akao-10q_20180930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-36323

 

ACHAOGEN, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

68-0533693

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1 Tower Place, Suite 300

South San Francisco, CA

(Address of principal executive offices)

94080

(Zip Code)

(650) 800-3636

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if registrant has elected not to use the extended transition period for complying with any new or reviewed accounting standards provided pursuant to Section 13(a) of the Exchange Act  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of November 1, 2018, there were 46,119,841 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

 


 

 

ACHAOGEN, INC.

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I—FINANCIAL INFORMATION

 

3

 

 

 

Item 1. Condensed Consolidated Financial Statements (unaudited)

 

3

 

 

 

Condensed Consolidated Balance Sheets

 

3

 

 

 

Condensed Consolidated Statements of Operations

 

4

 

 

 

Condensed Consolidated Statements of Comprehensive Loss

 

5

 

 

 

Condensed Consolidated Statements of Cash Flows

 

6

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

30

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

43

 

 

 

Item 4. Controls and Procedures

 

43

 

 

 

PART II—OTHER INFORMATION

 

44

 

 

 

Item 1. Legal Proceedings

 

44

 

 

 

Item 1A. Risk Factors

 

44

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

81

 

 

 

Item 3. Defaults Upon Senior Securities

 

81

 

 

 

Item 4. Mine Safety Disclosures

 

81

 

 

 

Item 5. Other Information

 

81

 

 

 

Item 6. Exhibits

 

81

 

 

 

SIGNATURES

 

83

 

 

 

 

Page 2 of 83


 

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements.

Achaogen, Inc.

Condensed Consolidated Balance Sheets

(In thousands except share and per share data)

 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

55,635

 

 

$

145,219

 

Short-term investments

 

 

2,589

 

 

 

19,572

 

Trade and contract receivables, net

 

 

1,981

 

 

 

1,357

 

Inventory

 

 

637

 

 

 

 

Prepaids and other current assets

 

 

6,348

 

 

 

6,367

 

Restricted cash

 

 

328

 

 

 

5,891

 

Total current assets

 

 

67,518

 

 

 

178,406

 

Property and equipment, net

 

 

15,754

 

 

 

14,810

 

Restricted cash

 

 

6,267

 

 

 

3,855

 

Non-current inventory

 

 

1,604

 

 

 

 

Other long-term assets

 

 

6,158

 

 

 

 

Total assets

 

$

97,301

 

 

$

197,071

 

Liabilities, contingently redeemable common stock and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

10,920

 

 

$

6,862

 

Accrued liabilities

 

 

14,355

 

 

 

15,441

 

Loan payable, current portion

 

 

 

 

 

12,500

 

Deferred revenue

 

 

328

 

 

 

2,100

 

Derivative liability

 

 

950

 

 

 

 

Total current liabilities

 

 

26,553

 

 

 

36,903

 

Loan payable, long-term

 

 

24,773

 

 

 

9,457

 

Warrant liability

 

 

2,600

 

 

 

9,774

 

Derivative liability, long-term

 

 

 

 

 

686

 

Deferred rent

 

 

8,588

 

 

 

8,289

 

Total liabilities

 

 

62,514

 

 

 

65,109

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

Contingently redeemable common stock (Note 9)

 

 

10,000

 

 

 

10,000

 

Stockholders' equity

 

 

 

 

 

 

 

 

Common stock, $0.001 par value, 290,000,000 shares authorized at

   September 30, 2018 and December 31, 2017; 45,967,093 and 42,515,015

   shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively

 

 

46

 

 

 

42

 

Preferred stock, $0.001 par value, 10,000,000 shares authorized and zero

   shares issued and outstanding at September 30, 2018 and December 31, 2017

 

 

 

 

 

 

Additional paid-in-capital

 

 

536,569

 

 

 

494,758

 

Accumulated deficit

 

 

(511,828

)

 

 

(372,838

)

Accumulated other comprehensive loss

 

 

 

 

 

 

Total stockholders’ equity

 

 

24,787

 

 

 

121,962

 

Total liabilities, contingently redeemable common stock and stockholders’ equity

 

$

97,301

 

 

$

197,071

 

 

See accompanying notes to condensed consolidated financial statements.

Page 3 of 83


 

Achaogen, Inc.

Condensed Consolidated Statements of Operations

(In thousands except share and per share data)

(unaudited)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenue, net

 

$

291

 

 

$

 

 

$

291

 

 

$

 

Contract revenue

 

 

1,707

 

 

 

577

 

 

 

6,412

 

 

 

9,306

 

Total revenues

 

 

1,998

 

 

 

577

 

 

 

6,703

 

 

 

9,306

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

11

 

 

 

 

 

 

11

 

 

 

 

Research and development

 

 

21,732

 

 

 

25,316

 

 

 

89,572

 

 

 

66,113

 

Selling, general and administrative

 

 

18,937

 

 

 

11,805

 

 

 

54,484

 

 

 

27,415

 

Restructuring charges

 

 

7,944

 

 

 

 

 

 

7,944

 

 

 

 

Total operating expenses

 

 

48,624

 

 

 

37,121

 

 

 

152,011

 

 

 

93,528

 

Loss from operations

 

 

(46,626

)

 

 

(36,544

)

 

 

(145,308

)

 

 

(84,222

)

Interest expense

 

 

(435

)

 

 

(740

)

 

 

(1,335

)

 

 

(2,170

)

Change in warrant and derivative liabilities

 

