with accounts payable and accrued expenses||$||694 ||$||3,892 |
|Right-of-use assets obtained in exchange for lease liabilities||$||— ||$||1,343 |
|Non-cash gain on debt extinguishment||$||4,340 ||$||956 |
|Deferred offering costs reclassified to additional paid-in capital||$||— ||$||364 |
|Contingent consideration related to EPI Health Acquisition||$||3,648 ||$||— |
Note payable issued for EPI Health Acquisition
|$||13,305 ||$||— |
|Reconciliation to condensed consolidated balance sheets:|
|Cash and cash equivalents||$||14,903 ||$||59,960 |
|Restricted cash included in noncurrent assets||583 ||472 |
|Total cash, cash equivalents and restricted cash shown in the statement of cash flows||$||15,486 ||$||60,432 |
The accompanying notes are an integral part of these condensed consolidated financial statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar values in thousands, except per share data)
Note 1: Organization and Significant Accounting Policies
Novan, Inc. (“Novan” and together with its subsidiaries, the “Company”) is a medical dermatology company focused primarily on researching, developing and commercializing innovative therapeutic products for skin diseases. Its goal is to deliver safe and efficacious therapies to patients, including developing product candidates where there are unmet medical needs. The Company is developing SB206 (berdazimer gel, 10.3%) as a topical prescription gel for the treatment of viral skin infections, with a current focus on molluscum contagiosum. On March 11, 2022, the Company acquired EPI Health, LLC, a specialty pharmaceutical company focused on medical dermatology (“EPI Health”), from Evening Post Group, LLC, a South Carolina limited liability company (“EPG” or the “Seller”). The acquisition of EPI Health (the “EPI Health Acquisition”) has provided the Company with a commercial infrastructure to sell a marketed portfolio of therapeutic products for skin diseases. Subsequent to the acquisition, the Company sells various medical dermatology products for the treatments of plaque psoriasis, rosacea, acne and dermatoses.
Novan was incorporated in January 2006 under the state laws of Delaware. In 2015, Novan Therapeutics, LLC, was organized as a wholly owned subsidiary under the state laws of North Carolina; in March 2019, the Company completed registration of a wholly owned Ireland-based subsidiary, Novan Therapeutics, Limited; and in March 2022, the Company acquired its wholly owned subsidiary, EPI Health, a South Carolina limited liability company. In August 2022, EPI Health, as sole equity member, formed and organized a new Delaware single member LLC.
See Note 2—“Acquisition of EPI Health” for further information regarding the EPI Health Acquisition. The post-acquisition operating results of EPI Health are reflected within the Company’s condensed consolidated statement of operations and comprehensive loss for the three and nine months ended September 30, 2022, specifically from March 11, 2022 through September 30, 2022.
Basis of Presentation
The accompanying condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The December 31, 2021 year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP for annual financial statements. Additionally, the Company’s independent registered public accounting firm’s report on the December 31, 2021 financial statements included an explanatory paragraph indicating that there was substantial doubt about the Company’s ability to continue as a going concern.
Basis of Consolidation
The accompanying condensed consolidated financial statements reflect the operations of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Reverse Stock Split
On May 25, 2021, the Company amended its restated certificate of incorporation effecting a 1-for-10 reverse stock split of its outstanding shares of capital stock (the “Reverse Stock Split”). The Reverse Stock Split did not change the number of authorized shares of capital stock of the Company or cause an adjustment to the par value of the Company’s capital stock. As a result of the Reverse Stock Split, the Company adjusted (i) the per share exercise price and the number of shares issuable upon the exercise of all outstanding stock options, warrants to purchase shares of common stock and stock appreciation rights, (ii) the share price targets of the Company’s Tangible Stockholder Return Plan and (iii) the number of shares reserved for issuance pursuant to the Company’s equity incentive compensation plans. No fractional shares were issued in connection with the Reverse Stock Split. Stockholders who would have otherwise held a fractional share of capital stock received a cash payment for any fractional share resulting from the Reverse Stock Split in an amount equal to such fraction multiplied by the closing sales price of the common stock as reported on the Nasdaq Stock Market on May 25, 2021, the last trading day immediately prior to the effectiveness of the Reverse Stock Split. See Note 11—“Stockholders’ Equity” for further information regarding the Reverse Stock Split.
All disclosures of shares and per share data in the condensed consolidated financial statements and related notes have been retroactively adjusted to reflect the Reverse Stock Split for all periods presented.
Liquidity and Ability to Continue as a Going Concern
The Company’s condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from uncertainty related to the Company’s ability to continue as a going concern.
The Company has evaluated principal conditions and events, in the aggregate, that may raise substantial doubt about its ability to continue as a going concern within one year from the date that these financial statements are issued. The Company identified the following conditions:
•The Company has reported a net loss in all fiscal periods since inception and, as of September 30, 2022, the Company had an accumulated deficit of $307,257.
