The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
September 30, 2016
The Company
Zosano Pharma Corporation and subsidiaries (the Company) is a clinical stage pharmaceutical company focusing on providing rapid symptom relief to
patients using the Companys proprietary intracutaneous delivery system to administer drugs through the skin. The Company is focused on developing products that deliver established molecules with known safety and efficacy profiles primarily for
treatment of central nervous system indications. Our intracutaneous technology offers rapid onset, consistent drug delivery, improved ease of use and room-temperature stability benefits that we believe would provide a potentially favorable
alternative to using oral formulations or injections.
The Company was incorporated in Delaware as ZP Holdings, Inc. in January 2012 and changed its
name to Zosano Pharma Corporation in June 2014. The Company was spun out of ALZA Corporation, a subsidiary of Johnson & Johnson, in October 2006, originally incorporated under the name The Macroflux Corporation, and changed its name to
Zosano Pharma, Inc. in 2007, following the spin-off from Johnson & Johnson. In April 2012, in a transaction to recapitalize the business, a wholly-owned subsidiary of Zosano Pharma Corporation was merged into Zosano Pharma, Inc., whereby
Zosano Pharma, Inc. was the surviving entity and became a wholly-owned subsidiary of Zosano Pharma Corporation. In June 2014, Zosano Pharma, Inc. changed its name to ZP Opco, Inc.
The Company has two wholly owned subsidiaries as of September 30, 2016: ZP Opco, Inc. (Opco), through which the Company conducts its primary
research and development activities, and ZP Group LLC, originally a joint venture with Asahi Kasei Pharmaceuticals USA (Asahi). The joint venture ceased operations in December 2013.
2.
|
Summary of Significant Accounting Policies
|
Basis of Presentation and Use of Estimates
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States (U.S. GAAP) and as required by Regulation S-X, Rule 10-01 for interim financial reporting. The preparation of the accompanying condensed consolidated financial statements in accordance with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements, and the reported amounts of revenue and
expenses during the reporting periods. Actual results could differ from those estimates.
Unaudited Interim Financial Information
The condensed consolidated balance sheet as of September 30, 2016, the condensed consolidated statements of operations and comprehensive loss for
the three and nine months ended September 30, 2016 and 2015, and the condensed consolidated statements of cash flows for the nine months ended September, 2016 and 2015 are unaudited. The unaudited interim condensed consolidated financial
statements have been prepared on the same basis as the annual audited consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the
Companys financial position as of September 30, 2016, and the condensed consolidated results of operations for the three and nine months ended September 30, 2016 and 2015, and the condensed consolidated statement of cash flows for
the nine months ended September 30, 2016 and 2015. The financial data and other information disclosed in these notes to the interim condensed consolidated financial statements as of September 30, 2016 and for the three and nine month
periods ended September 30, 2016 and 2015 are also unaudited. The results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016 or for
any other interim period or for any future year. These financial statements should be read in conjunction with the Companys audited financial statements for the year ended December 31, 2015 included in the Companys annual report on
Form 10-K filed with the Securities and Exchange Commission.
6
Liquidity
The Company has incurred significant operating losses and had an accumulated deficit of $189.0 million as of September 30, 2016. The Company has
financed its operations primarily through sale of equity securities, debt financing and payments received under its former licensing and collaboration agreements with pharmaceutical companies. To date, none of the Companys product candidates
have been approved for sale.
The Company will continue to require additional financing to develop its product candidates and fund operating losses.
Management intends to seek funds through equity or debt financings, collaborative or other arrangements with corporate partners, or through other sources of financing. However, if such financing is not available at adequate levels or on acceptable
terms, the Company could be required to significantly reduce its operating expenses and delay, reduce the scope of, or eliminate some of its development programs, out-license intellectual property rights, or a combination of the above, which may
have a material adverse effect on the Companys business, results of operations, financial condition and/or its ability to meet its scheduled obligations on a timely basis, if at all. There can be no assurance that the Company will be
successful in raising capital, or that any needed financing will be available in the future at terms acceptable to the Company.
Consolidation
The consolidated financial statements include the accounts of Zosano Pharma Corporation, ZP Opco, Inc., and ZP Group LLC post-termination of
the joint venture. Intercompany balances and transactions have been eliminated in consolidation.
