S-1 1 d513724ds1.htm FORM S-1 FORM S-1
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As filed with the Securities and Exchange Commission on December 31, 2013

Registration No. 333-          

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Revance Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   2834   77-0551645
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

7555 Gateway Boulevard

Newark, California 94560

(510) 742-3400

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

L. Daniel Browne

President and Chief Executive Officer

Revance Therapeutics, Inc.

7555 Gateway Boulevard

Newark, California 94560

(510) 742-3400

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Mark B. Weeks

Gordon K. Ho

Cooley LLP

3175 Hanover Street

Palo Alto, California 94304

(650) 843-5000

 

L. Daniel Browne

President and Chief Executive Officer

Revance Therapeutics, Inc.

7555 Gateway Boulevard

Newark, California 94560

(510) 742-3400

 

Bruce K. Dallas

Davis Polk & Wardwell LLP

1600 El Camino Real

Menlo Park, California 94025

(650) 752-2000

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

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

 

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

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of Securities to be Registered   Proposed Maximum
Aggregate
Offering Price(1)(2)
 

Amount of

Registration Fee(3)

Common Stock, $0.001 par value per share

  $86,250,000   $11,109.00

 

 

(1) Includes offering price of any additional shares that the underwriters have the over-allotment option to purchase.

 

(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

 

(3) Calculated pursuant to Rule 457(o) under the Securities Act of 1933, as amended, based on an estimate of the proposed maximum aggregate offering price.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED DECEMBER 31, 2013

PRELIMINARY PROSPECTUS

 

LOGO

                 Shares

Revance Therapeutics, Inc.

Common Stock

$         per share

This is the initial public offering of our common stock. We are selling                      shares of common stock in this offering. We currently expect the initial public offering price to be between $         and $         per share of common stock.

We have granted the underwriters an option to purchase up to                  additional shares of common stock to cover over-allotments.

We intend to apply to list our common stock on The NASDAQ Global Market under the symbol “RVNC.”

 

  

 

Investing in our common stock involves risk. See “Risk Factors” beginning on page 14.

We are an “emerging growth company” under applicable Securities and Exchange Commission rules and will be eligible for reduced public company disclosure requirements.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

       Per Share        Total  

Public Offering Price

     $                      $                

Underwriting Discount(1)

     $           $     

Proceeds to Revance (before expenses)

     $           $     

 

(1) See “Underwriting” for additional disclosure regarding underwriting commissions and expenses.

The underwriters expect to deliver the shares to purchasers on or about                 , 2014, through the book-entry facilities of The Depository Trust Company.

 

Cowen and Company     Piper Jaffray   

 

 

The date of this prospectus is                 , 2014.


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     14   

Special Note Regarding Forward-Looking Statements

     42   

Use of Proceeds

     44   

Dividend Policy

     45   

Capitalization

     46   

Dilution

     49   

Selected Consolidated Financial Data

     51   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     54   

Business

     89   

Management

     121   

Executive Compensation

     129   

Certain Relationships and Related Party Transactions

     140   

Principal Stockholders

     144   

Description of Capital Stock

     147   

Shares Eligible for Future Sale

     153   

Material U.S. Federal Income and Estate Tax Consequences to Non-U.S. Holders

     155   

Underwriting

     158   

Legal Matters

     163   

Experts

     163   

Where You Can Find More Information

     163   

Index to Consolidated Financial Statements

     F-1   

 

We have not, and the underwriters have not, authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses prepared by or on behalf of us or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus or in any applicable free writing prospectus is current only as of its date, regardless of its time of delivery or any sale of shares of our common stock. Our business, financial condition, results of operations and prospectus may have changed since that date.

 

Neither we nor the underwriters have done anything that would permit this offering, or possession or distribution of this prospectus, in any jurisdiction where action for that purpose is required, other than in the United States. Persons who come into possession of this prospectus and any applicable free writing prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus and any such free writing prospectus applicable to that jurisdiction.


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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes thereto and the information set forth under the sections “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case included in this prospectus. Unless the context otherwise requires, we use the terms “Revance,” “company,” “we,” “us” and “our” in this prospectus to refer to Revance Therapeutics, Inc. and, where appropriate, our consolidated subsidiary.

Our Company

We are a clinical stage specialty biopharmaceutical company focused on the development, manufacturing and commercialization of novel botulinum toxin products for multiple aesthetic and therapeutic applications. Botulinum toxin is a well-characterized protein currently used in numerous aesthetic and therapeutic indications and represents a multi-billion dollar market in the United States and other countries. All currently approved and commercially available botulinum toxin products are administered by injection. Our lead product candidate, RT001, is a topical formulation of botulinum toxin type A, which we believe has significant advantages over existing injectable products and could significantly expand the botulinum toxin market beyond existing users. Our second product candidate, RT002, is a novel injectable formulation of botulinum toxin type A designed to be more targeted and longer lasting than currently available botulinum toxin injectable products. Both of our product candidates combine our purified botulinum toxin with our proprietary TransMTS® peptide delivery system. We own the worldwide rights to both of our product candidates.

We are evaluating RT001 in a broad clinical program that includes aesthetic indications such as lateral canthal lines, the wrinkles around the eyes which are commonly referred to as crow’s feet lines, and therapeutic indications such as hyperhidrosis, or excessive sweating, migraine headache and allergic rhinitis, or inflammation of the mucous membrane inside the nose. RT001 is currently in a Phase 3 clinical development program in the United States for the treatment of crow’s feet lines and has the potential to be the first approved non-injectable botulinum toxin product. RT001’s primary advantages include painless topical administration, ease of use and limited dependence on administration technique by physicians and medical staff. These advantages should improve the experience of patients undergoing botulinum toxin procedures and make RT001 more suitable for many more indications than currently approved injectable botulinum toxin products.

We are in a Phase 3 clinical development program of RT001 in North America for the treatment of crow’s feet lines, and we plan to initiate an additional Phase 3 clinical trial in Europe by early 2015. We expect to receive primary efficacy data from a pivotal Phase 3 clinical trial of RT001 in mid-2014 and duration data in the second half of 2014. We plan to complete the Phase 3 program for the treatment of crow’s feet lines and file for regulatory approvals in the United States and Europe in 2016. To date, we have conducted thirteen clinical trials for RT001, with a total of over 1,400 subjects, for the treatment of crow’s feet lines.

We are also developing RT001 for therapeutic applications where botulinum toxin has shown efficacy and that are particularly well suited for needle-free treatments. We have successfully completed initial Phase 2 clinical trials for the treatment of primary axillary, or underarm, hyperhidrosis, and for the prevention of migraine headache. We expect to initiate additional clinical trials for the development of RT001 for these and other indications.

In addition to our topical product candidate, we are developing an injectable formulation of botulinum toxin type A, which we refer to as RT002, for indications where deeper delivery of the botulinum toxin is required and a longer lasting effect is desired. We believe RT002 can provide more targeted delivery of botulinum toxin to intended treatment sites while reducing the unwanted spread of botulinum toxin to adjacent areas.

In October 2012, we terminated a license agreement with Medicis Pharmaceutical Corporation, or Medicis, and reacquired from Medicis rights in all territories for RT001 and RT002 as part of a settlement and termination agreement with Medicis. The agreement requires that we make payments to Medicis from a portion of specified

 

 

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types of cash proceeds received by us, including from this offering. Upon the closing of this offering, we will make a payment of approximately $         million to Medicis under this agreement. This payment will satisfy our remaining payment obligations under the agreement, other than an additional $4.0 million due upon receipt of specified marketing approvals for RT001 or RT002.

Our Product Candidates

We plan to develop RT001 and RT002 for multiple aesthetic and therapeutic applications. The table below summarizes the phases of development for the indications we are currently pursuing for our two product candidates:

 

LOGO

RT001 — Our Topical Formulation of Botulinum Toxin

RT001, our lead product candidate, is a topical gel formulation of botulinum toxin type A in a proprietary single-use administration apparatus. RT001 is applied to the skin and uses our proprietary TransMTS® peptide technology to enable delivery of botulinum toxin across the skin, eliminating the need for injections. Our initial focus is to develop and commercialize RT001 for indications where topical application provides a meaningful advantage over injectable administration. In our Phase 2 clinical trials, RT001 has demonstrated a statistically significant and clinically meaningful reduction in crow’s feet lines that is visible to both physicians and patients. These and other studies have also indicated that RT001 is well tolerated with no serious adverse events related to study drug or study treatment procedures or other safety concerns.

The Opportunity for Botulinum Toxins for Aesthetic Indications

Today’s culture places significant value on physical appearance, leading to widespread adoption of anti-aging and aesthetic treatments. The aesthetic market has grown dramatically in the United States where consumers spent almost $11.0 billion in 2012 on over 10.1 million physician-administered surgical and non-surgical aesthetic procedures, according to American Society for Aesthetic Plastic Surgery annual statistics. A strong consumer preference for non-surgical options and the increasing availability of effective alternatives has prompted adoption of non-surgical aesthetic procedures by a broader patient population. These trends have made non-surgical procedures the primary driver of growth in the aesthetic medicine market, accounting for 83% of the total number of procedures performed in 2012.

Injectable botulinum toxin treatments are the single largest cosmetic procedure in the United States and the rest of the world. According to GlobalData, in 2012 clinicians spent an estimated $1.3 billion globally on injectable botulinum toxin for aesthetic procedures and such spending is expected to grow at a compounded annual growth rate of 14% from 2011 through 2018.

 

 

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We believe the botulinum toxin market could expand further with the introduction of a topical formulation such as RT001. Based on our market research, a topical treatment would address key consumer barriers for injectable botulinum toxin products such as fear of frozen face, needle aversion and aversion to injecting a toxin in their bodies. We believe that a topical treatment could expand the use of botulinum toxin to a wider range of physicians and allow those physicians who currently perform botulinum toxin procedures to do so on a larger number of patients. Additionally, our research indicates that a topical treatment can improve the profitability of physicians’ practices by increasing the number of procedures per patient.

Crow’s Feet Lines — Our Lead Indication for RT001

The first indication we are pursuing for RT001 is in the field of aesthetic dermatology. According to GlobalData, the largest use for botulinum toxins is in aesthetic dermatology, which is estimated to generate approximately $1.4 billion in worldwide sales in 2013. If approved, we believe RT001 can expand the overall botulinum toxin aesthetic market by adding new patients who would prefer a needle-free approach to treatment. The aesthetic dermatology market is attractive because we believe that patients in this market tend to be open to trying new products and are willing to pay for aesthetic procedures out of pocket, reducing reliance on reimbursement. We are focused on this market not only because of its size and growth potential but also because, in the United States and Europe, this market can be easily accessed by a small specialty sales force and distributor network.

Crow’s feet lines are skin wrinkles in the outer corner of the eye area, which are commonly caused by aging. Consumers in general, and women in particular, believe that the eye area is the first place where they notice the signs of aging. Consumers also believe that the perception of aging is affected by the quality of the skin. A large segment of the anti-aging topical cosmeceutical market is targeted towards improvement in skin texture and luminosity of the skin in the eye area. We believe that there is currently significant use of botulinum toxin for this indication given the desire of consumers to address the condition.

We believe that RT001 provides the following benefits to patients and physicians for treatment of crow’s feet lines, as compared to traditional botulinum toxin treatments that are administered by injection:

 

   

The RT001 procedure is painless and has not shown any evidence of bruising, swelling or any of the other adverse events associated with injections. RT001 has been shown to be well tolerated with no significant safety concerns;

 

   

RT001 relaxes the crow’s feet wrinkles appearance at “rest,” when the face is in a neutral expression, while still allowing a natural smile;

 

   

Consumers who indicated that they were averse to injecting toxin into their bodies found the concept of a topical treatment appealing;

 

   

RT001 is simple to use and results are not technique dependent. RT001 comes in a pre-filled applicator that contains the proper dose for the treatment of crow’s feet lines; and

 

   

RT001 is very appealing to both key physicians and practice groups who perform the majority of cosmetic procedures in the United States and physicians who have less injectable botulinum toxin experience.

We have conducted thirteen clinical trials, with a total of over 1,400 subjects, for the treatment of crow’s feet lines and are currently in Phase 3 clinical development in the United States. RT001 was shown to be safe, with statistically significant and clinically meaningful results in our Phase 2 clinical trials. In all concentrations of peptide and botulinum toxin studied, RT001 was well tolerated with no serious adverse events related to study drug or study treatment procedures or safety concerns.

We have completed three Phase 2b clinical trials of RT001 to evaluate a 25 ng/mL dose of botulinum toxin for the treatment of moderate to severe crow’s feet lines. Two of these trials were double-blind, randomized, placebo-controlled clinical trials. RT001 met the primary efficacy and all secondary endpoints in both trials.

 

 

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After completing these Phase 2b clinical trials, we modified the diluent formulation to improve stability. We then conducted a Phase 3 clinical trial of RT001, but saw no improvement from baseline in either the placebo or RT001 group using the new diluent formulation. Subsequently, we obtained stability data to confirm that the original Phase 2b formulation has adequate commercial stability. We have since returned to the original Phase 2b diluent formulation and have conducted a two-cohort Phase 2 double-blind, randomized, placebo-controlled clinical trial. The combined data for the first and second cohorts showed statistical significance in wrinkle severity from baseline comparable to that observed in our previous Phase 2b clinical trials. Additionally, we plan to initiate a long-term open label Phase 3 safety clinical trial in 2014.

Based on our discussions with the United States Food and Drug Administration, or the FDA, the European Medicines Agency and other regulatory authorities, we believe that three Phase 3 pivotal clinical trials and the Phase 3 open label safety clinical trial, if successful, will provide the efficacy data to support our regulatory filing for approval of RT001 for the treatment of crow’s feet lines in the United States, Europe and other countries.

The Opportunity for Botulinum Toxins for Therapeutic Indications

While currently approved botulinum toxin products may be better known for their aesthetic applications, according to the market research firm Global Industry Analysts, Inc, or GIA, the worldwide injectable botulinum toxin market has grown from $1.1 billion in 2004 to over $2.4 billion in 2012 and the fastest growing segment of that market in the United States and Europe is for therapeutic indications. This growth for therapeutic indications has been driven largely by the approval of injectable botulinum toxin products in new indications such as preventive treatment of migraine headache in 2010 and overactive bladder in 2011, in addition to other therapeutic indications including hyperhidrosis, movement disorders, such as cervical dystonia and upper limb spasticity, and uncontrolled blinking. This therapeutic usage has been enabled by botulinum toxin’s ability to affect neuromuscular junctions, muscle activity or the release of neuropeptides, neurotransmitters and neuromediators in a controlled manner.

While botulinum toxin products have been very effective in the treatment of many conditions, there are limitations to the use of the currently approved products in their injectable form. For example, in the case of hyperhidrosis, injectable botulinum toxin products require up to 30 injections in the underarms, and the procedure is reimbursed to physicians at a low rate relative to the time required. As a result, the use of Botox®, the only injectable botulinum toxin product currently approved for hyperhidrosis, has been limited. In the case of chronic migraine headache, injectable botulinum toxin products require as many as 31 injections in different parts of the head and neck.

We believe this leads to a significant need for a painless, topically administered and highly effective botulinum toxin. We also believe that there is an opportunity to develop and seek approval for a botulinum toxin product in therapeutic indications, such as allergic rhinitis, where there are currently no approved botulinum toxin products.

Development of RT001 for Treatment of Hyperhidrosis

According to published medical articles, hyperhidrosis affects an estimated eight million people in the United States, one million of whom have severe hyperhidrosis. Prevalence in the United States is slightly higher among men than women, but women are more likely to take action to have the condition treated. Only 38% of those affected by hyperhidrosis seek treatment. We also believe that the appeal of RT001 may go beyond sufferers of hyperhidrosis and appeal to the one-third of all U.S. adults who believe they have too much underarm sweat. According to a 2008 survey by the International Hyperhidrosis Society, 60% of all U.S. adults reported that they would be “embarrassed” or “very embarrassed” by visible underarm sweat stains, and 70% of those U.S. adults who believe they have too much underarm sweat took steps to hide their condition.

Injectable botulinum toxin is among the currently available treatments for hyperhidrosis. Allergan’s Botox® was approved in 2004 for underarm hyperhidrosis and remains the only botulinum toxin approved for the treatment of hyperhidrosis. However, the treatment requires up to 30 injections in the underarms. Having a

 

 

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topical solution could encourage more patients to seek treatment without having to suffer the pain of numerous injections. From the physicians’ standpoint, injections are very time-consuming and reimbursement for the procedure is relatively low. RT001 could significantly decrease the physician time and effort necessary for the procedure and potentially make the procedure more profitable for a physician’s practice.

Data from our initial dose escalation hyperhidrosis Phase 2 clinical trial suggest the feasibility of treating primary underarm hyperhidrosis with RT001.

Based on data generated from current studies to date, we plan to initiate additional Phase 2 clinical trials for the treatment of hyperhidrosis with RT001. In these future trials, we plan to evaluate the efficacy of a higher dose compared to placebo and permit evaluation of the RT001 dose response to treatment of signs and symptoms of primary underarm hyperhidrosis. This data should help to establish whether this new botulinum toxin dose is adequate or whether further dose escalation in this clinical indication is needed prior to definitive safety and efficacy testing.

Development of RT001 for Prevention of Migraine Headache

Migraine headache is a central nervous system disorder characterized by moderate-to-severe headache and often includes additional symptoms such as nausea and vomiting. The global market for treatment of migraine headache was estimated to be $3.8 billion in 2009. Injected delivery of botulinum toxin has been validated as a therapeutically effective pharmaceutical agent for the preventive treatment of migraine headache. However, the treatment requires up to 31 injections in a patient’s head and neck and may have significant side effects.

We have generated preliminary data that supports the feasibility of treating chronic migraine headache with topical application of RT001. In our initial Phase 2 clinical trial, RT001 was shown to be effective for the preventive treatment of chronic migraine headache, when applied topically to six areas on the head. This trial demonstrated statistically significant improvement of a composite endpoint.

For our next Phase 2 clinical trial, we plan to enroll and treat subjects with migraine headache using RT001 in a randomized double-blind placebo-controlled dose-ranging clinical trial design. This trial will provide new information on the treatment of subjects suffering migraine headache with RT001 and further characterize the dose-response relationship of RT001 in migraine headache to identify the optimal dose to be carried forward into later stage clinical trials.

RT001 for Treatment of Other Indications

Based on the results of our preclinical studies and clinical trials, we will determine further development of other indications for RT001, such as neuropathic pain and rhinitis.

RT002 — Our Injectable Formulation of Botulinum Toxin

We are developing RT002 as a new injectable botulinum toxin option that is designed to offer more targeted delivery of botulinum toxin to intended treatment sites while reducing the spread beyond the site of local injection. We believe this delivery permits safe administration of higher targeted doses of botulinum toxin and can result in longer lasting effect. These properties of RT002 have been demonstrated in preclinical studies and we are currently testing RT002 in a four-cohort, dose escalating, open label Phase 1/2 clinical trial outside of the United States for improvement of glabellar lines, the vertical lines between the eyebrows and above the nose. Initial data from this clinical trial indicated that RT002 is safe and efficacious at all four doses. Based upon the interim data analyzed, we plan to further develop RT002 for the treatment of glabellar lines, by filing a U.S. Investigational New Drug Application and initiating a Phase 2 clinical trial in the United States in 2014. In addition, we plan to study RT002 in therapeutic indications already approved for botulinum toxin, such as movement disorders and overactive bladder. These indications require deeper delivery of the botulinum toxin, and are likely to be better served by injectable delivery of RT002.

 

 

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Intellectual Property and Manufacturing

As of December 11, 2013, we held approximately 80 issued patents and over 150 pending patent applications in several countries and we expect to continue to expand this patent portfolio.

We have the ability to manufacture our own botulinum toxin type A product to support our clinical trials and eventually our commercial products. We manufacture and perform testing for both bulk drug substance and finished dose forms of drug product to support our topical RT001 product candidate and our injectable RT002 product candidate. The additional components required for our topical RT001 dose form, the peptide, diluent and delivery apparatus, are all manufactured by third parties. We are licensed with the Centers for Disease Control and Prevention, or CDC, and with the California Department of Health Food and Drug Branch for use of botulinum toxin and to manufacture both the active pharmaceutical ingredient, or API, and the finished product in topical and injectable dose forms. We believe that having direct control over our manufacturing processes, from initial drug substance to finished product, will enable us to develop additional pharmaceutical product configurations effectively and with a competitive cost structure.

Our Strategy

Our objective is to be a leading provider of botulinum toxin products across multiple aesthetic and therapeutic indications in both topical and injectable dose forms and to expand the market for botulinum toxin products. To achieve this objective, we plan to develop and commercialize two proprietary, patent-protected product candidates: RT001, our topical botulinum toxin, and RT002, our injectable botulinum toxin.

Key elements of our strategy are:

 

   

Complete development and seek regulatory approval for RT001;

 

   

Assess and prioritize future therapeutic indications for RT001;

 

   

Advance RT002 into clinical development in the United States;

 

   

Build our own sales and marketing capabilities to commercialize RT001 and RT002 in North America to support commercial launches starting in 2017, assuming successful and timely completion of our clinical trials and approval of our Biologic License Applications;

 

   

Expand the global market for botulinum toxin products;

 

   

Establish selective strategic partnerships to maximize the commercial potential of our product candidates and TransMTS® delivery technology platform; and

 

   

Maximize the value of our botulinum toxin cell line and manufacturing assets.

Risks That We Face

Our business is subject to numerous risks and uncertainties, including those highlighted in the section entitled “Risk Factors” immediately following this prospectus summary. These risks include, among others, the following:

 

   

We are substantially dependent on the clinical and commercial success of our product candidates, primarily our lead product candidate RT001, which is in Phase 3 clinical development, and our second product candidate, RT002, which is expected to enter into Phase 2 clinical development in the United States;

 

   

We may be unable to obtain regulatory approval for RT001, RT002 or future product candidates under applicable regulatory requirements. The denial or delay of any such approval would delay commercialization and have a material adverse effect on our potential to generate revenue, our business and our results of operations;

 

   

We will require substantial additional financing to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our product development, other operations or commercialization efforts;

 

 

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Even if our product candidates receive regulatory approval, they may fail to achieve the broad degree of physician adoption and use necessary for commercial success;

 

   

Our product candidates, if approved, will face significant competition and our failure to effectively compete may prevent us from achieving significant market penetration and expansion;

 

   

We currently make our clinical drug products exclusively in one manufacturing facility and plan to utilize this facility in the future to support commercial production if our product candidates are approved. If this or any future facility or our equipment were damaged or destroyed, or if we experience a significant disruption in our operations for any reason, our ability to continue to operate our business would be materially harmed;

 

   

We have a limited operating history and have incurred significant losses since our inception and we anticipate that we will continue to incur losses for the foreseeable future. We have only two product candidates in clinical trials and no commercial sales, which, together with our limited operating history, make it difficult to assess our future viability;

 

   

Even if RT001, RT002 or any future product candidates obtain regulatory approval, they may never achieve market acceptance or commercial success; and

 

   

If our efforts to protect our intellectual property related to RT001, RT002 or any future product candidates are not adequate, we may not be able to compete effectively in our market.

Our Corporate Information

We were incorporated in Delaware in August 1999 under the name Essentia Biosystems, Inc. We commenced operations in June 2002 and, in April 2005, changed our name to Revance Therapeutics, Inc. Our principal executive offices are located at 7555 Gateway Boulevard, Newark, California 94560, and our telephone number is (510) 742-3400. Our website address is http://www.revance.com. The information contained in, or that can be accessed through, our website is not part of this prospectus.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012. As an emerging growth company we are eligible for exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and reduced disclosure obligations regarding executive compensation. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the closing of this offering, (b) in which we have total annual gross revenue of at least $1.0 billion or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. We refer to the Jumpstart Our Business Startups Act of 2012 herein as the “JOBS Act,” and references herein to “emerging growth company” shall have the meaning associated with it in the JOBS Act.

“Revance Therapeutics,” the Revance logos and other trademarks or service marks of Revance appearing in this prospectus are the property of Revance. This prospectus contains additional trade names, trademarks and service marks of others, which are the property of their respective owners. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.

 

 

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THE OFFERING

 

Common stock offered by us

                shares

 

Common stock to be outstanding after this offering

                shares

 

Over-allotment option

The underwriters have an option to purchase up to                  additional shares of our common stock to cover over-allotments, if any.

 

Use of proceeds

We estimate the net proceeds from this offering will be approximately $         million (or $         million if the underwriters exercise their over-allotment option in full), assuming an initial public offering price of $         per share, which is the midpoint of the range listed on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

We currently expect to use the net proceeds from the offering as follows:

 

  Ÿ Approximately $     million to $     million to fund research and development expenses associated with our RT001 and RT002 manufacturing, quality and regulatory efforts.

 

  Ÿ Approximately $     million to $     million to complete one Phase 3 clinical pivotal trial in the United States, to continue a long term safety clinical trial and other associated programs relating to RT001 for the treatment of crow’s feet lines, and to initiate our first U.S. Phase 2 clinical trial and associated programs relating to RT002 for the treatment of glabellar lines.

 

  Ÿ Approximately $         million to make payments through 2014 under our September 2011 term loan agreement with Hercules Technology Growth Capital, Inc.

 

  Ÿ Approximately $         million to make payments under our settlement agreement with Medicis Pharmaceutical Corporation (acquired by Valeant Pharmaceuticals International, Inc.).

 

  We will use the balance of the proceeds, if any, for the development of RT001 for the treatment of hyperhidrosis and other indications, as well as for working capital and other general corporate purposes.

 

  Pending their use as described above, we plan to invest the net proceeds in short-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or guaranteed obligations of the U.S. government.

 

See “Use of Proceeds” for additional information.

 

Risk factors

See the section titled “Risk Factors” beginning on page 14 and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

 

Proposed NASDAQ Global Market trading symbol

“RVNC”

 

 

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The number of shares of our common stock to be outstanding after this offering is based on 133,761,470 shares of common stock outstanding as of September 30, 2013, excluding the following shares:

 

   

15,678,569 shares of our common stock issuable upon the exercise of options to purchase our common stock outstanding under our 2002 Equity Incentive Plan and 2012 Equity Incentive Plan at a weighted-average exercise price of $0.49 per share (excluding an additional 3,308,250 shares issuable upon the exercise of options to purchase our common stock at the weighted-average exercise price of $0.61 per share granted after September 2013);

 

   

2,582,181 shares of our common stock issuable upon the exercise of outstanding convertible preferred stock warrants at a weighted-average exercise price of $1.35 per share;

 

   

370,370 shares of our common stock issuable upon the exercise of convertible preferred stock warrants that we expect to issue to Essex Capital Corporation before the closing of this offering and                  shares of our common stock issuable upon the exercise of common stock warrants that we expect to issue to Essex Capital Corporation after the closing of this offering, assuming an initial public offering price of $            , which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, which we together refer to as the Essex warrants, and which are issuable pursuant to our loan and lease agreement with Essex Capital Corporation, which we refer to as the Essex Capital Facility;

 

   

5,595,667 shares of our common stock reserved for future issuance under our 2012 Equity Incentive Plan (including an additional 3,308,250 shares issuable upon the exercise of options to purchase our common stock granted after September 2013);

 

   

                shares of our common stock reserved for future issuance under our 2014 Equity Incentive Plan, plus annual increases thereunder, which will become effective prior to the closing of this offering as more fully described in “Executive Compensation—Employee Benefit Plans”; and

 

   

                shares of our common stock reserved for future issuance under our 2014 Employee Stock Purchase Plan, plus annual increases thereunder, which will become effective prior to the closing of this offering as more fully described in “Executive Compensation—Employee Benefit Plans.”

Unless otherwise indicated, all information in this prospectus reflects and assumes the following:

 

   

the conversion of all outstanding shares of our convertible preferred stock into an aggregate of                 shares of our common stock, which will occur upon the closing of this offering;

 

   

the automatic exercise of our outstanding common stock warrants, assuming net exercise for                 shares of our common stock immediately prior to the closing of this offering, assuming an initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus;

 

   

the automatic conversion of the $19.4 million in aggregate principal amount of convertible promissory notes, or the 2013 notes, and accrued interest through October 7, 2014, into              shares of common stock immediately prior to the closing of this offering at a conversion price equal to the initial public offering price, assuming an initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus;

 

   

the automatic exercise of outstanding common stock warrants issued in connection with the 2013 notes, or the 2013 warrants, assuming net exercise for              shares of our common stock immediately prior to the closing of this offering, assuming an initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus;

 

   

a reverse stock split of        -for-         of our common stock effected on                      , 2014;

 

   

no exercise by the underwriters of their over-allotment option to purchase up to                 additional shares of our common stock from us in this offering; and

 

 

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the filing and effectiveness of our amended and restated certificate of incorporation and the effectiveness of our amended and restated bylaws immediately prior to the closing of this offering.