•As of September 30, 2022, the Company had a total cash and cash equivalents balance of $14,903.
•The Company anticipates that it will continue to generate losses for the foreseeable future, and it expects the losses to increase as it continues the development of, and seeks regulatory approvals for, its product candidates and begins activities to prepare for potential commercialization of SB206, if approved.
•The Company has concluded that the prevailing conditions and ongoing liquidity risks faced by the Company, coupled with its current forecasts, including costs associated with implementing the SB206 prelaunch strategy and commercial preparation, raise substantial doubt about its ability to continue as a going concern.
This evaluation is also based on other relevant conditions that are known or reasonably knowable at the date that the financial statements are issued, including ongoing liquidity risks faced by the Company, the Company’s conditional and unconditional obligations due or anticipated within one year, the funds necessary to maintain the Company’s operations considering its current financial condition, obligations, and other expected cash flows, and other conditions and events that, when considered in conjunction with the above, may adversely affect the Company’s ability to meet its obligations. The Company will continue to evaluate this going concern assessment in connection with the preparation of its quarterly and annual financial statements based upon relevant facts and circumstances, including, but not limited to, its cash and cash equivalents balance and its operating forecast and related cash projection.
The Company believes that its existing cash and cash equivalents as of September 30, 2022, plus expected receipts associated with product sales from its commercial product portfolio, will provide it with adequate liquidity to fund its planned operating needs into the beginning of 2023. Variability in its operating forecast, driven primarily by (i) commercial product sales, (ii) timing of operating expenditures, and (iii) unanticipated changes in net working capital, will impact the Company’s cash runway. This operating forecast and related cash projection includes (i) costs associated with preparing for and seeking U.S. regulatory approval of SB206 as a treatment for molluscum, including studies enabling submission of a new drug application (“NDA”) for SB206, (ii) costs associated with the readiness and operation of the Company’s new manufacturing capability necessary to support small-scale drug substance and drug product manufacturing, (iii) conducting drug manufacturing activities with external third-party CMOs, (iv) ongoing commercial operations, including sales, marketing, inventory procurement and distribution, and supportive activities, related to its portfolio of therapeutic products for skin diseases acquired with the EPI Health Acquisition, and (v) initial efforts to support potential commercialization of SB206, but excludes additional operating costs that could occur between a potential NDA submission for SB206 through NDA approval, including, but not limited to, marketing and commercialization efforts to achieve potential launch of SB206. The Company does not currently have sufficient funds to complete commercialization of any of its product candidates that are under development, and its funding needs will largely be determined by its commercialization strategy for SB206, subject to the targeted submission timing for the NDA relating to SB206 and the regulatory approval process and outcome, and the operating performance of its commercial product portfolio.
The inability of the Company to generate sufficient net revenues to fund its operations or obtain significant additional funding on acceptable terms in the near term, could have a material adverse effect on the Company’s business and cause the Company to alter or reduce its planned operating activities, including, but not limited to, delaying, reducing, terminating or eliminating planned product candidate development activities, to conserve its cash and cash equivalents. The Company has pursued and may continue to pursue additional capital through equity or debt financings or from non-dilutive sources, including partnerships, collaborations, licensing, grants or other strategic relationships. The Company’s anticipated expenditure levels may change as it adjusts its current operating plan. Such actions could delay development timelines and have a material adverse effect on its business, results of operations, financial condition and market valuation.
The Company may also explore the potential for additional strategic transactions, such as strategic acquisitions or in-licenses, sales, out-licenses or divestitures of some of its assets, or other potential strategic transactions, which could include a sale of the Company. If the Company were to pursue such a transaction, it may not be able to complete the transaction on a timely basis or at all or on terms that are favorable to the Company. Alternatively, if the Company is unable to obtain significant additional funding on acceptable terms or progress with a strategic transaction, it could instead determine to dissolve and liquidate its assets or seek protection under the bankruptcy laws. If the Company decides to dissolve and liquidate its assets or to seek protection under the bankruptcy laws, it is unclear to what extent the Company would be able to pay its obligations, and, accordingly, it is further unclear whether and to what extent any resources would be available for distributions to stockholders.
The Company accounts for business acquisitions using the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”). ASC 805 requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values, as determined in accordance with ASC 820, Fair Value Measurements (“ASC 820”), as of the acquisition date. For certain assets and liabilities, book value approximates fair value. In addition, ASC 805 establishes that consideration transferred be measured at the closing date of the acquisition at the then-current market price. Under ASC 805, acquisition-related costs (i.e., advisory, legal, valuation and other professional fees) are expensed in the period in which the costs are incurred. The application of the acquisition method of accounting requires the Company to make estimates and assumptions related to the estimated fair values of net assets acquired.