 

4,865

 

 

 

6,773

 

 

 

6,909

 

 

 

(3,957

)

Loss on debt extinguishment

 

 

 

 

 

 

 

 

(819

)

 

 

 

Other income, net

 

 

405

 

 

 

604

 

 

 

1,563

 

 

 

1,114

 

Net loss

 

$

(41,791

)

 

$

(29,907

)

 

$

(138,990

)

 

$

(89,235

)

Net loss per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.92

)

 

$

(0.71

)

 

$

(3.10

)

 

$

(2.31

)

Diluted

 

$

(1.02

)

 

$

(0.85

)

 

$

(3.21

)

 

$

(2.31

)

Weighted-average shares used to calculate net loss per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

45,329,711

 

 

 

42,259,001

 

 

 

44,854,279

 

 

 

38,709,811

 

Diluted

 

 

45,794,686

 

 

 

43,211,059

 

 

 

45,595,838

 

 

 

38,709,811

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

Page 4 of 83


 

Achaogen, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(In thousands)

(unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net loss

 

$

(41,791

)

 

$

(29,907

)

 

$

(138,990

)

 

$

(89,235

)

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain (loss) on available-for-sale securities

 

 

2

 

 

 

33

 

 

 

 

 

 

(2

)

Total comprehensive loss

 

$

(41,789

)

 

$

(29,874

)

 

$

(138,990

)

 

$

(89,237

)

 

See accompanying notes to condensed consolidated financial statements.

Page 5 of 83


 

Achaogen, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(138,990

)

 

$

(89,235

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

2,149

 

 

 

851

 

Amortization of (discount) premium on short-term investments

 

 

(330

)

 

 

(144

)

Stock-based compensation expense

 

 

11,816

 

 

 

10,297

 

Non-cash facility exit costs, net

 

 

3,426

 

 

 

 

Loss on fixed asset disposition

 

 

 

 

 

54

 

Change in warrant and derivative liabilities

 

 

(6,910

)

 

 

3,958

 

Loss on debt extinguishment

 

 

819

 

 

 

 

Non-cash interest expense relating to notes payable

 

 

398

 

 

 

639

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Trade and contract receivables, net

 

 

(624

)

 

 

11,911

 

Prepaids and other assets

 

 

19

 

 

 

 

Inventory

 

 

(763

)

 

 

(3,985

)

Other long-term assets

 

 

(6,158

)

 

 

 

Accounts payable and accrued liabilities

 

 

932

 

 

 

(752

)

Deferred revenue

 

 

(1,772

)

 

 

2,708

 

Other liabilities

 

 

2,738

 

 

 

860

 

Net cash used in operating activities

 

 

(133,250

)

 

 

(62,838

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(8,396

)

 

 

(5,277

)

Purchases of short-term investments

 

 

(58,101

)

 

 

(121,796

)

Maturities of short-term investments

 

 

75,414

 

 

 

84,106

 

Net cash provided by (used in) investing activities

 

 

8,917

 

 

 

(42,967

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net of issuance costs

 

 

27,254

 

 

 

121,192

 

Proceeds from issuance of contingently redeemable common stock, net of issuance costs

 

 

 

 

 

10,000

 

Proceeds from the issuance of common stock in connection with equity incentive plans

 

 

2,745

 

 

 

1,789

 

Proceeds from exercise of stock warrants

 

 

 

 

 

417

 

Proceeds from loan payable, net of issuance costs

 

 

24,432

 

 

 

 

Repayment of loan payable

 

 

(22,833

)

 

 

(1,042

)

Net cash provided by financing activities

 

 

31,598

 

 

 

132,356

 

Net increase (decrease) in cash, cash equivalents, and restricted cash

 

 

(92,735

)

 

 

26,551

 

Cash, cash equivalents, and restricted cash at beginning of period

 

 

154,965

 

 

 

119,341

 

Cash, cash equivalents, and restricted cash at end of period

 

$

62,230

 

 

$

145,892

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Interest paid

 

$

1,272

 

 

$

1,531

 

Supplemental disclosures of noncash investing and financing information

 

 

 

 

 

 

 

 

Reclassification of warrant liability to additional paid-in capital

 

$

 

 

$

2,089

 

Purchases of property plant and equipment included in deferred rent

 

$

989

 

 

$

4,736

 

Purchases of property plant and equipment included in accounts payable

 

$

561

 

 

$

 

See accompanying notes to condensed consolidated financial statements.

Page 6 of 83


 

Achaogen, Inc.

September 30, 2018

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Organization and Basis of Presentation and Consolidation

Achaogen, Inc. (together with its consolidated subsidiary, the “Company”) is a biopharmaceutical company passionately committed to discovering, developing and commercializing innovative antibacterial agents for multi-drug resistant (“MDR”) gram-negative infections. On June 25, 2018, the U.S. Food and Drug Administration (“FDA”) approved the Company’s first commercial product ZEMDRI (plazomicin) for adults with complicated urinary tract infections (“cUTI”), including pyelonephritis, caused by certain Enterobacteriaceae in adult patients with limited or no alternative treatment options. ZEMDRI is an intravenous (“IV”) infusion, administered once daily over a 30-minute IV. The approval of ZEMDRI was supported by data from the EPIC (“Evaluating Plazomicin in cUTI”) clinical trial, which evaluated the safety and efficacy of plazomicin in patients with serious infections caused by gram-negative pathogens. ZEMDRI became commercially available in July 2018. The Company has global commercialization rights to ZEMDRI, which has patent protection in the United States estimated until 2031 to 2032.

