NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017
(unaudited)
(in
thousands, except share and per share data)
1. Organization
Pulmatrix, Inc. and its subsidiaries (the Company) is a clinical stage biotechnology company focused on the discovery and development of a novel
class of inhaled therapeutic products. The Companys proprietary dry powder delivery platform, iSPERSE (inhaled Small Particles Easily Respirable and Emitted), is engineered to deliver small, dense particles with highly efficient
dispersibility and delivery to the airways, which can be used with an array of dry powder inhaler technologies and can be formulated with a variety of drug substances. The Company is developing a pipeline of iSPERSE-based therapeutic candidates
targeted at prevention and treatment of a range of respiratory diseases and infections with significant unmet medical needs.
Liquidity
At March 31, 2017, the Company had unrestricted cash and cash equivalents of $10,541, an accumulated deficit of $159,429 and working capital of $6,619.
The Company will be required to raise additional capital within the next year to continue the development and commercialization of current product candidates and to continue to fund operations at the current cash expenditure levels.
The Company cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that the Company raises additional funds
by issuing equity securities, the Companys stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact the Companys ability to conduct business. If unable to raise
additional capital when required or on acceptable terms, the Company may have to (i) delay, scale back or discontinue the development and/or commercialization of one or more product candidates; (ii) seek collaborators for product
candidates at an earlier stage than otherwise would be desirable and on terms that are less favorable than might otherwise be available; or (iii) relinquish or otherwise dispose of rights to technologies, product candidates or products that the
Company would otherwise seek to develop or commercialize on unfavorable terms.
In February 2017, the Company closed sales of an aggregate of 2,950,000
shares of its common stock for aggregate net proceeds of $7,598 (see Note 8).
In March 2017, the Company sold 538,427 shares of its common stock for
aggregate net proceeds of $2,104 (See Note 8).
Subsequent to March 31, 2017, the Company sold 645,271 shares of its common stock for aggregate gross
proceeds of $2,211 (see Note 14).
The Companys ability to continue as a going concern is dependent upon its ability to obtain additional equity or
debt financing and, ultimately, to generate revenue. Those factors raise substantial doubt about the Companys ability to continue as a going concern. The Companys condensed consolidated financial statements as of March 31, 2017 do
not include any adjustments that might become necessary should the Company be unable to continue as a going concern.
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared on a going concern basis in accordance with accounting
principles generally accepted in the United States (GAAP) for interim financial reporting and as required by Regulation
S-X,
Rule
10-01.
Accordingly, they do
not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (including those which are normal and recurring) considered necessary for a fair presentation of the
interim financial information have been included. When preparing financial statements in conformity with GAAP, the Company must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and
related disclosures at the date of the financial statements. Actual results could differ from those estimates. Additionally, operating results for the three months ended March 31, 2017, are not necessarily indicative of the results that may be
expected for any other interim period or for the fiscal year ending December 31, 2017. For further information, refer to the financial statements and footnotes included in the Companys annual financial statements for the fiscal year ended
December 31, 2016, which are included in the Companys annual report on Form
10-K
filed with the SEC on March 10, 2017.
6
3. Summary of Significant Accounting Policies
In the three months ended March 31, 2017, there were no changes to the Companys significant accounting policies identified in the Companys
most recent annual financial statements for the fiscal year ended December 31, 2016, which are included in the Companys current report on Form
10-K
filed with the SEC on March 10, 2017, except
as noted below.
Recent Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
No. 2014-09,
Revenue
from
Contracts
with
Customers
(ASU
2014-09),
which requires an entity to recognize revenue at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring
goods or services to customers. ASU
2014-09
will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective in the annual period ending
December 31, 2017, including interim periods within that annual period. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The adoption of this standard is not
expected to have a material impact on the Companys consolidated financial position and results of operations.
There have been four new ASUs issued
amending certain aspects of ASU
2014-09,
ASU
2016-08,
Principal
versus
Agent
Considerations
(Reporting
Revenue
Gross
Versus
Net),
was issued in March, 2016 to clarify certain aspects of the principal versus agent guidance in ASU
2014-09.
In addition, ASU
2016-10,
Identifying
Performance
Obligations
and
Licensing,
issued in April 2016, amends other sections of ASU
2014-09
including clarifying guidance related to identifying performance obligations and licensing implementation.
ASU 2016-12,
Revenue
from
Contracts
with
Customers
Narrow
Scope
Improvements
and
Practical
Expedients
provides amendments and practical expedients to the guidance in ASU
2014-09
in the areas of assessing collectability, presentation of sales taxes received from customers, noncash consideration, contract modification and clarification of using the full retrospective approach to adopt
ASU
2014-09.