Significant Accounting Policies
There have been no material changes to the Companys significant accounting policies during the nine months ended September 30, 2016, as
compared to the significant accounting policies described in Note 2 of the Notes to Consolidated Financial Statements in the Company s Annual Report on Form 10-K for the year ended December 31, 2015. Below are those policies
with current period updates:
Research and Development Expenses
Research and development costs are charged to expense as incurred and consist of costs related to (i) furthering the Companys research and
development efforts, and (ii) designing and manufacturing the Companys intracutaneous microneedle patch and applicator for the Companys clinical and nonclinical studies. In 2015, research and development costs also consisted of
costs related to servicing the Companys collaborative development efforts with other pharmaceutical companies.
For the three months ended
September 30, 2016, the Company incurred research and development costs of approximately $3.3 million in connection with the Companys research and development efforts and approximately $1.8 million in the manufacturing of the
Companys microneedle patch system for development of the Companys product candidate. For the three months ended September 30, 2015, the Company incurred approximately $3.0 million in connection with the Companys research and
development efforts and approximately $3.6 million in the manufacturing of the Companys microneedle patch system for the development of the Companys product candidate. For the nine months ended September 30, 2016, the Company
incurred research and development costs of approximately $8.6 million in connection with the Companys research and development efforts and approximately $6.5 million in the manufacturing of the Companys microneedle patch system for
development of the Companys product candidate. For the nine months ended September 30, 2015, the Company incurred research and development costs of approximately $0.1 million in support of the Companys collaborative development
services, approximately $6.3 million in connection with the Companys research and development efforts, and approximately $8.3 million in the manufacturing of the Companys microneedle patch system for the development of the Companys
product candidate.
7
Comprehensive Loss
Comprehensive loss is comprised of net loss and the unrealized losses on the Companys marketable securities. Comprehensive loss is included in the
Companys consolidated statements of operations and comprehensive loss for all periods presented.
Net Loss Per Common Share
Basic net income (loss) per common share is calculated by dividing the net income (loss) by the weighted- average number of common shares outstanding
during the period, without consideration for potential dilutive common stock equivalents. Diluted net income (loss) per common share is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. For
purposes of this calculation, warrants and options to purchase common stock are considered potential dilutive common stock equivalents. For the three and nine months ended September 30, 2016 and 2015, diluted net loss per common share was the
same as basic net loss per common share since the effect of inclusion of potentially dilutive common stock equivalents would have an antidilutive effect due to the loss reported.
The following outstanding common stock equivalents were excluded from the computations of diluted net loss per common share for the periods presented as
the effect of including such securities would be antidilutive:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(unaudited; in shares)
|
|
Warrants to purchase common stock
|
|
|
9,672,379
|
|
|
|
72,379
|
|
Options to purchase common stock
|
|
|
1,372,808
|
|
|
|
956,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,045,187
|
|
|
|
1,029,330
|
|
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements
In March 2016, FASB issued ASU 2016-09,
Compensation - Stock Compensation: Improvements to Employee Share-Based Payment.
The new guidance
simplifies several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new standard is
effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2016. The Company is currently evaluating the impact of this accounting standard.
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13,
Financial Instruments-Credit Losses:
Measurement of Credit Losses on Financial Instruments
. The amendments in this ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader
range of reasonable and supportable information for credit loss estimates. The new standard is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted as
early as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact of this accounting standard.
In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-15,
Statement of Cash Flows:
Classification of Certain Cash Receipts and Cash Payments
. The amendment addresses eight specific cash flow issues with the objective of reducing diversity in practice. The new standard is effective for fiscal years, including interim periods
within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of this accounting standard.