Because the number of shares that will be issued upon conversion of the 2013 notes and the exercise of the 2013 warrants depends upon the actual initial public offering price per share in this offering, the actual number of shares issuable upon such conversion and exercise will likely differ from the number of shares set forth above. In this regard, a $1.00 increase in the assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would decrease the number of shares of our common stock issued on conversion of the 2013 notes and the exercise of the 2013 warrants (and therefore the number of shares to be outstanding after this offering) by          shares. A $1.00 decrease in the assumed initial public offering price would increase the number of shares of our common stock issued on conversion of the 2013 notes and the exercise of the 2013 warrants (and therefore the number of shares to be outstanding after this offering) by             shares.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following tables summarize our financial data. We derived the summary consolidated statements of operations data for the years ended December 31, 2011 and 2012 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the summary consolidated statements of operations data for the nine months ended September 30, 2012 and 2013 and the balance sheet data as of September 30, 2013 from our unaudited interim consolidated financial statements included elsewhere in this prospectus. The unaudited interim consolidated financial statements reflect, in the opinion of management, all adjustments, of a normal, recurring nature that are necessary for the fair presentation of the financial statements. Our historical results are not necessarily indicative of the results to be expected in the future and the results for the nine months ended September 30, 2013 are not necessarily indicative of results to be expected for the full year or any other period. You should read the following summary consolidated financial data in conjunction with the sections entitled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, related notes and other financial information included elsewhere in this prospectus.

Pro forma basic and diluted net loss per share has been calculated assuming the conversion of all outstanding shares of convertible preferred stock into common stock. See Note 16 to our consolidated financial statements for an explanation of the method used to determine the number of shares used in computing historical basic and diluted net income (loss) per share and our pro forma unaudited basic and diluted net loss per share.

 

     Year Ended
December 31,
    Nine Months Ended
September 30,
 
     2011     2012     2012     2013  
                 (Unaudited)  
     (In thousands, except share and per share
amounts)
 

Consolidated Statements of Operations Data:

        

Revenue

   $ 557      $ 717      $ 600      $ 308   

Cost of revenue

     5                        
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     552        717        600        308   

Operating expenses:

        

Research and development(1)

     22,735        32,708        15,829        21,592   

Sales, general and administrative(1)

     5,555        11,195        9,581        8,008   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     28,290        43,903        25,410        29,600   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (27,738     (43,186     (24,810     (29,292

Interest income

     15        7        8        2   

Interest expense

     (17,790     (28,959     (19,250     (13,466

Change in fair value of derivative liabilities associated with convertible notes

     (356     13,860        (3,338     1,800   

Change in fair value of derivative liabilities associated with the Medicis settlement

                          (265

Change in fair value of convertible preferred stock warrant liability

     836        125        117        (1,108

Other income (expense), net

     170        (106     (85     (40
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (44,863     (58,259     (47,358     (42,369

Benefit from income taxes

                            
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (44,863   $ (58,259   $ (47,358   $ (42,369
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders(2):

        

Basic

   $ (44,863   $ (58,259   $ (47,358   $ 733   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ (44,863   $ (58,259   $ (47,358   $ 2,966   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to common stockholders(2):

        

Basic

   $ (15.07   $ (19.37   $ (15.81   $ 0.23   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ (15.07   $ (19.37   $ (15.81   $ 0.20   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average number of shares used in computing net income (loss) per share attributable to common stockholders(2):

        

Basic

     2,976,846        3,008,401        2,995,795        3,229,730   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     2,976,846        3,008,401        2,995,795        14,572,082   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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     Year Ended
December 31,
    Nine Months Ended
September 30,
 
     2011    2012     2012    2013  
                (Unaudited)  
     (In thousands, except share and per share
amounts)
 

Pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)(2)

      $ (2.00      $ (0.43
     

 

 

      

 

 

 

Weighted-average number of shares used in computing pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)(2)

        29,129,887        

 

98,593,967

  

     

 

 

      

 

 

 

 

(1) Results above include stock-based compensation as follows:

 

     Year Ended
December  31,
     Nine Months  Ended
September 30,
 
     2011      2012      2012      2013  
                   (Unaudited)  
     (In thousands)  

Stock-Based Compensation:

        

Research and development

   $ 150       $ 48       $ 27       $ 138   

Sales, general and administrative

     123         31         39         208   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 273       $ 79       $ 66       $ 346   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) Please see Note 16 of our consolidated financial statements included elsewhere in this prospectus for an explanation of the calculations of our actual basic and diluted net income (loss) per share and our pro forma unaudited basic and diluted net loss per share.

 

     As of September 30, 2013  
     Actual     Pro Forma(1)      Pro Forma
as Adjusted(2)
 
     (Unaudited)  
     (In thousands)  

Balance Sheet Data:

       

Cash and cash equivalents

   $ 1,909      $                    $                

Restricted cash — current and non-current

     585        

Working capital (deficit)

     (28,645     

Total assets

     18,920        

Convertible notes

            

Notes payable — current and non-current

     12,951        

Derivative liabilities associated with Medicis settlement — current and non-current

     8,606        

Convertible preferred stock warrant liability

     1,459        

Convertible preferred stock

     123,982        

Total stockholders’ deficit

     (147,683     

 

(1) The pro forma column gives effect to (i) the conversion of all outstanding shares of our convertible preferred stock into shares of our common stock immediately upon the closing of this offering, (ii) the resulting reclassification of the convertible preferred stock warrant liability to additional paid-in capital, (iii) the filing and effectiveness of our amended and restated certificate of incorporation immediately prior to the closing of this offering, (iv) the issuance and automatic conversion of the principal and accrued interest through October 7, 2014 under the 2013 notes into                  shares of common stock immediately prior to the closing of this offering at a conversion price equal to the initial public offering price, assuming an initial public offering price of $         per share, the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and (v) the issuance and automatic exercise of the 2013 warrants and the automatic exercise of the other outstanding common stock warrants into                  shares of common stock upon the closing of this offering, assuming net share exercise and an initial public offering price of $         per share, the midpoint of the estimated offering price range set forth on the cover page of this prospectus, but does not give effect to the issuance and exercise of the Essex warrants.

 

     Because the number of shares of common stock that will be issued upon the conversion of the 2013 notes and the exercise of the 2013 warrants depends upon the actual initial public offering price per share in this offering, the actual number of shares issuable upon such exercise and conversion will likely differ from the respective number of shares set forth above. See “Prospectus Summary – The Offering.”

 

 

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(2) The pro forma as adjusted column gives further effect to the sale of                  shares of common stock in this offering at an assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase or decrease in the assumed initial public offering price of $        per share would increase or decrease our pro forma as adjusted cash and cash equivalents, working capital, total assets and total stockholders’ deficit by $        million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as all other information included in this prospectus, including our consolidated financial statements, the notes thereto and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before you decide to purchase shares of our common stock. If any of the following risks actually occurs, our business, prospects, financial condition and operating results could be materially harmed. As a result, the trading price of our common stock could decline and you could lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations and stock price.

Risks Related to Our Business and Strategy

We are substantially dependent on the clinical and commercial success of our product candidates, primarily our lead product candidate RT001, which is in Phase 3 clinical development, and our second product candidate RT002, which is expected to enter into Phase 2 clinical development in the United States.

To date, we have invested most of our efforts and financial resources in the research and development of RT001, a topical formulation of botulinum toxin, which is currently our lead product candidate. In particular, we have completed thirteen clinical trials and are in Phase 3 clinical development in the United States for RT001. We have also invested, to a lesser extent, in the research and development of an injectable form of botulinum toxin, RT002, which is expected to enter into Phase 2 clinical development in the United States in 2014. Our near-term prospects, including our ability to finance our company and generate revenue, will depend heavily on the successful development, regulatory approval and commercialization of RT001 and, to a lesser extent, RT002, as well as any future product candidates. The clinical and commercial success of our product candidates will depend on a number of factors, including the following:

 

   

timely completion of, or need to conduct additional, clinical trials, including our U.S. Phase 3 clinical trials for RT001, which may be significantly slower or cost more than we currently anticipate and will depend substantially upon the accurate and satisfactory performance of third party contractors;

 

   

our ability to demonstrate to the satisfaction of the United States Food and Drug Administration, or FDA, the safety and efficacy of RT001, RT002 or any future product candidates through clinical trials;

 

   

whether we are required by the FDA or other similar foreign regulatory agencies to conduct additional clinical trials to support the approval of RT001, RT002 or any future product candidates;

 

   

the acceptance of parameters for regulatory approval, including our proposed indication, primary endpoint assessment and primary endpoint measurement relating to our lead indications of RT001;

 

   

our success in educating physicians and patients about the benefits, administration and use of RT001, RT002 or any future product candidates, if approved;

 

   

the prevalence and severity of adverse events experienced with our product candidates or future approved products;

 

   

the timely receipt of necessary marketing approvals from the FDA and similar foreign regulatory authorities;

 

   

the ability to raise additional capital on acceptable terms to achieve our goals;

 

   

achieving and maintaining compliance with all regulatory requirements applicable to RT001, RT002 or any future product candidates or approved products;

 

   

the availability, perceived advantages, relative cost, relative safety and relative efficacy of alternative and competing treatments;

 

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the effectiveness of our own or our future potential strategic collaborators’ marketing, sales and distribution strategy and operations;

 

   

our ability to manufacture clinical trial supplies of RT001, RT002 or any future product candidates and to develop, validate and maintain a commercially viable manufacturing process that is compliant with current good manufacturing practices, or cGMP;

 

   

our ability to successfully commercialize RT001, RT002 or any future product candidates, if approved for marketing and sale, whether alone or in collaboration with others;

 

   

our ability to enforce our intellectual property rights in and to RT001, RT002 or any future product candidates;

 

   

our ability to avoid third party patent interference or intellectual property infringement claims;

 

   

acceptance of RT001, RT002 or any future product candidates, if approved, as safe and effective by patients and the medical community; and

 

   

a continued acceptable safety profile of RT001, RT002 or any future product candidates following approval.

If we do not achieve one or more of these factors, many of which are beyond our control, in a timely manner or at all, we could experience significant delays or an inability to successfully commercialize our product candidates. Accordingly, we cannot assure you that we will be able to generate sufficient revenue through the sale of RT001, RT002 or any future product candidate to continue our business.

We may be unable to obtain regulatory approval for RT001, RT002 or future product candidates under applicable regulatory requirements. The denial or delay of any such approval would delay commercialization and have a material adverse effect on our potential to generate revenue, our business and our results of operations.

To gain approval to market a biologic product such as RT001 and RT002, we must provide the FDA and foreign regulatory authorities with clinical data that adequately demonstrate the safety, purity and potency of the product for the intended indication applied for in a Biologics License Application, or BLA, or other respective regulatory filing. The development of biologic products is a long, expensive and uncertain process, and delay or failure can occur at any stage of any of our clinical trials. A number of companies in the pharmaceutical industry, including biotechnology companies, have suffered significant setbacks in clinical trials, including in Phase 3 development, even after promising results in earlier preclinical studies or clinical trials. These setbacks have been caused by, among other things, findings made while clinical trials were underway and safety or efficacy observations made in clinical trials, including previously unreported adverse events. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful, and the results of clinical trials by other parties may not be indicative of the results in trials we may conduct. In particular, we have conducted three positive Phase 2b clinical trials of RT001, in which RT001 met the primary efficacy and all secondary endpoints. However, we have conducted one Phase 3 clinical efficacy trial using a modified diluent formulation, the results of which were inconsistent with our previous Phase 2b clinical trials and which did not show improvement from baseline in either the placebo or RT001 group.

Our lead product candidate, RT001, is currently in Phase 3 clinical development, and our business currently depends substantially on its successful development, regulatory approval and commercialization. We currently have no drug or biologic products approved for sale, and we may never obtain regulatory approval to commercialize RT001. The research, testing, manufacturing, labeling, approval, sale, marketing and distribution of drug and biologic products are subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries, and such regulations differ from country to country. We are not permitted to market RT001 in the United States until we receive approval of a BLA from the FDA. We are also not permitted to market RT001 in any foreign countries until we receive the requisite approval from the regulatory authorities of such countries.

 

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The FDA or any foreign regulatory bodies can delay, limit or deny approval of our product candidates, including RT001, for many reasons, including:

 

   

our inability to demonstrate to the satisfaction of the FDA or the applicable foreign regulatory body that RT001, RT002 or any future product candidates are safe and effective for the requested indication;

 

   

the FDA’s or the applicable foreign regulatory agency’s disagreement with our trial protocol or the interpretation of data from preclinical studies or clinical trials;

 

   

our inability to demonstrate that clinical and other benefits of RT001, RT002 or any future product candidates outweigh any safety or other perceived risks;

 

   

the FDA’s or the applicable foreign regulatory agency’s requirement for additional preclinical or clinical studies;

 

   

the FDA’s or the applicable foreign regulatory agency’s non-approval of the formulation, labeling or the specifications of RT001, RT002 or any future product candidates;

 

   

the FDA’s or the applicable foreign regulatory agency’s failure to approve our manufacturing processes or facilities, or the manufacturing processes or facilities of third party manufacturers with which we contract; or

 

   

the potential for approval policies or regulations of the FDA or the applicable foreign regulatory agencies to significantly change in a manner rendering our clinical data insufficient for approval.

Of the large number of drugs, including biologics, in development, only a small percentage successfully complete the FDA or other regulatory approval processes and are commercialized. We are not conducting our U.S. Phase 3 clinical trials for RT001 under a Special Protocol Assessment, or SPA. In the absence of an agreed SPA, there can be no assurance that the FDA will agree with our Phase 3 clinical trial protocol.

Further, after our Phase 2 clinical trials, we used the FDA’s Formal Dispute Resolution process to obtain confirmation from the FDA that our proposed indication, primary endpoint assessment and primary endpoint measurement were acceptable for continued clinical trials. While the FDA provided written confirmation that our proposed indication, primary endpoint assessment and primary endpoint measurement were acceptable for Phase 3 clinical trials, the FDA has not confirmed that our proposed indication, primary endpoint assessment and primary endpoint measurement are acceptable for regulatory approval. Further, while we did obtain written confirmation with respect to these aspects of our Phase 3 clinical trial designs, there is no assurance that the FDA will approve our BLA for RT001, will agree that the benefits of RT001 outweigh its risks or will not raise new concerns regarding our clinical trial designs.

Even if we eventually complete clinical testing and receive approval of any regulatory filing for RT001, RT002 or any future product candidates, the FDA or the applicable foreign regulatory agency may grant approval contingent on the performance of costly additional post-approval clinical trials. The FDA or the applicable foreign regulatory agency also may approve RT001, RT002 or any future product candidates for a more limited indication or a narrower patient population than we originally requested, and the FDA or applicable foreign regulatory agency may not approve the labeling that we believe is necessary or desirable for the successful commercialization of our product candidates. Any delay in obtaining, or inability to obtain, applicable regulatory approval for any of our product candidates and RT001, in particular, would delay or prevent commercialization of RT001 and would materially adversely impact our business, results of operations and prospects.

We will require substantial additional financing to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our product development, other operations or commercialization efforts.

Since our inception, most of our resources have been dedicated to the preclinical and clinical development of our lead product candidate, RT001. In particular, our U.S. Phase 3 clinical program for RT001 will require substantial funds to complete. We have recorded net losses of $44.9 million, $58.3 million and $42.4 million for the years ended December 31, 2011 and 2012 and for the nine months ended September 30, 2013, respectively, had an accumulated deficit during our development stage through September 30, 2013 of $185.8 million and had

 

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a net working capital deficit of $28.6 million as of September 30, 2013. We have funded our operations primarily through the sale and issuance of convertible preferred stock, notes payable and convertible notes. As of September 30, 2013, we had capital resources consisting of cash and cash equivalents of $1.9 million. We believe that we will continue to expend substantial resources for the foreseeable future for the clinical development of RT001, RT002 and development of any other indications and product candidates we may choose to pursue. These expenditures will include costs associated with research and development, conducting preclinical studies and clinical trials, and manufacturing and supply as well as marketing and selling any products approved for sale. In addition, other unanticipated costs may arise. Because the outcome of any clinical trial is highly uncertain, we cannot reasonably estimate the actual amounts necessary to successfully complete the development and commercialization of RT001, RT002 and any future product candidates.

We believe that the net proceeds from this offering, together with our existing cash and cash equivalents and existing credit facility will allow us to fund our operating plan through at least the next              months. However, our operating plan may change as a result of many factors currently unknown to us, and we may need to seek additional capital sooner than planned, through public or private equity or debt financings or other sources, such as strategic collaborations. Such financings may result in dilution to stockholders, imposition of debt covenants and repayment obligations or other restrictions that may affect our business. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans.

Our future capital requirements depend on many factors, including:

 

   

the results of our Phase 3 clinical trials for RT001 in the United States and Europe;

 

   

the timing of, and the costs involved in, obtaining regulatory approvals for RT001, RT002 or any future product candidates;

 

   

the number and characteristics of any additional product candidates we develop or acquire;

 

   

the scope, progress, results and costs of researching and developing RT001, RT002 or any future product candidates, and conducting preclinical and clinical trials;

 

   

the cost of commercialization activities if RT001, RT002 or any future product candidates are approved for sale, including marketing, sales and distribution costs;

 

   

the cost of manufacturing RT001, RT002 or any future product candidates and any products we successfully commercialize and maintaining our related facilities;

 

   

our ability to establish and maintain strategic collaborations, licensing or other arrangements and the terms of and timing such arrangements;

 

   

the degree and rate of market acceptance of any future approved products;

 

   

the emergence, approval, availability, perceived advantages, relative cost, relative safety and relative efficacy of alternative and competing products or treatments;

 

   

any product liability or other lawsuits related to our products;

 

   

the expenses needed to attract and retain skilled personnel;

 

   

the costs associated with being a public company;

 

   

the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including litigation costs and the outcome of such litigation; and

 

   

the timing, receipt and amount of sales of, or royalties on, future approved products, if any.

Additional capital may not be available when we need them, on terms that are acceptable to us or at all. If adequate funds are not available to us on a timely basis, we may be required to:

 

   

delay, limit, reduce or terminate preclinical studies, clinical trials or other development activities for RT001, RT002 or any future product candidate;

 

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delay, limit, reduce or terminate our research and development activities; or

 

   

delay, limit, reduce or terminate our establishment of manufacturing, sales and marketing or distribution capabilities or other activities that may be necessary to commercialize RT001, RT002 or any future product candidates.

If we raise additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish certain valuable rights to our product candidates, technologies, future revenue streams or research programs or grant licenses on terms that may not be favorable to us. If we raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted and the terms of any new equity securities may have a preference over our common stock. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt or making capital expenditures or specified financial ratios, any of which could restrict our ability to commercialize our product candidates or operate as a business.

Even if our product candidates receive regulatory approval, they may fail to achieve the broad degree of physician adoption and use necessary for commercial success.

The commercial success of RT001, RT002 and any future product candidates, if approved, will depend significantly on the broad adoption and use of the resulting product by physicians for approved indications, including, in the case of RT001, the treatment of lateral canthal lines, or crow’s feet lines, hyperhidrosis and other aesthetic and therapeutic indications that we may seek to pursue. The degree and rate of physician adoption of RT001, RT002 and any future product candidates, if approved, will depend on a number of factors, including:

 

   

the effectiveness of our product as compared to existing therapies;

 

   

physician willingness to adopt a new therapy to treat crow’s feet lines, hyperhidrosis or other indications;

 

   

overcoming any biases physicians or patients may have toward injectable procedures for the treatment of crow’s feet lines, hyperhidrosis or other indications;

 

   

patient satisfaction with the results and administration of our product and overall treatment experience;

 

   

patient demand for the treatment of crow’s feet lines, hyperhidrosis or other indications; and

 

   

the revenue and profitability that our product will offer a physician as compared to alternative therapies.

If RT001, RT002 or any future product candidates are approved for use but fail to achieve the broad degree of physician adoption necessary for commercial success, our operating results and financial condition will be adversely affected.

Our product candidates, if approved, will face significant competition and our failure to effectively compete may prevent us from achieving significant market penetration and expansion.

We expect to enter highly competitive pharmaceutical and medical device markets. Successful competitors in the pharmaceutical and medical device markets have the ability to effectively discover, obtain patents, develop, test and obtain regulatory approvals for products, as well as the ability to effectively commercialize, market and promote approved products, including communicating the effectiveness, safety and value of products to actual and prospective customers and medical staff. Numerous companies are engaged in the development, patenting, manufacture and marketing of health care products competitive with those that we are developing. Many of these potential competitors are large, experienced companies that enjoy significant competitive advantages, such as substantially greater financial, research and development, manufacturing, personnel and marketing resources, greater brand recognition and more experience and expertise in obtaining marketing approvals from the FDA and other regulatory authorities.

Upon marketing approval, the first expected use of our products will be in aesthetic medicine. The aesthetic product market, and the facial aesthetic market in particular, is highly competitive and dynamic, and is

 

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characterized by rapid and substantial technological development and product innovations. This market is also characterized by competitors obtaining patents to protect what they consider to be their intellectual property. We are seeking regulatory approval of RT001 for the treatment of crow’s feet lines. We anticipate that RT001, if approved, will face significant competition from other facial aesthetic products, including injectable botulinum toxins and dermal fillers. If approved, RT001 may also compete with unapproved and off-label treatments. To compete successfully in the aesthetic market, we will have to demonstrate that the reduction of crow’s feet lines with RT001 is a worthwhile aesthetic treatment and is a superior alternative to existing therapies. Competing in the aesthetic market could result in price-cutting, reduced profit margins and limited market share, any of which would harm our business, financial condition and results of operations.

Due to less stringent regulatory requirements, there are many more aesthetic products and procedures available for use in international markets than are approved for use in the United States. There are also fewer limitations on the claims that our competitors in international markets can make about the effectiveness of their products and the manner in which they can market them. As a result, we face more competition in these markets than in the United States.

We currently make our clinical drug products exclusively in one manufacturing facility and plan to utilize this facility in the future to support commercial production if our product candidates are approved. If this or any future facility or our equipment were damaged or destroyed, or if we experience a significant disruption in our operations for any reason, our ability to continue to operate our business would be materially harmed.

We currently manufacture our own clinical drug products to support both RT001 and RT002 exclusively in a single manufacturing and laboratory facility and plan to utilize this facility in the future to support commercial production if our product candidates are approved. If this or any future facility were to be damaged, destroyed or otherwise unable to operate, whether due to earthquakes, fire, floods, hurricanes, storms, tornadoes, other natural disasters, employee malfeasance, terrorist acts, power outages or otherwise, or if performance of our manufacturing facility is disrupted for any other reason, such an event could delay our clinical trials or, if our product candidates are approved, jeopardize our ability to manufacture our products as promptly as our customers expect or possibly at all. If we experience delays in achieving our development objectives, or if we are unable to manufacture an approved product within a timeframe that meets our customers’ expectations, our business, prospects, financial results and reputation could be materially harmed.

Currently, we maintain insurance coverage totaling $13.7 million against damage to our property and equipment, $2.0 million in general liability coverage, a $9.0 million umbrella policy, and an additional $30.0 million to cover business interruption and research and development restoration expenses, subject to deductibles and other limitations. If we have underestimated our insurance needs with respect to an interruption, or if an interruption is not subject to coverage under our insurance policies, we may not be able to cover our losses.

We have a limited operating history and have incurred significant losses since our inception and we anticipate that we will continue to incur losses for the foreseeable future. We have only two product candidates in clinical trials and no commercial sales, which, together with our limited operating history, make it difficult to assess our future viability.

We are a clinical stage specialty biopharmaceutical company with a limited operating history. Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. We are not profitable and have incurred losses in each year since we commenced operations in 2002. We have only a limited operating history upon which you can evaluate our business and prospects. In addition, we have limited experience and have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the biopharmaceutical industry. To date, we have not obtained any regulatory approvals for any of our product candidates or generated any revenue from product sales relating to RT001 or RT002. We continue to incur significant research and development and other expenses related to our ongoing clinical trials and operations. We have recorded net losses of $44.9 million, $58.3 million and $42.4 million for the years ended December 31,

 

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2011 and 2012 and for the nine months ended September 30, 2013, respectively, had an accumulated deficit during our development stage through September 30, 2013 of $185.8 million and had a net working capital deficit of $28.6 million as of September 30, 2013. We expect to continue to incur losses for the foreseeable future, and we anticipate these losses will increase as we continue our development of, and seek regulatory approvals for, RT001 and RT002, and begin to commercialize RT001. Our ability to achieve revenue and profitability is dependent on our ability to complete the development of our product candidates, obtain necessary regulatory approvals and successfully manufacture, market and commercialize our products. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. Our prior losses, combined with expected future losses, may adversely affect the market price of our common stock and our ability to raise capital and continue operations.

Even if RT001, RT002 or any future product candidates obtain regulatory approval, they may never achieve market acceptance or commercial success.

Even if we obtain FDA or other regulatory approvals, RT001, RT002 or any future product candidates may not achieve market acceptance among physicians and patients, and may not be commercially successful.

The degree and rate of market acceptance of RT001, RT002 or any future product candidates for which we receive approval depends on a number of factors, including:

 

   

the safety and efficacy of the product as demonstrated in clinical trials;

 

   

the clinical indications for which the product is approved;

 

   

acceptance by physicians, major operators of clinics and patients of the product as a safe and effective treatment;

 

   

proper training and administration of our products by physicians and medical staff;

 

   

the potential and perceived advantages of our products over alternative treatments;

 

   

the cost of treatment in relation to alternative treatments and willingness to pay for our products, if approved, on the part of physicians and patients;

 

   

the willingness of patients to pay for RT001, RT002 and other aesthetic treatments in general, relative to other discretionary items, especially during economically challenging times;

 

   

relative convenience and ease of administration;

 

   

the prevalence and severity of adverse events; and

 

   

the effectiveness of our sales and marketing efforts.

Any failure by our product candidates that obtain regulatory approval to achieve market acceptance or commercial success would materially adversely affect our results of operations and delay, prevent or limit our ability to generate revenue and continue our business.

Clinical drug development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results.

Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Furthermore, we rely on contract research organizations, or CROs, and clinical trial sites to ensure the proper and timely conduct of our clinical trials. While we have agreements governing the committed activities of our CROs, we have limited influence over their actual performance. A failure of one or more of our clinical trials can occur at any time during the clinical trial process. The results of preclinical studies and clinical trials of our product candidates may not be predictive of the results of later-stage clinical trials. For example, the positive results generated to date in clinical trials for RT001 do not ensure that later clinical trials, including our ongoing Phase 3 clinical trials for the treatment of crow’s feet lines, will demonstrate similar results. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy despite having progressed through

 

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preclinical studies and initial clinical trials. In particular, we have conducted three positive Phase 2b clinical trials of RT001, in which RT001 met the primary efficacy and all secondary endpoints. However, we have conducted one Phase 3 clinical efficacy trial using a modified diluent formulation, the results of which were inconsistent with our previous Phase 2b clinical trials and which did not show improvement from baseline in either the placebo or RT001 group. A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier clinical trials, and we cannot be certain that we will not face similar setbacks. Even if our clinical trials are completed, the results may not be sufficient to obtain regulatory approval for our product candidates.

We have in the past and may in the future experience delays in our ongoing clinical trials, and we do not know whether future clinical trials, if any, will begin on time, need to be redesigned, enroll an adequate number of patients on time or be completed on schedule, if at all. Clinical trials can be delayed or aborted for a variety of reasons, including delay or failure to:

 

   

obtain regulatory approval to commence a trial;

 

   

reach agreement on acceptable terms with prospective CROs and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

 

   

obtain institutional review board, or IRB, approval at each site;

 

   

recruit suitable patients to participate in a trial;

 

   

have patients complete a trial or return for post-treatment follow-up;

 

   

ensure clinical sites observe trial protocol or continue to participate in a trial;

 

   

address any patient safety concerns that arise during the course of a trial;

 

   

address any conflicts with new or existing laws or regulations;

 

   

add a sufficient number of clinical trial sites; or

 

   

manufacture sufficient quantities of product candidate for use in clinical trials.