The extent to which COVID-19, and its variant strains, and domestic and global efforts to contain its spread along with lingering effects of the foregoing will impact the Company’s business, including its operations, preclinical studies, clinical trials, and financial condition, will depend on future developments, which are highly uncertain and cannot be predicted, and include the duration, severity and scope of the pandemic and its lingering impacts, the availability and effectiveness of vaccines in preventing the spread of COVID-19 (and its variants), and the actions taken by other parties, such as governmental authorities, to contain and treat COVID-19 and its variants.
During the pandemic, the timetable for development of the Company’s product candidates has been impacted and may face further disruption and the Company’s business could be further adversely affected by the outbreak of COVID-19 and its variants. In particular, COVID-19 impacted the timing of trial initiation of the Company’s B-SIMPLE4 Phase 3 study and was a factor influencing the Company’s previous adjustment of its targeted SB206 NDA submission timing, currently planned for around the end of 2022.
In addition, certain factors from the COVID-19 pandemic may delay or otherwise adversely affect the Company’s generation of product revenues from its portfolio of therapeutic products for skin diseases, as well as adversely impact the Company’s business generally, including (i) changes in buying patterns caused by lack of normal access by patients to the healthcare system and concern about the supply of medications, (ii) adverse impacts on the Company’s manufacturing operations, supply chain and distribution processes, which may impact its ability to procure, produce and distribute its products or product candidates, (iii) the inability of third parties to fulfill their obligations to the Company due to staffing shortages, production slowdowns or stoppages and disruptions in delivery systems, (iv) the risk of shutdown in countries where the Company relies on CMOs to provide commercial manufacture of its products or clinical batch manufacturing of its product candidates, (v) the ability to procure raw materials needed for the production of the Company’s active pharmaceutical ingredient (“API”) and other manufacturing components for the Company’s product candidates, (vi) the possibility that third parties on which the Company may rely for certain functions and services, including CMOs, suppliers, distributors, logistics providers, and external business partners, may be adversely impacted by restrictions resulting from the COVID-19 pandemic, which could cause the Company to experience delays or to incur additional costs, and (vii) the risk that the COVID-19 pandemic may intensify other risks inherent in the Company’s business.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. The Company reviews all significant estimates affecting the condensed consolidated financial statements on a recurring basis and records the effects of any necessary adjustments prior to their issuance.
Significant estimates made by management include provisions for product returns, coupons, rebates, chargebacks, trade and cash discounts, allowances and distribution fees paid to certain wholesalers, inventory net realizable value, useful lives of amortizable intangible assets, stock-based compensation, accrued expenses, valuation of assets and liabilities in business combinations, developmental timelines related to licensed products, valuation of contingent consideration and contingencies.
Actual results may differ materially and adversely from these estimates. To the extent there are material differences between the estimates and actual results, the Company’s future results of operations will be affected.
Unaudited Interim Condensed Consolidated Financial Statements
The accompanying interim condensed consolidated financial statements and the related footnote disclosures are unaudited. These unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and applicable rules and regulations of the Securities and Exchange Commission’s (“SEC”) Rule 10-01 of Regulation S-X for interim financial information. The condensed consolidated financial statements were prepared on the same basis as the audited consolidated financial statements and in the opinion of management, reflect all adjustments of a normal, recurring nature that are necessary for the fair statement of the Company’s financial position and its results of operations and cash flows. The results of operations for interim periods are not necessarily indicative of the results expected for the full fiscal year or any future period. These interim financial statements should be read in conjunction with the consolidated financial statements and notes set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 18, 2022.
Certain amounts in the Company’s consolidated balance sheet as of December 31, 2021 have been reclassified to conform to the current presentation. Prepaid insurance in the amount of $1,697 and other current assets related to leasing arrangement, net in the amount of $109 has been reclassified to prepaid expenses and other current assets. In addition, certain current liabilities totaling $2,164, which were previously classified as accrued compensation, accrued outside research and development services, and accrued legal and professional fees, have been reclassified to all be included in accrued expenses to conform with the current presentation.
These reclassifications had no impact on the Company’s consolidated current assets, current liabilities or on the consolidated statements of operations and comprehensive loss or cash flows as of and for the year ended December 31, 2021.
Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. For the three and nine months ended September 30, 2022 and 2021, comprehensive loss was equal to net loss.
Net Loss Per Share
Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Basic shares outstanding includes the weighted average effect of the Company’s outstanding pre-funded warrants, the exercise of which requires little or no consideration for the delivery of shares of common stock.
Diluted net loss per share is calculated by adjusting weighted average shares outstanding for the dilutive effect of common stock equivalents outstanding for the period. Diluted net loss per share is the same as basic net loss per share, since the effects of potentially dilutive securities are anti-dilutive for all periods presented.