8
3.
|
Cash, Cash Equivalents and Investments
|
The following is a summary of the Companys cash,
cash equivalents, and marketable securities investments for each of the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated Fair
Value
|
|
|
|
(unaudited; in thousands)
|
|
Cash in bank
|
|
$
|
11,934
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
11,934
|
|
Money market funds
|
|
|
7,244
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,244
|
|
Certificates of deposit (restricted)
|
|
|
35
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35
|
|
Certificates of deposit
|
|
|
480
|
|
|
|
-
|
|
|
|
-
|
|
|
|
480
|
|
Corporate bonds
|
|
|
2,398
|
|
|
|
-
|
|
|
|
(1)
|
|
|
|
2,397
|
|
U.S. government agency bonds
|
|
|
1,001
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23,092
|
|
|
$
|
-
|
|
|
$
|
(1)
|
|
|
$
|
23,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classified as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,178
|
|
Restricted cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
Short-term investments in marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated Fair
Value
|
|
|
|
(unaudited; in thousands)
|
|
Cash in bank
|
|
$
|
2,997
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,997
|
|
Money market funds
|
|
|
3,649
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,649
|
|
Certificates of deposit (restricted)
|
|
|
35
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35
|
|
Certificates of deposit
|
|
|
5,040
|
|
|
|
-
|
|
|
|
(4)
|
|
|
|
5,036
|
|
Corporate bonds
|
|
|
11,749
|
|
|
|
-
|
|
|
|
(22)
|
|
|
|
11,727
|
|
U.S. government agency bonds
|
|
|
13,544
|
|
|
|
-
|
|
|
|
(20)
|
|
|
|
13,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37,014
|
|
|
$
|
-
|
|
|
$
|
(46)
|
|
|
$
|
36,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classified as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,646
|
|
Restricted cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
Short-term investments in marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
36,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2016, there were no realized gains and losses on
available-for-sale securities. As of September 30, 2016, the maximum contractual maturity of the Companys available-for-sale investments was within 2 months. The Company does not intend to sell the investments that are in an unrealized
loss position, and it is unlikely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity. The Company has determined that the gross unrealized losses on its
available-for-sale investments as of September 30, 2016 were temporary in nature.
9
4.
|
Fair Value of Financial Instruments
|
The Company records its financial assets and liabilities at
fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a
three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:
|
|
|
Level 1: Inputs which include quoted prices in active markets for identical assets and liabilities.
|
|
|
|
Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, 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.
|
The carrying values of certain assets and liabilities of the Company, such as cash and cash equivalents, accounts receivable, prepaid expenses and other
current assets, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities. The carrying value of the Companys short-term notes payable approximates their fair value as the terms of the borrowing
are consistent with current market rates and the duration to maturity is short. The carrying value of the Companys long-term notes payable approximates fair value because the interest rates approximate market rates that the Company could
obtain for debt with similar terms and maturities.
The following tables set forth the fair value of the Companys financial instruments as of
September 30, 2016 and December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total
|
|
|
|
(unaudited; in thousands)
|
|
Financial Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit (restricted cash)
|
|
$
|
35
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
35
|
|
Money market funds
|
|
|
7,244
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,244
|
|
Certificates of deposit
|
|
|
-
|
|
|
|
480
|
|
|
|
-
|
|
|
|
480
|
|
Corporate bonds
|
|
|
-
|
|
|
|
2,397
|
|
|
|
-
|
|
|
|
2,397
|
|
U.S. government agency bonds
|
|
|
-
|
|
|
|
1,001
|
|
|
|
-
|
|
|
|
1,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial instruments
|
|
$
|
7,279
|
|
|
$
|
3,878
|
|
|
$
|
-
|
|
|
$
|
11,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total
|
|
|
|
(unaudited; in thousands)
|
|
Financial Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit (restricted cash)
|
|
$
|
35
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
35
|
|
Money market funds
|
|
|
3,649
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,649
|
|
Certificates of deposit
|
|
|
-
|
|
|
|
5,036
|
|
|
|
-
|
|
|
|
5,036
|
|
Corporate bonds
|
|
|
-
|
|
|
|
11,727
|
|
|
|
-
|
|
|
|
11,727
|
|
U.S. government agency bonds
|
|
|
-
|
|
|
|
13,524
|
|
|
|
-
|
|
|
|
13,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial instruments
|
|
$
|
3,684
|
|
|
$
|
30,287
|
|
|
$
|
-
|
|
|
$
|
33,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
5.