Patient enrollment is a significant factor in the timing of clinical trials and is affected by many factors, including the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the drug being studied in relation to other available therapies, including any new drugs or treatments that may be approved for the indications we are investigating.

We could also encounter delays if a clinical trial is suspended or terminated by us, by the IRBs of the institutions in which such trials are being conducted, by the data safety monitoring board, for such trial or by the FDA or other regulatory authorities. Such authorities may suspend or terminate a clinical trial due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial.

If we experience delays in the completion of, or termination of, any clinical trial of our product candidates, the commercial prospects of our product candidates may be harmed, and our ability to generate product revenues from any of these product candidates will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow down our product candidate development and approval process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may significantly harm our business, financial condition and prospects. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.

 

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We have no experience manufacturing our product candidates at full commercial scale. If our product candidates are approved, we will face certain risks associated with scaling up our manufacturing capabilities to support commercial production.

We have developed an integrated manufacturing, research and development facility located at our corporate headquarters. We manufacture drug substance and finished dose forms of drug product at this facility that we use for research and development purposes and for clinical trials of our product candidates. We do not have experience in manufacturing our product candidates at commercial scale. To meet our strategic objectives, which contemplate internally manufacturing a significant portion of our drug substance and finished dose form at full commercial scale if our product candidates are approved, we may need to expand our manufacturing facilities, add manufacturing personnel and ensure that validated processes are consistently implemented in our facilities. For example, plans are underway to fabricate and install a larger capacity fill-finish line dedicated to our topical non-aseptic dose form, which we expect will be installed in 2014 and validated in 2015 to support our regulatory license applications and future commercial demand for RT001, if approved. In addition, we expect to further scale up our RT002 drug product manufacture according to established demand. The upgrade and expansion of our facilities will require additional regulatory approvals. In addition, it will be costly and time-consuming to expand our facilities and recruit necessary additional personnel. If we are unable to expand our manufacturing facilities in compliance with regulatory requirements or to hire additional necessary manufacturing personnel, we may encounter delays or additional costs in achieving our research, development and commercialization objectives, including in obtaining regulatory approvals of our product candidates, which could materially damage our business and financial position.

We currently contract with third party manufacturers for certain components necessary to produce RT001 for clinical trials and expect to continue to do so to support commercial scale production if RT001 is approved. This increases the risk that we will not have sufficient quantities of RT001 or such quantities at an acceptable cost, which could delay, prevent or impair our development or commercialization efforts.

We currently rely on third party manufacturers for certain components necessary to produce RT001 for our clinical trials, including the bulk peptide, diluent and the delivery apparatus and expect to continue to rely on these or other manufacturers to support our commercial requirements if RT001 is approved. Some of our contracts with our manufacturers contain minimum order and pricing provisions and provide for early termination based on regulatory approval milestones.

Reliance on third party manufacturers entails additional risks, including reliance on the third party for regulatory compliance and quality assurance, the possible breach of the manufacturing agreement by the third party, and the possible termination or nonrenewal of the agreement by the third party at a time that is costly or inconvenient for us. In addition, third party manufacturers may not be able to comply with cGMP or Quality System Regulation, or QSR, or similar regulatory requirements outside the United States. Our failure, or the failure of our third party manufacturers, to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of RT001 or any other product candidates or products that we may develop. Any failure or refusal to supply the components for RT001 or any other product candidates or products that we may develop could delay, prevent or impair our clinical development or commercialization efforts.

We depend on single-source suppliers for the raw materials necessary to produce our product candidates. The loss of these suppliers, or their failure to supply us with these raw materials, would materially and adversely affect our business.

We and our manufacturers purchase the materials necessary to produce RT001 and RT002 for our clinical trials from single-source third party suppliers. There are a limited number of suppliers for the raw materials that we use to manufacture our product candidates and we may need to assess alternate suppliers to prevent a possible disruption of the manufacture of the materials necessary to produce our product candidates for our clinical trials,

 

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and if approved, ultimately for commercial sale. In particular, we outsource the manufacture of bulk peptide through American Peptide Company, Inc., the diluent through Hospira Worldwide, Inc. and our delivery apparatus through Duoject Medical Systems, Inc. We do not have any control over the process or timing of the acquisition of raw materials by our manufacturers. Although we generally do not begin a clinical trial unless we believe we have a sufficient supply of a product candidate to complete the clinical trial, any significant delay in the supply of RT001, RT002 or any future product candidates, or the raw material components thereof, for an ongoing clinical trial due to the need to replace a third party supplier could considerably delay completion of our clinical trials, product testing and potential regulatory approval of RT001, RT002 or any future product candidates. If we or our manufacturers are unable to purchase these raw materials on acceptable terms, at sufficient quality levels, or in adequate quantities, if at all, the development of RT001, RT002 and any future product candidates, or the commercial launch of any approved products, would be delayed or there would be a shortage in supply, which would impair our ability to meet our development objectives for our product candidates or generate revenues from the sale of any approved products.

Furthermore, if there is a disruption to our or our third party suppliers’ relevant operations, we will have no other means of producing RT001, RT002 or any future product candidates until they restore the affected facilities or we or they procure alternative facilities. Additionally, any damage to or destruction of our or our third party or suppliers’ facilities or equipment may significantly impair our ability to manufacture our product candidates on a timely basis.

We or the third parties upon whom we depend may be adversely affected by earthquakes or other natural disasters and our business continuity and disaster recovery plans may not adequately protect us from a serious disaster.

Our corporate headquarters and other facilities, including our sole manufacturing facility, are located in the San Francisco Bay Area, which in the past has experienced severe earthquakes. We do not carry earthquake insurance. Earthquakes or other natural disasters could severely disrupt our operations, and have a material adverse effect on our business, results of operations, financial condition and prospects.

If a natural disaster, power outage or other event occurred that prevented us from using all or a significant portion of our headquarters, that damaged critical infrastructure, such as our manufacturing facility, enterprise financial systems or manufacturing resource planning and enterprise quality systems, or that otherwise disrupted operations, it may be difficult or, in certain cases, impossible for us to continue our business for a substantial period of time. In particular, because we manufacture botulinum toxin in our facilities, we would be required to obtain further clearance and approval by state, federal or other applicable authorities to continue or resume manufacturing activities. The disaster recovery and business continuity plans we have in place currently are limited and may not be adequate in the event of a serious disaster or similar event. We may incur substantial expenses as a result of the limited nature of our disaster recovery and business continuity plans, which, particularly when taken together with our lack of earthquake insurance, could have a material adverse effect on our business.

Furthermore, integral parties in our supply chain are geographically concentrated and operating from single sites, increasing their vulnerability to natural disasters or other sudden, unforeseen and severe adverse events. If such an event were to affect our supply chain, it could have a material adverse effect on our business.

We rely on third parties and consultants to conduct all our preclinical studies and clinical trials. If these third parties or consultants do not successfully carry out their contractual duties or meet expected deadlines, we may be unable to obtain regulatory approval for or commercialize RT001, RT002 or any future product candidates.

We do not have the ability to independently conduct preclinical studies or clinical trials. We rely on medical institutions, clinical investigators, contract laboratories, collaborative partners and other third parties, such as CROs, to conduct clinical trials on our product candidates. The third parties with whom we contract for execution of our clinical trials play a significant role in the conduct of these trials and the subsequent collection and analysis of data. However, these third parties are not our employees, and except for contractual

 

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duties and obligations, we have limited ability to control the amount or timing of resources that they devote to our programs. Although we rely on these third parties to conduct our preclinical studies and clinical trials, we remain responsible for ensuring that each of our preclinical studies and clinical trials is conducted in accordance with its investigational plan and protocol. Moreover, the FDA and foreign regulatory authorities require us to comply with regulations and standards, commonly referred to as current good clinical practices, or GCPs, for conducting, monitoring, recording and reporting the results of clinical trials to ensure that the data and results are scientifically credible and accurate, and that the trial subjects are adequately informed of the potential risks of participating in clinical trials. We also rely on consultants to assist in the execution, including data collection and analysis, of our clinical trials.

In addition, the execution of preclinical studies and clinical trials, and the subsequent compilation and analysis of the data produced, requires coordination among various parties. In order for these functions to be carried out effectively and efficiently, it is imperative that these parties communicate and coordinate with one another. Moreover, these third parties may also have relationships with other commercial entities, some of which may compete with us. These third parties may terminate their agreements with us upon as little as 30 days’ prior written notice of a material breach by us that is not cured within 30 days. Many of these agreements may also be terminated by such third parties under certain other circumstances, including our insolvency or our failure to comply with applicable laws. In general, these agreements require such third parties to reasonably cooperate with us at our expense for an orderly winding down of services of such third parties under the agreements. If the third parties or consultants conducting our clinical trials do not perform their contractual duties or obligations, experience work stoppages, do not meet expected deadlines, terminate their agreements with us or need to be replaced, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical trial protocols or GCPs, or for any other reason, we may need to conduct additional clinical trials or enter into new arrangements with alternative third parties, which could be difficult, costly or impossible, and our clinical trials may be extended, delayed or terminated or may need to be repeated. If any of the foregoing were to occur, we may not be able to obtain, or may be delayed in obtaining, regulatory approval for and will not be able to, or may be delayed in our efforts to, successfully commercialize the product candidate being tested in such trials.

Our ability to market RT001, if approved, will be limited to use for the treatment of crow’s feet lines, and if we want to expand the indications for which we may market RT001, we will need to obtain additional regulatory approvals, which may not be granted.

We are currently seeking regulatory approval for RT001 in the United States and Europe for the treatment of crow’s feet lines. If RT001 is approved, the applicable regulatory agency will restrict our ability to market or advertise RT001 for other indications, which could limit physician and patient adoption. We may attempt to develop, promote and commercialize new treatment indications and protocols for RT001 in the future, but we cannot predict when or if we will receive the clearances required to do so. In addition, we would be required to conduct additional clinical trials or studies to support approvals for additional indications, which would be time consuming and expensive, and may produce results that do not support regulatory approvals. If we do not obtain additional regulatory approvals, our ability to expand our business will be limited.

If RT001 and/or RT002 is approved for marketing, and we are found to have improperly promoted off-label uses, or if physicians misuse our products or use our products off-label, we may become subject to prohibitions on the sale or marketing of our products, significant fines, penalties, and sanctions, product liability claims, and our image and reputation within the industry and marketplace could be harmed.

The FDA and other regulatory agencies strictly regulate the marketing and promotional claims that are made about drug products, such as RT001 and RT002, if approved. In particular, a product may not be promoted for uses or indications that are not approved by the FDA or such other regulatory agencies as reflected in the product’s approved labeling. For example, if we receive marketing approval for RT001 for the treatment of crow’s feet lines, the first indication we are pursuing, we cannot prevent physicians from using our RT001 products on their patients in a manner that is inconsistent with the approved label, potentially including for the treatment of other aesthetic or therapeutic indications. If we are found to have promoted such off-label uses, we may receive warning letters and

 

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become subject to significant liability, which would materially harm our business. The federal government has levied large civil and criminal fines against companies for alleged improper promotion and has enjoined several companies from engaging in off-label promotion. If we become the target of such an investigation or prosecution based on our marketing and promotional practices, we could face similar sanctions, which would materially harm our business. In addition, management’s attention could be diverted from our business operations, significant legal expenses could be incurred, and our reputation could be damaged. The FDA has also requested that companies enter into consent decrees or permanent injunctions under which specified promotional conduct is changed or curtailed. If we are deemed by the FDA to have engaged in the promotion of our products for off-label use, we could be subject to FDA prohibitions on the sale or marketing of our products or significant fines and penalties, and the imposition of these sanctions could also affect our reputation and position within the industry.

Physicians may also misuse our products or use improper techniques, potentially leading to adverse results, side effects or injury, which may lead to product liability claims. If our products are misused or used with improper technique, we may become subject to costly litigation by our customers or their patients. Product liability claims could divert management’s attention from our core business, be expensive to defend, and result in sizable damage awards against us that may not be covered by insurance. Furthermore, the use of our products for indications other than those cleared by the FDA may not effectively treat such conditions, which could harm our reputation in the marketplace among physicians and patients.

Any of these events could harm our business and results of operations and cause our stock price to decline.

Even if RT001 is approved for commercialization, if there is not sufficient patient demand for RT001 procedures, our financial results and future prospects will be harmed.

Treatment of crow’s feet lines with RT001, our lead product candidate, is an elective procedure, the cost of which must be borne by the patient, and we do not expect it to be reimbursable through government or private health insurance. The decision by a patient to elect to undergo treatment with RT001 for the treatment of crow’s feet lines or other aesthetic indications we may pursue may be influenced by a number of factors, including:

 

   

the success of any sales and marketing programs that we, or any third parties we engage, undertake, and as to which we have limited experience;

 

   

the extent to which physicians recommend RT001 to their patients;

 

   

the extent to which RT001 satisfies patient expectations;

 

   

our ability to properly train physicians in the use of RT001 such that their patients do not experience excessive discomfort during treatment or adverse side effects;

 

   

the cost, safety and effectiveness of RT001 versus other aesthetic treatments;

 

   

consumer sentiment about the benefits and risks of aesthetic procedures generally and RT001 in particular;

 

   

the success of any direct-to-consumer marketing efforts we may initiate; and

 

   

general consumer confidence, which may be impacted by economic and political conditions.

Our business, financial results and future prospects will be materially harmed if we cannot generate sufficient demand for RT001, or for RT002 or any other future product candidate, once approved.

We currently have limited marketing capabilities and no sales organization. If we are unable to establish sales and marketing capabilities on our own or through third parties, we will be unable to successfully commercialize RT001, RT002 or any other future product candidates, if approved, or generate product revenue.

We currently have limited marketing capabilities and no sales organization. To commercialize RT001, RT002 or any other future product candidates, if approved, in the United States, Europe and other jurisdictions we seek to enter, we must build our marketing, sales, distribution, managerial and other non-technical

 

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capabilities or make arrangements with third parties to perform these services, and we may not be successful in doing so. If RT001 receives regulatory approval, we expect to market RT001 in the United States through an internal specialized sales force and in Europe through either our internal sales force or a combination of our internal sales force and distributors, which will be expensive and time consuming. We have no prior experience in the marketing, sale and distribution of pharmaceutical products and there are significant risks involved in building and managing a sales organization, including our ability to hire, retain and incentivize qualified individuals, generate sufficient sales leads, provide adequate training to sales and marketing personnel and effectively manage a geographically dispersed sales and marketing team. Any failure or delay in the development of our internal sales, marketing and distribution capabilities would adversely impact the commercialization of these products. We may choose to collaborate with third parties that have direct sales forces and established distribution systems, either to augment our own sales force and distribution systems or in lieu of our own sales force and distribution systems. If we are unable to enter into such arrangements on acceptable terms or at all, we may not be able to successfully commercialize RT001, RT002 or any future product candidates. If we are not successful in commercializing RT001, RT002 or any future product candidates, either on our own or through collaborations with one or more third parties, our future product revenue will suffer and we would incur significant additional losses.

To establish our sales and marketing infrastructure and expand our manufacturing capabilities, we will need to increase the size of our organization, and we may experience difficulties in managing this growth.

As of December 1, 2013, we had 61 full-time employees. We will need to continue to expand our managerial, operational, finance and other resources to manage our operations and clinical trials, continue our development activities and commercialize RT001 or any other product candidates, if approved. Our management and personnel, systems and facilities currently in place may not be adequate to support this future growth. Our need to effectively execute our growth strategy requires that we:

 

   

manage our clinical trials effectively;

 

   

identify, recruit, retain, incentivize and integrate additional employees;

 

   

manage our internal development efforts effectively while carrying out our contractual obligations to third parties; and

 

   

continue to improve our operational, financial and management controls, reporting systems and procedures.

Due to our limited financial resources and our limited experience in managing a company with such anticipated growth, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. The physical expansion of our operations may lead to significant costs and may divert our management and business development resources. Any inability to manage growth could delay the execution of our development and strategic objectives, or disrupt our operations.

If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of any future products we develop.

We face an inherent risk of product liability as a result of the clinical testing of our product candidates and will face an even greater risk if we commercialize any products. For example, we may be sued if any product we develop allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability and a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our products. Even a successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:

 

   

decreased demand for RT001, RT002 or any future product candidates or products we develop;

 

   

injury to our reputation and significant negative media attention;

 

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withdrawal of clinical trial participants or cancellation of clinical trials;

 

   

costs to defend the related litigation;

 

   

a diversion of management’s time and our resources;

 

   

substantial monetary awards to trial participants or patients;

 

   

regulatory investigations, product recalls, withdrawals or labeling, marketing or promotional restrictions;

 

   

loss of revenue; and

 

   

the inability to commercialize any products we develop.

Our inability to obtain and maintain sufficient product liability insurance at an acceptable cost and scope of coverage to protect against potential product liability claims could prevent or inhibit the commercialization of RT001 or any future products we develop. We currently carry product liability insurance covering our clinical trials in the amount of $1.0 million in the aggregate. Although we maintain such insurance, any claim that may be brought against us could result in a court judgment or settlement in an amount that is not covered, in whole or in part, by our insurance or that is in excess of the limits of our insurance coverage. Our insurance policies also have various exclusions and deductibles, and we may be subject to a product liability claim for which we have no coverage. We will have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts. Moreover, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses. If and when we obtain approval for marketing RT001, we intend to expand our insurance coverage to include the sale of RT001; however, we may be unable to obtain this liability insurance on commercially reasonable terms.

If we fail to attract and keep senior management and key scientific personnel, we may be unable to successfully develop RT001, RT002 or any future product candidates, conduct our clinical trials and commercialize RT001, RT002 or any future products we develop.

Our success depends in part on our continued ability to attract, retain and motivate highly qualified management, clinical and scientific personnel. We believe that our future success is highly dependent upon the contributions of our senior management, particularly our President and Chief Executive Officer, as well as our senior scientists and other members of our senior management team. The loss of services of any of these individuals could delay or prevent the successful development of our product pipeline, completion of our planned clinical trials or the commercialization of RT001, RT002 or any future products we develop.

Although we have not historically experienced unique difficulties attracting and retaining qualified employees, we could experience such problems in the future. For example, competition for qualified personnel in the biotechnology and pharmaceuticals field is intense due to the limited number of individuals who possess the skills and experience required by our industry. We will need to hire additional personnel as we expand our clinical development and commercial activities. We may not be able to attract and retain quality personnel on acceptable terms, or at all. In addition, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited or that they have divulged proprietary or other confidential information, or that their former employers own their research output.

If we are not successful in discovering, developing, acquiring and commercializing additional product candidates, our ability to expand our business and achieve our strategic objectives would be impaired.

Although a substantial amount of our effort will focus on the continued clinical testing and potential approval of RT001 and RT002, a key element of our strategy is to discover, develop and commercialize a portfolio of botulinum toxin products to serve both the aesthetic and therapeutic markets. We are seeking to do so through our internal research programs and may explore strategic collaborations for the development or acquisition of new products. While our two product candidates, RT001 and RT002, are each in the clinical development stage, all of our other potential product candidates remain in the discovery stage. Research programs to identify product

 

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candidates require substantial technical, financial and human resources, whether or not any product candidates are ultimately identified. Our research programs may initially show promise in identifying potential product candidates, yet fail to yield product candidates for clinical development for many reasons, including the following:

 

   

the research methodology used may not be successful in identifying potential product candidates;

 

   

competitors may develop alternatives that render our product candidates obsolete or less attractive;

 

   

product candidates we develop may nevertheless be covered by third parties’ patents or other exclusive rights;

 

   

a product candidate may on further study be shown to have harmful side effects or other characteristics that indicate it is unlikely to be effective or otherwise does not meet applicable regulatory criteria;

 

   

a product candidate may not be capable of being produced in commercial quantities at an acceptable cost, or at all;

 

   

a product candidate may not be accepted as safe and effective by patients, the medical community or third party payors, if applicable; and

 

   

intellectual property rights of third parties may potentially block our entry into certain markets, or make such entry economically impracticable.

If we fail to develop and successfully commercialize other product candidates, our business and future prospects may be harmed and our business will be more vulnerable to any problems that we encounter in developing and commercializing RT001 and RT002.

We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives. We may fail to comply with the rules that apply to public companies, including Section 404 of the Sarbanes-Oxley Act of 2002, which could result in sanctions or other penalties that would harm our business.

As a public company in the United States, we will be required, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. We expect that our first report on compliance with Section 404 will be in connection with our consolidated financial statements for the year ending December 31, 2014.

The controls and other procedures are designed to ensure that information required to be disclosed by us in the reports that we file with the Securities and Exchange Commission, or SEC, is disclosed accurately and is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. We are in the early stages of conforming our internal control procedures to the requirements of Section 404 and we may not be able to complete our evaluation, testing and any required remediation needed to comply with Section 404 in a timely fashion. Our independent registered public accounting firm was not engaged to perform an audit of our internal control over financial reporting for the year ended December 31, 2012 or for any other period. Accordingly, no such opinion was expressed. Even if we develop effective controls, these new controls may become inadequate because of changes in conditions or the degree of compliance with these policies or procedures may deteriorate.

Even after we develop these new procedures, material weaknesses in our internal control over financial reporting may be discovered. To fully comply with Section 404, we will need to retain additional employees to supplement our current finance staff, and we may not be able to do so in a timely manner, or at all. In addition, in the process of evaluating our internal control over financial reporting, we expect that certain of our internal control practices will need to be updated to comply with the requirements of Section 404 and the regulations promulgated thereunder, and we may not be able to do so on a timely basis, or at all. In the event that we are not able to demonstrate compliance with Section 404 in a timely manner, or are unable to produce timely or accurate consolidated financial statements, we may be subject to sanctions or investigations by regulatory authorities, such as the SEC or the stock exchange on which our stock is listed, and investors may lose confidence in our operating results and the price of our common stock could decline. Furthermore, if we are unable to certify that our internal control over financial reporting is effective and in compliance with Section 404, we may be subject to sanctions

 

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or investigations by regulatory authorities, such as the SEC or stock exchanges, and we could lose investor confidence in the accuracy and completeness of our financial reports, which could hurt our business, the price of our common stock and our ability to access the capital markets.

Our business involves the use of hazardous materials and we and our third party manufacturers and suppliers must comply with environmental laws and regulations, which can be expensive and restrict how we do business.

Our research and development and manufacturing activities and our third party manufacturers’ and suppliers’ activities involve the controlled storage, use and disposal of hazardous materials owned by us, including botulinum toxin type A, a key component of our product candidates, and other hazardous compounds. We and our manufacturers and suppliers are subject to laws and regulations governing the use, manufacture, storage, handling and disposal of these hazardous materials. We are licensed with the Centers for Disease Control and Detection, or CDC, and with the California Department of Health, Food and Drug Branch for use of botulinum toxin and to manufacture both the active pharmaceutical ingredient, or API, and the finished product in topical and injectable dose forms. In some cases, these hazardous materials and various wastes resulting from their use are stored at our and our manufacturers’ facilities pending their use and disposal. We cannot eliminate the risk of contamination, which could cause an interruption of our commercialization efforts, research and development efforts and business operations, environmental damage resulting in costly clean-up and liabilities under applicable laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. Although we believe that the safety procedures utilized by us and our third party manufacturers for handling and disposing of these materials generally comply with the standards prescribed by these laws and regulations, we cannot guarantee that this is the case or eliminate the risk of accidental contamination or injury from these materials. In such an event, we may be held liable for any resulting damages and such liability could exceed our resources and state or federal or other applicable authorities may curtail our use of certain materials and interrupt our business operations. Furthermore, environmental laws and regulations are complex, change frequently and have tended to become more stringent. We cannot predict the impact of such changes and cannot be certain of our future compliance.

We may use third party collaborators to help us develop, validate or commercialize any new products, and our ability to commercialize such products could be impaired or delayed if these collaborations are unsuccessful.

We may license or selectively pursue strategic collaborations for the development, validation and commercialization of RT001, RT002 and any future product candidates. In any third party collaboration, we would be dependent upon the success of the collaborators in performing their responsibilities and their continued cooperation. Our collaborators may not cooperate with us or perform their obligations under our agreements with them. We cannot control the amount and timing of our collaborators’ resources that will be devoted to performing their responsibilities under our agreements with them. Our collaborators may choose to pursue alternative technologies in preference to those being developed in collaboration with us. The development, validation and commercialization of our product candidates will be delayed if collaborators fail to conduct their responsibilities in a timely manner or in accordance with applicable regulatory requirements or if they breach or terminate their collaboration agreements with us. Disputes with our collaborators could also impair our reputation or result in development delays, decreased revenues and litigation expenses.

If we fail to comply with the covenants and other obligations under our credit facilities, the lenders may be able to accelerate amounts owed under the facilities and may foreclose upon the assets securing our obligations.

In September 2011, we entered into a credit facility with Hercules Technology Growth Capital, Inc., or Hercules. The facility consists of $22.0 million in a term loan from Hercules. The balance of the term loan as of September 30, 2013 was $13.0 million and is payable in monthly installments of principal and interest through March 1, 2015. Borrowings under our credit facility are secured by substantially all of our tangible assets. The covenants set forth in the loan and security agreement require, among other things, that we seek consent from

 

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Hercules prior to certain corporate changes and provide certain unaudited financial information within 30 days after the end of each month. If we fail to comply with the covenants and our other obligations under the credit facility, Hercules would be able to accelerate the required repayment of amounts due under the loan agreement and, if they are not repaid, could foreclose upon our assets securing our obligations under the credit facility.

In December 2013, we entered into a $10.8 million loan and lease agreement with Essex Capital Corporation, or the Essex Capital Facility. Borrowings under the Essex Capital Facility are secured by substantially all of our tangible assets, excluding intellectual property. The covenants set forth in the Essex Capital Facility require, among other things, that we seek consent from Essex Capital prior to certain corporate events, including the incurrence of additional secured indebtedness or additional liens. If we fail to comply with the covenants and our other obligations under the Essex Capital Facility, Essex Capital would be able to accelerate the required repayment of amounts due under the Essex Capital Facility and, if they are not repaid, could foreclose upon our assets securing our obligations under the Essex Capital Facility, subject to limitations set forth in a subordination agreement between Essex Capital and Hercules.

Unfavorable global economic conditions could adversely affect our business, financial condition or results of operations.

Our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets. Furthermore, the market for aesthetic medical procedures may be particularly vulnerable to unfavorable economic conditions. We do not expect RT001 for the treatment of crow’s feet lines to be reimbursed by any government or third party payor and, as a result, demand for this product will be tied to discretionary spending levels of our targeted patient population. The recent global financial crisis caused extreme volatility and disruptions in the capital and credit markets. A severe or prolonged economic downturn could result in a variety of risks to our business, including weakened demand for RT001, RT002 or any future product candidates, if approved, and our ability to raise additional capital when needed on acceptable terms, if at all. This is particularly true in Europe, which is undergoing a continued severe economic crisis. A weak or declining economy could also strain our suppliers, possibly resulting in supply disruption, or cause our customers to delay making payments for our services. Any of the foregoing could harm our business and we cannot anticipate all of the ways in which the current economic climate and financial market conditions could adversely impact our business.

Risks Related to Our Intellectual Property

If our efforts to protect our intellectual property related to RT001, RT002 or any future product candidates are not adequate, we may not be able to compete effectively in our market.

We rely upon a combination of patents, trade secret protection and confidentiality agreements to protect the intellectual property related to RT001, RT002 and our development programs. Any disclosure to or misappropriation by third parties of our confidential proprietary information could enable competitors to quickly duplicate or surpass our technological achievements, eroding our competitive position in our market.