Finally, ASU
2016-20,
Technical
Corrections
and
Improvements
to
Topic
606,
Revenue
from
Contracts
with
Customers,
was issued in December 2016, and provides elections regarding the disclosures required for remaining performance obligations in certain cases and also makes other technical corrections and
improvements to the standard. With its evaluation of the impact of ASU
2014-09,
the Company will also consider the impact on its financial statements related to the updated guidance provided by these four new
ASUs.
In January 2017, the Financial Accounting Standard Board (the FASB) issued Accounting Standards Update (ASU)
2017-04:
Intangibles
Goodwill
and
Other
(Topic
350):
Simplifying
the
Test
for
Goodwill
Impairment
(ASU
2017-04),
which removes Step 2 from the goodwill impairment test. It is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted
for interim or annual goodwill impairment test performed with a measurement date after January 1, 2017. The Company has adopted this standard and its impact on its consolidated financial statements and related disclosures was immaterial.
Use of Estimates
In preparing consolidated financial
statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements,
as well as the reported amounts of expenses during the reporting period. Due to inherent uncertainty involved in making estimates, actual results may differ from these estimates. On an ongoing basis, the Company evaluates its estimates and
assumptions. These estimates and assumptions include valuing equity securities in share-based payments, estimating fair value of equity instruments recorded as derivative liabilities, estimating the fair value of net assets acquired in business
combinations, estimating the useful lives of depreciable and amortizable assets, valuation allowance against deferred tax assets, goodwill impairment, and estimating the fair value of long-lived assets to assess whether impairment charges may apply.
Revenue Recognition
The Companys
principal sources of revenue during the reporting period were reimbursement of clinical study costs. In all instances, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, and collectability of the resulting receivable is reasonably assured.
Goodwill
Goodwill represents the difference between the consideration transferred and the fair value of the net assets acquired and liabilities assumed under the
acquisition method of accounting for push-down accounting. Goodwill is not amortized but is evaluated for impairment within the Companys single reporting unit on an annual basis, during the fourth quarter, or more frequently if an event occurs
or circumstances change that would more likely than not reduce the fair value of the Companys reporting unit below its carrying amount. When performing the impairment assessment, the accounting standard for testing goodwill for impairment
permits a company to first assess the qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the goodwill is impaired. If the Company believes, as a result of the qualitative
assessment, that it is more likely than not that the fair value of goodwill is impaired, the Company must perform the first step of the goodwill impairment test. The Company completed a qualitative assessment and determined that there was no
impairment of goodwill as of March 31, 2017.
7
4. Goodwill
The Company recognized $10,914 of goodwill and as of March 31, 2017, there was no impairment. Goodwill has been assigned to the Companys single
reporting unit.
5. Prepaid Expenses and Other Current Assets
Prepaid expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2017
|
|
|
At December 31, 2016
|
|
Prepaid Insurance
|
|
$
|
111
|
|
|
$
|
197
|
|
Prepaid Clinical Trials
|
|
|
62
|
|
|
|
9
|
|
Prepaid Other
|
|
|
126
|
|
|
|
58
|
|
Stock Subscriptions
|
|
|
108
|
|
|
|
206
|
|
Deferred Clinical Costs
|
|
|
6
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
Total prepaid and other current assets
|
|
$
|
413
|
|
|
$
|
577
|
|
|
|
|
|
|
|
|
|
|
6. Debt
Loan and
Security Agreement and Warrant Agreement
On June 11, 2015, Pulmatrix Operating entered into a Loan and Security Agreement (LSA) with
Hercules Technology Growth Capital, Inc. (Hercules), for a term loan in a principal amount of $7,000 (Term Loan). The term loan is secured by substantially all of the Companys assets, excluding intellectual property.
The term loan bears interest at a floating annual rate equal to the greater of (i) 9.50% and (ii) the sum of (a) the prime rate as
reported by The Wall Street Journal minus 3.25% plus (b) 8.50%. The Company is required to make interest payments in cash on the first business day of each month, beginning on July 1, 2015. Beginning on August 1, 2016, the Company
will be required to make monthly payments on the first business day of each month consisting of principal and interest based upon a
30-month
amortization schedule, and any unpaid principal and interest is due
on the maturity date of July 1, 2018. Upon repayment of the term loan, the Company is also required to pay an end of term charge to the Lenders equal to $245.