|
Property and Equipment
|
The following summarizes the Companys property and equipment as of
September 30, 2016 and December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
(in thousands)
|
|
Property and Equipment:
|
|
|
|
|
|
|
|
|
Laboratory and office equipment
|
|
$
|
1,093
|
|
|
$
|
1,112
|
|
Manufacturing equipment
|
|
|
10,798
|
|
|
|
10,730
|
|
Computer equipment and software
|
|
|
314
|
|
|
|
229
|
|
Leasehold improvements
|
|
|
15,542
|
|
|
|
15,534
|
|
Construction in progress
|
|
|
2,181
|
|
|
|
2,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,928
|
|
|
|
29,671
|
|
Less: accumulated depreciation
|
|
|
(23,821)
|
|
|
|
(22,011)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,107
|
|
|
$
|
7,660
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense was approximately $0.6 million and $0.6 million for the three months ended
September 30, 2016 and 2015, respectively, and $1.9 million and $1.8 for the nine months ended September 30, 2016 and 2015, respectively.
6.
|
Research and Development Collaboration and License Agreements
|
Former Collaboration
Agreement with Novo Nordisk
Pursuant to a collaboration agreement with Novo Nordisk dated January 31, 2014 related to the development
of an intracutaneous presentation of select Novo Nordisk glucagon-like peptide-1 (GLP-1) analogues, the Company received a non-refundable upfront payment of $1.0 million. The upfront payment was recorded as deferred revenue in the consolidated
balance sheet and recognized as license fees revenue over the performance period that was consistent with the term of performance obligations under the specified feasibility study plan.
In July 2015, the Company announced that Novo Nordisk had notified the Company of its intention to discontinue the collaboration agreement. The
termination became effective on October 27, 2015, and all technology rights licensed to Novo Nordisk related to the field of GLP-1 products reverted to the Company. As of June 30, 2015, the collaboration with Novo Nordisk was no
longer a source of revenue or research and development expense for the Company.
For the three months ended September 30, 2015, the Company did
not recognize any service revenue pursuant to the Novo Nordisk collaboration agreement. For the nine months ended September 30, 2015, the Company recognized $46,000 as service revenue pursuant to the Novo Nordisk collaboration agreement.
Conversion of Related Parties Convertible Promissory Notes
On January 30, 2015, upon the closing of the Companys initial public offering, the principal and all unpaid and accrued interest on the
September 2013, and the February and December 2014 convertible promissory notes outstanding as of January 30, 2015, totaling $7.4 million, automatically converted into an aggregate of 792,182 shares of common stock at a price equal to 85% of
the initial public offering price, resulting in the liability for such notes being reclassified to permanent equity.
Previous Secured
Financing with BMR
In connection with the recapitalization of the Company in April 2012, the Company renegotiated its lease agreement with
its landlord, BioMed Realty Holdings, Inc. and affiliates (BMR Holdings), to include reduced rent obligations. In connection with the rent reduction, the Company issued a secured promissory note (the BMR Note) for the principal amount of
approximately $8.6 million to BMR Holdings in 2012, which was subsequently assigned to its affiliate BMV Direct SOTRS LP, one of our largest shareholders, and all previously accrued interest, unpaid rent, future rent obligations and other fees due
to BMR Holdings were either rolled into the BMR Note or eliminated. In June 2015, the Company terminated the BMR Note by prepaying the outstanding principal and all accrued interest totaling $11.4 million. As of June 30, 2015, the Company does
not have any debt outstanding with BMR.
11
For the three months ended September 30, 2015, the Company did not record any interest expense
pursuant to the BMR Note and for the nine months ended September 30, 2015, the Company recorded $0.6 million in interest expense pursuant to the BMR Note. No interest expense was recorded in 2016 in connection with the BMR Note.
Senior Secured Term Loan with Hercules
In June 2014, the Company entered into a loan and security agreement with Hercules Technology Growth Capital, Inc. (Hercules) which provided the Company
$4.0 million in debt financing. In June 2015, the Company entered into a first amendment to the loan and security agreement with Hercules to increase the aggregate principal amount of the loan to $15.0 million (the Hercules Term Loan). Upon the
execution of the first amendment to the loan and security agreement, the Company used approximately $11.4 million of the Hercules Term Loan to prepay all amounts owing under the secured promissory note held by BMV Direct SOTRS LP, an affiliate of
BioMed Realty Holdings, Inc.
