Quarterly report pursuant to Section 13 or 15(d)

Summary of Significant Accounting Policies

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Summary of Significant Accounting Policies
6 Months Ended
Jun. 30, 2016
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying interim condensed financial statements are unaudited. These unaudited interim financial statements have been prepared in accordance U.S. GAAP (“GAAP”) and following the requirements of the United States Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted. In management’s opinion, the unaudited interim condensed financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company’s financial position and its results of operations and comprehensive loss and its cash flows for the periods presented. These statements do not include all disclosures required by GAAP and should be read in conjunction with the Company’s financial statements and accompanying notes for the fiscal year ended December 31, 2015, which is contained in the Company’s Annual Report on Form 10-K as filed with the SEC on March 29, 2016. The results for the three and six months ended June 30, 2016, are not necessarily indicative of results to be expected for the year or for any other period.

 

Use of Estimates

The condensed financial statements have been prepared in accordance with GAAP, which requires management to make estimates and assumptions that affect the amounts and disclosures reported in the condensed financial statements and accompanying notes. Management bases its estimates on historical experience and on assumptions believed to be reasonable under the circumstances. The estimation process often may yield a range of potentially reasonable estimates of the ultimate future outcomes, and management must select an amount that falls within that range of reasonable estimates. Actual results could differ materially from those estimates. The Company believes significant judgment is involved in estimating stock-based compensation, accrued clinical expenses, and equity instrument valuations.

Fair Value of Financial Instruments

The Company’s financial instruments during the periods reported consist of cash and cash equivalents, marketable securities, accrued interest receivable, prepaid expenses, accounts payable, accrued interest payable, accrued expenses, the facility loan, and warrant liabilities. Fair value estimates of these instruments are made at a specific point in time, based on relevant market information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment. The carrying amounts of financial instruments such as cash and cash equivalents, accrued interest receivable, prepaid expenses, accounts payable, accrued expenses, and accrued interest payable approximate the related fair values due to the short maturities of these instruments. Based on prevailing borrowing rates available to the Company for loans with similar terms, the Company believes the fair value of the Facility Loan, considering level 2 inputs, approximates its carrying value.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Assets and liabilities that are measured at fair value are reported using a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy maximizes the use of observable inputs and maximizes the use of unobservable inputs and is as follows:

Level 1—Inputs which include quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2—Inputs other than quoted prices in active markets that are observable for the asset or liability, either directly or indirectly.

Level 3—Inputs that are significant to the fair value measurement and are unobservable (i.e. supported by little market activity), which requires the reporting entity to develop its own valuation techniques and assumptions.

 

     As of June 30, 2016  
     (In thousands)  

Description

   Level 1      Level 2      Level 3      Fair Value  

Cash equivalents:

           

Money market funds

   $ 11,384       $ —         $ —         $ 11,384   

Commercial paper

     —           899         —           899   

Short-term investments:

           

Commercial paper

     —           7,969         —           7,969   

Corporate debt and asset backed securities

     —           8,736         —           8,736   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value

   $ 11,384       $ 17,604       $ —         $ 28,988   
  

 

 

    

 

 

    

 

 

    

 

 

 

Warrant liability

   $ —         $ —         $ 1,259       $ 1,259   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities measured at fair value

   $ —         $ —         $ 1,259       $ 1,259   
  

 

 

    

 

 

    

 

 

    

 

 

 
     As of December 31, 2015  
     (In thousands)  

Description

   Level 1      Level 2      Level 3      Fair Value  

Cash equivalents:

           

Money market funds

   $ 6,942       $ —         $ —         $ 6,942   

Short-term investments:

           

Commercial paper

     —           5,992         —           5,992   

Government debt securities

     —           1,507         —           1,507   

Corporate debt and asset backed securities

     —           26,275         —           26,275   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value

   $ 6,942       $ 33,774       $ —         $ 40,716   
  

 

 

    

 

 

    

 

 

    

 

 

 

Warrant liability

   $ —         $ —         $ 1,220       $ 1,220   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities measured at fair value

   $ —         $ —         $ 1,220       $ 1,220   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company estimates the fair value of its corporate debt, government debt, money market funds, commercial paper, and asset backed securities by taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities, issuer credit spreads; benchmark securities; prepayment/default projections based on historical data; and other observable inputs.

There were no transfers between Level 1 and Level 2 during the periods presented.

The Company holds a Level 3 liability associated with common stock warrants that were issued in connection with the Company’s financings completed in September and October 2013, January 2014, and August 2015. The warrants are classified as liabilities and recorded at fair value using a binomial lattice option-pricing model, the inputs for which include the exercise price of the warrants, market price of the underlying common shares, expected term, volatility, the risk-free rate, and the expected changes in stock price that follow announcements of the Company’s clinical trial results and other strategic initiatives. Changes to any of the inputs to the valuation model used by the Company can have a significant impact to the estimated fair value of the warrants.