The following securities, presented on a common stock equivalent basis, have been excluded from the calculation of weighted average common shares outstanding for the three and nine months ended September 30, 2022 and September 30, 2021 because the effect is anti-dilutive due to the net loss reported in each of those periods. All share amounts presented in the table below represent the total number outstanding as of the end of each period.
| ||September 30,|
|Warrants to purchase common stock (Note 11)||5,535,637 ||1,274,176 |
|Stock options outstanding under the 2008 and 2016 Plans (Note 16)||1,044,753 ||392,058 |
|Nonvested restricted stock units (Note 16)||464,206 ||— |
|Stock appreciation rights outstanding under the 2016 Plan (Note 16)||60,000 ||60,000 |
|Inducement stock options outstanding (Note 16)||1,250 ||1,250 |
Segment and Geographic Information
Operating segments are identified as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker. The Company’s chief operating decision maker reviews financial information on a disaggregated basis for purposes of allocating resources and evaluating financial performance. See Note 18—“Segment Information” for further information on reportable segments.
The Company accounts for revenue in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”). To determine revenue recognition for arrangements that are within the scope of ASC 606, the Company (i) identifies the contract with a customer, (ii) identifies the performance obligations within the contract, (iii) determines the transaction price, (iv) allocates the transaction price to the performance obligations in the contract, and (v) recognizes revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that it will collect the consideration to which it is entitled in exchange for the goods or services it transfers to the customer.
At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within the contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Upon occurrence of a contract modification, the Company conducts an evaluation pursuant to the modification framework in ASC 606 to determine the appropriate revenue recognition. The framework centers around key questions, including (i) whether the modification adds additional goods and services, (ii) whether those goods and services are distinct, and (iii) whether the contract price increases by an amount that reflects the standalone selling price for the new goods or services. The resulting conclusions will determine whether the modification is treated as a separate, standalone contract or if it is combined with the original contract and accounted for in that manner. In addition, some modifications are accounted for on a prospective basis and others on a cumulative catch-up basis.
The Company currently has the following types of revenue generating arrangements:
Net Product Revenues
Net product revenues encompass sales recognized resulting from transferring control of products to the customer, excluding amounts collected on behalf of third parties and sales taxes. The amount of revenue recognized is the amount allocated to the satisfied performance obligation taking into account variable consideration. The estimated amount of variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
Product sales are recognized at the point in time when legal transfer of title has occurred, based on shipping terms. The Company records a reduction to the transaction price for estimated chargebacks, rebates, coupons, trade and cash discounts and sales returns. A liability is recognized for expected sales returns, rebates, coupons, trade and cash discounts, chargebacks or other reimbursements to customers in relation to sales made in the reporting period. Payment terms can differ from contract to contract, but no element of financing is deemed present as the typical payment terms are less than one year. Therefore, the transaction price is not adjusted for the effects of a significant financing component. A receivable is recognized as soon as control over the products is transferred to the customer as this is the point in time that the consideration is unconditional because only the passage of time is required before the payment is due.
Variable consideration relates to sales returns, rebates, coupons, trade and cash discounts, and chargebacks granted to various direct and indirect customers. The Company recognizes provisions at the time of sale and adjusts them if the actual amounts differ from the estimated provisions. The following describes the nature of each deduction and how provisions are estimated:
Chargebacks – The Company has arrangements with various third-party wholesalers that require the Company to issue a credit to the wholesaler for the difference between the invoice price to the wholesaler and the customer’s contract price. Provisions for chargebacks involve estimates of the contract prices within multiple contracts with multiple wholesalers. The provisions for chargebacks vary in relation to changes in product mix, pricing and the level of inventory at the wholesalers and, in addition, fluctuate in proportion to an increase or decrease in sales. Provisions for estimated chargebacks are calculated using the historical chargeback experience and expected chargeback levels for new products and anticipated pricing changes. Chargeback provisions are compared to externally obtained distribution channel reports for reasonableness. The Company regularly monitors the provisions for chargebacks and makes adjustments when the Company believes that actual chargebacks may differ from estimated provisions.
Rebates – Rebates include managed care services, fee for service and Medicaid rebate programs. Rebates are primarily related to volume-based incentives and are offered to key customers to promote loyalty. Customers receive rebates upon the attainment of a pre-established volume or the attainment of revenue milestones for a specified period. Since rebates are contractually agreed upon, provisions are estimated based on the specific terms in each agreement based on historical trends and expected sales.
Returns – Returns primarily relate to customer returns of expired products that the customer has the right to return up to one year following the product’s expiration date. Such returned products are destroyed and credits and/or refunds are issued to the customer for the value of the returns. Accordingly, no returned assets are recorded in connection with those products. The returns provision is estimated by applying a historical return rate to the amounts of revenue estimated to be subject to returns. Revenue subject to returns is estimated based on the lag time from time of sale to date of return. The estimated lag time is developed by analyzing historical experience. Additionally, the Company considers specific factors, such as levels of inventory in the distribution channel, product dating and expiration, size and maturity of launch, entrance of new competitors, changes in formularies or packaging and any changes to customer terms, in determining the overall expected levels of returns.