The first amendment to the loan and security agreement with Hercules provides that the $15.0 million principal balance
will be subject to a 12-month interest-only period beginning July 1, 2015, followed by equal monthly installment payments of principal and interest, with all outstanding amounts due and payable on December 1, 2018. The outstanding
principal balance bears interest at a variable rate of the greater of (i) 7.95%, or (ii) 7.95% plus the prime rate as quoted in the Wall Street Journal minus 5.25%. In addition, the Company will be obligated to pay a $100,000 legacy end of
term charge on the earlier of June 1, 2017 or the date the Company prepays the Hercules Term Loan and a $351,135 end of term charge on the earlier of loan maturity or at the date the Company prepays the Hercules Term Loan. The Company may
prepay all, but not less than all, of the Hercules Term Loan subject to a prepayment charge of 1.0% of the then outstanding principal if prepaid prior to June 23, 2016, or 0.5% of the then outstanding principal if prepaid on or after
June 23, 2016 but prior to June 23, 2017, with no prepayment charge if prepaid thereafter. The Hercules Term Loan is secured by a first priority security interest and lien in and to all of the Companys tangible and intangible
properties and assets, including intellectual properties.
In connection with the first amendment to the loan and security agreement with Hercules,
the Company issued Hercules a warrant to purchase 40,705 shares of the Companys common stock at an exercise price of $7.37 per share. The warrant was recorded at fair value on the date of issuance and treated as a debt discount which is being
amortized to interest expense over the term of the loan using the effective interest method. (See Note 9 for a discussion of warrants to purchase common stock.)
The following is a summary of the Companys long-term debt, net of unamortized debt discount and issuance costs, as of September 30, 2016 and
December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
(in thousands)
|
|
Principal amount
|
|
$
|
13,637
|
|
|
$
|
15,000
|
|
Less: unamortized debt issuance costs
|
|
|
(52)
|
|
|
|
(91)
|
|
unamortized fair value of free standing
warrant
|
|
|
(95)
|
|
|
|
(163)
|
|
Plus: unamortized fair value debt premium
|
|
|
180
|
|
|
|
310
|
|
accrued terminal interest
|
|
|
266
|
|
|
|
111
|
|
accrued interest
|
|
|
90
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of unamortized debt issuance cost and premium
|
|
$
|
14,026
|
|
|
$
|
15,270
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2016, the Company recorded total interest expense of $0.3 million
and $1.0 million, respectively, related to the Hercules Term Loan. For the three and nine months ended September 30, 2015, the Company recorded total interest of $0.3 million and $0.6 million, respectively, in connection with the agreement with
Hercules.
12
8.
|
Commitments and Contingencies
|
The Company has an operating lease with BMR-34790 Ardentech Court
LP, an affiliate of BMR Holdings, for its office, research and development, and manufacturing facilities in Fremont, California. In April 2012, the Company amended the lease agreement to reduce future rent obligations with a new lease term of seven
years in exchange for a potential reduction of premises from a recapturable premises clause. In June 2015, the Company entered into another amendment to the lease, pursuant to which BMR-34790 Ardentech Court LPs option to recapture a specified
portion of the leased premises (comprising approximately 29,348 square feet of the approximate total 55,588 square feet of leased premises) has been suspended. The Company had the option until December 31, 2015 to extend the term of the lease.
The Company did not exercise this option and as a result, the terms of the previous amendment entered in April 2012 remain in effect.
For the three
months ended September 30, 2016 and 2015, rental expense under operating leases was $0.2 million and $0.2 million, respectively. For the nine months ended September 30, 2016 and 2015, rental expense under operating leases was $0.5 million
and $0.5 million, respectively.
As of September 30, 2016 future minimum payments under non-cancelable operating leases for each year ending
December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2016
|
|
$
|
|
|
163
|
|
2017
|
|
|
|
|
632
|
|
2018
|
|
|
|
|
650
|
|
2019
|
|
|
|
|
164
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
1,609
|
|
|
|
|
|
|
|
|
Initial Public Offering
On January 30, 2015, the Company completed an initial public offering (IPO) of its common stock on the NASDAQ Capital Market. The
Company sold an aggregate of 4,500,000 shares of common stock under a registration statement on Form S-1, declared effective on January 27, 2015, at a public offering price of $11.00 per share. Net proceeds to the Company were approximately
$44.2 million, after deducting underwriting commissions and expenses. On February 27, 2015, the underwriters exercised the overallotment option resulting in the Companys issuing an additional 110,000 shares of its common stock at $11.00
per share, resulting in additional net proceeds of approximately $1.1 million after underwriting discounts.