The strength of patents in the biotechnology and pharmaceutical field involves complex legal and scientific questions and can be uncertain. This uncertainty includes changes to the patent laws through either legislative action to change statutory patent law or court action that may reinterpret existing law in ways affecting the scope or validity of issued patents. The patent applications that we own or license may fail to result in issued patents in the United States or foreign countries. Competitors in the field of cosmetics and botulinum toxin have created a substantial amount of prior art, including scientific publications, patents and patent applications. Our ability to obtain and maintain valid and enforceable patents depends on whether the differences between our technology and the prior art allow our technology to be patentable over the prior art. Even if the patents do successfully issue, third parties may challenge the validity, enforceability or scope of such issued patents or any other issued patents we own or license, which may result in such patents being narrowed, invalidated or held unenforceable. For example, patents granted by the European Patent Office may be opposed by any person within nine months from the publication of their grant. Furthermore, even if they are unchallenged, our patents and patent applications may not adequately protect our intellectual property or prevent others from designing around our

 

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claims. In addition, recent changes to the patent laws of the United States provide additional procedures for third parties to challenge the validity of issued patents based on patent applications filed after March 15, 2013. If the breadth or strength of protection provided by the patents and patent applications we hold or pursue with respect to RT001, RT002 or any future product candidates is challenged, then it could threaten our ability to commercialize RT001, RT002 or any future product candidates. Further, if we encounter delays in our clinical trials, the period of time during which we could market RT001, RT002 or any future product candidates under patent protection would be reduced. Since patent applications in the United States and most other countries are confidential for a period of time after filing, we cannot be certain that we were the first to either (i) file any patent application related to our product candidates or (ii) invent any of the inventions claimed in our patents or patent applications. Furthermore, for applications filed before March 16, 2013, or patents issuing from such applications, an interference proceeding can be provoked by a third party, or instituted by the United States Patent and Trademark Office, or USPTO, to determine who was the first to invent any of the subject matter covered by the patent claims of our applications and patents. As of March 16, 2013, the United States transitioned to a “first-to-file” system for deciding which party should be granted a patent when two or more patent applications are filed by different parties claiming the same invention. A third party that files a patent application in the USPTO before us could therefore be awarded a patent covering an invention of ours even if we had made the invention before it was made by the third party.

The change to “first-to-file” from “first-to-invent” is one of the changes to the patent laws of the United States resulting from the Leahy-Smith America Invents Act signed into law on September 16, 2011. Among some of the other changes to the patent laws are changes that limit where a patentee may file a patent infringement suit and providing opportunities for third parties to challenge any issued patent in the USPTO. Because of a lower evidentiary standard in USPTO proceedings compared to the evidentiary standard in United States federal court necessary to invalidate a patent claim, a third party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold a claim invalid even though the same evidence would be insufficient to invalidate the claim if first presented in a district court action. Accordingly, a third party may attempt to use the USPTO procedures to invalidate our patent claims that would not have been invalidated if first challenged by the third party as a defendant in a district court action.

Even where laws provide protection, costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and the outcome of such litigation would be uncertain. Moreover, any actions we may bring to enforce our intellectual property against our competitors could provoke them to bring counterclaims against us, and some of our competitors have substantially greater intellectual property portfolios than we have.

We also rely on trade secret protection and confidentiality agreements to protect proprietary know-how that may not be patentable, processes for which patents may be difficult to obtain or enforce and any other elements of our product development processes that involve proprietary know-how, information or technology that is not covered by patents.

In an effort to protect our trade secrets and other confidential information, we require our employees, consultants, collaborators and advisors to execute confidentiality agreements upon the commencement of their relationships with us. These agreements require that all confidential information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties. These agreements, however, may not provide us with adequate protection against improper use or disclosure of confidential information, and these agreements may be breached. Adequate remedies may not exist in the event of unauthorized use or disclosure of our confidential information. A breach of confidentiality could significantly affect our competitive position. In addition, in some situations, these agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants, collaborators or advisors have previous employment or consulting relationships. To the extent that our employees, consultants or contractors use any intellectual property owned by others in their work for us, disputes may arise as to the rights in any related or resulting know-how and inventions. Also, others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and other confidential information.

 

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If we infringe or are alleged to infringe intellectual property rights of third parties, our business could be harmed.

Our research, development and commercialization activities may infringe or otherwise violate or be claimed to infringe or otherwise violate patents owned or controlled by other parties. Competitors in the field of cosmetics and botulinum toxin have developed large portfolios of patents and patent applications in fields relating to our business. In particular, there are patents held by third parties that relate to the treatment with botulinum toxin-based products for indications we are currently developing. There may also be patent applications that have been filed but not published that, when issued as patents, could be asserted against us. These third parties could bring claims against us that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages. Further, if a patent infringement suit were brought against us, we could be forced to stop or delay research, development, manufacturing or sales of the product or product candidate that is the subject of the suit.

As a result of patent infringement claims, or to avoid potential claims, we may choose or be required to seek licenses from third parties. These licenses may not be available on acceptable terms, or at all. Even if we are able to obtain a license, the license would likely obligate us to pay license fees or royalties or both, and the rights granted to us might be nonexclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, or be forced to cease some aspect of our business operations, if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses on acceptable terms.

There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical industry. In addition to infringement claims against us, we may become a party to other patent litigation and other proceedings, including interference, derivation or post-grant proceedings declared or granted by the USPTO and similar proceedings in foreign countries, regarding intellectual property rights with respect to our current or future products. The cost to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. Patent litigation and other proceedings may also absorb significant management time. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could impair our ability to compete in the marketplace. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition or results of operations.

We may become involved in lawsuits to protect or enforce our patents or other intellectual property or the patents of our licensors, which could be expensive and time consuming.

Competitors may infringe our intellectual property, including our patents or the patents of our licensors. As a result, we may be required to file infringement claims to stop third party infringement or unauthorized use. This can be expensive, particularly for a company of our size, and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patent claims do not cover its technology or that the factors necessary to grant an injunction against an infringer are not satisfied.

An adverse determination of any litigation or other proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.

Interference, derivation or other proceedings brought at the USPTO may be necessary to determine the priority or patentability of inventions with respect to our patent applications or those of our licensors or collaborators. Litigation or USPTO proceedings brought by us may fail or may be invoked against us by third parties. Even if we are successful, domestic or foreign litigation or USPTO or foreign patent office proceedings may result in substantial costs and distraction to our management. We may not be able, alone or with our licensors or collaborators, to prevent misappropriation of our proprietary rights, particularly in countries where the laws may not protect such rights as fully as in the United States.

 

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Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation or other proceedings, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation or proceedings. In addition, during the course of this kind of litigation or proceedings, there could be public announcements of the results of hearings, motions or other interim proceedings or developments or public access to related documents. If investors perceive these results to be negative, the market price for our common stock could be significantly harmed.

We may not be able to protect our intellectual property rights throughout the world.

Filing, prosecuting and defending patents on product candidates in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States can be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States and in some cases may even force us to grant a compulsory license to competitors or other third parties. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and further, may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our products and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biopharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.

In addition, our ability to protect and enforce our intellectual property rights may be adversely affected by unforeseen changes in domestic and foreign intellectual property laws.

Risks Related to Government Regulation

Our business and products are subject to extensive government regulation.

We are subject to extensive, complex, costly and evolving regulation by federal and state governmental authorities in the United States, principally by the FDA, the U.S. Drug Enforcement Administration, or DEA, the Centers for Disease Control and Prevention, or CDC, and foreign regulatory authorities. Failure to comply with all applicable regulatory requirements, including those promulgated under the Federal Food, Drug, and Cosmetic Act, or FFDCA, the Public Health Service Act, or PHSA, and Controlled Substances Act, may subject us to operating restrictions and criminal prosecution, monetary penalties and other disciplinary actions, including, sanctions, warning letters, product seizures, recalls, fines, injunctions, suspension, revocation of approvals, or exclusion from future participation in the Medicare and Medicaid programs.

After our products receive regulatory approval or clearance, we, and our direct and indirect suppliers, remain subject to the periodic inspection of our plants and facilities, review of production processes, and testing of our products to confirm that we are in compliance with all applicable regulations. Adverse findings during regulatory inspections may result in the implementation of Risk Evaluation and Mitigation Strategies, or REMS,

 

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programs, completion of government mandated clinical trials, and government enforcement action relating to labeling, advertising, marketing and promotion, as well as regulations governing manufacturing controls noted above.

The regulatory approval process is highly uncertain and we may not obtain regulatory approval for the commercialization of RT001 or any future product candidates.

The research, testing, manufacturing, labeling, approval, selling, import, export, marketing and distribution of drug and biologic products are subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries, which regulations differ from country to country. Neither we nor any collaboration partner is permitted to market RT001, RT002 or any future product candidates in the United States until we receive approval of a BLA from the FDA. We have not submitted an application or obtained marketing approval for RT001 anywhere in the world. Obtaining regulatory approval of a BLA can be a lengthy, expensive and uncertain process. In addition, failure to comply with FDA and other applicable United States and foreign regulatory requirements may subject us to administrative or judicially imposed sanctions or other actions, including:

 

   

warning letters;

 

   

civil and criminal penalties;

 

   

injunctions;

 

   

withdrawal of approved products;

 

   

product seizure or detention;

 

   

product recalls;

 

   

total or partial suspension of production; and

 

   

refusal to approve pending BLAs or supplements to approved BLAs.

Prior to obtaining approval to commercialize a product candidate in the United States or abroad, we or our collaborators must demonstrate with substantial evidence from well controlled clinical trials, and to the satisfaction of the FDA or other foreign regulatory agencies, that such product candidates are safe and effective for their intended uses. Results from preclinical studies and clinical trials can be interpreted in different ways. Even if we and our collaborator believe the preclinical or clinical data for our product candidates are promising, such data may not be sufficient to support approval by the FDA and other regulatory authorities. Administering product candidates to humans may produce undesirable side effects, which could interrupt, delay or halt clinical trials and result in the FDA or other regulatory authorities denying approval of a product candidate for any or all targeted indications.

Regulatory approval of a BLA or BLA supplement is not guaranteed, and the approval process is expensive and may take several years. The FDA also has substantial discretion in the approval process. Despite the time and expense expended, failure can occur at any stage, and we could encounter problems that cause us to abandon or repeat clinical trials, or perform additional preclinical studies and clinical trials. The number of preclinical studies and clinical trials that will be required for FDA approval varies depending on the product candidate, the disease or condition that the product candidate is designed to address and the regulations applicable to any particular product candidate. The FDA can delay, limit or deny approval of a product candidate for many reasons, including the following:

 

   

a product candidate may not be deemed safe, effective, pure or potent;

 

   

FDA officials may not find the data from preclinical studies and clinical trials sufficient;

 

   

the FDA might not approve our third party manufacturers’ processes or facilities; or

 

   

the FDA may change its approval policies or adopt new regulations.

 

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If RT001, RT002 or any future product candidates fail to demonstrate safety and efficacy in clinical trials or do not gain approval, our business and results of operations will be materially and adversely harmed.

Even if we receive regulatory approval for RT001, RT002 or any future product candidates, we will be subject to ongoing regulatory obligations and continued regulatory review, which may result in significant additional expense, limit or delay regulatory approval and subject us to penalties if we fail to comply with applicable regulatory requirements.

Once regulatory approval has been granted, RT001, RT002, or any approved product will be subject to continual regulatory review by the FDA and/or non-U.S. regulatory authorities. Additionally, any product candidates, if approved, will be subject to extensive and ongoing regulatory requirements, including labeling and other restrictions and market withdrawal and we may be subject to penalties if we fail to comply with regulatory requirements or experience unanticipated problems with our products.

Any regulatory approvals that we or our collaborators receive for RT001, RT002 or any future product candidates may also be subject to limitations on the approved indications for which the product may be marketed or to the conditions of approval, or contain requirements for potentially costly post-marketing testing, including Phase 4 clinical trials, and surveillance to monitor the safety and efficacy of the product candidate. In addition, if the applicable regulatory agency approves RT001, RT002 or any future product candidates, the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion and recordkeeping for the product will be subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports, registration, as well as continued compliance with cGMP and GCP for any clinical trials that we conduct post-approval. Later discovery of previously unknown problems with RT001, RT002 or any future product candidates, including adverse events of unanticipated severity or frequency, or with our third party manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things:

 

   

restrictions on the marketing or manufacturing of the product, withdrawal of the product from the market, or voluntary or mandatory product recalls;

 

   

fines, warning letters or holds on clinical trials;

 

   

refusal by the FDA to approve pending applications or supplements to approved applications filed by us or our strategic collaborators, or suspension or revocation of product license approvals;

 

   

product seizure or detention, or refusal to permit the import or export of products; and

 

   

injunctions or the imposition of civil or criminal penalties.

Our ongoing regulatory requirements may also change from time to time, potentially harming or making costlier our commercialization efforts. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or other countries. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained and we may not achieve or sustain profitability, which would adversely affect our business.

If we fail to obtain regulatory approvals in foreign jurisdictions for RT001, RT002 or any future product candidates, we will be unable to market our products outside of the United States.

In addition to regulations in the United States, we will be subject to a variety of foreign regulations governing manufacturing, clinical trials, commercial sales and distribution of our future products. Whether or not we obtain FDA approval for a product candidate, we must obtain approval of the product by the comparable regulatory authorities of foreign countries before commencing clinical trials or marketing in those countries. The approval procedures vary among countries and can involve additional clinical testing, and the time required to obtain approval may differ from that required to obtain FDA approval. Clinical trials conducted in one country may not be accepted by regulatory authorities in other countries. Approval by the FDA does not ensure approval

 

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by regulatory authorities in other countries, and approval by one or more foreign regulatory authorities does not ensure approval by regulatory authorities in other foreign countries or by the FDA. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval. We may not be able to file for regulatory approvals or to do so on a timely basis, and even if we do file, we may not receive necessary approvals to commercialize our products in markets outside of the United States.

If approved, RT001, RT002 or any future products may cause or contribute to adverse medical events that we are required to report to regulatory agencies and if we fail to do so, we could be subject to sanctions that would materially harm our business.

Some participants in our clinical trials have reported adverse events after being treated with RT001. If we are successful in commercializing RT001 or any other products, FDA and foreign regulatory agency regulations require that we report certain information about adverse medical events if those products may have caused or contributed to those adverse events. The timing of our obligation to report would be triggered by the date we become aware of the adverse event as well as the nature of the event. We may fail to report adverse events we become aware of within the prescribed timeframe. We may also fail to appreciate that we have become aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the use of our products. If we fail to comply with our reporting obligations, the FDA or a foreign regulatory agency could take action including criminal prosecution, the imposition of civil monetary penalties, seizure of our products, or delay in approval or clearance of future products.

We may in the future be subject to various U.S. federal and state laws pertaining to health care fraud and abuse, including anti-kickback, self-referral, false claims and fraud laws, and any violations by us of such laws could result in fines or other penalties.

While we do not expect that RT001, if approved for the treatment of crow’s feet lines, will subject us to the various U.S. federal and state laws intended to prevent health care fraud and abuse, we may in the future become subject to such laws. The federal anti-kickback statute prohibits the offer, receipt, or payment of remuneration in exchange for or to induce the referral of patients or the use of products or services that would be paid for in whole or part by Medicare, Medicaid or other federal health care programs. Remuneration has been broadly defined to include anything of value, including cash, improper discounts, and free or reduced price items and services. Many states have similar laws that apply to their state health care programs as well as private payors. Violations of the anti-kickback laws can result in exclusion from federal health care programs and substantial civil and criminal penalties.

The federal False Claims Act, or FCA, imposes liability on persons who, among other things, present or cause to be presented false or fraudulent claims for payment by a federal health care program. The FCA has been used to prosecute persons submitting claims for payment that are inaccurate or fraudulent, that are for services not provided as claimed, or for services that are not medically necessary. The FCA includes a whistleblower provision that allows individuals to bring actions on behalf of the federal government and share a portion of the recovery of successful claims. If our marketing or other arrangements were determined to violate anti-kickback or related laws, including the FCA, then our revenues could be adversely affected, which would likely harm our business, financial condition, and results of operations.

State and federal authorities have aggressively targeted medical technology companies for alleged violations of these anti-fraud statutes, based on improper research or consulting contracts with doctors, certain marketing arrangements that rely on volume-based pricing, off-label marketing schemes, and other improper promotional practices. Companies targeted in such prosecutions have paid substantial fines in the hundreds of millions of dollars or more, have been forced to implement extensive corrective action plans, and have often become subject to consent decrees severely restricting the manner in which they conduct their business. If we become the target of such an investigation or prosecution based on our contractual relationships with providers or institutions, or our marketing and promotional practices, we could face similar sanctions, which would materially harm our business.

Also, the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of

 

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obtaining or retaining business. We cannot assure you that our internal control policies and procedures will protect us from reckless or negligent acts committed by our employees, future distributors, partners, collaborators or agents. Violations of these laws, or allegations of such violations, could result in fines, penalties or prosecution and have a negative impact on our business, results of operations and reputation.

Legislative or regulatory healthcare reforms in the United States may make it more difficult and costly for us to obtain regulatory clearance or approval of RT001, RT002 or any future product candidates and to produce, market, and distribute our products after clearance or approval is obtained.

From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulatory clearance or approval, manufacture, and marketing of regulated products or the reimbursement thereof. In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of RT001, RT002 or any future product candidates. We cannot determine what effect changes in regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted may have on our business in the future. Such changes could, among other things, require:

 

   

changes to manufacturing methods;

 

   

recall, replacement, or discontinuance of one or more of our products; and

 

   

additional recordkeeping.

Each of these would likely entail substantial time and cost and could materially harm our business and our financial results. In addition, delays in receipt of or failure to receive regulatory clearances or approvals for any future products would harm our business, financial condition, and results of operations.

Risks Related to this Offering and Our Common Stock

An active trading market for our common stock may not develop.

Prior to this offering, there has been no public market for our common stock. The initial public offering price for our common stock was determined through negotiations with the underwriters and may bear no relationship to the price at which the common stock will trade upon the closing of this offering. Although we intend to apply to list our common stock on The NASDAQ Global Market, an active trading market for our shares may never develop or be sustained following this offering. If an active market for our common stock does not develop, it may be difficult for you to sell the shares you purchase in this offering without depressing the market price for the common stock or to sell your shares at all.

The trading price of our common stock is likely to be volatile, and purchasers of our common stock could incur substantial losses.

Our stock price is likely to be volatile. The stock market in general and the market for pharmaceutical companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above the initial public offering price. The market price for our common stock may be influenced by many factors, including:

 

   

regulatory or legal developments in the United States and foreign countries;

 

   

results from or delays in clinical trials of our product candidates, including our Phase 3 clinical program for RT001 and our Phase 2 clinical program for RT002;

 

   

announcements of regulatory approval or disapproval of RT001, RT002 or any future product candidates;

 

   

FDA or other U.S. or foreign regulatory actions affecting us or our industry;

 

   

introductions and announcements of new products by us, any commercialization partners or our competitors, and the timing of these introductions and announcements;

 

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variations in our financial results or those of companies that are perceived to be similar to us;

 

   

changes in the structure of healthcare payment systems;

 

   

announcements by us or our competitors of significant acquisitions, licenses, strategic partnerships, joint ventures or capital commitments;

 

   

market conditions in the pharmaceutical and biopharmaceutical sectors and issuance of securities analysts’ reports or recommendations;

 

   

quarterly variations in our results of operations or those of our future competitors;

 

   

changes in financial estimates or guidance, including our ability to meet our future revenue and operating profit or loss estimates or guidance;

 

   

sales of substantial amounts of our stock by insiders and large stockholders, or the expectation that such sales might occur;

 

   

general economic, industry and market conditions;

 

   

additions or departures of key personnel;

 

   

intellectual property, product liability or other litigation against us;

 

   

expiration or termination of our potential relationships with customers and strategic partners; and

 

   

the other factors described in this “Risk Factors” section.

In addition, in the past, stockholders have initiated class action lawsuits against pharmaceutical companies following periods of volatility in the market prices of these companies’ stock. Such litigation, if instituted against us, could cause us to incur substantial costs and divert management’s attention and resources.

If securities or industry analysts do not publish research or publish unfavorable research about our business, our stock price and trading volume could decline.

Equity research analysts do not currently provide research coverage of our common stock, and we cannot assure you that any equity research analysts will provide research coverage of our common stock after the closing of this offering. In particular, as a smaller company, it may be difficult for us to attract the interest of equity research analysts. A lack of research coverage may adversely affect the liquidity of and market price of our common stock. To the extent we obtain equity research analyst coverage, we will not have any control of the analysts or the content and opinions included in their reports. The price of our stock could decline if one or more equity research analysts downgrade our stock or issue other unfavorable commentary or research. If one or more equity research analysts ceases coverage of our company, or fails to publish reports on us regularly, demand for our stock could decrease, which in turn could cause our stock price or trading volume to decline.

Sales of substantial amounts of our common stock in the public markets, or the perception that such sales might occur, could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. If our stockholders sell, or the market perceives that our stockholders intend to sell, substantial amounts of our common stock in the public market following this offering, the market price of our common stock could decline significantly.

Upon the closing of this offering, we will have outstanding                  shares of common stock, assuming the conversion of all outstanding shares of convertible preferred stock into                  shares common stock, the conversion of the 2013 notes and the net exercise of the 2013 warrants, no other outstanding options or warrants are exercised and no exercise of the underwriters’ over-allotment option, and assuming an initial public offering price of $        , which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus. Of these shares,                  shares sold in this offering to new investors will be freely tradable and                  additional shares of common stock will be available for sale in the public market beginning 180 days after the date of this prospectus following the expiration of lock-up agreements entered into by our directors,

 

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officers and substantially all of our equity holders with the underwriters. Cowen and Company, LLC and Piper Jaffray & Co. may release these stockholders from their lock-up agreements with the underwriters at any time prior to their expiration, which would allow for earlier sales of shares in the public market.

In addition, promptly following the closing of this offering, we intend to file one or more registration statements on Form S-8 registering the issuance of approximately                  shares of common stock subject to options or other equity awards issued or reserved for future issuance under our equity incentive plans. Shares registered under these registration statements on Form S-8 will be available for sale in the public market subject to vesting arrangements and exercise of options, the lock-up agreements described above and the restrictions of Rule 144 in the case of our affiliates.

Additionally, after this offering, the holders of an aggregate of approximately                  shares of our common stock, assuming the conversion of the 2013 notes and the net exercise of the 2013 warrants, assuming an initial public offering price of $        , which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and assuming no other outstanding options or warrants are exercised, or their transferees, will have rights, subject to some conditions, to require us to file one or more registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. Once we register the issuance of these shares, they can be freely sold in the public market. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

Provisions in our corporate charter documents and under Delaware law could discourage takeover attempts and lead to management entrenchment, and the market price of our common stock may be lower as a result.

Certain provisions in our certificate of incorporation and bylaws as they will be in effect upon the closing of this offering may make it difficult for a third party to acquire, or attempt to acquire, control of our company, even if a change in control was considered favorable by you and other stockholders. For example, our board of directors will have the authority to issue up to 5,000,000 shares of preferred stock. Our board of directors can fix the price, rights, preferences, privileges, and restrictions of the preferred stock without any further vote or action by our stockholders. The issuance of shares of preferred stock may delay or prevent a change in control transaction. As a result, the market price of our common stock and the voting and other rights of our stockholders may be adversely affected. An issuance of shares of preferred stock may result in the loss of voting control to other stockholders.

Our charter documents will also contain other provisions that could have an anti-takeover effect, including:

 

   

only one of our three classes of directors will be elected each year;

 

   

no cumulative voting in the election of directors;

 

   

the ability of our board of directors to issues shares of preferred stock and determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval;

 

   

the exclusive right of our board of directors to elect a director to fill a vacancy or newly created directorship;

 

   

stockholders will not be permitted to take actions by written consent;

 

   

stockholders cannot call a special meeting of stockholders;

 

   

stockholders must give advance notice to nominate directors or submit proposals for consideration at stockholder meetings;

 

   

the ability of our board of directors, by a majority vote, to amend the bylaws; and

 

   

the requirement for the affirmative vote of at least 66 2/3% or more of the outstanding common stock to amend many of the provisions described above.

In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which regulates corporate acquisitions. These provisions could discourage potential acquisition proposals and could delay or prevent a change in control transaction. They could also have the effect of discouraging others from making tender offers for our common stock, including transactions that may be in your

 

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best interests. These provisions may also prevent changes in our management or limit the price that certain investors are willing to pay for our stock.

Our amended and restated certificate of incorporation will also provide that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders.

Concentration of ownership of our common stock among our existing principal stockholders after this offering may effectively limit the voting power of other stockholders, including purchasers in this offering.

Upon the closing of this offering, our current beneficial owners of 5% or more of our common stock will, in aggregate, beneficially own approximately        % of our outstanding common stock, assuming no exercise of the underwriters’ over-allotment option assuming conversion of the 2013 notes and net exercise of 2013 warrants, and assuming an initial public offering price of $         per share, the midpoint of the estimated offering price range set forth on the cover page of this prospectus. These stockholders, acting together, will continue to be able to significantly influence all matters requiring stockholder approval, including the election and removal of directors and any merger or other significant corporate transactions. The interests of this group of stockholders may not coincide with the interests of other stockholders.

We will have broad discretion in the use of proceeds from this offering and may invest or spend the proceeds in ways with which you do not agree and in ways that may not yield a return.

We will have broad discretion over the use of proceeds from this offering. You may not agree with our decisions, and our use of the proceeds may not yield any return on your investment in us. Our failure to apply the net proceeds of this offering effectively could result in financial losses that could materially impair our ability to pursue our growth strategy, cause the price of our common stock to decline, delay development of our product candidates or require us to raise additional capital.

Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third party claims against us and may reduce the amount of money available to us.

Our amended and restated certificate of incorporation and amended and restated bylaws as they will be in effect following this offering provide that we will indemnify our directors and officers, in each case to the fullest extent permitted by Delaware law.

In addition, as permitted by Section 145 of the Delaware General Corporation Law, our amended and restated bylaws as they will be in effect following this offering and our indemnification agreements that we have entered into with our directors and officers provide that:

 

   

We will indemnify our directors and officers for serving us in those capacities, or for serving other business enterprises at our request, to the fullest extent permitted by Delaware law. Delaware law provides that a corporation may indemnify such person if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the registrant and, with respect to any criminal proceeding, had no reasonable cause to believe such person’s conduct was unlawful.

 

   

We may, in our discretion, indemnify employees and agents in those circumstances where indemnification is permitted by applicable law.

 

   

We are required to advance expenses, as incurred, to our directors and officers in connection with defending a proceeding, except that such directors or officers shall undertake to repay such advances if it is ultimately determined that such person is not entitled to indemnification.

 

   

We will not be obligated pursuant to our amended and restated bylaws to indemnify a person with respect to proceedings initiated by that person against us or our other indemnitees, except with respect to proceedings authorized by our board of directors or brought to enforce a right to indemnification.

 

   

The rights conferred in our amended and restated bylaws are not exclusive, and we are authorized to enter into indemnification agreements with our directors, officers, employees and agents and to obtain insurance to indemnify such persons.

 

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We may not retroactively amend our amended and restated bylaw provisions to reduce our indemnification obligations to directors, officers, employees and agents.

Because we do not anticipate paying any cash dividends on our common stock in the foreseeable future, capital appreciation, if any, will be your sole source of gains.

We have not declared or paid cash dividends on our common stock to date. We currently intend to retain our future earnings, if any, to fund the development and growth of our business. In addition, the terms of any existing or future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

We will incur costs and demands upon management as a result of complying with the laws and regulations affecting public companies in the United States, which may adversely affect our operating results.

As a public company listed in the United States, we will incur significant additional legal, accounting and other expenses. In addition, changing laws, regulations and standards relating to corporate governance and public disclosure, including regulations implemented by the SEC and the NASDAQ Stock Market, may increase legal and financial compliance costs and make some activities more time consuming. These laws, regulations and standards are subject to varying interpretations and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If notwithstanding our efforts to comply with new laws, regulations and standards, we fail to comply, regulatory authorities may initiate legal proceedings against us and our business may be harmed.

Failure to comply with these rules might also make it more difficult for us to obtain certain types of insurance, including director and officer liability insurance, and we might be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on committees of our board of directors or as members of senior management.

We are an “emerging growth company,” and if we decide to comply only with reduced disclosure requirements applicable to emerging growth companies, our common stock could be less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or JOBS Act, enacted in April 2012, and, for as long as we continue to be an “emerging growth company,” we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We will remain an “emerging growth company” until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the closing of this offering, (b) in which we have total annual gross revenues of over $1.0 billion or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and our stock price may be more volatile.