 

The following table sets forth an activity summary which includes the changes in the fair value of the Company’s Level 3 financial instruments (in thousands):

 

     For the Six Months
Ended June 30,
 
     2016      2015  

Balance, beginning of period

   $ 1,220       $ 13,596   

Issuance of financial instrument

     —           —     

Change in fair value

     39         (9,902

Settlement of financial instrument

     —           (1,513
  

 

 

    

 

 

 

Balance, end of period

   $ 1,259       $ 2,181   
  

 

 

    

 

 

 

Cash, Cash Equivalents, and Marketable Securities

The Company considers all highly liquid investments with a remaining maturity of 90 days or less at the time of purchase to be cash equivalents. Cash and cash equivalents consist primarily of deposits with commercial banks in checking, interest-bearing, and demand money market accounts.

The Company invests excess cash in marketable securities with high credit ratings. These securities consist primarily of corporate debt and asset-backed securities and are classified as “available-for-sale.” Management may liquidate any of these investments in order to meet the Company’s liquidity needs in the next year. Accordingly, any investments with contractual maturities greater than one year from the balance sheet date are classified as short-term in the condensed balance sheets.

Realized gains and losses from the sale of marketable securities, if any, are calculated using the specific identification method. Realized gains and losses and declines in value judged to be other-than-temporary are included in interest income or expense in the statements of operations. Unrealized holding gains and losses are reported in accumulated other comprehensive loss, in the balance sheets. To date, the Company has not recorded any impairment charges on its marketable securities related to other-than-temporary declines in market value. In determining whether a decline in market value is other-than-temporary, various factors are considered, including the cause, duration of time and severity of the impairment, any adverse changes in the investees’ financial condition, and the Company’s intent and ability to hold the security for a period of time sufficient to allow for an anticipated recovery in market value.

Marketable securities in the condensed balance sheets, all of which are classified as available-for-sale, consisted of the following (in thousands):

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
 

As of June 30, 2016:

           

Corporate debt securities

   $ 12,797       $ —         $ (4    $ 12,793   

Asset-backed securities

     3,913         —           (1      3,912   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 16,710       $ —         $ (5    $ 16,705   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
 

As of December 31, 2015:

           

Government debt securities

   $ 1,509       $ —         $ (2    $ 1,507   

Corporate debt securities

     27,663         —         $ (17      27,646   

Asset-backed securities

     4,623         —           (2      4,621   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 33,795       $ —         $ (21    $ 33,774   
  

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2016, and December 31, 2015, the remaining contractual maturities of the Company’s government and corporate debt securities was less than one year and asset backed securities was between two and five years. Realized gains and losses were immaterial for all periods presented. None of these investments has been in a continuous unrealized loss position for more than 12 months as of June 30, 2016, or December 31, 2015.

 

Restricted Cash

The Company is required to maintain compensating cash balances with financial institutions that provide the Company with its corporate credit cards. As of June 30, 2016, and December 31, 2015, cash restricted under these arrangements was $170,000. This amount is presented in other assets on the accompanying condensed balance sheets.

Concentration of Credit Risk

Cash, cash equivalents, and marketable securities consist of financial instruments that potentially subject the Company to a concentration of credit risk to the extent of the fair value recorded in the balance sheet. The Company invests cash that is not required for immediate operating needs primarily in highly liquid instruments that bear minimal risk. The Company has established guidelines relating to the quality, diversification, and maturities of securities to enable the Company to manage its credit risk. The counterparties to the agreements relating to the Company’s investments consist of financial institutions of high credit standing.

Common Stock Warrant Liability

Warrants issued to common stock holders and lenders by the Company in conjunction with financings from 2013 through 2015 are classified as liabilities in the accompanying condensed balance sheets, as the terms for redemption of the underlying security are outside the Company’s control. The warrants are recorded at fair value and are re-measured at each financial reporting period until the warrants are exercised or expire and immediately before exercise, with any changes in fair value being recognized as a component of other income (expense), net in the accompanying condensed statements of operations and comprehensive loss.

Research and Development Expenses

Research and development expenses consist of costs incurred in identifying, developing, and testing product candidates. These expenses consist primarily of costs for research and development personnel (including related stock-based compensation); contract research organizations and other third parties that assist in managing, monitoring, and analyzing clinical trials; investigator and site fees; laboratory services; consultants; contract manufacturing services; non-clinical studies, including materials; and allocated expenses, such as depreciation of assets, and facilities and information technology that support research and development activities. Research and development costs are expensed as incurred, including expenses that may or may not be reimbursed under research and development funding arrangements.