Concurrent Private Placement - January 2015
On January 30, 2015, the Company issued and sold 1,363,636 shares of its common stock to Eli Lilly and Company (Lilly) in a private
placement pursuant to a common stock purchase agreement dated November 21, 2014 between the Company and Lilly and received net proceeds of $14.5 million, after underwriting discounts. The closing of this private placement took place
concurrently with the Companys IPO. As of September 30, 2016, Lilly beneficially owned approximately 11% of the Companys outstanding common stock.
Private Investment in Public Equity (PIPE) - August 2016
On August 15, 2016, the Company entered into a Securities Purchase Agreement (Purchase Agreement) between the Company and certain
purchasers, including members of the Companys Board of Directors and executive management, pursuant to which the Company sold and issued shares of common stock and warrants to purchase shares of common stock for aggregate gross proceeds of
$7.5 million. Costs related to the offering were $0.9 million. Pursuant to the Purchase Agreement, the Company sold 4,800,000 common shares at $1.32 per common share, the closing price per share on August 15, 2016, for gross proceeds of $6.3
million. Additionally, 9,600,000 warrants were sold, at a price of $0.125 per warrant, for gross proceeds of $1.2 million. Each warrant grants the holder the right to purchase one share of our common stock. The Company granted 4,800,000 Series A
Warrants and 4,800,000 Series B Warrants. Series A Warrants and Series B Warrants have a per share exercise price of $1.45 and $1.55, respectively, and will expire one year and one week and five years, respectively, from the date of issuance,
August 19, 2016. Certain of our directors and executive officers purchased an aggregate of 275,454 shares of common stock and an aggregate of 550,908 warrants in this offering at the same price as the other investors.
13
In connection with the PIPE transaction, the Company filed a registration statement, Form S-3, with the
U.S. Securities and Exchange Commission, or SEC, registering for resale the shares of common stock and shares of common stock issuable upon exercise of the warrants. The registration statement was declared effective by the SEC on September 23,
2016.
Hercules Warrants
In connection with the
Companys entry into the loan and security agreement with Hercules in June 2014, the Company issued Hercules a warrant to purchase $280,000 worth of the Companys stock. The warrant was initially recorded on the Companys consolidated
balance sheet at fair value on the date of issuance and treated as a debt discount that is being amortized to interest expense over the debt repayment period using the effective interest method. As a result of the pricing of the Companys IPO
on January 27, 2015, and pursuant to the agreement the exercise price was fixed at $8.84 per share, resulting in the warrant being exercisable for 31,674 shares (warrant amount of $280,000 divided by $8.84 per share) of the Companys
common stock. Accordingly, management concluded that the requirements for equity classification had been met and effected a reclassification of the warrant liability of $0.3 million to equity. The warrant is exercisable at any time, in whole or in
part, until five years from the date of the Companys IPO. For the three and nine months ended September 30, 2015, the Company recorded other income of zero and $48,000, respectively, related to the change in fair value of the warrant
before equity reclassification, which was determined by using the Black-Scholes option valuation model with the following assumptions: expected term of 5.00 years; volatility of 89%; risk free interest rate of 1.32%; and no dividend yield.
In connection with the Companys entry into the first amendment to loan and security agreement with Hercules in June 2015, the Company issued
Hercules a warrant to purchase 40,705 shares of the Companys common stock at an exercise price of $7.37 per share. Hercules can exercise its purchase right under the warrant, in whole or in part, at any time until June 23, 2020. The
warrant was recorded at fair value on the date of issuance and treated as a debt discount that is being amortized to interest expense over the term of the loan using the effective interest method. The Company classified the warrant to equity and
recorded the fair value of the warrant of $212,000 to additional paid-in capital in its consolidated balance sheet. The warrant fair value was determined by using the Black-Scholes option valuation model with the following assumptions: expected term
of 5.00 years; volatility of 89%; risk free interest rate of 1.73% and no dividend yield.
