NOVAQUEST FUNDING ARRANGEMENT

9 Months Ended

Sep. 30, 2019

Research and Development [Abstract]

NOVAQUEST FUNDING ARRANGEMENT

NOVAQUEST FUNDING ARRANGEMENT

On August 31, 2019, concurrent with the Merger Agreement, the Company entered into a research and development arrangement with NovaQuest pursuant to which NovaQuest committed up to $25.0 million in research and development funding to the

Company following the closing of the Merger. These proceeds will partially fund the Company’s Phase 3 clinical trials in the United States for its product candidate that contains sofpironium bromide, which treats hyperhidrosis of the skin. The Company is obligated to use commercially reasonable efforts to complete the clinical trials and file to obtain regulatory approval. The funding was projected to cover 67% of the product development costs up to $25.0 million.

As there is a substantive and genuine transfer of risk, the development funding is accounted for as an obligation to perform contractual services. However, given the potential obligation to repay the amounts received, the Company defer any funding received as a liability unless and until it becomes probable that the Company will not have to make a repayment of the received funding to NovaQuest. If the research and development is successful and the product candidate is ultimately approved by the FDA, NovaQuest will be entitled to a payment in the amount of $37.5 million, with $20.0 million due upon approval and the remainder due within two years of approval. Additionally, NovaQuest will be entitled to royalty payments based on annual net sales (except for Japan and certain other Asian countries) of the product candidate based on a sliding scale starting from the date that is two years after the first commercial sale. The portion of the approval payment, should it occur, that exceeds any liabilities recorded on the balance sheet, will be expensed immediately as interest expense. The royalties will be expensed as incurred and will also be included in cost of sales.

If the funding arrangement is terminated in certain circumstances, the Company will be required to pay NovaQuest $25.0 million plus interest, ranging from 8% to 12%. However, in the event that the Company terminates its development program for sofpironium bromide for other specified reasons, including serious safety issues, a failure of the product’s Phase 3 studies, or the FDA’s unwillingness to approve the product, the Company will not be obligated to make any payments to NovaQuest.

In conjunction with the transaction, the Company issued a fully vested warrant to NovaQuest providing it with the right to purchase 241,225 shares of common stock at an exercise price of $10.36 that is exercisable any time within ten years of the execution of the research and development arrangement (the “NovaQuest Warrant”). At issuance, the NovaQuest Warrant was classified as equity and recorded at fair value with no subsequent remeasurement. The fair value of the outstanding warrants was derived from the Black-Scholes option-pricing model using the following assumptions: expected volatility of 85.56%; risk free interest rate of 1.50%; expected term of 10 years; and expected dividend yield of 0.00%.

As of September 30, 2019, $5.6 million of funding had been received from NovaQuest, of which $0.9 million was allocated to the NovaQuest Warrant and deferred on the balance sheet within other current assets and will be recorded as interest expense over the term of the NovaQuest Warrant. In October 2019, NovaQuest notified the Company that additional funding was suspended temporarily based on a material adverse event. Refer to Note 11 for additional details.