Prompt pay discounts – Prompt pay discounts are offered to most customers to encourage timely payment. Discounts are estimated at the time of invoice based on historical discounts in relation to sales. Prompt pay discounts are almost always utilized by customers. As a result, the actual discounts typically do not vary significantly from the estimated amount.
Coupons – The Company offers coupons to market participants in order to stimulate product sales. The redemption cost of consumer coupons is based on historical redemption experience by product and value.
Sales and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue. Shipping and handling costs are accounted for as a fulfillment cost and are recorded as cost of revenue. Incidental items that are immaterial in the context of the contract are recognized as expense. Costs incurred to obtain a contract will be expensed as incurred when the amortization period is less than a year.
There can be a lag between the Company’s establishment of an estimate and the timing of the invoicing or claim. The Company believes it has made reasonable estimates for future rebates and claims, however, these estimates involve assumptions pertaining to contractual utilization and performance, and payor mix. If the performance or mix across third-party payors is different from the Company’s estimates, the Company may be required to pay higher or lower total price adjustments and/or chargebacks than it had estimated.
License and Collaboration Revenues
The Company has entered into various types of agreements that either license the Company’s intellectual property to a third party or acquire license rights to intellectual property of a third party, or both.
Agreements where the Company licenses its intellectual property to a third party for development and commercialization in a licensed territory. If the applicable license is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from non-refundable, upfront fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. For licenses that are bundled with other promises, the Company’s management utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the estimated performance period and the appropriate method of measuring progress during the performance period for purposes of recognizing revenue. The Company re-evaluates the estimated performance period and measure of progress each reporting period and, if necessary, adjusts related revenue recognition accordingly. These arrangements often include milestone as well as royalty or profit-share payments, contingent upon the occurrence of certain future events linked to the success of the asset in development, as well as expense reimbursements from or payments to the collaboration partner. Because of the risk that products in development will not receive regulatory approval, the Company does not recognize any contingent payments until after regulatory approval has been achieved.
Agreements where the Company acquires licensed rights to, or otherwise accesses, a third party’s intellectual property for commercialization of the third party’s product in a licensed territory. The Company also enters into various types of arrangements to commercialize products. The Company’s services provided to the third party under such arrangements, in exchange for compensation that may take the form of cost reimbursements, may include promoting, marketing, selling and distributing the third party’s developed drugs, and may also involve certain license rights granted to the parties for use of the other party’s intellectual property while providing defined services under the arrangements. The Company assesses the nature of each such arrangement and the various rights granted and services performed thereunder, and determines the applicable accounting standard, which may include ASC 808, Collaborative Arrangements (“ASC 808”) or ASC 606.
Royalty revenue from licenses provided to the Company’s collaboration partners, which is based on sales to third parties of licensed products and technology, is recorded when the third-party sale occurs and the performance obligation to which some or all of the royalty has been allocated has been satisfied. This royalty revenue is included in license and collaboration revenue in the accompanying condensed consolidated statements of operations and comprehensive loss.
When the Company performs and incurs marketing and promotional services expense under an arrangement that is determined to be within the scope of ASC 808, and where such services are on behalf of a collaboration partner that is not considered a customer under ASC 606, the Company recognizes a contra-expense that reflects the value of the cost reimbursement to which the Company is expected to be entitled in exchange for those services.
Such contractually required reimbursements are reported as a liability or an asset within the accompanying condensed consolidated balance sheets based upon the timing of cash receipt from the collaboration partner.
Government research contracts and grants revenue
Under the terms of the contracts and grants awarded, the Company is entitled to receive reimbursement of its allowable direct expenses, allocated overhead, general and administrative expenses and payment of other specified amounts. Revenues from development and support activities under government research contracts and grants are recorded in the period in which the related costs are incurred. Associated expenses are recognized when incurred as research and development expense. Revenue recognized in excess of amounts collected from funding sources is recorded as accounts receivable. Any of the funding sources may, at their discretion, request reimbursement for expenses or return of funds, or both, as a result of noncompliance by the Company with the terms of the grants. No reimbursement of expenses or return of funds has been requested or made since inception of the contracts and grants.
Product Cost of Goods Sold
Product cost of goods sold includes the direct costs attributable to the Company’s product revenue. It includes the cost of the purchased finished goods, shipping and storage costs related to the Company’s marketed drug products, sales based royalty and milestone expenses, and certain third-party intellectual property licensing costs.
Promotion, marketing and advertising costs are expensed as incurred. Promotion, marketing and advertising costs for the three and nine months ended September 30, 2022, were approximately $710 and $1,288, respectively. There were no costs for the three and nine months ended September 30, 2021. The costs are included in selling, general and administrative expenses in the condensed consolidated statement of operations and comprehensive loss.