10.
|
Stock-Based Compensation
|
The Company has reserved 1.4 million shares of common stock for
issuance under the Companys 2014 Equity and Incentive Plan (the 2014 Plan). In connection with the Companys IPO of its common stock in January 2015, the Companys board of directors terminated the Companys 2012 Stock Incentive
Plan (the 2012 Plan) effective as of January 27, 2015 and no further awards may be issued under the 2012 Plan. However, the awards outstanding under the 2012 Plan at January 27, 2015 continue to be governed by the terms of the 2012 Plan.
On September 7, 2016, the Company awarded an inducement option grant to our Chief Business Officer to purchase 252,000 shares of our common
stock at an exercise price of $0.77 per share. This inducement option grant was issued outside of the existing equity compensation plans in accordance with NASDAQ listing rule 5635(c)(4).
14
The following table summarizes option and award activity during the nine months ended September 30,
2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Available for
Grant
|
|
|
Shares
Subject
to
Outstanding
Options
|
|
|
Weighted-
Average
Exercise
Price
per Share
|
|
|
Weighted-
Average
Remaining
Contractual
Term
(In Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Options at December 31, 2015
|
|
|
858,606
|
|
|
|
972,951
|
|
|
$
|
2.35
|
|
|
|
7.40
|
|
|
|
|
|
Options granted
|
|
|
(792,463)
|
|
|
|
792,463
|
|
|
$
|
1.92
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
-
|
|
|
|
(145,892)
|
|
|
$
|
1.53
|
|
|
|
|
|
|
|
|
|
Options cancelled/forfeited
|
|
|
246,714
|
|
|
|
(246,714)
|
|
|
$
|
2.76
|
|
|
|
|
|
|
|
|
|
Restricted stock units granted
|
|
|
(9,478)
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Shares expired under 2012 Plan
|
|
|
(21,314)
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2016
|
|
|
282,065
|
|
|
|
1,372,808
|
|
|
$
|
2.12
|
|
|
|
8.47
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2016
|
|
|
|
|
|
|
299,911
|
|
|
$
|
2.09
|
|
|
|
5.22
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at September 30, 2016
|
|
|
|
1,293,252
|
|
|
$
|
2.14
|
|
|
|
8.40
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic values of options outstanding and exercisable, vested and expected to vest were calculated as
the difference between the exercise price of the options and the closing market value of the Companys common stock as reported on NASDAQ as of September 30, 2016.
The following summarizes the composition of stock options outstanding and exercisable as of September 30, 2016 (unaudited):
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding and Exercisable
|
|
Exercise Price
|
|
Number of
Shares
|
|
|
Weighted-
Average
Remaining
Contractual
Life (in years)
|
|
$0.77 - $1.40
|
|
|
503,050
|
|
|
|
1.06
|
|
$2.04 - $2.57
|
|
|
805,457
|
|
|
|
2.38
|
|
$4.52 - $9.05
|
|
|
33,301
|
|
|
|
5.05
|
|
$9.13 - $9.29
|
|
|
31,000
|
|
|
|
9.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,372,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On March 29, 2016, the Board of Directors of the Company approved the grant of certain performance-based stock
options to employees of the Company for a total of 164,500 option shares with an aggregate grant date fair value of approximately $0.3 million. As of September 30, 2016, a total of 58,125 of such options vested upon achievement of certain
specified performance conditions. The Company accounts for these performance-based stock options in accordance with the provisions under ASC 718 and recognized compensation expense when the performance conditions are considered probable of
achievement.
Stock-Based Compensation Expense
Total stock-based compensation expense recognized was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(unaudited; in thousands)
|
|
|
(unaudited; in thousands)
|
|
Research and development
|
|
$
|
76
|
|
|
$
|
103
|
|
|
$
|
351
|
|
|
$
|
166
|
|
General and administrative
|
|
|
154
|
|
|
|
63
|
|
|
|
545
|
|
|
|
203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
230
|
|
|
$
|
166
|
|
|
$
|
896
|
|
|
$
|
369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2016, the Company had $2.4 million of total unrecognized stock-based compensation, net of
estimated forfeitures, related to outstanding stock options that will be recognized over a weighted-average period of 3.41 years.