The Company is also developing C-Scape as a product candidate, an orally administered antibiotic to address a serious unmet need for an effective oral treatment for patients with cUTI, including pyelonephritis, caused by extended spectrum beta-lactamases (“ESBL”)-producing Enterobacteriaceae. C-Scape is a beta-lactam/beta-lactamase inhibitor combination comprised of ceftibuten, an approved third generation cephalosporin, and clavulanate, an approved beta-lactamase inhibitor. On January 2, 2018, the Company announced positive Phase 1 top-line results and continues to do additional development on C-Scape including a Phase 1 Clinical Pharmacology study to improve the likelihood of clinical and commercial success.

The Company was incorporated in Delaware in 2002 and commenced operations in 2004. Since commencing operations in 2004, the Company has devoted substantially all its resources to identifying, developing and commercializing its product candidates, including conducting preclinical studies and clinical trials and providing general and administrative support for these operations.

Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and the requirements of the Securities and Exchange Commission (the “SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. These financial statements have been prepared on the same basis as the Company’s annual financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of the Company’s financial information. The results of operations for the three and nine-month periods ended September 30, 2018 are not necessarily indicative of the results to be expected for the full year or any other future period. The balance sheet as of  December 31, 2017 has been derived from audited consolidated financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements. Intercompany accounts and transactions have been eliminated upon consolidation.

The accompanying condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K.

Liquidity and Going Concern

On April 7, 2015, the Company entered into a Common Stock Sales Agreement (the “Sales Agreement”) with Cowen and Company, LLC (“Cowen”), pursuant to which the Company could issue and sell shares of our common stock having aggregate sales proceeds of up to $30.0 million from time to time through an at-the-market (“ATM”) equity offering program under which Cowen acted as sales agent. During the nine-month period ended September 30, 2018, the Company sold 2,144,454 shares of common stock under the Sales Agreement, at a weighted-average price of approximately $11.51 per share for aggregate gross proceeds of $24.7 million and aggregate net proceeds of $24.0 million, of which all sales took place during the three-month period ended March 31, 2018. As of September 30, 2018, the Company had sold 3,250,003 shares of common stock under the Sales Agreement for aggregate gross proceeds of $30.0 million and aggregate net proceeds of $29.2 million. No shares remain available for sale under the Sales Agreement.

On May 31, 2017, the Company completed an underwritten public offering of 5,750,000 shares of its common stock at a price to the public of $22.50 per share, including the closing of the full exercise of the underwriters’ option to purchase an additional 750,000

Page 7 of 83


 

shares of common stock on June 9, 2017. The Company received net proceeds from the offering of $121.2 million, after deducting the underwriting discounts and commissions and offering expenses.

On May 4, 2017, the Company entered into an agreement with the Bill & Melinda Gates Foundation (the “Gates Foundation”) to discover drug candidates against gram-negative bacterial pathogens intended to prevent neonatal sepsis (the “Grant Agreement”). Pursuant to the Grant Agreement, the Gates Foundation awarded the Company up to approximately $10.5 million in grant funding (“Grant Funds”) over a three-year research term, of which approximately $3.2 million was received in May 2017 (the “Advance Funds”). Concurrently with the Grant Agreement, the Company entered into a Common Stock Purchase Agreement (the “Gates Purchase Agreement”) with the Gates Foundation, pursuant to which the Company agreed to sell 407,331 shares of its contingently redeemable common stock to the Gates Foundation in a private placement at a purchase price per share equal to $24.55, for gross proceeds to the Company of $10.0 million (“Gates Investment”).  

In connection with the Grant Agreement and the Gates Investment, the Company entered into a strategic relationship with the Gates Foundation (the “Letter Agreement”). Under the terms of the Letter Agreement, the Gates Investment and Grant Funds may only be used to conduct mutually agreed upon work, including the scale up of the Company’s antibody platform technology to launch a product intended to prevent neonatal sepsis (the “NSP”). Pursuant to the Letter Agreement, the Company agreed to make the NSP available and accessible in certain developing countries and to grant the Gates Foundation a non-exclusive license to commercialize selected drug candidates in certain developing countries, which may only be exercised in the event of certain defaults as described in the Letter Agreement (the “Global Access Commitments”). The Global Access Commitments will continue in effect until the earlier of 25 years from the closing of the Gates Investment or 7 years following the termination of all funding provided by the Gates Foundation; provided, that the Global Access Commitments will continue for any products or services developed with funding provided by the Gates Foundation which continue to be developed or available in certain developing countries.

In September 2017, the Company was awarded a contract (the “C-Scape Contract”) valued at up to $18.0 million in grant funding from the Biomedical Advanced Research and Development Authority (“BARDA”) to support the development of C-Scape. The C-Scape Contract includes a base period with committed funding of $12.0 million and subsequent option periods that, if exercised, would bring the total value of the award to $18.0 million.

On February 26, 2018, the Company entered into a new Loan and Security Agreement (“SVB Loan Agreement”) with Silicon Valley Bank (“SVB”), pursuant to which SVB agreed to make available to the Company term loans with an aggregate principal amount of up to $50.0 million, $20.9 million of which was used to repay our loan with Solar Capital Ltd., $4.1 million of which was provided to us on February 26, 2018 and $25.0 million of which the Company borrowed on October 29, 2018.