Deferred tax assets and liabilities are determined based on the temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities using the enacted tax rates in effect in the years in which the differences are expected to reverse. In estimating future tax consequences, all expected future events are considered other than enactment of changes in the tax law or rates.
The Company did not record a federal or state income tax benefit for the three and nine months ended September 30, 2022 or 2021 due to its conclusion that a full valuation allowance is required against the Company’s deferred tax assets.
The determination of recording or releasing a tax valuation allowance is made, in part, pursuant to an assessment performed by management regarding the likelihood that the Company will generate future taxable income against which benefits of its deferred tax assets may or may not be realized. This assessment requires management to exercise judgment and make estimates with respect to its ability to generate taxable income in future periods.
Restricted cash as of September 30, 2022 and December 31, 2021 includes funds maintained in a deposit account to secure a letter of credit for the benefit of the lessor of the Company’s headquarters. See Note 6—“Leases” for further information regarding the letter of credit.
Accounts Receivable, net
Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables. An account receivable is considered to be past due if any portion of the receivable balance is outstanding beyond the agreed-upon due date.
The Company records an allowance for credit losses, which includes a provision for expected losses based on historical write-offs, adjusted for current conditions as deemed necessary, reasonable and supportable forecasts about future conditions that affect the expected collectability of the reported amount of the financial asset, as well as a specific reserve for accounts deemed
at risk. The allowance is the Company’s estimate for accounts receivable as of the balance sheet date that ultimately will not be collected. Any changes in the allowance are reflected in the results of operations in the period in which the change occurs. No allowance for credit losses was recorded as of September 30, 2022 or December 31, 2021 as all amounts included in accounts receivable are expected to be collected.
Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Recoveries of receivables previously written off are recorded when received. The Company does not charge interest on accounts receivable.
As part of the EPI Health Acquisition, accounts receivable, net, were marked to fair value as part of the Company’s ASC 805 business combination accounting. See Note 2—“Acquisition of EPI Health” for additional detail.
The Company maintains inventory consisting of for-sale pharmaceuticals related to its marketed product portfolio. The Company measures inventory using the first-in, first-out method and values inventory at the lower of cost or net realizable value. Net realizable value represents the estimated selling price for inventories less all estimated costs to sell.
The Company performs an analysis and records a provision for potentially obsolete inventory. The reserve for obsolescence is generally an estimate of the amount of inventory held at period end that is expected to expire in the future based on projected sales volume and expected product expiration or sell-by dates. These assumptions require the Company to analyze the aging of and forecasted demand for its inventory and make estimates regarding future product sales.
Property and Equipment, net
Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives. Leasehold improvements are amortized over the shorter of the life of the lease or the useful life of the improvements. Expenditures for maintenance and repairs are expensed as incurred. Improvements and betterments that add new functionality or extend the useful life of an asset are capitalized. Leases for real estate often include tenant improvement allowances, which the Company assesses according to applicable accounting guidance to determine the appropriate owner, and capitalizes such tenant improvement assets accordingly.
Intangible Assets, net and Goodwill
Intangible assets represent certain identifiable intangible assets, including pharmaceutical product licenses and patents. Amortization for pharmaceutical products licenses is computed using the straight-line method based on the lesser of the term of the agreement and the useful life of the license. Amortization for pharmaceutical patents is computed using the straight-line method based on the useful life of the patent.
Definite-lived intangible assets are reviewed for impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. In the event impairment indicators are present or if other circumstances indicate that an impairment might exist, then management compares the future undiscounted cash flows directly associated with the asset or asset group to the carrying amount of the asset group being determined for impairment. If those estimated cash flows are less than the carrying amount of the asset group, an impairment loss is recognized. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. Considerable judgment is necessary to estimate the fair value of these assets, accordingly, actual results may vary significantly from such estimates.
Indefinite-lived intangible assets, such as goodwill and the cost to obtain and register the Company’s internet domain, are not amortized. The Company tests the carrying amounts of goodwill for recoverability on an annual basis at September 30 or when events or changes in circumstances indicate evidence that a potential impairment exists, using a fair value based test.
A significant amount of judgment is involved in determining if an indicator of goodwill impairment has occurred. Such indicators may include, among others: a significant decline in expected future cash flows, a sustained, significant decline in the Company’s stock price and market capitalization, a significant adverse change in legal factors or in the business climate, adverse assessment or action by a regulator, and unanticipated competition. Key assumptions used in the annual goodwill impairment test are highly judgmental. Any change in these indicators or key assumptions could have a significant negative impact on the Company’s financial condition, impact the goodwill impairment analysis or cause the Company to perform a goodwill impairment analysis more frequently than once per year.
Contingent consideration is recorded as a liability and is the estimate of the fair value of potential milestone payments related to the EPI Health Acquisition. The estimated fair value of contingent consideration was determined based on a probability-weighted valuation model that measures the present value of the probable cash payments based upon the future milestone
events of EPI Health at a discount rate that captures the risk associated with the liability and also based on a Monte Carlo simulation, whereby EPI Health’s forecasted net sales from the EPI Health legacy products were simulated over the measurement period to calculate the contingent consideration. See Note 2—“Acquisition of EPI Health” for further information regarding purchase consideration.