The Company may elect to prepay all, but not less than all, of the outstanding principal balance of the term loan, subject to a prepayment fee of 1%
3%, depending on the date of repayment. Contingent on the occurrence of several events, including that the Companys closing stock price exceed $11.73 per share for the seven days preceding a payment date, the Company may elect to pay, in whole
or in part, any regularly scheduled installment of principal up to an aggregate maximum amount of $1,000 by converting a portion of the principal into shares of the Companys common stock at a price of $11.73 per share. Hercules may elect to
receive payments in the Company common stock by requiring the Company to effect a conversion option whereby Hercules can elect to receive a principal installment payment in shares of the Company common stock based on a price of $11.73 per share,
subject to an aggregate maximum principal amount of $1,000.
The Company determined that the Companys provisions allowing conversion of all or a
portion of the LSA contained a beneficial conversion feature (BCF). The BCF is contingent upon the occurrence of certain events and as such, the Company will not record the BCF until the contingency is resolved. Through March 31,
2017 the contingency was not resolved.
The credit facility includes affirmative and negative covenants. The affirmative covenants include, among others,
covenants requiring the Company to maintain its legal existence and governmental approvals deliver certain financial reports and maintain insurance coverage. The negative covenants include, among others, restrictions on transferring collateral,
incurring additional indebtedness, engaging in mergers or acquisitions, paying dividends or making other distributions, making investments, creating liens, selling assets, and undergoing a change in control, in each case subject to certain
exceptions. In general, the Term Loan prohibits the Company from (i) repurchasing or redeeming any class of capital stock, including common stock or (ii) declaring or paying any cash dividend or making cash distribution on any class of
capital stock, including common stock.
The LSA includes provisions requiring the embedded interest rate reset upon an event of default and the put option
upon an event of default or qualified change of control each represent an embedded derivative instrument requiring bifurcation from the loan. The embedded derivatives were bundled and valued as one compound derivative in accordance with the
applicable accounting guidance for derivatives and hedging. The fair value of the compound derivative at issuance of $11 was recorded as a derivative liability and as
8
a discount to the debt. The derivative liability is remeasured at fair value at each reporting date, with changes in fair value being recorded as other income (expense) in the statements of
operations (Note 11). At March 31, 2017 and December 31, 2016, the fair value of the derivative liability was valued at $35. The net debt discounts resulting from the embedded compound derivative and lender fees are being amortized as
interest expense from the date of issuance through the maturity date using the effective interest method. The Company incurred interest expense of $187 and $223 during the three months ended March 31, 2017 and 2016, respectively. Of the total
interest expense, $139 and $173 was payable in cash during the three months ended March 31, 2017 and 2016, respectively.
The carrying amounts of the
Companys Term Loan as of March 31, 2017 and December 31, 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hercules
Term
Loan
|
|
|
Debt
Discount
|
|
|
Issuance
Costs
|
|
|
Total
|
|
Balance January 1, 2017
|
|
$
|
5,954
|
|
|
$
|
(136
|
)
|
|
$
|
(15
|
)
|
|
$
|
5,803
|
|
Accretion of debt discount
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
27
|
|
Accretion of issuance costs
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
4
|
|
Principal payments
|
|
|
(651
|
)
|
|
|
|
|
|
|
|
|
|
|
(651
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2017
|
|
$
|
5,303
|
|
|
$
|
(109
|
)
|
|
$
|
(11
|
)
|
|
|
5,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of debt, net of debt discount and issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term portion of debt, net of current portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future principal payments in connection with the Term Loan are as follows:
|
|
|
|
|
Remainder of 2017
|
|
$
|
2,044
|
|
2018
|
|
|
3,259
|
|
|
|
|
|
|
|
|
$
|
5,303
|
|
|
|
|
|
|
7. Accrued Expenses and Other Current Liabilities
Accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2017
|
|
|
At December 31, 2016
|
|
Accrued vacation
|
|
$
|
75
|
|
|
$
|
54
|
|
Accrued wages and incentive
|
|
|
870
|
|
|
|
796
|
|
Accrued clinical & consulting
|
|
|
153
|
|
|
|
202
|
|
Accrued legal & patent
|
|
|
60
|
|
|
|
51
|
|
Accrued end of term fee
|
|
|
176
|
|
|
|
155
|
|
Deferred Rent
|
|
|
52
|
|
|
|
46
|
|
Accrued other expenses
|
|
|
53
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses
|
|
$
|
1,439
|
|
|
$
|
1,317
|
|
|
|
|
|
|
|
|
|
|
9
8. Common Stock
Registered Direct Offering
On January 27, 2017, the
Company entered into a Securities Purchase Agreement (the Purchase Agreement) with certain investors for the sale by the Company of 2,000,000 shares of the Companys common stock at a purchase price of $2.50 per share in a
registered direct offering. The closing of the sale of the shares under the Purchase Agreement occurred on February 2, 2017.