On February 27, 2018, the Company filed an amended Registration Statement on Form S-3 (the “2018 Shelf Registration Statement”) covering the offering of up to $250.0 million of common stock, preferred stock, debt securities, warrants and units.  In addition, on February 27, 2018, the Company filed a prospectus supplement to the 2018 Shelf Registration Statement covering the offering, issuance and sale of up to $50.0 million shares of the Company’s common stock in ATM offerings pursuant to a Common Stock Sales Agreement entered into with Cowen and Company, LLC (the “2018 Sales Agreement”). During the three-month period ended September 30, 2018, the Company sold 718,624 shares of common stock under the 2018 Sales Agreement, at a weighted-average price of approximately $4.64 per share for aggregate gross and net proceeds of $3.3 million.

On April 24, 2018, the Company was awarded $2.4 million, with a possibility of up to $9.6 million in additional funding based on achievement of certain project milestones, from CARB-X. The funding was awarded to support the development of a next-generation broad-spectrum aminoglycoside antibiotic capable of overcoming clinically-relevant resistance mechanisms and potentially treating highly-resistant gram-negative pathogens such as the Enterobacteriaceae family, Acinetobacter baumannii, and Pseudomonas aeruginosa.

The Company has incurred losses and negative cash flows from operations every year since its inception.  As of September 30, 2018, the Company had unrestricted cash, cash equivalents and short-term investments of approximately $58.2 million and an accumulated deficit of approximately $511.8 million. On November 5, 2018, the Company announced that it is has begun a review of strategic alternatives to maximize shareholder value, including but not limited to the potential sale or merger of the Company or its assets. The Company may be unable to identify or execute such strategic alternatives for the Company, and even if executed such strategic alternatives may not enhance stockholder value or the Company’s financial position.  The Company also announced on November 5, 2018 a restructuring of its organization to preserve cash resources which is expected to reduce total operating expenses by approximately 35-40 percent, excluding one-time charges. The restructuring is expected to be largely completed before the end of 2018.  The restructuring is designed to focus the Company’s cash resources on the continued successful launch of ZEMDRI and advancing C-Scape.

Based on the Company’s available cash resources, which exclude restricted cash and $25.0 million which will be collaterized in connection with the SVB Loan Agreement if the Company’s cash balance falls below a certain threshold (see Note 7 (Borrowings) for further details of the SVB Loan Agreement), the Company believes it has sufficient funds to support current planned operations

Page 8 of 83


 

through the middle of the first quarter of 2019. This condition results in the assessment that there is substantial doubt about the Company’s ability to continue as a going concern. The Company’s plan to address this condition includes seeking additional funds through equity or debt financings, government contracts, third party collaborations, commercial sales of ZEMDRI or other sources to permit additional investments in the commercialization of ZEMDRI and continued research and development efforts. The Company may be unable to obtain equity or debt financings, government contracts, third party collaborations or other sources of additional investment and, if necessary, the Company will be required to implement further cost reduction strategies, including a reduction in the scope of our research and development programs and other operations.  

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.  The financial statements do not reflect any adjustments relating to the recoverability and reclassification of assets and liabilities that might be necessary if the Company is unable to continue as a going concern. As of September 30, 2018, the Company has primarily financed its operations through public offerings and private placements of its equity securities, debt financings and government contracts. There can be no assurance that the Company will be able to obtain additional debt or equity financing or continue to generate product revenue or revenues from collaborative partners, on terms acceptable to the Company, on a timely basis or at all. The failure of the Company to obtain sufficient funds on acceptable terms when needed would adversely affect the Company’s business, results of operations, and financial condition.

2. Summary of Significant Accounting Policies

Use of Estimates

The accompanying financial statements have been prepared in accordance with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires management to make judgments, assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent liabilities. On an ongoing basis, management evaluates its estimates, including those related to net product revenue, clinical trial accruals, fair value of derivative and warrant liabilities, common stock and stock-based awards and income taxes. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from those estimates.

Fair Value of Financial Instruments

The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, trade and contract receivables, prepaid and other current assets, accounts payable, accrued liabilities, and other current liabilities approximate fair value due to their short-term maturities. Short-term investments consist of available-for-sale securities and are carried at fair value. Based upon the borrowing rates currently available to the Company for loans with similar terms, the Company believes the carrying amount of the loan payable approximates its fair value. The warrant and derivative liabilities are recorded at estimated fair value with changes in estimated fair value recorded in the Company's statements of operations.

Cash and Cash Equivalents

Cash equivalents include only securities having a maturity of three months or less at the time of purchase. As of September 30, 2018 and December 31, 2017, cash and cash equivalents consisted of bank deposits, cash, commercial paper, money market funds, cash repurchase agreement investments and overnight cash sweep investments in government money market funds.

Short-term Investments

Short-term investments consist of debt securities with maturities greater than three months, but less than one year from the date of acquisition, and are classified as available for sale. Short-term investments are carried at fair value. Unrealized gains and losses on available-for-sale debt securities are excluded from earnings and reported as a component of net unrealized (loss) on available-for-sale securities in the Company's consolidated statements of comprehensive loss. The amortized cost of debt securities reflects amortization of purchase premiums and accretion of purchase discounts to date, which are included in net other income.

The Company reviews all of its marketable securities on a regular basis to evaluate whether any security has experienced an other-than-temporary decline in fair value.