Under the JOBS Act, emerging growth companies that become public can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards following the closing of this offering and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, particularly in the sections titled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “believe,” “will,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “could,” “potentially” or the negative of these terms or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, but are not limited to, statements concerning the following:

 

   

our expectations regarding the results and the timing of results in our Phase 3 clinical trials of RT001 for the treatment of crow’s feet lines;

 

   

our expectations regarding the results and the timing of clinical trials of RT001 for the treatment of hyperhidrosis or other indications;

 

   

our expectations regarding the results and the timing of clinical trials of RT002 for the treatment of glabellar lines;

 

   

our expectations regarding our future development of RT001 for other indications, including therapeutic indications;

 

   

our expectation regarding the timing of our regulatory submissions for approval of RT001 for the treatment of crow’s feet lines in the United States, Europe and other countries or for treatment of hyperhidrosis in the United States;

 

   

our expectation regarding the timing of our filing of a U.S. IND for RT002 for the treatment of glabellar lines;

 

   

the potential for commercialization of RT001 and RT002, if approved, by us;

 

   

our expectations regarding the potential market size, opportunity and growth potential for RT001 and RT002, if approved for commercial use;

 

   

our belief that RT001 and RT002 can expand the overall botulinum toxin market;

 

   

our ability to build our own sales and marketing capabilities, or seek collaborative partners, to commercialize our product candidates, if approved;

 

   

our ability to scale up our manufacturing capabilities if our product candidates are approved;

 

   

estimates of our expenses, future revenue, capital requirements and our needs for additional financing;

 

   

the timing or likelihood of regulatory filings and approvals;

 

   

our ability to advance product candidates into, and successfully complete, clinical trials;

 

   

the implementation of our business model, strategic plans for our business, product candidates and technology;

 

   

the initiation, timing, progress and results of future preclinical studies and clinical trials, and our research and development programs;

 

   

the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates and technology;

 

   

our ability to establish collaborations or obtain additional funding;

 

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our expectations regarding the time during which we will be an emerging growth company under the JOBS Act;

 

   

our use of proceeds from this offering;

 

   

our financial performance; and

 

   

developments and projections relating to our competitors and our industry.

These forward-looking statements are subject to a number of risks, uncertainties and assumptions described under the section titled “Risk Factors” and elsewhere in this prospectus. We also operate in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances described in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements contained in this prospectus.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance, events, circumstances or achievements reflected in the forward-looking statements will ever be achieved or occur. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations.

You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement on Form S-1, of which this prospectus is a part, with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

 

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USE OF PROCEEDS

We estimate that the net proceeds from the sale of shares of our common stock in this offering will be $        million, based on an assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ over-allotment option to purchase additional shares in this offering is exercised in full, we estimate that our net proceeds would be $        million, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

A $1.00 increase or decrease in the assumed initial public offering price of $         per share would increase or decrease the net proceeds that we receive from this offering by $        million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease of one million in the number of shares of common stock offered by us would increase or decrease the net proceeds that we receive from this offering by $        million, assuming that the assumed initial public offering price remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

We currently expect to use the net proceeds from the offering as follows:

 

   

Approximately $         million to $         million to fund research and development expenses associated with our RT001 and RT002 manufacturing, quality and regulatory efforts.

 

   

Approximately $         million to $         million to complete one Phase 3 clinical pivotal trial in the United States, to continue a long term safety clinical trial and other associated programs relating to RT001 for the treatment of crow’s feet lines, and to initiate our first U.S. Phase 2 clinical trial and associated programs relating to RT002 for the treatment of glabellar lines.

 

   

Approximately $         million to make payments through 2014 under our September 2011 term loan agreement with Hercules Technology Growth Capital, Inc., which bears interest at a rate equal to the greater of 9.85% or the prime rate plus 6.60%, and requires the principal balance to be repaid in thirty-three equal monthly installments beginning in July 2012.

 

   

Approximately $         million to make payments under our settlement agreement with Medicis Pharmaceutical Corporation (acquired by Valeant Pharmaceuticals International, Inc.).

We will use the balance of the proceeds, if any, for the development of RT001 for the treatment of hyperhidrosis and other indications, as well as for working capital and other general corporate purposes.

This expected use of the net proceeds from the offering represents our intentions based upon our current plans and business conditions. As of the date of this prospectus, we cannot predict with any certainty all of the particular uses for the net proceeds or the amounts that we will actually spend on the uses set forth above. The amounts and timing of our actual expenditures and the extent of clinical development may vary significantly depending on numerous factors, including the status, results and timing of our current preclinical studies and ongoing clinical trials or clinical trials we may commence in the future, product approval process with the FDA, as well as any collaborations that we may enter into with third parties and any unforeseen cash needs. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering.

Pending their use as described above, we plan to invest the net proceeds in short-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or guaranteed obligations of the U.S. government.

 

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DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings and do not expect to pay any cash dividends on our common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will be dependent on a number of factors, including our earnings, capital requirements, overall financial conditions, business prospects, contractual restrictions and other factors our board of directors may deem relevant. Our loan and security agreement with Hercules Technology Growth Capital, Inc. prohibits the payment of dividends.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2013 on:

 

   

an actual basis;

 

   

a pro forma basis to give effect to (i) the conversion of all outstanding shares of our convertible preferred stock into common stock immediately upon the closing of this offering, (ii) the resulting reclassification of the convertible preferred stock warrant liability to additional paid-in capital, (iii) the filing and effectiveness of our amended and restated certificate of incorporation immediately prior to the closing of this offering, (iv) the issuance and automatic conversion of the principal and accrued interest through October 7, 2014 under the 2013 notes into              shares of common stock immediately prior to the closing of this offering at a conversion price equal to the initial public offering price, assuming an initial public offering price of $         per share, the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and (v) the issuance and automatic exercise of the 2013 warrants and the automatic exercise of the other outstanding common stock warrants into              shares of common stock upon the closing of this offering, assuming net share exercise and an initial public offering price of $         per share, the midpoint of the estimated offering price range set forth on the cover page of this prospectus, but does not give effect to transactions under the Essex Capital Facility; and

 

   

a pro forma as adjusted basis to give further effect to the sale of                  shares of our common stock offered by us in this offering at an assumed initial public offering price of $         per share, the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Because the number of shares that will be issued upon conversion of the 2013 notes and the exercise of the 2013 warrants depends upon the actual initial public offering price per share in this offering, the actual number of shares issuable upon such conversion and exercise will likely differ from the number of shares set forth above. In this regard, a $1.00 increase in the assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would decrease the number of shares of our common stock issued on conversion of the 2013 notes and the exercise of the 2013 warrants (and therefore the number of shares to be outstanding after this offering) by          shares. A $1.00 decrease in the assumed initial public offering price would increase the number of shares of our common stock issued on conversion of the 2013 notes and the exercise of the 2013 warrants (and therefore the number of shares to be outstanding after this offering) by             shares.

Share amounts have been retroactively adjusted to give effect to a reverse stock split of                -for-                 of our common stock effected on                 , 2014.

 

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The information below is illustrative only, and our capitalization following the closing of this offering will be adjusted based on the actual initial public offering price and other terms of the offering determined at the pricing of this offering. You should read this table together with our consolidated financial statements and related notes, “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” each included elsewhere in this prospectus.

 

     As of September 30, 2013  
     Actual     Pro Forma      Pro Forma
as Adjusted
 
     (In thousands, except per share amounts)  
     (Unaudited)  

Cash and cash equivalents(1)

   $ 1,909      $                      $                  
  

 

 

   

 

 

    

 

 

 

Note payable, net of discounts and including current and non-current portion

   $ 12,951      $         $     

Capital leases, including current and non-current portion

     125        

Convertible notes

            

Convertible preferred stock warrant liability

     1,459             

Convertible preferred stock, par value of $0.001 per share: 145,010,269 shares authorized, 130,350,918 shares issued and outstanding, actual; 5,000,000 shares authorized and no shares issued or outstanding, pro forma or pro forma as adjusted

     123,982             

Stockholders’ deficit:

       

Common stock, par value of $0.001 per share: 221,000,000 shares authorized; 3,410,552 shares issued and outstanding, actual;          shares authorized, 133,761,470 shares issued and outstanding, pro forma;          shares authorized,          shares issued and outstanding, pro forma as adjusted

     3        

Additional paid-in capital

     38,115        

Deficit accumulated during the development stage

     (185,801     
  

 

 

   

 

 

    

 

 

 

Total stockholders’ deficit

     (147,683     
  

 

 

   

 

 

    

 

 

 

Total capitalization

   $ (9,166   $         $     
  

 

 

   

 

 

    

 

 

 

 

(1) Excludes restricted cash of $585,000.

A $1.00 increase or decrease in the assumed initial public offering price of $        per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ deficit and total capitalization by $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease of one million in the number of shares of common stock offered by us would increase or decrease our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ deficit and total capitalization by $         million, assuming that the assumed initial public offering price remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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The number of shares of common stock issued and outstanding actual, pro forma and pro forma as adjusted in the table above excludes the following shares as of September 30, 2013:

 

   

15,678,569 shares of our common stock issuable upon the exercise of options to purchase our common stock outstanding under our 2002 Equity Incentive Plan and 2012 Equity Incentive Plan, with a weighted-average exercise price of $0.49 per share (excluding an additional 3,308,250 shares issuable upon the exercise of options to purchase our common stock at the weighted-average exercise price of $0.61 per share granted after September 2013);

 

   

2,582,181 shares of our common stock issuable upon the exercise of outstanding convertible preferred stock warrants at a weighted-average exercise price of $1.35 per share;

 

   

                 shares of our common stock issuable upon the exercise of the Essex warrants, assuming an initial public offering price of $                , which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus;

 

   

5,595,667 shares of our common stock reserved for future issuance under our 2012 Equity Incentive Plan (including an additional 3,308,250 shares issuable upon the exercise of options to purchase our common stock granted after September 2013);

 

   

                 shares of our common stock reserved for future issuance under our 2014 Equity Incentive Plan, plus annual increases thereunder, which will become effective prior to the closing of this offering as more fully described in “Executive Compensation—Employee Benefit Plans”; and

 

   

                 shares of our common stock reserved for future issuance under our 2014 Employee Stock Purchase Plan, plus annual increases thereunder, which will become effective prior to the closing of this offering as more fully described in “Executive Compensation—Employee Benefit Plans”.

The number of shares of common stock issued and outstanding actual in the table above as of September 30, 2013 excludes 11,864,484 shares of our common stock issuable upon the exercise of outstanding common stock warrants at a weighted-average exercise price of $0.01 per share.

 

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DILUTION

If you invest in our common stock in this offering, your interest will be diluted immediately to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. Our pro forma net tangible book value as of September 30, 2013 was $         million, or $        per share. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the number of shares of common stock outstanding as of September 30, 2013, after giving effect to (i) the conversion of all outstanding shares of our convertible preferred stock into shares of our common stock immediately upon the closing of this offering, (ii) the resulting reclassification of the convertible preferred stock warrant liability to additional paid-in capital, (iii) the filing and effectiveness of our amended and restated certificate of incorporation immediately prior to the closing of this offering, (iv) the issuance and automatic conversion of the principal and accrued interest through October 7, 2014 under the 2013 notes into             shares of common stock immediately prior to the closing of this offering at a conversion price equal to the initial public offering price, assuming an initial public offering price of $         per share, the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and (v) the issuance and automatic exercise of the 2013 warrants and the automatic exercise of the other outstanding common stock warrants into              shares of common stock upon the closing of this offering, assuming net share exercise and an initial public offering price of $             per share, the midpoint of the estimated offering price range set forth on the cover page of this prospectus, but does not give effect to transactions under the Essex Capital Facility.

After giving further effect to the sale by us of                 shares of common stock in this offering at an assumed initial public offering price of $        per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of September 30, 2013 would have been $        million, or $        per share. This amount represents an immediate increase in pro forma net tangible book value of $        per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of $        per share to new investors purchasing shares of common stock in this offering at the assumed initial public offering price.

Because the number of shares of common stock that will be issued upon the conversion of the 2013 notes and the exercise of the 2013 warrants depends upon the actual initial public offering price per share in this offering, the actual number of shares issuable upon such exercise and conversion will likely differ from the respective number of shares set forth above. See “Prospectus Summary – The Offering.”

The following table illustrates this dilution:

 

Assumed initial public offering price per share

      $                

Pro forma net tangible book value per share as of September 30, 2013

   $               

Increase in pro forma net tangible book value per share attributable to new investors in this offering

     
  

 

 

    

Pro forma as adjusted net tangible book value per share after this offering

     
     

 

 

 

Dilution in pro forma net tangible book value per share to investors in this offering

      $     
     

 

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $        per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease our pro forma as adjusted net tangible book value per share after this offering by $         and would increase or decrease dilution per share to new investors by $         and $        , respectively, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, giving effect to the conversion of the 2013 notes and exercise of the 2013 warrants and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. In addition, to the extent any outstanding options or warrants are exercised, new investors will experience further dilution.

 

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The following table presents, as of September 30, 2013, on a pro forma as adjusted basis, as described above, the number of shares of common stock purchased from us, the total consideration and the average price per share (i) paid to us by our existing stockholders and (ii) to be paid by new investors purchasing shares of our common stock in this offering at an assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Shares Purchased     Total Consideration     Average Price
per Share
 
      Number    Percent     Amount      Percent    

Existing stockholders

        %      $                             $            

New investors

            
  

 

  

 

 

   

 

 

    

 

 

   

Totals

        100.0   $           100.0  
  

 

  

 

 

   

 

 

    

 

 

   

A $1.00 increase or decrease in the assumed initial public offering price of $        per share would increase or decrease the total consideration paid by new investors by $        million and increase or decrease the percent of total consideration paid by new investors by        %, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Assuming the underwriters’ over-allotment option to purchase additional shares is exercised in full, sales by us in this offering will reduce the percentage of shares held by existing stockholders to        % and will increase the number of shares held by our new investors to        , or         % of the total number of shares of our common stock to be outstanding after this offering.

The number of shares of our common stock to be outstanding after this offering is based upon the number of shares of our common stock outstanding as of September 30, 2013 and excludes the following shares:

 

   

15,678,569 shares of our common stock issuable upon the exercise of options to purchase our common stock outstanding under our 2002 Equity Incentive Plan and 2012 Equity Incentive Plan, with a weighted-average exercise price of $0.49 per share (excluding an additional 3,308,250 shares issuable upon the exercise of options to purchase our common stock at the weighted-average exercise price of $0.61 per share granted after September 2013);

 

   

2,582,181 shares of our common stock issuable upon the exercise of outstanding convertible preferred stock warrants at a weighted-average exercise price of $1.35 per share;

 

   

                 shares of our common stock issuable upon the exercise of the Essex warrants, assuming an initial public offering price of $        , which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus;

 

   

5,595,667 shares of our common stock reserved for future issuance under our 2012 Equity Incentive Plan (including an additional 3,308,250 shares issuable upon the exercise of options to purchase our common stock granted after September 2013);

 

   

                shares of our common stock reserved for future issuance under our 2014 Equity Incentive Plan, plus annual increases thereunder, which will become effective prior to the closing of this offering as more fully described in “Executive Compensation—Employee Benefit Plans”; and

 

   

                shares of our common stock reserved for future issuance under our 2014 Employee Stock Purchase Plan, plus annual increases thereunder, which will become effective prior to the closing of this offering as more fully described in “Executive Compensation—Employee Benefit Plans”.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

We derived the selected consolidated statements of operations data for the years ended December 31, 2011 and 2012 and the balance sheet data as of December 31, 2011 and 2012 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the selected consolidated statements of operations data for the nine months ended September 30, 2012 and 2013 and the balance sheet data as of September 30, 2013 from our unaudited interim consolidated financial statements included elsewhere in this prospectus. The unaudited interim consolidated financial statements reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for the fair presentation of the financial statements. Our historical results are not necessarily indicative of the results to be expected in the future and the results for the nine months ended September 30, 2013 are not necessarily indicative of results to be expected for the full year or any other period. You should read the following selected consolidated financial data in conjunction with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, related notes and other financial information included elsewhere in this prospectus. The selected financial data in this section is not intended to replace the consolidated financial statements and is qualified in its entirety by the consolidated financial statements, related notes and other financial information included elsewhere in this prospectus.

 

     Year Ended
December 31,
    Nine Months Ended
September 30,
 
     2011     2012     2012     2013  
                 (Unaudited)  
     (In thousands, except share and per share amounts)  

Consolidated Statements of Operations Data:

        

Revenue

   $ 557      $ 717      $ 600      $ 308   

Cost of revenue

     5                        
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     552        717        600        308   

Operating expenses:

        

Research and development(1)

     22,735        32,708        15,829        21,592   

Sales, general and administrative(1)

     5,555        11,195        9,581        8,008   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     28,290        43,903        25,410        29,600   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (27,738     (43,186     (24,810     (29,292

Interest income

     15        7        8        2   

Interest expense

     (17,790     (28,959     (19,250     (13,466

Change in fair value of derivative liabilities associated with convertible notes

     (356     13,860        (3,338     1,800   

Change in fair value of derivative liabilities associated with the Medicis settlement

                          (265

Change in fair value of convertible preferred stock warrant liability

     836        125        117        (1,108

Other income (expense), net

     170        (106     (85     (40
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (44,863     (58,259     (47,358     (42,369

Benefit from income taxes

                            
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (44,863   $ (58,259   $ (47,358   $ (42,369
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Year Ended December 31,     Nine Months Ended
September 30,
 
     2011     2012     2012     2013  
                 (Unaudited)  
     (In thousands, except share and per share amounts)  

Net income (loss) attributable to common stockholders(2):

        

Basic

   $ (44,863   $ (58,259   $ (47,358   $ 733   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ (44,863   $ (58,259   $ (47,358   $ 2,966   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to common stockholders(2):

        

Basic

   $ (15.07   $ (19.37   $ (15.81   $ 0.23   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ (15.07   $ (19.37   $ (15.81   $ 0.20   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average number of shares used in computing net income (loss) per share attributable to common stockholders(2):

        

Basic

     2,976,846        3,008,401        2,995,795        3,229,730   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     2,976,846        3,008,401        2,995,795        14,572,082   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)(2)

     $ (2.00     $ (0.43
    

 

 

     

 

 

 

Weighted-average number of shares used in computing pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)(2)

       29,129,887          98,593,967   
    

 

 

     

 

 

 

 

(1) Results above include stock-based compensation as follows:

 

     Year Ended December 31,      Nine Months Ended September 30,  
         2011              2012              2012              2013      
                   (Unaudited)  
     (In thousands)  

Stock-Based Compensation:

           

Research and development

   $ 150       $ 48       $ 27       $ 138   

Sales, general and administrative

     123         31         39         208   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 273       $ 79       $ 66       $ 346   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) Pro forma basic and diluted net loss per share has been calculated assuming the conversion of all outstanding shares of convertible preferred stock into shares of common stock. Please see Note 16 of our consolidated financial statements included elsewhere in this prospectus for an explanation of the calculations of our actual basic and diluted net income (loss) per share and our pro forma unaudited basic and diluted net loss per share.

 

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     As of December 31,     As of September 30,  
     2011     2012     2013  
                 (Unaudited)  
     (In thousands)  

Balance Sheet Data:

      

Cash and cash equivalents

   $ 29,621      $ 4,083      $ 1,909   

Restricted cash

     735        660        585   

Working capital (deficit)

     21,264        (112,530     (28,645

Total assets

     39,928        13,423        18,920   

Convertible notes payable – current and non-current(3)

     45,062        86,985          

Note payable, net – current and non-current

     21,887        18,519        12,951   

Deferred revenue, net – current and non-current

     10,500                 

Derivative liabilities associated with convertible notes – current and non-current(3)

     13,405        1,800          

Derivative liabilities associated with Medicis settlement – current and non-current

            15,268        8,606   

Convertible preferred stock warrant liability

     476        351        1,459   

Convertible preferred stock

     95,433        95,433        123,982   

Total stockholders’ deficit

     (155,482     (216,727     (147,683

 

  (3) The convertible notes converted into an aggregate of 71,227,270 shares of Series E-4 convertible preferred stock in March 2013. As a result, the liability on the consolidated balance sheets for the convertible notes and the derivative liabilities associated with these convertible notes are no longer outstanding following the conversion.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our “Selected Consolidated Financial Data” and our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed above in the section entitled “Risk Factors.”

Overview

We are a clinical stage specialty biopharmaceutical company focused on the development, manufacturing and commercialization of novel botulinum toxin products for multiple aesthetic and therapeutic applications. Botulinum toxin is a well-characterized protein currently used in numerous aesthetic and therapeutic indications and represents a multi-billion dollar market in the United States and other countries. All currently approved and commercially available botulinum toxin products are administered by injection. Our lead product candidate, RT001, is a topical formulation of botulinum toxin type A, which we believe has significant advantages over existing injectable products and could significantly expand the botulinum toxin market beyond existing users. Our second product candidate, RT002, is a novel injectable formulation of botulinum toxin type A designed to be more targeted and longer lasting than currently available botulinum toxin injectable products. Both of our product candidates combine our purified botulinum toxin with our proprietary TransMTS® peptide delivery system.

We are evaluating RT001 in a broad clinical program that includes aesthetic indications such as lateral canthal lines, the wrinkles around the eyes which are commonly referred to as crow’s feet lines, and therapeutic indications such as hyperhidrosis, or excessive sweating, migraine headache and allergic rhinitis, or inflammation of the mucous membrane inside the nose.

We are in a Phase 3 clinical development program of RT001 in North America for the treatment of crow’s feet lines, and we plan to initiate an additional Phase 3 clinical trial in Europe by early 2015. We expect to receive primary efficacy data from a pivotal Phase 3 clinical trial of RT001 in mid-2014 and duration data in the second half of 2014. To date, we have conducted thirteen clinical trials for RT001, with a total of over 1,400 subjects for the treatment of crow’s feet lines. In these Phase 2 clinical trials, RT001 has demonstrated a statistically significant and clinically meaningful reduction in crow’s feet lines. These and other studies have also indicated that RT001 is well tolerated with no serious adverse events related to study drug or study treatment procedures or other safety concerns. RT001 is our lead product candidate in clinical development and we are substantially dependent on its regulatory approval and successful commercialization.

Since commencing operations in 2002, we have devoted substantially all our efforts identifying and developing product candidates for the aesthetic and therapeutic markets, recruiting personnel and raising capital. We have devoted predominantly all of our resources to the preclinical and clinical development of, and manufacturing capabilities for, RT001 and RT002. We have retained all rights to develop and commercialize RT001 and RT002 worldwide. We have not filed for approval with the U.S. Food and Drug Administration, or FDA, for the commercialization of RT001 and we have not generated any revenue from product sales for RT001. Through December 31, 2012, we have funded substantially all of our operations through the sale and issuance of our preferred stock, venture debt and convertible debt. In the nine months ended September 30, 2013, we raised proceeds in the aggregate amount of $40.8 million through the sale of shares of our Series E convertible preferred stock. We also raised $19.4 million through the issuance of convertible notes and common stock warrants in the fourth quarter of 2013.

We have never been profitable and, as of September 30, 2013, had an accumulated deficit of $185.8 million. We incurred net losses of $44.9 million, $58.3 million and $42.4 million in the years ended December 31, 2011 and 2012 and for the nine months ended September 30, 2013, respectively. We expect to continue to incur net operating losses for at least the next several years as we advance RT001 and RT002 through clinical development, seek regulatory approval, prepare for and, if approved, proceed to commercialization. We have the ability to manufacture

 

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our own botulinum toxin type A product to support our clinical trials and eventually a substantial portion of our commercial production. Additionally, we currently utilize third-party clinical research organizations, or CROs, to carry out our clinical development and we do not yet have a sales organization. We will need substantial additional funding to support our operating activities, especially as we approach anticipated regulatory approval in the United States and other territories and begin to establish our sales capabilities. Adequate funding may not be available to us on acceptable terms, or at all. Our failure to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on our business, results of operations, and financial condition.

Medicis Settlement

In October 2012, we entered into a settlement and termination agreement with Medicis Pharmaceutical Corporation, or Medicis, through which we reacquired from Medicis rights in all territories for RT001 and RT002. The agreement terminated our license agreement with Medicis and requires that we make payments to them of up to $25.0 million, comprised of (i) an upfront payment of $7.0 million, which we made in November 2012, (ii) payments of $14.0 million from a portion of specified types of cash proceeds received by us, an aggregate of $6.9 million of which we paid in April and May 2013, and (iii) a payment of $4.0 million upon the achievement of specified regulatory milestones. The Medicis settlement also impacted our deferred revenue, research and development expenses, our stockholders’ deficit and liabilities due to derivatives derived from the settlement payments, which are discussed below and in Note 4 of our consolidated financial statements included elsewhere in this prospectus.

Series E Convertible Preferred Stock Financing

We raised $40.8 million through the issuance of 27,276,108 shares of our Series E-5 convertible preferred stock at $1.495 per share and warrants to purchase an aggregate of 8,182,810 shares of our common stock during the nine months ended September 30, 2013. In addition, we issued 71,227,270 shares of Series E-4 convertible preferred stock upon the conversion of the outstanding principal and accrued interest of our outstanding convertible notes in the amount of $71.0 million. Also in conjunction with the Series E preferred stock financing during the nine months ended September 30, 2013, our prior outstanding shares of convertible preferred stock converted into new shares of Series E convertible preferred stock as follows: (i) conversion of our Series A and B convertible preferred stock into our Series E-1 convertible preferred stock, (ii) conversion of our Series C convertible preferred stock into our Series E-2 convertible preferred stock and (iii) conversion of our Series D convertible preferred stock into our Series E-3 convertible preferred stock. As a result of the extinguishment of the convertible notes prior to maturity and the related conversion into shares of Series E-4 convertible preferred stock, we recognized a capital contribution of $32.0 million to additional paid-in capital during the nine months ended September 30, 2013, as substantially all of the lenders were stockholders at the time of the extinguishment. As a result of the extinguishment of the prior outstanding shares of convertible preferred stock and the related conversion into new shares of Series E convertible preferred stock, we recognized a capital contribution of $74.9 million as a benefit to our net income per share attributable to common stockholders for the nine months ended September 30, 2013.

Essex Capital Facility

In December 2013, we entered into a $10.8 million loan and lease agreement, or the Essex Capital Facility, with Essex Capital Corporation to finance the construction and installation of equipment for use in our manufacturing facility. We borrowed $2.5 million under the Essex Capital Facility in December 2013 and we anticipate borrowing an additional $2.5 million in January 2014. In connection with each borrowing, we are required to issue warrants convertible into our Series E-5 convertible preferred stock if the borrowing occurs prior to the closing of our initial public offering or into our common stock if the borrowing occurs on or after the closing of our initial public offering. See “—Liquidity and Capital Resources”. Essex Capital Corporation currently owns $250,000 principal amount of our 2013 notes and 1,489,951 shares of our common stock, on an as-converted, as-exercised basis.

 

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Financial Operations Overview

Revenue

During the years ended December 31, 2011 and 2012 and the nine months ended September 30, 2012 and 2013, we recognized revenue from license and royalty agreements and from the sale of products.

We recognized only a limited amount of product revenue during the year ended December 31, 2011 of which all was derived from the promotion and sale of Relastin, an over-the-counter skincare product that does not incorporate any of our technology related to RT001 or RT002. During the year ended December 31, 2011, we entered into an asset purchase agreement for the sale of the Relastin product line for $50,000 and royalties on future sales of Relastin. As a result, our only product revenue during the years presented consisted of $57,000 in the year ended December 31, 2011 from sales of Relastin. We did not have any product revenue during the year ended December 31, 2012. With the divestment of the Relastin product line, we are solely focused on the development of our RT001 and RT002 product candidates.

We recognized royalty revenue during the year ended December 31, 2012 and the nine months ended September 30, 2012 and 2013 related to the Relastin asset purchase and royalty agreement and we did not recognize any royalty revenue during the year ended December 31, 2011. The Relastin royalty agreement provides for minimum royalty payment of $0.3 million per year, to be paid quarterly for up to 15 years from the execution date; however, the acquirer may terminate the royalty agreement with 90 days’ notice as of December 31, 2013 with the rights to the Relastin product line reverting back to us. We do not currently have any plans for the future of Relastin as our focus has been primarily on the development of RT001 and RT002.