The expenses related to clinical trials are based upon estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and clinical research organizations (CROs) that conduct and manage clinical trials on behalf of the Company. Expenses related to clinical trials are accrued based upon the level of activity incurred under each contract as indicated by such factors as progress made against specified milestones or targets in each period, patient enrollment levels, and other trial activities as reported by CROs. Accordingly, the Company’s clinical trial accrual is dependent upon the timely and accurate reporting of expenses by clinical research organizations and other third-party vendors. Payments made to third parties under these clinical trial arrangements in advance of the receipt of the related services are recorded as prepaid assets, depending on the terms of the agreement, until the services are rendered.

Stock-Based Compensation

Employee and director stock-based compensation is measured at the grant date, based on the fair-value of the awards, and the portion that is ultimately expected to vest is recognized as an expense over the related vesting periods, net of estimated forfeitures. The Company calculates the fair-value of option grants and incentive awards using the Black-Scholes model and recognizes expense using the straight-line attribution method.

Equity awards granted to non-employees are valued using the Black-Scholes option pricing model to determine the fair value of such instruments. The fair value of equity awards granted to non-employees are re-measured throughout the related vesting period and amortized to expense over that period.

Net Loss Per Common Share

Basic net loss per share of common stock is calculated as the weighted average number of shares of common stock outstanding equivalents during the period. Diluted net loss per share of common stock is calculated as the weighted average number of shares of common stock outstanding adjusted to include the assumed exercises of stock options and warrants, if dilutive.

 

The calculation of diluted loss per share also requires that, to the extent the average market price of the underlying shares for the reporting period exceeds the exercise price of the warrants and the presumed exercise of such securities are dilutive to earnings (loss) per share for the period, adjustments to net income or net loss used in the calculation are required to remove the change in fair value of the warrants for the period. Likewise, adjustments to the denominator are required to reflect the related dilutive shares.

In all periods presented, the Company’s outstanding stock options and incentive awards were excluded from the calculation of net loss per share because the effect would be antidilutive.

The Company’s computation of net loss per share is as follows (in thousands, except share and per share amounts):

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2016      2015      2016      2015  

Numerator:

           

Net loss allocated to common stock-basic

   $ (6,992    $ (1,357    $ (13,840    $ (3,685

Adjustments for revaluation of warrants

     —           —           —           (9,902
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss allocated to common stock-diluted

   $ (6,992    $ (1,357    $ (13,840    $ (13,587
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

           

Weighted average number of common stock shares outstanding — basic

     23,447,003         15,258,363         23,447,003         15,179,404   

Dilutive Securities:

           

Common stock warrants

     —           —           —           248,428   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common stock shares outstanding — diluted

     23,447,003         15,258,363         23,447,003         15,427,832   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss per share—basic:

   $ (0.30    $ (0.09    $ (0.59    $ (0.24

Net loss per share—diluted:

   $ (0.30    $ (0.09    $ (0.59    $ (0.88

The following table shows the total outstanding common stock equivalents considered anti-dilutive and therefore excluded from the computation of diluted net loss per share (in thousands).

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2016      2015      2016      2015  

Warrants for common stock

     1,667         1,553         1,667         —     

Common stock options

     2,415         1,794         2,415         1,794   

Incentive awards

     243         245         243         245   
  

 

 

    

 

 

    

 

 

    

 

 

 
     4,325         3,592         4,325         2,039   
  

 

 

    

 

 

    

 

 

    

 

 

 

Recent Accounting Pronouncements

Accounting Standards Update 2014-15

In August 2014, the FASB issued guidance codified in ASC 205, Presentation of Financial Statements — Going Concern. Accounting Standards Update 2014-15 requires an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern and if those conditions exist, to make the required disclosures. Early adoption will be permitted. The standard is effective for annual periods ending after December 15, 2016, and for annual and interim periods thereafter. The Company does not expect that the adoption of this standard will have a significant impact on its condensed financial statements.

 

Accounting Standards Update 2015-03

In April 2015, the FASB issued ASU No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the corresponding debt liability rather than as an asset. The Company adopted this ASU with retrospective application in the first quarter of 2016. As the Company does not have any debt issuance costs recorded as assets, the adoption of this standard did not have any impact on its condensed financial statements.

Accounting Standards Update 2016-02

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU requires management to recognize lease assets and lease liabilities by lessees for most leases. The ASU is effective for the annual periods beginning after December 15, 2018 and interim periods therein on a modified retrospective basis. The Company is currently evaluating the impact this guidance will have on its condensed financial statements.

Accounting Standards Update 2016-09

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation – Stock Compensation. The ASU includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. The ASU will be effective for the Company for the annual periods beginning after December 15, 2016 and interim periods within those annual periods on a modified retrospective basis. The Company is currently evaluating the impact this guidance will have on its condensed financial statements.

Accounting Standards Update 2016-13

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), which introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available–for-sale debt securities and provides for a simplified accounting model for purchased financial assets with deterioration since their origination. The ASU is effective for the annual periods beginning after December 15, 2019 including interim periods within those annual periods. The Company is currently evaluating the impact this guidance will have on its condensed financial statements.