Trade and Contract Receivables, net

Trade accounts receivable consist of payments to be received from customers for sales of ZEMDRI recorded net of prompt-payment discounts, incentive fees, chargebacks, and doubtful accounts. Estimates for chargebacks, prompt-payment discounts and incentive fees are based on contractual terms, historical trends and expectations regarding the utilization rates for these programs.

Page 9 of 83


 

Contract accounts receivable consist of payments to be received from U.S. government contracts.

Restricted Cash

At September 30, 2018 and December 31, 2017, the Company had restricted cash of $6.6 million and $9.7 million, respectively. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheet that sum to the total of the same such amounts shown in the condensed consolidated balance sheets (in thousands):

 

 

 

September 30, 2018

 

 

December 31, 2017

 

Cash and cash equivalents

 

$

55,635

 

 

$

145,219

 

Restricted cash, current

 

 

328

 

 

 

5,891

 

Restricted cash, non-current

 

 

6,267

 

 

 

3,855

 

Total cash, cash equivalents, and restricted cash

 

$

62,230

 

 

$

154,965

 

 

In May 2017, the Company received $13.2 million of funding from the Gates Foundation from the Grant Funds and Gates Investment (see Note 1). The Letter Agreement restricts the Company’s use to expenditures that are reasonably attributable to the activities required to support the research projects funded by the Gates Foundation, including an allocation of overhead and administrative expenses. As of September 30, 2018 and December 31, 2017, the Company had $6.1 million and $9.2 million, respectively, of restricted cash related to the cash provided by the Gates Foundation. As of September 30, 2018 and December 31, 2017, the Company had $0.5 million of restricted cash, which relates to the Company’s facility leases.

 

Other Long-Term Assets

 

Other long-term assets consist of deferred manufacturing costs related to clinical research or production of ZEMDRI. These costs are amortized over the life of the respective contract.

Segment Reporting

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker regarding resource allocation and assessing performance. The Company has one operating segment.

Customer Concentration

For the three and nine-month periods ended September 30, 2018 and 2017, the Company’s revenue was generated from product revenues, funding pursuant to U.S. government contracts and a non-profit foundation grant. All trade and contract receivables relate to sales from product revenue and funding from U.S. government contracts. As of and for the year ended December 31, 2017 all of the Company’s revenue and contract receivable balance was represented by funding from U.S. government contracts and a non-profit foundation grant.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a significant concentration of credit risk consist of cash, cash equivalents and short-term investments. Cash and cash equivalents are deposited in checking, overnight sweep and money market accounts at one financial institution with balances that generally exceed federally insured limits. Management believes that the financial institution is financially sound, and, accordingly, minimal credit risk exists with respect to this financial institution. The Company’s investment policy limits investments to certain types of debt securities issued by the U.S. government, its agencies and institutions with investment-grade credit ratings and places restrictions on maturities and concentration by type and issuer. The Company is exposed to credit risk in the event of default by the institutions holding its cash and cash equivalents or issuing the debt securities. As of September 30, 2018 and December 31, 2017, the Company had not experienced any credit losses in such accounts or investments.

Inventory

Inventory is stated at the lower of cost and net realizable value with costs determined under the first-in, first-out (FIFO) cost method and consists of raw materials, work-in-process and finished goods. Costs capitalized as inventory include third party manufacturing costs, associated compensation-related costs of personnel indirectly involved in the manufacturing process and other overhead costs. The Company uses standard costs to determine its cost basis for inventory, which approximates actual costs. Standard costs are reviewed and updated annually or as needed.

Page 10 of 83


 

The inventory capitalization process began to be applied to ZEMDRI upon FDA approval on June 25, 2018. Prior to regulatory approval of ZEMDRI, the Company incurred expenses related to the manufacturing of the product and recorded all such costs as research and development expenses. Beginning on June 25, 2018, the Company began to capitalize inventory costs associated with ZEMDRI when it was determined that the inventory had a probable future economic benefit and the related costs were expected to be realized through commercialization of ZEMDRI. If information becomes available that suggests that inventories may not be realizable, the Company may be required to expense a portion or all of its previously capitalized inventory. The Company periodically analyzes its inventory levels, and evaluates for potential excess inventory by analyzing current and future product demand relative to the remaining product shelf life. The Company builds demand forecasts by considering factors such as, but not limited to, overall market potential, market share, market acceptance and patient usage.

Revenue Recognition

Product Revenue, Net

For revenue recognized as product revenue, the Company adopted the Accounting Standards Update (“ASU”) No 2014-09, Revenue from Contracts with Customers (“ASC 606”) at the time of its first commercial sale of ZEMDRI in the third quarter of 2018. Pursuant to ASC 606, the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that it will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract, determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes revenue in the amount of the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied.

The Company’s product revenue consists of the sales of ZEMDRI, which the Company began shipping to customers in July 2018. Prior to July 2018, the Company had no product revenues. The Company sells ZEMDRI to specialty distributors and physician-owned infusion centers in the United States. These customers subsequently resell the Company’s product to hospitals, medical centers, or patients. In addition to these distributions and purchasing agreements, the Company enters into arrangements with health care providers and payors  that provide government mandated or negotiated rebates, chargebacks, and discounts with respect to the purchase of the Company’s product.

Revenue is recognized on product sales when the customer obtains control of the Company’s product, which occurs at a point in time (upon delivery). Product revenues are recorded net of applicable reserves for variable consideration, including discounts and allowances, chargebacks and government rebates. The Company expenses incremental costs of obtaining a contract when incurred, if the expected amortization period of the asset that the Company would have recognized is one year or less. To date, the Company has not incurred such costs.  