Our license revenue has historically been derived through nonrefundable technology license fees for our RT001 and RT002 product candidates. During the years ended December 31, 2011 and 2012 and the nine months ended September 30, 2012, our license revenue was derived from an arrangement with Medicis whereby, prior to our settlement with them, we had granted them specified rights to RT002 in return for an upfront payment. The upfront payment was deferred and recognized over the estimated performance period; however, we did not recognize any license revenue from the agreement with Medicis during the nine months ended September 30, 2013 as the prior license agreement was discontinued as part of the Medicis legal settlement in October 2012. In the nine months ended September 30, 2013, we recognized license revenue of $0.1 million pursuant to an exclusive technology evaluation agreement in June 2013 whereby we received an upfront payment in the amount of $0.3 million, which was initially recorded as deferred revenue and is being recognized over the estimated performance period.

Costs and Operating Expenses

Our cost and operating expenses consist of cost of revenue, research and development expenses and sales, general and administrative expenses. Our cost of revenue has not been significant to date. As for our operating expenses, the largest component is our personnel costs which consist primarily of wages, benefits and bonuses as well as the related stock-based compensation. We expect costs to continue to increase in absolute dollars as we hire new employees to continue to grow our business and we expect clinical trial and other expenses paid to third parties to increase as we complete development of RT001, RT002 or any other product candidates.

Research and Development Expenses

We recognize research and development expenses as they are incurred. Since our inception, we have focused on our clinical development programs and the related research and development. Our research and development expenses consist primarily of:

 

   

salaries and related expenses for personnel in research and development functions, including expenses related to stock-based compensation granted to such personnel;

 

   

expenses related to the completion of Phase 3 clinical trials for RT001 and Phase 1 and 2 trials for RT002, including expenses related to production of clinical supplies;

 

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fees paid to clinical consultants, clinical trial sites and vendors, including CROs in conjunction with implementing and monitoring our preclinical and clinical trials and acquiring and evaluating preclinical and clinical trial data, including all related fees, such as for investigator grants, patient screening fees, laboratory work and statistical compilation and analysis;

 

   

the fair value of technology rights reacquired as part of our settlement with Medicis;

 

   

other consulting fees paid to third parties;

 

   

expenses related to production of clinical supplies, including fees paid to contract manufacturers;

 

   

expenses related to establishment of our own manufacturing facilities;

 

   

expenses related to license fees and milestone payments under in-licensing agreements;

 

   

expenses related to compliance with drug development regulatory requirements in the United States, the European Union and other foreign jurisdictions; and

 

   

depreciation and other allocated expenses.

We expense both internal and external research and development expenses as they are incurred. We have been developing RT001 and RT002 since 2002 and we typically use our employees, consultants and infrastructure resources across both programs.

For the years ended December 31, 2011 and 2012 and the nine months ended September 30, 2012 and 2013, costs associated with our manufacturing, quality and regulatory efforts for both RT001 and RT002 development have been our largest research and development related expenses, totaling $21.9 million, or 96.2%, and $30.3 million, or 92.6%, of research and development expenses in 2011 and 2012, respectively, and $14.6 million, or 92.5%, and $15.0 million, or 69.4%, of research and development expenses for the nine months ended September 30, 2012 and 2013, respectively. These costs do not include clinical costs associated with the development of RT001 and RT002. We believe that the strict allocation of costs by product candidate would not be meaningful. As such, we generally do not track these costs by product candidate.

Clinical costs associated with the development of RT001 and RT002, including clinical trials of RT001 for the treatment of crow’s feet lines and clinical trials of RT002 for the improvement of glabellar lines, totaled $0.9 million, or 3.8%, and $2.4 million, or 7.4%, of research and development expenses in 2011 and 2012, respectively, and $1.2 million, or 7.5%, and $6.6 million, or 30.6%, of research and development expenses for the nine months ended September 30, 2012 and 2013, respectively. Clinical costs associated with the development of RT002 have been insignificant to date.

Our research and development expenditures are subject to numerous uncertainties primarily related to the timing and cost needed to complete our respective projects. Further, the development timelines, the probability of success and development expenses can differ materially from expectations and the completion of clinical trials may take several years or more depending on the type, complexity, novelty and intended use of a product candidate. Accordingly, the cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical development. We expect our research and development expenses to increase as we continue our Phase 3 clinical development of RT001 for the treatment of crow’s feet lines or if the FDA requires us to do additional clinical trials for its approval and as we enter into clinical trials for RT001 for hyperhidrosis and other indications and for RT002.

Sales, General and Administrative Expenses

Sales, general and administrative expenses consist primarily of personnel costs, including stock-based compensation, for employees in our commercial, administration, finance and business development functions. Other significant expenses include professional fees for accounting and legal services, including legal services associated with obtaining and maintaining patents and the recent Medicis settlement. We expect that our sales, general and administrative expenses will increase with the continued development of, and if approved, the commercialization of RT001 and as we begin to operate as a public company after the closing of this offering.

 

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Other Income (Expense)

Other income (expense) is comprised of interest income, interest expense, changes in fair value of derivative liabilities associated with convertible notes, changes in fair value of derivative liabilities associated with the Medicis settlement, changes in fair value of convertible preferred stock warrant liability and other income (expense), net.

Interest Income

Interest income consists primarily of interest income earned on our cash and cash equivalents and marketable securities balances. We expect interest income to vary each reporting period depending on our average cash and cash equivalents and marketable securities balances during the period and market interest rates. To date, our interest income has not been significant in any individual period.

Interest Expense

Interest expense primarily consists of the interest charges associated with our convertible notes, notes payable and capital lease obligations. Notes payable under our term loan agreement with Hercules Technology Growth Capital, Inc., or Hercules, bear interest at a rate equal to the greater of 9.85% or the prime rate plus 6.60%. The interest charge on our convertible notes and capital lease obligations is fixed at the inception of the related transaction based on the incremental borrowing rate in effect on such date. Our interest expense also includes cash and non-cash components with the non-cash components consisting of (i) interest recognized from the amortization of debt issuance costs which are generally derived from cash payments related to the issuance of our convertible notes and our notes payable and which are capitalized on our balance sheets, (ii) interest recognized from the amortization of debt discounts derived from the issuance of warrants and derivatives issued in conjunction with our outstanding convertible notes which are also capitalized on our balance sheets and (iii) interest recognized on our convertible notes which was not paid and was instead converted into shares of our convertible preferred stock.

In March 2013, all of our then-outstanding convertible notes converted into shares of convertible preferred stock and, as a result, we expect our interest expense to substantially decrease. However, this decrease will be partially offset by new interest expense resulting from the issuance of $19.4 million in convertible notes in the fourth quarter of 2013, or the 2013 notes, and the Essex Capital Facility. See “—Liquidity and Capital Resources” for a description of the 2013 notes and the Essex Capital Facility.

Change in Fair Value of Derivative Liabilities Associated with Convertible Notes

Our derivative liabilities associated with convertible notes are classified as liabilities on our consolidated balance sheets and are remeasured to fair value at each balance sheet date with the corresponding gain or loss from the adjustment recorded in the consolidated statements of operations and comprehensive loss. In March 2013, all of our then-outstanding convertible notes, to which these derivative liabilities relate, converted into shares of convertible preferred stock and, as a result, these derivative liabilities were settled and will no longer require periodic fair value remeasurements.

Change in Fair Value of Derivative Liabilities Associated with the Medicis Settlement

Our outstanding derivative liabilities associated with the Medicis settlement are classified as liabilities on our consolidated balance sheets. These liabilities will be reduced as the related payments are made under the settlement agreement and the remaining liabilities will be subsequently remeasured to fair value at each balance sheet date with the corresponding gain or loss from the adjustment recorded in the consolidated statements of operations and comprehensive loss. We will continue to record adjustments to the fair value of the Medicis settlement derivative liabilities until the related settlement payments have been paid. At that time, these derivative liabilities associated with the Medicis settlement will be adjusted to fair value one last time with the final fair value being reclassified to additional paid-in capital. See “—Results of Operations for the Nine Months Ended September 30, 2012 and 2013—Other Income (Expense).”

 

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Change in Fair Value of Convertible Preferred Stock Warrant Liability

Our outstanding convertible preferred stock warrants are classified as liabilities on our consolidated balance sheets at fair value as they are contingently redeemable because they may obligate us to transfer assets to the holders at a future date under certain circumstances, such as a deemed liquidation event. The convertible preferred stock warrants are remeasured to fair value at each balance sheet date with the corresponding gain or loss from the adjustment recorded in the consolidated statements of operations and comprehensive loss. We will continue to record adjustments to the fair value of the convertible preferred stock warrants until they are exercised, convert into warrants to purchase common stock or expire, at which time the warrants will no longer require remeasurement.

Other Income (Expense), net

Other income (expense), net is comprised of miscellaneous tax and other expense items.

Income Taxes

Since inception, we have incurred net losses and have not recorded any U.S. federal or state income tax and the tax benefits of our operating losses have been fully offset by valuation allowances.

 

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Results of Operations

The following tables provide our consolidated statements of operations data for the years ended December 31, 2011 and 2012 and the nine months ended September 30, 2012 and 2013. The information for the years ended December 31, 2011 and 2012 was derived from our audited consolidated financial statements and the information for the nine months ended September 30, 2012 and 2013 was derived from our unaudited interim consolidated financial statements, in each case as included elsewhere in this prospectus.

 

     Year Ended
December 31,
    Nine Months Ended
September 30,
 
     2011     2012     2012     2013  
                 (Unaudited)  
    

(In thousands)

 

Consolidated Statements of Operations Data:

        

Revenue

   $ 557      $ 717      $ 600      $ 308   

Cost of revenue

     5                        
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     552        717        600        308   

Operating expenses:

        

Research and development(1)

     22,735        32,708        15,829        21,592   

Sales, general and administrative(1)

     5,555        11,195        9,581        8,008   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     28,290        43,903        25,410        29,600   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (27,738     (43,186     (24,810     (29,292

Interest income

     15        7        8        2   

Interest expense

     (17,790     (28,959     (19,250     (13,466

Change in fair value of derivative liabilities associated with convertible notes

     (356     13,860        (3,338     1,800   

Change in fair value of derivative liabilities associated with the Medicis settlement

                          (265

Change in fair value of convertible preferred stock warrant liability

     836        125        117        (1,108

Other income (expense), net

     170        (106     (85     (40
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (44,863     (58,259     (47,358     (42,369

Benefit from income taxes

                            
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (44,863   $ (58,259   $ (47,358   $ (42,369
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Results above include stock-based compensation as follows:

 

     Year Ended
December 31,
     Nine Months Ended
September 30,
 
     2011      2012      2012      2013  
                   (Unaudited)  
     (In thousands)  

Stock-Based Compensation:

           

Research and development

   $ 150       $ 48       $       27       $     138   

Sales, general and administrative

     123         31         39         208   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 273       $ 79       $ 66       $ 346   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Results of Operations for the Nine Months Ended September 30, 2012 and 2013

The following table presents our revenue for the periods indicated and related changes from the prior period:

Revenue

 

     Nine Months Ended
September 30,
     2013 vs. 2012  
       2012          2013        $  Change     %  Change  
     (Unaudited)               
     (In thousands, except percentages)  

Relastin Product

   $       $       $         —          

Relastin Royalty

     225         225                  

License

     375         83         (292     (78 )% 
  

 

 

    

 

 

    

 

 

   

Total revenue

   $  600       $  308       $ (292     (49 )% 
  

 

 

    

 

 

    

 

 

   

Our total revenue decreased by $0.3 million, or 49%, to $0.3 million during the nine months ended September 30, 2013 from $0.6 million during the nine months ended September 30, 2012 due to changes in licensing revenue.

During the year ended December 31, 2011, we entered into the Relastin asset purchase agreement for the sale of the Relastin product line. The Relastin asset purchase and royalty agreement provides that we will receive royalties on future sales of Relastin with a minimum royalty payment of $0.3 million per year, to be paid quarterly for up to 15 years from the execution date. However, the acquirer may terminate the royalty agreement with 90 days’ notice as of December 31, 2013 with the product rights to the Relastin product line reverting to us. We recognized the annual minimum royalty payment on a pro rata basis in the amount of $0.2 million for the nine months ended September 30, 2012 and 2013 as set forth in the Relastin asset purchase agreement. With the divestment of Relastin, our primary focus has been on the development of RT001 and RT002.

Our license revenue decreased to $0.1 million for the nine months ended September 30, 2013 from $0.4 million for the nine months ended September 30, 2012. The decrease was due to the termination of a license agreement for RT002 as a result of the Medicis settlement in October 2012. This decrease was partially offset by $0.1 million of revenue recognized pursuant to an exclusive technology evaluation agreement whereby we received an upfront payment in the amount of $0.3 million which was initially recorded as deferred revenue and is being recognized over the estimated performance period. Prior to the termination of the Medicis license agreement, we were recognizing license revenue of $0.5 million per year through the amortization of an upfront payment made by Medicis during the year ended December 31, 2009, which was initially recorded as deferred revenue. As a result of the termination of the Medicis license agreement, we will no longer recognize any license revenue from the 2009 Medicis license agreement for RT002.

Operating Expenses

 

     Nine Months  Ended
September 30,
     2013 vs. 2012  
     2012      2013      $     %  
     (Unaudited)               
     (In thousands, except percentages)  

Research and development

   $ 15,829       $ 21,592       $ 5,763        36

Sales, general and administrative

     9,581         8,008         (1,573     (16 )% 
  

 

 

    

 

 

    

 

 

   

Total operating expenses

   $ 25,410       $ 29,600       $ 4,190        16
  

 

 

    

 

 

    

 

 

   

Research and Development Expenses

Research and development expenses increased by $5.8 million, or 36%, to $21.6 million during the nine months ended September 30, 2013 from $15.8 million during the nine months ended September 30, 2012. Our research and development expenses fluctuate as projects transition from one development phase to the next.

 

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Depending on the stage of completion and level of effort related to each development phase undertaken, we may reflect variations in our research and development expense. Our overall research and development expenses increased by $5.8 million primarily due to an increase in outside services and personnel expenses relating to increased clinical trial and regulatory affairs activities during the nine months ended September 30, 2013.

Sales, General and Administrative Expenses

Sales, general and administrative expenses decreased by $1.6 million, or 16%, to $8.0 million during the nine months ended September 30, 2013 from $9.6 million during the nine months ended September 30, 2012. The change was primarily attributable to a decrease in professional fees relating to the Medicis litigation during the nine months ended September 30, 2012.

Other Income (Expense)

 

     Nine Months Ended
September 30,
    2013 vs. 2012  
     2012     2013     $     %  
     (Unaudited)              
     (In thousands, except percentages)  

Interest income

   $ 8      $ 2      $ (6     (75 )% 

Interest expense

     (19,250     (13,466     5,784        30

Change in fair value of derivative liabilities associated with convertible notes

     (3,338     1,800        5,138        154

Change in fair value of derivative liabilities associated with the Medicis settlement

            (265     (265     *   

Change in fair value of convertible preferred stock warrant liability

     117        (1,108     (1,225     *   

Other expense, net

     (85     (40     45        53
  

 

 

   

 

 

   

 

 

   

Total other expense

   $ (22,548   $ (13,077   $ 9,471        (42 )% 
  

 

 

   

 

 

   

 

 

   

 

* Not meaningful

Our interest expense decreased by $5.8 million, or 30%, to $13.5 million during the nine months ended September 30, 2013 from $19.3 million during the nine months ended September 30, 2012 primarily due to the conversion of the then-outstanding convertible notes into Series E-4 convertible preferred stock in March 2013. We incurred interest charges, including amortization of the related debt discount, on our then-outstanding convertible notes and notes payable. In addition, we accrued and charged to interest expense an amount equal to 150% of the aggregate amount of the outstanding principal and accrued interest which the holders of these convertible notes were entitled to receive if the notes would have been paid upon maturity in May 2013. Upon the conversion of these convertible notes in March 2013, we ceased accruing interest related to the convertible notes.

 

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Our interest expense includes cash and non-cash components. These non-cash components of our interest expense consist of (i) interest recognized from the amortization of debt issuance costs which are generally derived from cash payments related to the issuance of our convertible notes and our notes payable and which are capitalized on our balance sheets, (ii) interest recognized from the amortization of debt discounts derived from the issuance of warrants and derivatives issued in conjunction with our outstanding convertible notes which are also capitalized on our balance sheets, and (iii) interest recognized on our convertible notes which was not paid and was instead converted into shares of our convertible preferred stock. The capitalized amounts related to the debt issuance costs and debt discounts are generally amortized to interest expense over the term of the related debt instruments. The interest expense by cash and non-cash components is as follows:

 

     Nine Months Ended
September 30,
    2013 vs. 2012  
     2012     2013     $     %  
     (Unaudited)              
     (In thousands, except percentages)  

Interest expense

        

Cash related interest expense

   $ (1,782     (1,215     567        32

Non-cash interest expense – debt issuance costs

     (225     (178     47        21

Non-cash interest expense – warrant and derivative related debt discounts

     (4,930     (2,869     2,061        42

Non-cash interest expense – convertible notes

     (12,313     (9,204     3,109        25
  

 

 

   

 

 

   

 

 

   

Total interest expense

     (19,250     (13,466     (5,784     (30 )% 
  

 

 

   

 

 

   

 

 

   

The change in the fair value of the derivative liabilities associated with the convertible notes changed by $5.1 million to a gain of $1.8 million during the nine months ended September 30, 2013 compared to a loss of $3.3 million during the nine months ended September 30, 2012. The gain from the remeasurement of the derivative liabilities associated with the convertible notes was due to the decrease in the fair value of these derivatives liabilities to approximately zero immediately prior to the conversion of the convertible notes in March 2013, as the execution of a qualified financing approached certainty.

The change in the fair value of the derivative liabilities associated with the Medicis settlement was a loss in the amount of $0.3 million and these derivatives were not outstanding during the nine months ended September 30, 2012. The loss from the remeasurement of the derivative liabilities associated with the Medicis settlement was due primarily to an increase in the fair value of the Proceeds Sharing Arrangement Payment (as defined below) derivative liability in the amount of $1.1 million as a result of our estimate of the timing of the related payments. This loss was partially offset by a decrease in the fair value of the Product Approval Payment (as defined below) derivative liability in the amount of $0.8 million due to our updated estimate of the probability of the related product approval during the nine months ended September 30, 2013.

The change in the fair value of the convertible preferred stock warrant liability increased by $1.2 million reflecting a loss of $1.1 million during the nine months ended September 30, 2013 as compared to a gain of $0.1 million during the nine months ended September 30, 2012. The loss from the remeasurement of the convertible preferred stock warrant liability was due to the increase in the fair value of our outstanding convertible preferred stock warrants primarily as a result of a reduction in the exercise price of the warrants due to the modification of the terms as a result of the Series E financing in the nine months ended September 30, 2013.

 

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Results of Operations for the Years Ended December 31, 2011 and 2012

The following table presents our revenue for the periods indicated and related changes from the prior period:

Revenue

 

     Years Ended December 31,      2012 vs. 2011  
     2011      2012      $     %  
     (In thousands, except percentages)  

Relastin Product

   $ 57       $       $ (57     100

Relastin Royalty

             300         300        *   

License

     500         417         (83     (17 )% 
  

 

 

    

 

 

    

 

 

   

Total revenue

   $ 557       $ 717       $ 160        29
  

 

 

    

 

 

    

 

 

   

 

* Not meaningful

Our total revenue increased by $0.2 million, or 29%, to $0.7 million during the year ended December 31, 2012 from $0.6 million during the year ended December 31, 2011.

During the year ended December 31, 2011, we generated limited product revenue from the promotion and sale of Relastin, an over-the-counter skincare product. During the year ended December 31, 2011, we entered into an asset purchase agreement for the sale of the Relastin product line and royalties on future sales of Relastin. As a result, our only product revenue during the years presented consists of $57,000 in the year ended December 31, 2011 from sales of Relastin and we did not have any product revenue during the year ended December 31, 2012.

We recognized royalty revenue during the year ended December 31, 2012 in the amount of $0.3 million related to the Relastin asset purchase and royalty agreement and we did not recognize any royalty revenue during the year ended December 31, 2011. The Relastin royalty agreement provides for minimum royalty payment of $0.3 million per year, to be paid quarterly for up to 15 years from the execution date; however, the acquirer may terminate the royalty agreement with 90 days’ notice as of December 31, 2013 with the rights to the Relastin product line reverting back to us. With the divestment of Relastin, our primary focus has been on the development of RT001 and RT002.

Our license revenue decreased by $0.1 million, or 17%, to $0.4 million during the year ended December 31, 2012 from $0.5 million during the year ended December 31, 2011. The decrease was due to the termination of a license agreement for RT002 as a result of the Medicis settlement in October 2012. Prior to the termination of the Medicis license agreement, we were recognizing license revenue of $0.5 million per year through the amortization of an upfront payment made by Medicis during the year ended December 31, 2009, which was initially recorded as deferred revenue. As a result of the termination of the Medicis license agreement, we will no longer recognize any license revenue from the 2009 Medicis license agreement for RT002.

Operating Expenses

 

     Year Ended December 31,      2012 vs. 2011  
         2011              2012          $       
     (In thousands, except percentages)  

Research and development

   $ 22,735       $ 32,708       $ 9,973         44

Sales, general and administrative

     5,555         11,195         5,640         102
  

 

 

    

 

 

    

 

 

    

Total operating expenses

   $ 28,290       $ 43,903       $ 15,613         55
  

 

 

    

 

 

    

 

 

    

Research and Development Expenses

Research and development expenses increased by $10.0 million, or 44%, to $32.7 million during the year ended December 31, 2012 from $22.7 million during the year ended December 31, 2011. Of this increase, $9.0 million was due to the reacquisition of technology rights from Medicis as part of our Medicis settlement,

 

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which was immediately expensed. Our research and development expenses fluctuate as projects transition from one development phase to the next. Depending on the stage of completion and level of effort related to each development phase undertaken, we may reflect variations in our research and development spending. Our overall research and development spending increased as we experienced a $0.7 million increase in personnel costs due to increased head count related to our research efforts and an increase in outside services of $0.6 million due to increased clinical trials. These increases were partially offset by reductions in our material purchases of $0.4 million and a decrease in stock-based compensation costs of $0.1 million during the year ended December 31, 2012.

Sales, General and Administrative Expenses

Sales, general and administrative expenses increased by $5.6 million, or 102%, to $11.2 million during the year ended December 31, 2012 from $5.6 million during the year ended December 31, 2011. The change was primarily attributable to a $5.4 million increase in legal expenses associated with the Medicis settlement and, to a lesser extent, legal expenses associated with our patents and patent protection. These increases were partially offset by a decrease in stock-based compensation costs of $0.1 million during the year ended December 31, 2012.

Other Income (Expense)

 

     Year Ended December 31,     2012 vs. 2011  
           2011                 2012           $     %  
     (In thousands, except percentages)  

Interest income

   $ 15      $ 7      $ (8     (53 )% 

Interest expense

     (17,790     (28,959     (11,169     63

Change in fair value of derivative liabilities associated with convertible notes

     (356     13,860        14,216         

Change in fair value of convertible preferred stock warrant liability

     836        125        (711     (85 )% 

Other income (expense), net

     170        (106     (276      
  

 

 

   

 

 

   

 

 

   

Total other income (expense)

   $ (17,125   $ (15,073   $ 2,052        (12 )% 
  

 

 

   

 

 

   

 

 

   

 

* Not meaningful

Our interest expense increased by $11.2 million, or 63%, to $29.0 million during the year ended December 31, 2012 from $17.8 million during the year ended December 31, 2011 as we incurred a full year of interest charges, including amortization of the related debt discount, on our outstanding convertible notes and notes payable which were first issued during the year ended December 31, 2011 with additional borrowings of $18.2 million undertaken in connection with the convertible notes issued during the year ended December 31, 2012.

 

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Our interest expense includes cash and non-cash components. These non-cash components of our interest expense consist of (i) interest recognized from the amortization of debt issuance costs which are generally derived from cash payments related to the issuance of our convertible notes and our notes payable and which are capitalized on our balance sheets, (ii) interest recognized from the amortization of debt discounts derived from the issuance of warrants and derivatives issued in conjunction with our outstanding convertible notes which are also capitalized on our balance sheets, and (iii) interest recognized on our convertible notes which was not paid and was instead converted into shares of our convertible preferred stock. The capitalized amounts related to the debt issuance costs and debt discounts are generally amortized to interest expense over the term of the related debt instruments. The interest expense by cash and non-cash components is as follows:

 

    Year Ended December 31,     2012 vs. 2011  
          2011                 2012           $     %  
    (In thousands, except percentages)  

Interest expense

       

Cash related interest expense

  $ (3,112   $ (2,302   $ 810        26

Non-cash interest expense — debt issuance costs

    (230     (300     (70     (30 )% 

Non-cash interest expense — warrant and derivative related debt discounts

    (4,904     (7,427     (2,522     (51 )% 

Non-cash interest expense — convertible notes

    (9,544     (18,930     (9,387     (98 )% 
 

 

 

   

 

 

   

 

 

   

Total interest expense

  $ (17,790   $ (28,959   $ (11,169     (63 )% 
 

 

 

   

 

 

   

 

 

   

The fair value of the derivative liabilities associated with the convertible notes changed by $14.2 million to a gain of $13.9 million during the year ended December 31, 2012 compared to a charge of $0.4 million during the year ended December 31, 2011. The gain from the remeasurement of the outstanding derivative liabilities was due to the reduction in the fair value of the related derivatives primarily as a result of the increased probability of the convertible notes being repaid at maturity as opposed to conversion upon a change of control or initial public offering.

The fair value of the convertible preferred stock warrant liability changed by $0.7 million, or 85%, to a gain of $0.1 million during the year ended December 31, 2012 as compared to a gain of $0.8 million during the year ended December 31, 2011. The gain from the remeasurement of the convertible preferred stock warrant liability was due to the reduction in the fair value of our outstanding convertible preferred stock warrant liability primarily as a result of a reduction in the contractual term of the warrants.

Other income (expense), net changed by $0.3 million to expense of $0.1 million during the year ended December 31, 2012 compared to income of $0.2 million during the year ended December 31, 2011. The $0.3 million change in other income (expense), net was primarily a result of payment to us in the amount of $0.3 million for a one-time option to license certain zinc-based topical skin care products which was recognized during the year ended December 31, 2011.

Income Taxes

There was no provision or benefit from income taxes during the years ended December 31, 2011 and 2012.

Liquidity and Capital Resources

Since our inception, we have incurred losses from operations and negative cash flows from our operations. For the year ended December 31, 2012, we incurred a net loss of $58.3 million, which includes non-cash interest expenses in aggregate of $26.7 million related to the amortization of debt issuance costs, warrants and derivatives issued in conjunction with our outstanding debt instruments, and used $38.9 million for our operating activities. For the nine months ended September 30, 2013, we had a net loss of $42.4 million, which includes non-cash interest expenses in the aggregate amount of $12.2 million related to the amortization of debt issuance costs, warrants and derivatives issued in conjunction with our outstanding debt instruments, and we also used $33.8 million for our operating activities. As of December 31, 2012 and September 30, 2013, we had a working

 

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capital deficit of $112.5 million and $28.6 million, respectively, and an accumulated deficit of $218.3 million and $185.8 million, respectively. Our principal sources of liquidity as of December 31, 2012 and September 30, 2013 consisted of cash and cash equivalents of $4.1 million and $1.9 million, respectively.

Historically, we have financed our operations primarily through private placements of our convertible preferred stock and the proceeds received from our debt financings. From inception through September 30, 2013, we have received net cash proceeds of (i) $199.4 million from the sale of convertible preferred stock and convertible notes and (ii) $22.0 million from a term loan.