Contingent consideration is remeasured at each reporting date and any changes in the liability are recorded within the consolidated statement of operations and comprehensive loss. See Note 17—“Fair Value” for further information.
Classification of Warrants Issued in Connection with Offerings of Common Stock
The Company accounts for common stock warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, whether the warrants meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own common stock and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance.
For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded at their initial fair value on the date of issuance, and remeasured each balance sheet date thereafter. Changes in the estimated fair value of the liability-classified warrants are recognized as a non-cash gain or loss in the accompanying condensed consolidated statements of operations and comprehensive loss.
Members of the Company’s board of directors held 124,497 and 100,497 shares of the Company’s common stock as of September 30, 2022 and December 31, 2021, respectively.
Recently Issued Accounting Standards
Accounting Pronouncements Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which is designed to provide financial statement users with more information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. When determining such expected credit losses, the guidance requires companies to apply a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The adoption of this new accounting guidance, as of January 1, 2022, did not have a material impact on the Company’s condensed consolidated financial statements.
Note 2: Acquisition of EPI Health
On March 11, 2022, the Company completed the EPI Health Acquisition, in which the Company acquired all of the issued and outstanding units of membership interest of EPI Health from EPG for an estimated fair value of purchase consideration of $32,046. EPI Health is an integrated medical dermatology company providing the Company with a commercial infrastructure to support the commercialization of products. Subsequent to the EPI Health Acquisition, the Company sells various dermatological products for the treatments of plaque psoriasis, rosacea, acne and dermatoses.
At closing, the Company paid or committed to pay non-contingent consideration totaling $27,500, as adjusted for cash, indebtedness, net working capital estimates and other contractually defined adjustments (the “Closing Purchase Price”). The Closing Purchase Price consisted of (i) $11,000 paid in cash, (ii) a secured promissory note issued to EPG in the principal amount of $16,500 (the “Seller Note”), and (iii) a $993 payment representing an adjustment for estimated net working capital. See Note 9—“Notes Payable” for additional detail regarding the Seller Note and its related terms.
The purchase agreement entered into in connection with the EPI Health Acquisition (the “EPI Heath Purchase Agreement”) included the potential payment of additional contingent consideration totaling up to $23,500 upon achievement of certain milestones, as follows:
a.$1,000, as a one-time cash payment, upon EPG’s performance of transition services and the successful completion of the transition provided under the transition services agreement between the Company and EPG;
b.$3,000, as a one-time payment, payable in cash or the Company’s common stock, at the discretion of the Company, upon net sales of certain of EPI Health’s legacy products exceeding $30,000 during the period from April 1, 2022 through March 31, 2023;
c.up to $2,500, paid in quarterly installments in cash or the Company’s common stock at the discretion of the Company, upon net sales of Wynzora Cream (“Wynzora”) exceeding certain quarterly thresholds or an annual threshold of $12,500 during the period from April 1, 2022 through March 31, 2023;
d.$5,000, as a one-time payment, payable in cash or the Company’s common stock at the discretion of the Company, upon the first occurrence of post-closing net sales of certain of EPI Health’s legacy products exceeding $35,000 during any twelve-month period from April 1, 2023 through March 31, 2026; and
e.up to $12,000 based on receipt by EPI Health of regulatory and net sales milestones related to Sitavig from EPI Health’s OTC Switch License Agreement with Bayer.
Certain of the above milestone payments will accelerate and become immediately payable upon certain specified events during the applicable milestone periods, including a sale of all or substantially all of the assets with respect to certain of EPI Health’s legacy products. The EPI Health Purchase Agreement provides that payment of any additional consideration may be made in cash or in shares of the Company’s common stock, so long as the number of shares that may be issued pursuant to the EPI Health Purchase Agreement or otherwise in connection with the EPI Health Acquisition is limited to no more than 19.99% of the Company’s outstanding shares of common stock immediately prior to the closing, unless stockholder approval is obtained to issue more than 19.99%.
The EPI Health Acquisition is being accounted for as a business combination using the acquisition method in accordance with ASC 805. Under this method of accounting the fair value of the consideration transferred is allocated to the assets acquired and liabilities assumed based upon their estimated fair values on the date of the EPI Health Acquisition. Any excess of the purchase price over the fair value of identified assets acquired and liabilities assumed is recognized as goodwill.
For the nine months ended September 30, 2022, the Company incurred costs related to the EPI Health Acquisition of $4,811 recognized in selling, general and administrative expenses within the condensed consolidated statements of operations and comprehensive loss.