Reserves for Variable Consideration

Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established and which result from discounts, returns, chargebacks, rebates, and other allowances that are offered within contracts between the Company and its customers, payors and other indirect customers relating to product sales. These reserves as detailed below are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to the customer) or a current liability (if the amount is payable to a party other than a customer). Where appropriate, these estimates take into consideration a range of possible outcomes that are probability-weighted in accordance with the expected value method under ASC 606 for relevant factors. These factors include current contractual and statutory requirements, specific known market events and trends, industry data, and/or forecasted customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which the Company is entitled based on the terms of the respective underlying contracts.

The amount of variable consideration that is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from estimates. If actual results in the future vary from our estimates, the Company will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.

Page 11 of 83


 

Trade Discounts and Allowances: The Company generally provides customers with discounts which include incentive fees and other considerations, including prompt-pay discounts, service fees, and other contract fees that are explicitly stated in contracts. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and receivables or recording of accrued liabilities. In addition, the Company compensates its customers for sales order management, data, administrative, and distribution services. However, the Company has determined such services received to date are not distinct from the sale of products to the customer and therefore a fair market value for these services may not be reasonably determined. Therefore, these payments have been recorded as a reduction of revenue within the condensed consolidated statement of operations for the three and nine-months ended September 30, 2018.

Product Returns: The Company’s standard return policy offers customers a right of return for shipping errors or product damage. The Company estimates the amount of product sales that may be returned by customers and records this estimate as a reduction of revenue in the period the related product revenue is recognized. The Company currently estimates product return liabilities using available industry data, sales information and visibility into the inventory remaining in the distribution channel.

Chargebacks: Chargebacks are discounts that occur when qualified healthcare providers purchase directly from the Company’s specialty distributors at a discounted price. The specialty distributors, in turn, charge the Company the difference between the price initially paid by the wholesaler and the discounted price paid to the wholesaler by the healthcare providers or government entities. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and receivables. Chargeback amounts are generally determined at the time of resale to the qualified healthcare provider by customers, and the Company generally issues credits for such amounts shortly after the chargeback has been processed and approved. Reserves for chargebacks consist of amounts that the Company expects to issue for units that remain in the distribution channel at each reporting period end and chargebacks that customers have claimed but for which the Company have not yet issued a credit.

Government Rebates: Based on established reimbursement arrangements under the Medicaid and Medicare programs, the Company is obliged to make payment of rebates with respect to utilization of the Company’s product by qualified customers. The Company estimates these rebates and records such estimates in the same period the related revenue is recognized, resulting in a reduction of product revenue and recording of accrued liabilities. The Company’s liability for these rebates consists of invoices received for claims that have not been paid or for which an invoice has not yet been received, estimates of claims for the current quarter, and estimates of future claims that will be made for product that has been recognized as revenue, but which remains in the distribution channel at the end of each reporting period.

The Company will continue to assess its estimates of variable consideration as it accumulates additional historical data and will adjust these estimates accordingly.

Contract Revenue

For revenue recognized as contract revenue, the Company evaluated Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASC 606”) and determined that the government contracts and non-profit foundation grant are not in scope as the government entities and foundations are not customers under the agreements. For services performed under these contracts and grant agreements, the Company recognizes revenue when: (i) evidence of an arrangement exists, (ii) fees are fixed or determinable, (iii) services have been delivered, and (iv) collectability is reasonably assured. Government contracts provide the Company with payments for certain types of expenditures in return for research and development activities over a contractually defined period. Revenue from government contracts is recognized in the period during which the related costs are incurred and the related services are rendered, provided that the applicable conditions under the government contracts have been met. Costs of contract revenue are recorded as a component of operating expenses in the Company’s consolidated statements of operations.

Funds received from third parties under contract or grant arrangements are recorded as revenue if the Company is deemed to be the principal participant in the arrangements because the activities under the contracts or grants are part of the Company’s development programs. If the Company is not the principal participant, the funds from contracts or grants are recorded as a reduction to research and development expense. Contract funds received are not refundable and are recognized when the related qualified research and development costs are incurred and there is reasonable assurance that the funds will be received. Funds received in advance are recorded as deferred revenue. Management has determined that the Company is the principal participant under the Company’s government contract arrangements and non-profit grant agreement, and accordingly, the Company records amounts earned under these arrangements as revenue.

Cost of Sales

Cost of sales represents primarily the costs associated with manufacturing ZEMDRI and ZEMDRI net sales-based royalties.

Page 12 of 83


 

Research and Development Costs

Research and development costs are expensed as incurred. Research and development expenses include certain payroll and personnel expenses, laboratory supplies, consulting costs, external contract research and development expenses, and allocated overhead, including rent, equipment depreciation, and utilities and relate to both Company-sponsored programs as well as costs incurred pursuant to collaboration agreements, non-profit grants and government contracts. Nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities are deferred and recognized as an expense as the goods are delivered or the related services are performed.

For certain research and development services where the Company has not yet been invoiced or otherwise notified of actual cost from the third-party contracted service providers, the Company is required to estimate the extent of the services that have been performed on the Company’s behalf and the associated costs incurred at each reporting period. The majority of the service providers invoice the Company monthly in arrears for services performed. The Company makes estimates of the accrued expenses as of each balance sheet date in the consolidated financial statements based on facts and circumstances known to the Company at that time. The Company periodically confirms the accuracy of the estimates with the service providers and makes adjustments if necessary. Examples of estimated accrued research and development expenses include services from:

 

contract research organizations (“CROs”) and other service providers in connection with clinical studies;

 

contract manufacturers in connection with the production of clinical trial materials; and

 

vendors in connection with preclinical development activities.