In September 2011, we entered into a $22.0 million term loan agreement with Hercules. Notes payable under the Hercules term loan bear interest at a rate equal to the greater of 9.85% or the prime rate plus 6.60%, and requires the principal balance to be repaid in thirty-three equal monthly installments of $764,000 beginning July 2012. The balance of this term loan was $13.0 million as of September 30, 2013. As of December 31, 2012 and September 30, 2013, the applicable interest rate under the term loan was 9.85%. We have the right to prepay amounts due under the Hercules term loan in whole, but not in part, subject to paying a prepayment premium equal to $300,000 if prepaid prior to September 20, 2014 and $150,000 if prepaid later. During the year ended December 31, 2012 and the nine months ended September 30, 2013, we made principal payments in the amount of $3.4 million and $ 5.6 million, respectively, on our outstanding notes payable and we will continue to make monthly payments in the amount of $0.8 million until March 2015. In addition, we are required to make an end of term payment of $400,000, subject to an increase to $500,000, if we elect to prepay amounts due under the term loan. Concurrently with the March 2013 closings of the Series E preferred stock financing, all of our outstanding convertible notes and related accrued interest in the amount of $71.0 million converted into 71,227,270 shares of Series E-4 convertible preferred stock.

In addition, we issued approximately $19.4 million convertible notes in the fourth quarter of 2013 which carry an annual interest rate of 12% and mature in October 2014. The principal and interest under the 2013 notes are (i) convertible into shares of convertible preferred stock in the next qualified financing at the per share price of the stock sold in the financing, upon election of the holders or (ii) automatically convertible into shares of common stock immediately prior to an IPO at the per share price to the public of the stock sold in the IPO, if either event occurs prior to maturity of the 2013 notes. If such conversion occurs prior to October 7, 2014, the unpaid accrued interest shall also include any interest that would have accrued had the 2013 notes remained outstanding through October 7, 2014. If upon maturity a qualified preferred stock financing or IPO has not occurred, the holders may convert their 2013 notes into shares of Series E-5 convertible preferred stock at $1.495 per share. Upon a liquidation event, acquisition or asset sale of our company before the 2013 notes are converted or repaid, the 2013 notes will be either, at the election of the holder, (i) repaid at 300% of the original principal plus accrued interest or (ii) converted into shares of Series E-5 convertible preferred stock at $1.495 per share. The 2013 notes may not be prepaid without written consent of the holders, but upon consent of the holders of at least 66 2/3% of the aggregate principal amount, may be repaid at 150% of the outstanding principal plus accrued interest to the date of the prepayment. The 2013 notes were also accompanied by warrants to purchase such number of common stock, or 2013 warrants, equal to (i) the aggregate number of shares issuable upon conversion of the notes multiplied by 25% or (ii) 25% of the aggregate principal amount of the 2013 notes divided by $1.3455 if the 2013 notes have not converted or been repaid at the time of exercise. The 2013 warrants have an exercise price of $0.01 per share and expire if not exercised on the earlier to occur of (i) the IPO of our company, (ii) an acquisition or asset transfer or (iii) seven years from the date of issuance.

In December 2013, we entered into the Essex Capital Facility to finance the construction and installation of equipment for use in our manufacturing facility. Under this facility, Essex Capital will provide us a series of short-term notes aggregating to $10.8 million during the construction period which is expected to last through 2014. These short-term notes mature one year from the date of the Essex Capital Facility and bear interest at 11.5%. Upon completion of our initial public offering, the interest rate will decrease to 10.375%. Upon completion of the installation and acceptance of equipment, we will sell the equipment back to Essex Capital for a purchase price equal to the principal and any accrued interest then outstanding on the notes issued to finance such equipment. We will then lease back the equipment for a thirty-six month lease term. At the end of the lease term, we will have the option to purchase the equipment at 10% of the original equipment cost. The short-term

 

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notes to be issued under the Essex Capital Facility are secured by all of our tangible assets, excluding intellectual property. Under the Essex Capital Facility, we also agreed to issue warrants to purchase our capital stock in connection with each issuance of notes. We are required to issue these warrants regardless of whether we draw down the full $10.8 million under the agreement. Convertible preferred stock warrants will be issued for all notes issued before our initial public offering. These warrants will be exercisable for our (i) next round of convertible preferred stock with the number of shares determined by dividing 10% of the principal amount of the notes by 90% of the issuance price of that preferred stock or (ii) Series E-5 convertible preferred stock, if another round of equity financing does not occur before the exercise of these warrants, with the number of shares determined by dividing 10% of the principal amount of the notes by $1.35 per share. Common stock warrants will be issued for all notes issued after our initial public offering. The number of shares of common stock to be issued pursuant to these warrants will be determined by dividing 10% of the principal amount of the notes divided by 81% of the price per share of common stock issued to public in the initial public offering. In December 2013 and January 2014, we plan to draw down $5.0 million under short-term notes pursuant to the Essex Capital Facility and will issue 370,370 shares of Series E-5 convertible preferred stock warrants.

Our recurring operating losses raise substantial doubt about our ability to continue as a going concern. As a result, our independent registered public accounting firm included an explanatory paragraph in its report on our consolidated financial statements as of and for the year ended December 31, 2012 with respect to this uncertainty. We have no current source of revenue to sustain our present activities, and we do not expect to generate revenue until, and unless, the FDA or other regulatory authorities approve RT001 or RT002 and we begin commercializing them. Accordingly, our ability to continue as a going concern will require us to obtain additional financing to fund our operations. The sale of additional equity securities could result in additional dilution to our stockholders and those securities may have rights senior to those of our common stock. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. We cannot assure you that financing will be available in the amounts we need or on terms acceptable to us, if at all.

Cash Flows

We derived the following summary of our consolidated cash flows for the periods indicated from our audited consolidated financial statements and unaudited interim consolidated financial statements included elsewhere in this prospectus:

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
         2011             2012         2012     2013  
                 (Unaudited)  
     (In thousands)  

Net cash used in operating activities

   $ (28,413   $ (38,914   $ (23,543   $ (33,779

Net cash used in investing activities

     (75     (244     (213     (2,597

Net cash provided by financing activities

     54,067        13,620        3,255        34,202   

Cash Flows from Operating Activities

Our cash used in operating activities is primarily driven by personnel-related expenditures, manufacturing costs and costs related to our facilities. Our cash flows from operating activities will continue to be affected principally by our working capital requirements and the extent to which we increase spending on personnel and research and development activities as our business grows.

Cash used in operating activities of $33.8 million during the nine months ended September 30, 2013 resulted in part from our net loss of $42.4 million and non-cash adjustments for the revaluation of derivative liabilities associated with our convertible notes of $1.8 million offset by the accrual of interest on our convertible notes of $9.2 million, the amortization of the discount and issuance costs on our outstanding debt and capital leases of $3.0 million, the revaluation of our preferred stock warrants of $1.1 million and depreciation and amortization of

 

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our property and equipment of $1.4 million. The $4.8 million increase in our net operating assets and liabilities was primarily a result of the reduction in the derivative liabilities associated with the Medicis settlement due to the payment of $6.9 million during the period and the decrease of accruals and other current liabilities of $3.2 million, however, these increases were partially offset by increases in accounts payable of $5.2 million related to the growth in our operations during the year. Property and equipment purchases included in accounts payable and accruals and other current liabilities was $4.7 million and deferred initial public offering costs included in accounts payable and accruals and other current liabilities were $1.7 million as of September 30, 2013.

Cash used in operating activities of $38.9 million during the year ended December 31, 2012 resulted in part from our net loss of $58.3 million and non-cash adjustments for the modification of the Series C-3 convertible preferred stock of $3.2 million associated with the Medicis settlement and the revaluation of derivative liabilities associated with convertible notes of $13.9 million that were partially offset by non-cash adjustments for depreciation and amortization of our property and equipment of $1.8 million, the recognition of derivative liabilities associated with the Medicis settlement of $15.3 million, the amortization of the discount and issuance costs on our outstanding debt and capital leases of $7.7 million and interest accrued on our convertible notes of $18.8 million. The $7.1 million decrease in our net operating assets and liabilities was primarily a result of the decrease in deferred revenue of $10.5 million as a result of this revenue stream being eliminated as a result of the Medicis settlement and a $1.1 million decrease in prepaid expenses and other current assets due primarily to the timing of the related payments. These decreases were partially offset by increases in accruals and other current liabilities of $3.0 million and accounts payable of $1.0 million related to the growth in our operations during the year.

Cash used in operating activities of $28.4 million during the year ended December 31, 2011 was primarily attributable to a net loss of $44.9 million and non-cash adjustments for the revaluation of our convertible preferred stock warrant liability of $0.8 million that was partially offset by non-cash adjustments for the revaluation of derivative liabilities associated with the convertible notes of $0.4 million, the amortization of the discount and issuance costs on our outstanding debt and capital leases of $5.1 million, depreciation and amortization of our property and equipment of $2.0 million, stock-based compensation in the amount of $0.3 million and interest accrued on our convertible notes of $9.6 million. The $0.1 million decrease in our net operating assets and liabilities was primarily a result of the decrease in deferred revenue of $0.8 million and accounts payable of $0.6 million along with increases in prepaid expenses and other current assets of $0.4 million and other noncurrent assets of $0.6 million. These decreases were partially offset by an increase in accruals and other current liabilities of $1.5 million related to the growth in our operations during the year.

Cash Flows from Investing Activities

During the nine months ended September 30, 2013, cash used in investing activities was $2.6 million consisting of $2.7 million in purchases of property and equipment which were partially offset by a reduction of our restricted cash of $0.1 million.

During the year ended December 31, 2012, cash used in investing activities was $0.2 million consisting of $0.3 million in purchases of property and equipment which were partially offset by a reduction of our restricted cash of $0.1 million.

During the year ended December 31, 2011, cash used in investing activities was $0.1 million resulting from purchases of property and equipment of $0.2 million which were partially offset by a reduction of our restricted cash of $0.1 million.

Cash Flows from Financing Activities

During the nine months ended September 30, 2013, cash provided by financing activities was $34.2 million primarily comprised of net proceeds received from the issuance of our Series E-5 convertible preferred stock in the amount of $40.8 million which were partially offset by repayments of $6.5 million on our outstanding debt and capital lease obligations.

 

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During the years ended December 31, 2011 and 2012, cash provided by financing activities was $54.0 million and $13.6 million, respectively. During the year ended December 31, 2012, these amounts were primarily comprised of proceeds received from the issuance of convertible notes in the amount of $18.2 million which were partially offset by repayments of $4.6 million on our outstanding debt and capital lease obligations.

During the year ended December 31, 2011, these amounts were primarily comprised of proceeds received from the issuance of convertible notes of $45.0 million and notes payable of $22.0 million which were partially offset by repayments of $13.1 million on our outstanding debt and capital lease obligations.

Operating and Capital Expenditure Requirements

We have not achieved profitability on a quarterly or annual basis since our inception and we expect to continue to incur net losses for the foreseeable future. We expect our cash expenditures to increase in the near term as we fund our Phase 3 clinical trials of RT001 for the treatment of crow’s feet lines and trials for other indications, our manufacturing, quality and regulatory efforts related to RT001, and our development of RT002. Additionally, as a public company, we will incur significant audit, legal and other expenses that we did not incur as a private company. We believe that our existing capital resources, together with the proceeds from our convertible note financing and the net proceeds from this offering, will be sufficient to fund our operations for at least the next      months. However, we anticipate that we will need to raise substantial additional financing in the future to fund our operations. In order to meet these additional cash requirements, we may seek to sell additional equity or convertible debt securities that may result in dilution to our stockholders. If we raise additional funds through the issuance of convertible debt securities, these securities could have rights senior to those of our common stock and could contain covenants that restrict our operations. There can be no assurance that we will be able to obtain additional equity or debt financing on terms acceptable to us, if at all. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring debt, making capital expenditures or declaring dividends. Our failure to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on our business, results of operations, and financial condition.

If adequate funds are not available to us on a timely basis, or at all, we may be required to terminate or delay clinical trials or other development activities for RT001, RT002 and any future product candidates, or delay our establishment of sales and marketing capabilities or other activities that may be necessary to commercialize our product candidates, if we obtain marketing approval. We may elect to raise additional funds even before we need them if the conditions for raising capital are favorable. Our future capital requirements depend on many factors, including:

 

   

the results of our Phase 3 clinical trials for RT001 in the United States and Europe;

 

   

the timing of, and the costs involved in, obtaining regulatory approvals for RT001, RT002 or any future product candidates;

 

   

the number and characteristics of any additional product candidates we develop or acquire;

 

   

the scope, progress, results and costs of researching and developing RT001, RT002 or any future product candidates, and conducting preclinical and clinical trials;

 

   

the cost of commercialization activities if RT001, RT002 or any future product candidates are approved for sale, including marketing, sales and distribution costs;

 

   

the cost of manufacturing RT001, RT002 or any future product candidates and any products we successfully commercialize;

 

   

our ability to establish and maintain strategic collaborations, licensing or other arrangements and the terms of and timing such arrangements;

 

   

the degree and rate of market acceptance of any future approved products;

 

   

the emergence, availability, perceived advantages, relative cost, relative safety and relative efficacy of alternative and competing treatments;

 

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any product liability or other lawsuits related to our products;

 

   

the expenses needed to attract and retain skilled personnel;

 

   

the costs associated with being a public company;

 

   

the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including litigation costs and the outcome of such litigation; and

 

   

the timing, receipt and amount of sales of, or royalties on, future approved products, if any.

Please see “Risk Factors” for additional risks associated with our substantial capital requirements.

We have not generated significant revenue from RT001 or RT002 and we do not know when, or if, we will generate such revenue. We do not expect to generate significant revenue unless or until we obtain marketing approval of, and commercialize RT001 or RT002. We expect our continuing operating losses to result in increases in cash used in operations over the next several years.

We have based our estimates of future capital requirements on a number of assumptions that may prove to be wrong, and changing circumstances beyond our control may cause us to consume capital more rapidly than we currently anticipate. For example, our ongoing clinical trials of RT001 and RT002 may encounter technical or other difficulties that could increase our development costs more than we currently expect or the FDA may require us to conduct additional clinical trials prior to approving RT001 or RT002. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical trials.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of these consolidated financial statements requires our management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the applicable periods. We base our estimates, assumptions and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. Different assumptions and judgments would change the estimates used in the preparation of our consolidated financial statements, which, in turn, could change the results from those reported. We evaluate our estimates, assumptions and judgments on an ongoing basis.

The critical accounting estimates, assumptions and judgments that we believe have the most significant impact on our consolidated financial statements are described below.

Revenue Recognition

We recognize revenue when the following criteria are met: persuasive evidence of a sales arrangement exists; delivery has occurred; the price is fixed or determinable; and collectability is reasonably assured. We recognized revenue from the sale of products and from license and royalty agreements as follows.

We recognized only a limited amount of product revenue during the year ended December 31, 2011 of which all was derived from the promotion and sale of Relastin, an over-the-counter skincare product. During the year ended December 31, 2011, we entered into an asset purchase agreement for the sale of the Relastin product line and royalties on future sales of Relastin. We recognized the related product revenue during the year ended December 31, 2011 upon the sale of the products. We did not recognize any revenue from sales of our products during the year ended December 31, 2012 and the nine months ended September 30, 2013.

We recognized royalty revenue related to the Relastin asset purchase and royalty agreement discussed immediately above. The Relastin royalty agreement provides for minimum royalty payment of $0.3 million per year, to be paid quarterly for up to 15 years from the execution date; however, the royalty agreement may be

 

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terminated with 90 days’ notice as of December 31, 2013 with the rights to the Relastin product line reverting to us. We recognize Relastin royalty revenue based upon minimum royalty requirements per the asset purchase and royalty agreement or when we receive the related royalty statement because we do not have sufficient ability to reasonably estimate the underlying sales prior to that time.

During the years ended December 31, 2011 and 2012, we recognized license revenue from a license agreement with Medicis whereby they were granted exclusive rights to RT002. As part of this license agreement, we received an upfront payment which was deferred and recognized over the estimated performance period which was estimated as the remaining life of the underlying patent at the inception of the license agreement. We did not recognize any license revenues from the agreement with Medicis during the nine months ended September 30, 2013 as the prior license agreement was discontinued as part of the Medicis settlement in October 2012. In the nine months ended September 30, 2013, we recognized license revenue of $0.1 million pursuant to an exclusive technology evaluation agreement executed in June 2013 whereby we received an upfront payment in the amount of $0.3 million, which was initially recorded as deferred revenue and is being recognized over the estimated performance period.

Clinical Trial Accruals

Our clinical trial accrual process seeks to account for expenses resulting from obligations under contracts with CROs and consultants, and under clinical site agreements in connection with conducting clinical trials. Clinical trial costs are charged to research and development expense as incurred. The financial terms of these contracts are subject to negotiations, which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided under such contracts. Our objective is to reflect the appropriate trial expense in the consolidated financial statements by matching the appropriate expenses with the period in which services and efforts are expended. In the event advance payments are made to a CRO, the payments will be recorded as a prepaid asset which will be amortized over the period of time the contracted services are performed. In addition to pass-through costs, we incur costs in clinical trials in three distinct phases as follows:

 

  (i) Start-up Phase — This phase includes the initial set-up of the clinical trial and usually occurs within a few months after the contract has been executed and includes costs which are expensed ratably over the start-up phase. Start-up phase activities include study initiation, site recruitment, regulatory applications, investigator meetings, screening, preparation, pre-study visits and training.

 

  (ii) Site and Study Management Phase — This phase includes medical and safety monitoring, and patient administration and data management. These costs are usually calculated on a per patient basis and expensed ratably over the treatment period beginning on the date that the patient enrolls.

 

  (iii) Close Down and Reporting Phase — This phase includes analyzing the data obtained and reporting results, which occurs after patients have ceased treatment and the database of information collected is locked. These costs are expensed ratably over the close down and reporting phase.

The CRO contracts generally include pass-through fees including, but not limited to, regulatory expenses, investigator fees, travel costs and other miscellaneous costs, including shipping and printing fees. We determine accrual estimates through reports from and discussion with applicable personnel and outside services providers as to the progress or state of completion of trials, or the services completed. We make estimates of accrued expenses as of each balance sheet date in the consolidated financial statements based on the facts and circumstances known at that time. Our clinical trial accrual is dependent, in part, upon the receipt of timely and accurate reporting from the CROs and other third-party vendors.

Stock-Based Compensation

We recognize compensation costs related to stock options granted to employees based on the estimated fair value of the awards on the date of grant, net of estimated forfeitures, using the Black-Scholes option-pricing model. The grant date fair value of the stock-based awards is recognized over the requisite service period, which

 

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is generally the vesting period of the respective awards. Stock-based compensation expenses are classified in the consolidated statements of operations and comprehensive loss based on the functional area to which the related recipients belong.

The estimated grant date fair values of the option awards granted to employees during the years ended December 31, 2011 and 2012 and the nine months ended September 30, 2012 and 2013 were calculated using the Black-Scholes option-pricing model with the following weighted-average assumptions:

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
     2011     2012     2012     2013  

Expected term (in years)

     5.6        5.9        5.9        6.0   

Risk-free interest rate

     1.7     0.8     0.8     1.3

Expected volatility

     58.0     56.9     56.9     61.3

Dividend rate

     0     0     0     0

The Black-Scholes option-pricing model requires the use of highly subjective and complex assumptions that determine the fair value of options. These assumptions are as follows:

 

   

Expected term — The expected term represents the period that our options are expected to be outstanding.

 

   

Risk-free interest rate — The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the option’s expected term.

 

   

Expected volatility — Because our common stock has never been publicly traded, the expected volatility was derived from the average historic volatilities of several unrelated public companies within our industry that we considered to be comparable to our business over a period equivalent to the expected term of the option.

 

   

Dividend rate — The expected dividend was assumed to be zero as we have never paid dividends and have no current plans to do so.

In addition to the assumptions used in the Black-Scholes option-pricing model, we must also estimate a forfeiture rate to calculate the stock-based compensation for our options. Our forfeiture rate is based on an analysis of our actual forfeitures. We will continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover and other factors. Quarterly changes in the estimated forfeiture rate can have a significant impact on our stock-based compensation as the cumulative effect of adjusting the rate is recognized in the period in which we change the forfeiture estimate. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, we make an adjustment that will result in a decrease to the stock-based compensation recognized in our consolidated financial statements. If a revised forfeiture rate is lower than the previously estimated forfeiture rate, we make an adjustment that will result in an increase to the stock-based compensation recognized in our consolidated financial statements.

We will continue to use judgment in evaluating the expected term, expected volatility and forfeiture rate related to our stock-based compensation calculations on a prospective basis. As we continue to accumulate additional data related to our common stock, we may make refinements to the estimates of our expected terms, expected volatility and forfeiture rates that could materially impact our future stock-based compensation.

Significant Factors, Assumptions and Methodologies Used in Determining Fair Value of Our Common Stock

We are also required to estimate the fair value of the common stock underlying our options when performing the fair value calculations using the Black-Scholes option-pricing model. Our board of directors, with input from management, estimates the fair value of the common stock underlying our options on each grant date. Our board of directors is comprised of a majority of non-employee directors with significant experience in the pharmaceutical industry. Thus, we believe that the composition of our board of directors, together with our board of directors’ cumulative knowledge of and experience with similar companies, resulted in a fair valuation of our

 

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common stock on each respective grant date. Given the absence of a public trading market for our common stock, and in accordance with the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, our board of directors exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of the fair value of our common stock on each respective grant date, including:

 

   

valuations performed by an independent third-party specialist;

 

   

the prices at which we sold our shares of convertible preferred stock sold to outside investors in arm’s length transactions and the rights, preferences and privileges of the convertible preferred stock relative to those of our common stock, including the liquidation preferences of the convertible preferred stock;

 

   

our actual operating and financial performance;

 

   

our hiring of key personnel and the experience of our management;

 

   

risks inherent in the development of our product candidates;

 

   

the present value of our future cash flows;

 

   

the value of companies we consider peers based on a number of factors including, but not limited to, similarity to us with respect to industry, business model, stage of growth, geographic diversification, profitability, company size, financial risk or other factors;

 

   

the market value of a comparable group of privately held companies that were in a state of development similar to ours;

 

   

the illiquidity of options involving securities in a private company;

 

   

our stage of development;

 

   

the status of our research and development efforts;

 

   

important developments in our operations, most significantly related to the clinical development of our product candidates;

 

   

industry information such as market size and growth;

 

   

the estimated likelihood of achieving a liquidity event for our shares of common stock, such as an initial public offering or an acquisition of our company, in light of prevailing market conditions; and

 

   

the United States and global capital market conditions.

To determine the fair value of our common stock during 2012, our board of directors considered both an income approach and a market approach, however, our board of directors ultimately determined the equity value of the company using the income approach for all of the 2012 valuations discussed further below because our lack of revenue limits the results that can be expected from the respective market approaches. The income approach estimates the value of the company based on our expected future cash flows discounted to present value at a rate of return commensurate with the risks associated with the cash flows. Cash flows are estimated for future periods based on projected revenue and costs. Because the cash flows are only projected over a limited number of years, it is also necessary under the income approach to compute a terminal value as of the last period for which discrete cash flows are projected. This terminal value represents the future cash flows beyond the projection period and is determined by taking the projected revenue for the final year of the projection and applying a terminal multiple. The terminal value is then discounted to its present value using an appropriate discount rate to arrive at its present value. The discounted projected cash flows and terminal value are summed together to arrive at an indicated aggregate equity value under the income approach. In applying the income approach, we derived the discount rate based on a review of industry studies that compare a privately-held start-up company’s stage of development and the corresponding venture capital required rates of return. Considering our lack of near-term revenue and regulatory risks involving our primary product candidate, in connection with each valuation described below, we concluded that an investor would require a rate of return on equity at the first

 

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stage of development level. We derived the terminal multiple based on a review of multiples calculated in the comparable public companies and comparable acquisitions analyses. In evaluating comparability, we considered factors such as industry, stage of life cycle and size. We then used the implied long-term growth rate of our company to assess the reasonableness of the selected terminal multiple.

For each valuation, we prepared a financial forecast to be used in the computation of the value of invested capital for the income approach. The financial forecast took into account our historical financial operating results and expected future financial performance. The discount rate is related generally to market required rates of return observed in the venture capital industry as well as the specific perceived risks of achieving the forecasted financial performance. The risks associated with achieving these forecasts were assessed in selecting the appropriate cost of capital. There is inherent uncertainty in these estimates as the assumptions used are highly subjective and subject to changes as a result of new operating data and economic and other conditions that impact our business.

For the March 2013 valuation, we first incorporated the probability weighted expected return method, or PWERM, into the valuation process. When the PWERM was utilized, we established our enterprise value under multiple approaches which included an analysis of trading multiples, enterprise values and market capitalizations of our comparable public companies as discussed further in the March 2013 valuation discussion below.

Once we determined an equity value from the above valuation approaches, we utilized one or the combination of the Option Pricing Method, or OPM, and PWERM to allocate the equity value to each of our classes of stock. The OPM allocation treats common stock and convertible preferred stock as call options on the total equity value of a company, with exercise prices based on the aggregate liquidation preferences of the convertible preferred stock. Therefore, the common stock has value only if the funds available for distribution to the stockholders exceed the value of the aggregate liquidation preferences at the time of a liquidity event assuming the business has funds available to make liquidation preferences meaningful and collectible by the preferred stockholders. The common stock is modeled to be a call option with a claim on the underlying equity value at an exercise price equal to the remaining value immediately after the convertible preferred stock is liquidated. The OPM uses the Black-Scholes option-pricing model to price the call option. This method is appropriate to use when the range of possible future outcomes is so difficult to predict that forecasts would be highly speculative and dissolution or liquidation is not imminent. In connection with each valuation obtained during 2012 described below, we determined that the OPM was the most appropriate allocation methodology because the range of possible future outcomes at the time of the valuations was so difficult to predict that forecasts would have been highly speculative. The OPM, when not used in conjunction with the PWERM, was used to allocate our equity value under two approaches: the merger and sale approach, or M&A approach, and the initial public offering approach, or IPO approach, which were weighted based on our board of directors’ view of the most likely outcome at that time. The resulting equity value for the common stock was then divided by the number of shares of common stock outstanding at the date of the valuation to derive a per share value on a non-marketable basis.

The PWERM allocation involves a forward-looking analysis of the possible future outcomes of a company. This method is particularly useful when discrete future outcomes can be predicted at a high confidence level with a probability distribution. Discrete future outcomes considered under the PWERM used by us only included IPO scenarios. The enterprise values determined under the IPO scenarios were weighted according to our board of directors’ estimate of the probability of each scenario. The resulting equity value for the common stock was then divided by the number of shares of common stock outstanding at the date of the valuation to derive a per share value on a non-marketable basis.

In order to determine the fair value of our common stock on a marketable basis, we then applied a discount for lack of marketability which we derived using a put option model based on inputs including a company-specific volatility rate, a term equal to the expected time to a future liquidity event and a risk free rate equal to the yield on treasuries of similar duration.

We partially transitioned from OPM to PWERM starting with the March 2013 valuation as a result of the increasing likelihood of the occurrence of certain discrete events, including an IPO, as a result of improving market conditions and receptivity of the market to IPOs.

 

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The following table summarizes, by grant date, the number of shares underlying stock options granted since January 1, 2012, the related exercise prices and the associated fair value of our common stock:

 

Grant Date

   Number of Shares
Underlying Stock
Options Granted
     Exercise
Price
     Estimated Grant
Date Fair Value
Per Share of
Common Stock
     Estimated Stock
Option Aggregate
Grant Date Fair
Value(1)
            (In thousands)

February 16, 2012

     30,500       $ 0.03       $ 0.10       $    2

July 26, 2012

     83,500         0.10         0.12             6

October 14, 2012

     40,000         0.10         0.15             4

May 24, 2013

     1,450,105         0.58         0.58         386

May 27, 2013

     10,125,000         0.58         0.58       2,908

October 3, 2013

     50,000         0.59         0.59             21

December 17, 2013

     3,258,250         0.61         0.61       1,114

 

(1) We determined the aggregate grant date fair value using the Black-Scholes option-pricing model.

The intrinsic value of all options outstanding as of December 31, 2013 was $         million, based on an assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus.

No single event caused the valuation of our common stock to increase during the periods discussed. Instead, a combination of the factors described below in each period led to the changes in the fair value of the underlying common stock.

February 2012 Awards

We granted options to purchase 30,500 shares of our common stock on February 16, 2012. Our board of directors set an exercise price of $0.03 per share at the grant date for these options based in part on the results of a contemporaneous third party valuation prepared as of May 31, 2011, which determined a fair value of our common stock of $0.03 per share. Subsequent to the granting of these options, we obtained a third party valuation of our common stock as of December 31, 2011 which determined a fair value of our common stock of $0.10 per share. To calculate the stock-based compensation expense for these options, we also used the fair value as determined in the December 31, 2011 valuation of $0.10 per share as the fair value of the underlying common stock for these options.