From the EPI Health Acquisition date through September 30, 2022, $11,202 of total net revenue and a net loss of $3,461 associated with EPI Health’s operations are included in the condensed consolidated statements of operations and comprehensive loss for the nine months ended September 30, 2022.
The following table presents the estimated fair value of purchase consideration as of each interim reporting period end date since the EPI Health Acquisition date, including measurement period adjustments made during each interim period. The estimated fair value of purchase consideration is then allocated to the estimated fair values of the net assets acquired at the EPI Health Acquisition date, as described further following the table under the section entitled Provisional Allocation of Purchase Consideration to Estimated Fair Values of Net Assets Acquired.
|As of March 11, 2022||Measurement Period Adjustments||As of June 30, 2022||Measurement Period Adjustments||As of September 30, 2022|
|Initial cash consideration to Seller||$||11,000 ||$||— ||$||11,000 ||$||— ||$||11,000 |
Secured promissory note issued to Seller
|16,500 ||— ||16,500 ||(3,195)||(B)||13,305 |
|Closing date fair value of contingent consideration liability||3,773 ||— ||3,773 ||(125)||(C)||3,648 |
|Remaining working capital adjustment to be paid||4,069 ||(969)||(A)||3,100 ||— ||3,100 |
|Working capital adjustment paid at close||993 ||— ||993 ||— ||993 |
|Total estimated purchase consideration||$||36,335 ||$||(969)||$||35,366 ||$||(3,320)||$||32,046 |
A.On July 7, 2022, the Company and EPG agreed to the final net working capital adjustment amount (the “Total Adjustment Amount”), as defined in the EPI Health Purchase Agreement, as part of the post-closing adjustment to the estimated purchase price for the EPI Health Acquisition. The Total Adjustment Amount was determined to be positive
and in the amount of $3,100, which was paid to EPG on July 7, 2022. As of March 31, 2022, the Company had previously estimated that the Total Adjustment Amount would be $4,069. Therefore, the Company has reflected a $969 measurement period adjustment to the estimated fair value of total purchase consideration. As this adjustment related to the estimated fair value of purchase consideration and did not affect the fair value of any assets acquired or liabilities assumed, it resulted in a reduction of goodwill.
B.During the third quarter of 2022, the Company, with the assistance of a third-party valuation specialist, continued to conduct a fair value assessment of the Seller Note as of the EPI Health Acquisition date of March 11, 2022. The Company completed the fair value assessment and updated the Seller Note fair value estimate as of March 11, 2022 to $13,305 via a downward measurement period adjustment of $3,195 during the interim quarterly period ended September 30, 2022. See Note 9—“Notes Payable” to these condensed consolidated interim financial statements for further discussion regarding the Seller Note, including its repayment and termination during the third quarter of 2022.
C.During the third quarter of 2022, the Company, with the assistance of a third-party valuation specialist, continued to conduct a fair value assessment of the contingent consideration liability as of the EPI Health Acquisition date of March 11, 2022. The Company updated the contingent consideration provisional fair value estimate as of March 11, 2022 to $3,648 via a downward measurement period adjustment of $125 during the interim quarterly period ended September 30, 2022, based on progression of the fair value assessment procedures conducted to date.
Provisional Allocation of Purchase Consideration to Estimated Fair Values of Net Assets Acquired
ASC 805 requires, among other things, that the assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the acquisition date. Further, ASC 805 requires any consideration transferred or paid in a business combination in excess of the fair value of the assets acquired and liabilities assumed should be recognized as goodwill.
The total estimated purchase consideration was provisionally allocated to the estimated fair values of the assets acquired and liabilities assumed as of March 11, 2022 as follows:
|As of March 11, 2022||Measurement Period Adjustments||As of June 30, 2022||Measurement Period Adjustments||As of September 30, 2022|
|Assets acquired and liabilities assumed:|
|Accounts receivable||$||20,083 ||$||— ||$||20,083 ||$||— ||$||20,083 |
|Inventory||1,710 ||— ||1,710 ||(410)||(B)||1,300 |
|Prepaid expenses and other current assets||3,692 ||— ||3,692 ||— ||3,692 |
|Property and equipment||100 ||— ||100 ||— ||100 |
|Intangible assets||33,000 ||— ||33,000 ||(4,000)||(C)||29,000 |
|Other assets||27 ||— ||27 ||— ||27 |
|Right-of-use lease assets||400 ||— ||400 ||— ||400 |
|Total assets||$||59,012 ||$||— ||$||59,012 ||$||(4,410)||$||54,602 |
|Accounts payable||$||947 ||$||— ||$||947 ||$||— ||$||947 |
|Accrued expenses||24,892 ||— ||24,892 ||— ||24,892 |
|Operating lease liabilities, current portion||208 ||— ||208 ||— ||208 |
|Operating lease liabilities, net of current portion||342 ||— ||342 ||— ||342 |
|Other long-term liabilities||290 ||— ||290 ||— ||290 |