The Company bases the expenses related to preclinical studies and clinical trials on estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and CROs that conduct and manage such studies and trials on the Company’s behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract, and may result in uneven payment flows and expense recognition. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, the Company estimates the time period over which these services will be performed and the level of effort to be expended and costs to be incurred during each reporting period. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company adjusts the accrual accordingly. The Company’s estimation of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting changes in estimates in any particular period. To date, there have been no material adjustments from the Company’s estimates to the amount actually incurred.

Property and Equipment, Net

Property and equipment consist of office equipment, laboratory equipment, and leasehold improvements and are stated at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets, generally three to seven years. Leasehold improvements are amortized over their estimated useful lives or the remaining lease term, whichever is shorter. Maintenance and repair costs are recorded as a component of operating expenses in the Company’s consolidated statement of operations when incurred.

Impairment of Long-Lived Assets

The Company reviews long-lived assets, including property and equipment, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. If indicators of impairment exist, an impairment loss would be recognized when the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. The impairment charge is determined based upon the excess of the carrying value of the asset over its estimated fair value, with estimated fair value determined based upon an estimate of discounted future cash flows or other appropriate measures of estimated fair value. As of December 31, 2017, the Company did not have any impairment charges. During the three months ended September 30, 2018, the Company identified an impairment charge related to long-lived assets which the Company ceased use of in connection with the restructuring effected in July 2018 (see Note 4).

Warrant Liability

On June 3, 2016, the Company issued warrants to purchase 1,999,999 shares of its common stock pursuant to a Securities Purchase Agreement (the “Purchase Agreement”) in connection with a private placement financing transaction (the “Private Placement”). Each warrant has an exercise price of $3.66 per share and is exercisable for five years from the date of issuance. The Company accounts for these warrants as a liability instrument measured at estimated fair value. The initial fair value of the warrants was determined using a calibration model that involved using the Black-Scholes Pricing Model ("Black-Scholes"), which requires inputs such as the risk-free interest rate, expected share price volatility, underlying price per share of the Company's common stock and remaining term of the warrants. The warrants are subject to remeasurement at each balance sheet date, using Black-Scholes, with

Page 13 of 83


 

any changes in the fair value of the outstanding warrants recognized in the condensed consolidated statements of operations. As of September 30, 2018, a warrant to purchase 1,178,782 shares of the Company’s common stock remains outstanding and unexercised.

Contingently Redeemable Common Stock

In May 2017, the Company agreed to sell 407,331 shares of its contingently redeemable common stock to the Gates Foundation in a private placement at a purchase price per share equal to $24.55 (see Note 1). Common stock with embedded redemption features that are settled at the option of the holder, are considered redeemable common stock. Redeemable common stock is considered to be temporary equity and presented in a section between liabilities and equity on the Company’s consolidated balance sheets. Subsequent adjustment of the amount presented in temporary equity is required only if the Company determines that it is probable that the instrument will become redeemable. Upon termination of the redemption features, the redeemable common stock is reclassified into equity. As of September 30, 2018, 407,331 shares of contingently redeemable common stock remain as temporary equity.

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases, which, for operating leases, requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. This ASU will be effective for the Company in fiscal year 2019. Early adoption is permitted. The Company has identified the relevant lease arrangements and is currently in the process of evaluating the impact of this new guidance on its condensed consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU provides guidance about which changes to the terms or conditions of a share-based payment award requires the Company to apply modification accounting. This ASU will be effective for the Company for annual reporting periods, including interim reporting periods, beginning after December 15, 2017. The Company adopted this standard on January 1, 2018 noting it did not have a material impact on the Company’s financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments- Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which includes provisions to accounting for equity investments, financial liabilities under the fair value option, and presentation and disclosure requirements for financial instruments. The amended guidance requires equity securities, except for those accounted for under the equity method of accounting, with determinable fair values to be measured at fair with changes in fair value recognized in net income (loss). This ASU will be effective for the Company for annual reporting periods, including interim reporting periods, beginning after December 15, 2017.  The Company adopted this standard on January 1, 2018 noting it did not have a material impact on the Company’s financial statements.

In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The amendments add various Securities and Exchange Commission (“SEC) paragraphs pursuant to the issuance of SEC Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“Act”) (“SAB 118”). The SEC issued SAB 118 to address concerns about reporting entities’ ability to timely comply with the accounting requirements to recognize all of the effects of the Act in the period of enactment. SAB 118 allows disclosure that timely determination of some or all of the income tax effects from the Act are incomplete by the due date of the financial statements and if possible to provide a reasonable estimate. The Company has provided a reasonable estimate in the notes to the consolidated financial statements.