On February 3,
2017, Pulmatrix, Inc. entered into a Securities Purchase Agreement (the Second Purchase Agreement) with certain investors for the sale by the Company of 950,000 shares of the Companys common stock at a purchase price of $3.50 per
share in a registered direct offering. The closing of the sale of the shares under the Second Purchase Agreement occurred on February 8, 2017.
Net
of commissions and other issuance costs totaling $727, aggregate net proceeds of the two noted registered direct offerings were $7,598. The shares were offered and sold by the Company pursuant to an effective shelf registration statement on Form
S-3,
which was filed with the Securities and Exchange Commission on July 15, 2016, and subsequently declared effective on August 3, 2016 (File
No. 333-212546),
and a related prospectus.
At-the-Market
Offering
On March 17, 2017, the Company entered into an
At-The-Market
Sales
Agreement (the Sales Agreement) with BTIG, LLC (BTIG) to act as the Companys sales agent with respect to the issuance and sale of up to $11,000,000 of the Companys shares of common stock, from time to time in an
at-the-market
public offering (the Offering). Sales of common stock under the Sales Agreement are made pursuant to an effective shelf registration statement on
Form
S-3,
which was filed with the Securities and Exchange Commission on July 15, 2016, and subsequently declared effective on August 3, 2016 (File
No. 333-212546),
and a related prospectus. BTIG acts as the Companys sales agent on a commercially reasonable efforts basis, consistent with its normal trading and sales practices and applicable
state and federal laws, rules and regulations and the rules of The NASDAQ Global Market. If expressly authorized by the Company, BTIG may also sell the Companys common stock in privately negotiated transactions. There is no specific date on
which the Offering will end, there are no minimum sale requirements and there are no arrangements to place any of the proceeds of this offering in an escrow, trust or similar account.
BTIG is entitled to compensation at a fixed commission rate of 3.0% of the gross proceeds from the sale of the Companys common stock pursuant to the
Sales Agreement.
During the three month period ended March 31, 2017, the Company sold 538,427 shares of its common stock under the Sales Agreement
at an average selling price of approximately $4.04 per share which resulted in gross proceeds of approximately $2,175 and net proceeds of approximately $2,104 after payment of 3% commission to BTIG and other issuance costs. Approximately $108 of
these proceeds were classified in stock subscriptions receivable as of March 31, 2017 which were subsequently collected in April 2017.
9.
Warrants
There were 3,284,440 common stock warrants outstanding at March 31, 2017. The warrants had a weighted-average exercise price of $7.79
with no intrinsic value and a remaining contractual life of 3.20 years.
10. Stock-Based Compensation
The Company sponsors the Pulmatrix, Inc. 2013 Employee, Director and Consultant Equity Incentive Plan (the 2013 Plan). As of March 31, 2017, the
2013 Plan provides for the grant of up to 4,193,075 shares of Company Common Stock, of which 1,149,194 shares remained available for future grant.
In
addition, the Company has two legacy plans: The Pulmatrix Operatings 2013 Employee, Director and Consultant Equity Incentive Plan (the Original 2013 Plan) and Pulmatrix Operatings 2003 Employee, Director, and Consultant Stock
Plan (the 2003 Plan). As of March 31, 2017, a total of 503,062 shares of Company Common Stock may be delivered under options outstanding under the Original 2013 Plan and the 2003 Plan, however no additional awards may be granted
under the Original 2013 Plan or the 2003 Plan.
10
Options
During the first three months of 2017, the Company granted options to purchase 343,555 shares of Company Common Stock to employees and options to purchase
22,000 shares of Company Common Stock to directors. At the date of grant the fair value of those options aggregated to $659 and $42 respectively. The stock options granted vest over 48 months (the Time Based Options). Subject to the
grantees continuous service with the Company, Time Based Options vest 25% on the first anniversary of the option grant date and the remainder in 36 equal monthly installments beginning in the month after the vesting start date. Stock options
generally expire ten years after the date of grant.