15
The Company uses the Black-Scholes model for valuing its options and awards granted to employees and
non-employees. Stock-based compensation in connection with non-employee grants was immaterial for the three and nine months ended September 30, 2016 and 2015. The following table illustrates the input assumptions used to value employee stock
option grants for the three and nine months ended September 30, 2016 and 2015 (unaudited):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Dividend yield
|
|
0%
|
|
0%
|
|
0%
|
|
0%
|
Risk-free interest rate
|
|
1.26%
|
|
1.07% - 1.73%
|
|
1.06 - 1.97%
|
|
1.07% - 2.01%
|
Expected volatility
|
|
89%
|
|
89%
|
|
89%
|
|
89%
|
Expected term (years)
|
|
6.08
|
|
6.08
|
|
6.08
|
|
6.08
|
11.
|
Restructuring and Severance
|
In January 2016, the Company terminated the employment of its Chief
Executive Officer (CEO). Pursuant to the terms of his employment agreement, the Company was obligated to its former CEO for certain severance payments, continuation of benefits, and acceleration of vesting of the remaining outstanding unvested stock
options. For the three months ended March 31, 2016, the Company had recorded a liability and an expense of $0.4 million for postemployment severance and benefits and a stock-based compensation expense of approximately $16,000 related to the
acceleration of vesting of the former CEOs stock options. For the nine months ended September 30, 2016, the Company had paid $0.4 million of the postemployment severance and benefits, with $7,500 remaining included within accrued
compensation on the condensed consolidated balance sheet.
In March 2016, the Company consolidated its operations with the primary focus on
continued development of M207 (previously known as ZP-Triptan). In accordance with ASC 420, Exit or Disposal Cost Obligations, the aggregate restructuring charges of approximately $0.5 million represent one-time termination benefits, comprised
principally of severance, benefit continuation costs and outplacement services. For the three months ended March 31, 2016, the Company had recorded $0.5 million as a liability and an expense and a stock-based compensation expense of
approximately $5,000 on the acceleration of vesting of certain stock options related to the elimination of certain senior positions in connection with the workforce reduction. For the nine months ended September 30, 2016, the Company paid
approximately $0.5 million, with approximately $31,000 remaining included within accrued compensation on the condensed consolidated balance sheet.
The accompanying condensed consolidated financial statements have been prepared in
conformity with U.S. GAAP, which contemplate continuation of the Company as a going concern. As of September 30, 2016, the Company has an accumulated deficit of $189.0 million as well as negative cash flows from operating activities. Presently,
the Company does not have sufficient cash resources to meet its plans in the next twelve months following September 30, 2016. The Company will continue to require substantial funds to continue research and development, including clinical trials
of its product candidate. Managements plans in order to meet its operating cash flow requirements include financing activities such as private placements of its common stock, preferred stock offerings, issuances of debt and convertible
debt instruments and collaborative or other arrangements with corporate sources.
These factors raise substantial doubt regarding the Companys
ability to continue as a going concern. There are no assurances that such additional funding will be achieved and that the Company will succeed in its future operations. The Companys inability to obtain required funding in the near future or
its inability to obtain funding on favorable terms will have a material adverse effect on its operations and strategic development plan for future growth. If the Company cannot successfully raise additional capital and implement its strategic
development plan, its liquidity, financial condition and business prospects will be materially and adversely affected, and the Company may have to cease operations.
16
On October 12, 2016, we received a deficiency letter from the Listing
Qualifications Department of The NASDAQ Stock Market notifying us that, for the preceding 30 consecutive business days, the bid price for our common stock had closed below the minimum $1.00 per share requirement for continued inclusion on The NASDAQ
Global Market pursuant to NASDAQ Listing Rule 5550(a)(2). In accordance with NASDAQ Listing Rule 5810(c)(3)(A), the Company has been provided an initial period of 180 calendar days, or until April 10, 2017, to regain compliance with the Rule.
If, at any time before April 10, 2017, the bid price for the Companys common stock closes at $1.00 or more for a minimum of 10 consecutive business days as required under Listing Rule 5810(c)(3)(A), the Staff will provide written
notification to the Company that it complies with the Rule.
If the Company does not regain compliance with the Rule by April 10, 2017, the
Company may be eligible for an additional 180 calendar day compliance period. To qualify, the Company will be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards, with
the exception of the bid price requirement, and will need to provide written notice to the Staff of its intention to cure the deficiency during the second compliance period by effecting a reverse stock split if necessary.
17