Page 14 of 83


 

Net Loss Per Share

Basic net loss per common share is computed by dividing the net loss by the weighted-average number of common shares outstanding during the period.  Diluted net loss per common share is computed by dividing the net loss by the weighted-average number of common shares and dilutive common share equivalents outstanding during the period. For purposes of this calculation, preferred stock, stock options, restricted stock units and warrants are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss used to compute basic net loss per share

 

$

(41,791

)

 

$

(29,907

)

 

$

(138,990

)

 

$

(89,235

)

Less: Gain on private placement warrants

 

 

(4,877

)

 

 

(6,795

)

 

 

(7,173

)

 

 

-

 

Net loss used to compute diluted net loss per share

 

$

(46,668

)

 

$

(36,702

)

 

$

(146,163

)

 

$

(89,235

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares used to compute basic net loss per share

 

 

45,329,711

 

 

 

42,259,001

 

 

 

44,854,279

 

 

 

38,709,811

 

Add: Private placement warrant shares

 

 

464,975

 

 

 

952,058

 

 

 

741,559

 

 

 

-

 

Weighted-average shares used to compute diluted net loss per share

 

 

45,794,686

 

 

 

43,211,059

 

 

 

45,595,838

 

 

 

38,709,811

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.92

)

 

$

(0.71

)

 

$

(3.10

)

 

$

(2.31

)

Diluted

 

$

(1.02

)

 

$

(0.85

)

 

$

(3.21

)

 

$

(2.31

)

 

For the three and nine-month periods ended September 30, 2018 and 2017, potentially dilutive securities outstanding have been excluded from the computations of diluted weighted-average shares outstanding because such securities have an antidilutive impact due to losses reported. The following potentially dilutive securities have been excluded from diluted net loss per share, because their effect would be antidilutive, as of September 30, 2018 and 2017:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Shares subject to options to purchase common stock

 

 

5,811,627

 

 

 

4,793,775

 

 

 

5,811,627

 

 

 

4,793,775

 

Restricted stock units

 

 

1,591,663

 

 

 

845,705

 

 

 

1,591,663

 

 

 

845,705

 

Shares subject to warrants to purchase common stock

 

 

17,514

 

 

 

17,514

 

 

 

17,514

 

 

 

1,196,296

 

 

3. Fair Value Measurements

Financial assets and liabilities are recorded at fair value. The carrying amount of certain financial instruments, including cash and cash equivalents, restricted cash, trade and contract receivables, accounts payable and accrued liabilities approximate fair value due to their relatively short maturities. Assets and liabilities recorded at fair value on a recurring basis in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:

Level 1: Quoted prices in active markets for identical assets or liabilities.

Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability.

Page 15 of 83


 

Where quoted prices are available in an active market, securities are classified as Level 1 of the valuation hierarchy, including cash held at overnight sweep accounts. The Company’s Level 2 valuations of marketable securities are generally derived from independent pricing services based upon quoted prices in active markets for similar securities, with prices adjusted for yield and number of days to maturity, or based on industry models using data inputs, such as interest rates and prices that can be directly observed or corroborated in active markets.

In certain cases, where there is limited activity or less transparency around inputs to valuation, securities are classified as Level 3 within the valuation hierarchy. Level 3 liabilities that are measured at estimated fair value on a recurring basis consist of a derivative liability in connection with the loan repaid in February 2018 and a warrant liability in connection with the Private Placement.

As of September 30, 2018 and December 31, 2017, financial assets and liabilities measured and recognized at fair value on a recurring basis and classified under the appropriate level of the fair value hierarchy as described above were as follows (in thousands):

 

 

September 30, 2018

 

 

 

Amortized Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair Value

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted cash

 

 

6,595

 

 

 

 

 

 

 

 

 

6,595

 

Money market funds

 

 

35,635

 

 

 

 

 

 

 

 

 

35,635

 

U.S. Treasury bills

 

 

 

 

 

 

 

 

 

 

 

 

Subtotal

 

 

42,230

 

 

 

 

 

 

 

 

 

42,230

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

2,589

 

 

 

 

 

 

 

 

 

2,589

 

Corporate securities

 

 

 

 

 

 

 

 

 

 

 

 

Other debt securities

 

 

20,000

 

 

 

 

 

 

 

 

 

20,000

 

Subtotal

 

 

22,589

 

 

 

 

 

 

 

 

 

22,589

 

Total

 

$

64,819

 

 

$

 

 

$

 

 

$

64,819

 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

$

55,635

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2,589

 

Restricted cash

 

 

 

 

 

 

 

 

 

 

 

 

 

$

6,595

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities, Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrant Liability

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2,600

 

Derivative Liability

 

 

 

 

 

 

 

 

 

 

 

 

 

$

950

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,550

 

Page 16 of 83


 

 

 

 

December 31, 2017

 

 

 

Amortized Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair Value

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted cash

 

 

9,746

 

 

 

 

 

 

 

 

 

9,746

 

Money market funds

 

 

58,769

 

 

 

 

 

 

 

 

 

58,769

 

U.S. Treasury bills

 

 

4,992

 

 

 

 

 

 

 

 

 

4,992

 

Subtotal

 

 

73,507

 

 

 

 

 

 

 

 

 

73,507

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

46,040

 

 

 

 

 

 

 

 

 

46,040

 

U.S. agency securities

 

 

4,990

 

 

 

 

 

 

 

 

 

4,990

 

Other debt securities

 

 

50,000

 

 

 

 

 

 

 

 

 

50,000

 

Subtotal

 

 

101,030

 

 

 

 

 

 

 

 

 

101,030

 

Total

 

$

174,537

 

 

$

 

 

$

 

 

$

174,537

 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

$

145,219

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

$

19,572

 

Restricted cash

 

 

 

 

 

 

 

 

 

 

 

 

 

$

9,746

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities, Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrant Liability