The fair value as of December 31, 2011 was estimated by our board of directors with assistance from a third party valuation. The December 31, 2011 valuation was prepared on a minority, non-marketable interest basis. Our aggregate enterprise value was determined using the income approach. We applied a discount rate of 45% to the values derived from the income approach, which we believed to be reasonable given that we considered our business to still be in the first stage of development in light of the status of our ongoing clinical development efforts, lack of near-term revenue and the regulatory risks related to our product candidates, including the uncertainty in connection with our then-ongoing discussions with the FDA through the FDA’s Formal Dispute Resolution process, which concluded in May 2012. The enterprise value was then allocated among the securities utilizing an OPM under both an M&A approach and an IPO approach. The allocation weighted the M&A approach by 75% while the IPO approach was weighted by 25% as our board determined that this was the best estimate of these potential outcomes at the time of the valuation. The fair value also reflected a discount for lack of marketability of 40% for the M&A approach and 34% for the IPO approach. The increase from the May 2011 valuation to the December 2011 valuation primarily resulted from an increase in the enterprise value and a slight increase in the equity value related to a reduction in the discount rate used in the discounted cash flow analysis from 50% to 45%, a decrease in the discount for lack of marketability from a weighted 40% discount to 40% for the M&A approach and 34% for the IPO approach, and the increase in the weighting toward an IPO scenario which was not previously contemplated in this manner.

 

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July 2012 Awards

We granted options to purchase 83,500 shares of our common stock on July 26, 2012. Our board of directors set an exercise price of $0.10 per share at the grant date for these options based in part on the results of a third- party valuation prepared as of December 31, 2011, which determined a fair value of our common stock of $0.10 per share. Subsequent to the granting of these options, we obtained a third party valuation of our common stock as of June 30, 2012 which determined a fair value of our common stock of $0.12 per share. To calculate the stock-based compensation expense for these options, we also used the fair value as determined in the June 30, 2012 valuation of $0.12 per share as the fair value of the underlying common stock for these options.

The fair value as of June 30, 2012 was estimated by our board of directors with assistance from a third party valuation. The June 30, 2012 valuation was prepared on a minority, non-marketable interest basis. Our aggregate enterprise value was determined using the income approach. We applied a discount rate of 40% to the values derived from the income approach, which we believed to be reasonable given that we considered our business to still be in the first stage of development in light of the status of our ongoing clinical development efforts, lack of near-term revenue and the regulatory risks related to our product candidates and the uncertainty relating to our then-ongoing litigation with Medicis, which was resolved in October 2012. The enterprise value was then allocated among the securities utilizing an OPM under both an M&A approach and an IPO approach. The allocation weighted the M&A approach and the IPO approach evenly as our board determined that this was the best estimate of these potential outcomes at the time of the valuation. The fair value also reflected a discount for lack of marketability of 37% for the M&A approach and 34% for the IPO approach. The increase from the December 2011 valuation to the June 2012 valuation primarily resulted from a decrease in the discount for lack of marketability in the M&A approach from 40% to 37% and the increase in the weighting to an IPO scenario from 25% to 50% as the IPO scenario generally provides for a greater common stock fair value.

October 2012 Awards

We granted options to purchase 40,000 shares of our common stock on October 4, 2012. Our board of directors set an exercise price of $0.10 per share for these options at the grant date based in part on the results of a third party valuation prepared as of December 31, 2011, which determined a fair value of our common stock of $0.10 per share. Subsequent to the granting of these options, we obtained a third party valuation of our common stock as of September 30, 2012 which determined a fair value of our common stock of $0.15 per share. To calculate the stock-based compensation expense for these options, we also used the fair value as determined in the September 30, 2012 valuation of $0.15 per share as the fair value of the underlying common stock for these options.

The fair value as of September 30, 2012 was estimated by our board of directors with assistance from a third party valuation. The September 30, 2012 valuation was prepared on a minority, non-marketable interest basis. Our aggregate enterprise value was determined using the income approach. We applied a discount rate of 40% to the values derived from the income approach, which we believed to be reasonable given that we considered our business to still be in the first stage of development in light of the status of our ongoing clinical development efforts, lack of near-term revenue and the regulatory risks related to our product candidates. The enterprise value was then allocated among the securities utilizing an OPM under both an M&A approach and an IPO approach. The allocation weighted the M&A approach and the IPO approach evenly as our board determined that this was the best estimate of these potential outcomes at the time of the valuation. The fair value also reflected a discount for lack of marketability of 32% for both the M&A approach and the IPO approach. The increase from the June 2012 valuation to the September 2012 valuation primarily resulted from an increase in the enterprise value and equity value related to a reduction in the period utilized in the discounted cash flow analysis and a decrease in the discount for lack of marketability in the M&A approach from 37% to 32% and in the IPO approach from 34% to 32%.

May 2013 Awards

We granted options to purchase 1,450,105 shares of our common stock with a grant date of May 24, 2013 and another 10,125,000 options to purchase shares of our common stock with a grant date of May 27, 2013. Our board of directors set an exercise price of $0.58 per share for these options on the grant date based in part on the results of a third party valuation prepared as of March 31, 2013, which determined a fair value of our common

 

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stock of $0.58 per share. We also used the fair value as determined in the March 31, 2013 valuation of $0.58 per share as the fair value of the underlying common stock for purposes of calculating our stock-based compensation for these options. The board chose to use the fair value as of March 31, 2013 even though the awards were granted in May 2013 as they were not aware of any significant events or series of events that would have provided evidence that the fair value of $0.58 per share was not still appropriate as of the grant date. This is also because the March 31, 2013 valuation incorporated the Series E convertible preferred stock financing that occurred during the three months ended March 31, 2013 on a pro forma basis and also factored an assumption that an initial draft registration statement submission would occur in April 2013 into the valuation scenario probability estimates as discussed further below.

The fair value of our common stock as of March 31, 2013 was estimated by our board of directors with assistance from a third party valuation. The March 31, 2013 valuation was prepared on a minority, non-marketable interest basis. Our aggregate enterprise value was determined using the income approach and a form of market approach under the PWERM. For the income approach, we continued to apply a discount rate of 40%, which was consistent with the September 2012 valuation, to the values derived from the income approach as we were still lacking of near-term revenue and still had similar regulatory risks related to our product candidates. The enterprise value derived under the income approach, after adding back current cash holdings and backing out outstanding debt to determine an equity value, was then allocated among the securities utilizing an OPM which determined a fair value on a non-marketable basis under the income approach of $0.03 per share. The primary reason for the decrease in the fair value determined under the income approach compared to the September 2012 valuation was the significant increase in shares outstanding from approximately 39.4 million shares as of September 30, 2012 to approximately 145.1 million shares as of March 31, 2013 due to the conversion of the convertible notes and other Series E issuances during the three months ended March 31, 2013.

For the PWERM market-based approach, we established an equity value under three scenarios: (i) based on values of IPOs for other biotech and pharma companies over the past three years focusing primarily on companies that were in phase 3 trials with the FDA, (ii) based on a range of market multiples compared to our estimated 2017 revenues discounted back to our estimated IPO date on September 30, 2013 and (iii) based on current trading values of comparable aesthetic, late-stage and fast-follower companies. The resulting equity values were then divided by the outstanding shares of common stock, assuming conversion of all outstanding convertible preferred stock as though they converted automatically upon the closing of an IPO, which determined a fair value on a non-marketable basis under the PWERM market-based approach of $1.00 per share.

The non-marketable fair value of the common stock was determined under the income approach and PWERM market approach. The resulting common stock fair values were then weighted by estimating a 60% probability to the fair value determined under the PWERM market-based approach and a 40% probability to the fair value determined under the income approach. The increase in the fair value of the common stock from the September 2012 valuation to the March 2013 valuation primarily resulted from a change in our valuation methodology which was partially offset by a significant increase in the number of outstanding shares of capital stock. Generally, higher probability weighting toward an IPO in a PWERM results in a higher per share fair value of common stock.

October 2013 Award

We granted an option to purchase 50,000 shares of our common stock on October 3, 2013. Our board of directors set an exercise price of $0.59 per share for this option at the grant date based in part on the results of a third party valuation prepared as of September 30, 2013, which determined a fair value of our common stock of $0.59 per share. We also used the fair value as determined in the September 30, 2013 valuation of $0.59 per share as the fair value of the underlying common stock for purposes of calculating our stock-based compensation for this option.

The fair value of our common stock as of September 30, 2013 was estimated by our board of directors with assistance from a third party valuation. The September 30, 2013 valuation was prepared on a minority, non-marketable interest basis. Our aggregate enterprise value was determined using the income approach and a form

 

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of market approach under the PWERM. For the income approach, we continued to apply a discount rate of 40%, which was consistent with the March 2013 valuation, to the values derived from the income approach as we were still lacking of near-term revenue and still had similar regulatory risks related to our product candidates.

The enterprise value derived under the income approach, after adding back current cash holdings and backing out outstanding debt to determine an equity value, was then allocated among the securities utilizing an OPM which determined a fair value on a non-marketable basis under the income approach of $0.01 per share.

For the PWERM market-based approach, we established an equity value under three scenarios: (i) based on values of IPOs for other biotech and pharma companies over the past three years focusing primarily on companies that were in phase 3 trials with the FDA, (ii) based on a range of market multiples compared to our estimated 2017 revenues discounted back to our estimated IPO date and (iii) based on current trading values of comparable aesthetic, late-stage and fast-follower companies. The resulting equity values were then divided by the outstanding shares of common stock, assuming conversion of all outstanding convertible preferred stock as though they converted automatically upon the closing of an IPO, which determined a fair value on a non-marketable basis under the PWERM market-based approach of $0.98 per share.

The non-marketable fair value of the common stock was determined under the income approach and PWERM market approach. The resulting common stock fair values were then weighted by estimating a 60% probability to the fair value determined under the PWERM market-based approach and a 40% probability to the fair value determined under the income approach. The increase in the fair value of the common stock from the March 2013 valuation to the September 2013 valuation primarily resulted from higher implied pre-money equity values for recent IPOs.

December 2013 Awards

We granted options to purchase 3,258,250 shares of our common stock on December 17, 2013. Our board of directors set an exercise price of $0.61 per share for these options at the grant date based in part on the results of a third party valuation prepared as of December 2, 2013, which determined a fair value of our common stock of $0.61 per share. We also used the fair value as determined in the December 2, 2013 valuation of $0.61 per share as the fair value of the underlying common stock for purposes of calculating our stock-based compensation for these options. The board chose to use the fair value as of December 2, 2013 even though the awards were granted on December 17, 2013 as they were not aware of any significant events or series of events that were not incorporated into the analysis that would have provided evidence that the fair value of $0.61 per share was not still appropriate as of the grant date.

The fair value of our common stock as of December 2, 2013 was estimated by our board of directors with assistance from a third party valuation. The December 2, 2013 valuation was prepared on a minority, non-marketable interest basis. Our aggregate enterprise value was determined using the income approach and a form of market approach under the PWERM. For the income approach, we applied a discount rate of 35%, which was a slight decrease from the 40% discount rate utilized in the September 2013 valuation. We reduced the discount rate as we gained more clarity into our future revenue streams or determined there was a reduced risk to these forecasts but determined to leave the rate at 35% because we were still lacking of near-term revenue and still had similar regulatory risks related to our product candidates.

The enterprise value derived under the income approach, after adding back current cash holdings and backing out outstanding debt to determine an equity value, was then allocated among the securities utilizing an OPM which determined a fair value on a non-marketable basis under the income approach of $0.001 per share. The primary reason for the decrease in the fair value determined under the income approach compared to the September 2013 valuation was the increase in shares outstanding from approximately 163.9 million shares as of September 30, 2013 to approximately 170.8 million shares as of December 2, 2013, as adjusted for the issuance of warrants to purchase common stock and the issuance of $19.4 million in convertible notes during the three months ended December 31, 2013.

For the PWERM market-based approach, we established an equity value under three scenarios: (i) based on values of IPOs for other biotech and pharma companies over the past three years focusing primarily on

 

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companies that were in phase 3 trials with the FDA, (ii) based on a range of market multiples compared to our estimated 2017 revenues discounted back to our estimated IPO date and (iii) based on current trading values of comparable aesthetic, late-stage and fast-follower companies. The resulting equity values were then divided by the outstanding shares of common stock, assuming conversion of all outstanding convertible preferred stock as though they converted automatically upon the closing of an IPO, which determined a fair value on a non-marketable basis under the PWERM market-based approach of $0.88 per share.

The non-marketable fair value of the common stock was determined under the income approach and PWERM market approach. The resulting common stock fair values were then weighted by estimating a 70% probability to the fair value determined under the PWERM market-based approach and a 30% probability to the fair value determined under the income approach. The increase in the fair value of the common stock from the September 2013 valuation to the December 2, 2013 valuation primarily resulted from a higher probability weighting toward an IPO, offset by a decrease in implied equity values due to revised forecasts. Generally, higher probability weighting toward an IPO in a PWERM results in a higher per share fair value of common stock.

Our stock-based compensation for the years ended December 31, 2011 and 2012 and nine months ended September 30, 2012 and 2013 was recognized as follows:

 

     Year Ended December 31,      Nine Months Ended
September 30,
 
       2011          2012          2012          2013    
                   (Unaudited)  
     (In thousands)  

Stock-Based Compensation:

           

Research and development

   $ 150       $ 48       $ 27       $ 138   

Sales, general and administrative

     123         31         39         208   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 273       $ 79       $ 66       $ 346   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of September 30, 2013, we had $2.8 million of unrecognized stock-based compensation, net of estimated forfeitures that we expect to recognize over a weighted-average period of 3.2 years. In future periods, we expect our stock-based compensation to increase in absolute dollars as a result of our existing unrecognized stock-based compensation to be recognized as these options vest and as we issue additional stock-based awards to attract and retain employees.

Convertible Preferred Stock Warrants

We account for warrants to purchase shares of our convertible preferred stock as liabilities at fair value because these warrants may obligate us to transfer assets to the holders at a future date under certain circumstances, such as a change of control. We remeasure these warrants to current fair value at each balance sheet date, and any change in fair value is recognized as a change in fair value of warrant liability in our consolidated statements of operations and comprehensive loss. We estimated the fair value of these warrants at the respective balance sheet dates using the Black-Scholes option-pricing model. We use a number of assumptions to estimate the fair value including the remaining contractual terms of the warrant, risk-free interest rates, expected dividend yield and expected volatility of the price of the underlying stock.

The fair value of the outstanding convertible preferred stock warrants was remeasured as of each period end using a Black-Scholes option-pricing model with the following assumptions:

 

     As of December 31,     As of September 30,  
       2011         2012         2013    

Remaining contractual term (in years)

     3.9        6.5        6.8   

Risk-free interest rate

     0.7     1.0     1.9

Expected volatility

     58     57     59

Expected dividend rate

     0     0     0

 

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These assumptions are subjective and the fair value of these warrants may have differed significantly had we used different assumptions. We will continue to adjust the liability for changes in fair value until the earlier of the exercise or expiration of the convertible preferred stock warrants, conversion of convertible preferred stock into common stock, or until holders of the convertible preferred stock can no longer trigger a deemed liquidation event. At that time, the convertible preferred stock warrant liability will be reclassified to additional paid-in capital.

Derivative Liabilities

As of December 31, 2011 and 2012 and September 30, 2013, the following derivative liabilities were outstanding (in thousands):

 

     As of December 31,      As of
September 30,
 
     2011      2012      2013  
                   (Unaudited)  
     (In thousands)  

Derivative liabilities associated with the convertible notes

   $ 13,405       $ 1,800       $   

Derivative liabilities associated with Medicis settlement – Proceed sharing payment

             12,880         7,069   

Derivative liabilities associated with Medicis settlement – Product approval payment

             2,388         1,537   
  

 

 

    

 

 

    

 

 

 

Total fair value of outstanding derivatives

   $ 13,405       $ 17,068       $ 8,606   
  

 

 

    

 

 

    

 

 

 

Derivatives Liabilities Associated with the Convertible Notes

During the years ended December 31, 2011 and 2012, we issued convertible notes in the aggregate amount of $63.3 million. The convertible notes have conversion and redemption features related to the conversion of the notes. These conversion and redemption features were determined to be embedded derivatives requiring bifurcation and separate accounting. Accordingly, we recorded a derivative liability which will be remeasured to fair value as of each balance sheet date and the related remeasurement adjustments will be recognized as a change in fair value of derivative liabilities associated with the convertible notes in the consolidated statements of operations and comprehensive loss.

 

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As a result of the convertible note issuances, we recorded a derivative liability of $13.0 million associated with the convertible notes issued during the year ended December 31, 2011 and an additional derivative liability of $2.3 million associated with the convertible notes issued during the year ended December 31, 2012. The fair value of these derivative instruments was recognized as an additional debt discount and as a derivative liability on the consolidated balance sheets upon issuance of the respective convertible notes. The derivative liability required periodic remeasurements to fair value while the derivative was still outstanding and, accordingly, we recognized a charge of $0.4 million for the remeasurement of the derivative liability associated with convertible notes during the year ended December 31, 2011 but recognized remeasurement gains for this instrument during the year ended December 31, 2012 and the nine months ended September 30, 2013 of $13.9 million and $1.8 million, respectively. The fair value of the derivative liabilities associated with convertible notes was determined upon issuance in 2011 and 2012 using “with and without” valuation methodology with the following weighted-average assumptions:

 

     Year Ended
December 31,
 
       2011         2012    
              

Expected term (in years)

     2.1        0.6   

Discount rate

     55     55

Weighted-average scenario probabilities

    

Maturity

     20     5

Qualified financing

     30     70

Initial public offering

     20     14

Private Investment in Public Equity, or PIPE

     10     0

Change in control

     20     11

There were no issuances of convertible notes, or the related instruments, during the nine months ended September 30, 2013.

The fair value of the derivative liabilities associated with convertible notes was determined as of December 31, 2011 and 2012 using the “with-and-without” valuation methodology with the following weighted-average assumptions:

 

     As of December 31,  
       2011         2012    

Expected term (in years)

     1.4        0.4   

Discount rate

     55     55

Weighted-average scenario probabilities

    

Maturity

     10     5

Qualified financing

     50     93

Initial public offering

     25     0

PIPE

     0     0

Change in control

     15     2

The remeasurement adjustments were reflected in the consolidated statements of operations and comprehensive loss as change in fair value of derivative liabilities associated with the convertible notes and the fair value of the derivatives was recorded as a non-current obligation on the consolidated balance sheets as of December 31, 2011 and as a current obligation as of December 31, 2012. The related convertible notes converted into shares of Series E convertible preferred stock during the nine months ended September 30, 2013. Immediately prior to the conversion in March 2013, we determined the fair value of the embedded derivatives to be approximately zero as the execution of a qualified financing approached certainty. Accordingly, the derivative liabilities associated with these convertible notes were no longer outstanding as of September 30, 2013 and will therefore no longer require periodic fair value remeasurements.

 

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As noted earlier in this section, the fair values of the derivative liabilities associated with the convertible notes were measured using a “with-and-without” valuation methodology. Inputs used to determine the estimated fair value of these derivative instruments include the probability estimates of potential settlement scenarios for the convertible notes, a present value discount rate and an estimate of the expected timing of settlement, all of which are highly subjective and open to change. Generally, increases (decreases) in the discount rate would result in a directionally opposite impact to the fair value measurement of this derivative instrument. Also, changes in the probability scenarios would have had varying impacts depending on the weighting of each specific scenario. More specifically, heavier weighting towards a change in control, a PIPE transaction or an initial public offering would result in an increase in fair value of this derivative instrument. The decrease in the fair value of the derivative liabilities associated with the convertible notes during the year ended December 31, 2012 and the nine months ended September 30, 2013 was due primarily to (i) the decrease in the expected term for a liquidity event due to the passage of time and (ii) the weightings of the various scenario probabilities. The reduction in the expected term reduces the fair value of the derivatives primarily because awards are generally less valuable if there is less time allowed for exercising and recognizing the related expected benefit underlying the derivative instruments. In addition, the fair value of the award was reduced as we moved our estimated probabilities away from the initial public offering, PIPE and change in control scenarios and estimated a significantly higher weighting towards a qualified financing. Our board of directors’ estimates for these probabilities became much more clear towards the end of 2012 and into 2013 when we had already started discussions for a qualified financing in the form of the Series E preferred stock financing which ultimately occurred in the first quarter of 2013.

Derivatives Associated with the Medicis Settlement

In October 2012, we entered into a settlement with Medicis that resulted in the termination of their contractual relationship with us. In the settlement, we agreed to pay Medicis an aggregate of up to $25.0 million consisting of (i) $7.0 million payable at the execution of the settlement agreement; (ii) $14.0 million payable based on a proceed sharing arrangement (the Proceeds Sharing Arrangement Payment) whereby 15% of specified types of cash proceeds received by us are to be remitted to Medicis until the full $14.0 million is paid (an aggregate of $6.9 million of which was paid to Medicis in April and May 2013); and (iii) $4.0 million payable due upon marketing approval of RT001 or RT002 in the United States or any major European market (the Product Approval Payment). We determined that the settlement provisions related to (ii) and (iii) above were derivative instruments that require fair value accounting at the time of settlement and fair value remeasurements on a periodic basis going forward. Accordingly, we recorded derivative liabilities on the balance sheet based on the derivative liabilities respective fair values on the settlement date. These derivative liabilities will be reduced as the related payments are made under the settlement agreement and the remaining liabilities will be subsequently remeasured to fair value as of each balance sheet date with the related remeasurement adjustments recognized in the consolidated statements of operations and comprehensive loss.

The fair value of the Proceeds Sharing Arrangement Payment was estimated to be $12.9 million and fair value of the Product Approval Payment was estimated to be $2.4 million upon issuance in October 2012 and as of December 31, 2012. The fair value of the Proceeds Sharing Arrangement Payment derivative was initially determined using an option pricing model with the following assumptions: expected term of 0.75 years, risk-free rate of 0.2% and volatility of 46%. During the nine months ended September 30, 2013, we made payments in the amount of $6.9 million against the Proceeds Sharing Arrangement Payment. As of September 30, 2013, the fair value of the Proceeds Sharing Arrangement Payment derivative was $7.1 million which was determined using an option pricing model with the following assumptions: expected term of 0.75 years, risk-free rate of 0.1% and volatility of 43%. These valuations were also heavily weighted toward an initial public offering being the most likely outcome for our business at the time of issuance. With that said, the estimated fair value of the Proceeds Sharing Arrangement Payment was essentially equal to the amount owed to Medicis under this component of the settlement agreement. Therefore as we pay down the amounts due under this component of the Medicis settlement agreement, the related fair value of the Proceeds Sharing Arrangement Payment derivative liability will also be reduced.

The fair value of the Product Approval Payment derivative was initially determined by estimating the timing and probability of the related approval and multiplying the payment amount by this probability percentage and a

 

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discount factor assuming a term of two years and a risk free rate of 0.25%. As of September 30, 2013, the fair value of the Product Approval Payment derivative was $1.5 million which was determined using a term of 3.5 years, a risk-free rate of 0.8%, and a credit risk adjustment of 7%. The primary drivers of any fair value movements for the Product Approval Payment derivative are the estimated probability of the related approval and the credit risk adjustment. If the probability estimate increases (decreases) and the credit risk adjustment decreases (increases), the fair value of the derivative will increase (decrease).

We will record adjustments to the fair value of the derivative liabilities associated with the Medicis settlement until the related settlement payments have been paid. At that time, these derivative liabilities associated with the Medicis settlement will be adjusted to fair value one last time with the final fair value being be reclassified to additional paid-in capital.

Multiple Element Arrangements

We record arrangements with multiple deliverables based on the individual units of accounting determined to exist in the arrangement. A deliverable item is considered a separate unit of accounting when the item has value to the parties entering into the arrangement on a stand-alone basis, the delivery or performance of an undelivered item is considered probable and under our control, or represents a legal obligation for us. Items are considered to have stand-alone value when we could negotiate similar items on a stand-alone basis. When a deliverable does not meet the criteria to be considered a separate unit of accounting, we group it with other deliverables that, when combined, meet the criteria, and the appropriate allocation of arrangement consideration is determined. Consideration is allocated at the inception of the contract to all deliverables based on their relative fair values.

Impairment of Long-Lived Assets

We assess the impairment of long-lived assets, such as property and equipment subject to depreciation and amortization, when events or changes in circumstances indicate that their carrying amount may not be recoverable. Among the factors and circumstances we considered in determining recoverability are: (i) a significant adverse change in the extent to which, or manner in which, a long-lived asset is being used or in its physical condition; (ii) a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset, including an adverse action or assessment by a regulator; (iii) an accumulation of costs significantly in excess of the amount originally expected for the acquisition; and (iv) current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. There have been no indicators of impairment, and we did not record any impairment losses during the years ended December 31, 2011 and 2012 or the nine months ended September 30, 2013.

Income Taxes

We are subject to income taxes in the United States, and we use estimates in determining our provision for income taxes. We use the asset and liability method of accounting for income taxes. Under this method, we calculate deferred tax asset or liability account balances at the balance sheet date using current tax laws and rates in effect for the year in which the differences are expected to affect our taxable income.

We estimate actual current tax exposure together with assessing temporary differences resulting from differences in accounting for reporting purposes and tax purposes for certain items, such as accruals and allowances not currently deductible for tax purposes. These temporary differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. In general, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in our consolidated statements of operations and comprehensive loss become deductible expenses under applicable income tax laws or when net operating loss or credit carryforwards are utilized. Accordingly, realization of our deferred tax assets is dependent on future taxable income against which these deductions, losses and credit carryforwards can be utilized.

 

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We must assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, establish a valuation allowance.

As of December 31, 2012, we had net operating loss carryforwards of $160.0 million for federal and state income purposes. The federal net operating loss carryforwards will begin to expire in 2020, and the state net operating loss carryforwards began expiring in 2011. In addition, as of December 31, 2012, we had federal and state research and development tax credit carryforwards of $4.1 million and $4.0 million, respectively. Due to U.S. federal legislation on January 2, 2013 extending federal research development tax credits from January 1, 2012 to December 31, 2013, we will record an additional $0.4 million of credits in the tax year 2013 related to tax year 2012. The federal research and development tax credit carryforwards will begin to expire in 2023, if not used, and the state research and development tax credit carryforwards do not expire. Because of the net operating loss and credit carryforwards, all of our tax years remain open to federal and California examinations.

Under federal and similar state tax statutes, changes in our ownership, including ownership changes resulting from the offering contemplated by this prospectus, may limit our ability to use our available net operating loss and tax credit carryforwards. The annual limitation, as a result of a change of control, may result in the expiration of net operating losses and credits before utilization. We conducted an analysis through December 31, 2012 and determined an ownership change occurred in April 2004. As a result of this deemed change in ownership, we have determined that federal and California net operating loss carryovers subject to the limitation were $2.0 and $1.0 million, respectively.

There was no impact on the provision (benefit) for income taxes or the deferred tax assets as a result of the extinguishment of debt and extinguishment of preferred stock and related conversion, which occurred in March 2013.

JOBS Act

We are an “emerging growth company” within the meaning of the JOBS Act, which was enacted in April 2012. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies that are not emerging growth companies.

Contractual Obligations

Our contractual commitments will have an impact on our future liquidity. The following table summarizes our contractual obligations as of December 31, 2012, which represent material expected or contractually committed future obligations, with terms in excess of one year. We believe that we will be able to fund these obligations through cash generated funding activities and from our existing cash balances.

 

     Payments Due by Period  

Contractual Obligations:(1)(2)

   Total      Year 1      Years 2 to 3      Years 4 to 5      More than
5 Years
 
     (In thousands)  

Operating lease obligations(3)

   $ 42,867       $ 4,267       $ 8,864       $ 9,327       $ 20,409   

Capital lease obligations(4)

     1,034         1,029         5                   

Long-term debt obligations — notes payable(5)

     18,597         7,559         11,038                   

Milestones payable(6)

     3,775         3,775                           

Medicis legal settlement payable(7)

     14,000         14,000                      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 80,273       $ 30,630       $ 19,907       $ 9,327       $ 20,409