The following table summarizes stock option activity for the three months ended
March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term
( Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding January 1, 2017
|
|
|
2,829,301
|
|
|
$
|
6.89
|
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
365,555
|
|
|
$
|
2.78
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(136,249
|
)
|
|
$
|
2.19
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(54,822
|
)
|
|
$
|
7.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding March 31, 2017
|
|
|
3,003,785
|
|
|
$
|
6.59
|
|
|
|
8.08
|
|
|
$
|
1,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable March 31, 2017
|
|
|
1,437,144
|
|
|
$
|
6.99
|
|
|
|
7.23
|
|
|
$
|
846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest March 31, 2017
|
|
|
2,956,125
|
|
|
$
|
6.56
|
|
|
|
8.08
|
|
|
$
|
1,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated fair values of employee stock options granted during the three months ended March 31, 2017 and 2016, were
determined on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
Expected option life (years)
|
|
5.80 6.71
|
|
6.22
|
Risk-free interest rate
|
|
2.10% - 2.23%
|
|
1.61% -1.94%
|
Expected volatility
|
|
76.6% - 79.9%
|
|
70.0%
|
Expected dividend yield
|
|
0%
|
|
0%
|
The risk-free interest rate was obtained from U.S. Treasury rates for the applicable periods. The Companys expected
volatility was based upon the historical volatility for industry peers and used an average of those volatilities. The expected life of the Companys options was determined using the simplified method as a result of limited historical data
regarding the Companys activity. The dividend yield considers that the Company has not historically paid dividends, and does not expect to pay dividends in the foreseeable future. As of March 31, 2017 there was $5,636 of unrecognized
stock-based compensation expense related to unvested stock options granted under the Companys stock award plans. This expense is expected to be recognized over a weighted-average period of approximately 2.3 years.
The following table presents total stock-based compensation expense for the three months ended March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Research and development
|
|
$
|
153
|
|
|
$
|
214
|
|
General and administrative
|
|
|
462
|
|
|
|
1,019
|
|
|
|
|
|
|
|
|
|
|
Total stock based compensation expense
|
|
$
|
615
|
|
|
$
|
1,233
|
|
Restricted Stock Units (RSU)
In August 2015, the Company granted 10,374 RSUs to other employees that vest over a two year period. The Company recorded stock-based compensation expense of
$7 for the RSUs during the three months ended March 31, 2017. At March 31, 2017, 5,187 RSUs were outstanding with a weighted-average grant date fair value of $5.50 per share and total grant date fair value of $29.
11
11. Fair Value Measurements
Information about the liabilities measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016, and the input categories
associated with those liabilities, is as follows:
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March 31, 2017
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Fair Value Measurements Using
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Level 1
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Level 2
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Level 3
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Total
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Liabilities:
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Embedded compound derivative
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$
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$
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$
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35
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$
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35
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December 31, 2016
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Fair Value Measurements Using
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Level 1
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Level 2
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Level 3
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Total
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Liabilities:
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Embedded compound derivative
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$
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$
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$
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35
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$
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35
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Embedded Compound Derivatives LSA with Hercules
As described in Note 6, the LSA contains an interest rate reset upon an event of default and a put option upon an event of default or qualified change of
control. Each of these features represents an embedded derivative instrument requiring bifurcation from the Term Loan. The embedded derivatives were bundled and valued as one compound derivative in accordance with the applicable accounting guidance
for derivatives and hedging. The proceeds from the issuance of the Term Loan were allocated first to the warrant and compound derivative at their respective fair values, with the residual going to the carrying amount of the loan resulting in a
discount to the face value of the debt. The fair value of the compound derivative upon issuance of $11 was recognized as a derivative liability and will be adjusted to fair value at each reporting date. At December 31, 2016, the fair value of
the derivative liability was remeasured and valued at $35. The fair value of the derivative instruments is based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The
Company used an income approach to estimate the fair value of the derivative liability and estimated the probability of an event of default occurring at various dates and then estimates the present value of the amount the holders would receive upon
an event of default.
The significant assumption used in the model is the probability of the following scenarios occurring:
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At Issuance Date
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At March 31, 2017
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Probability of an event of default
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10%
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50%
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Prepayment penalties
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1.0% - 3.0%
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1.0% - 3.0%
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End of term payment
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$245,000
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$245,000
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Risk-free interest rate
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1.01%
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1.03%
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The risk-free interest rate was obtained from U.S. Treasury rates for the applicable periods. The Companys expected
volatility was based upon the historical volatility for industry peers and used an average of those volatilities. The expected life of the Companys options was determined using the simplified method as a result of limited historical data
regarding the Companys activity. The dividend yield considers that the Company has not historically paid dividends, and does not expect to pay dividends in the foreseeable future.
A roll-forward of the preferred stock warrant liability and derivative liability categorized with Level 3 inputs is as follows:
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Derivative Instruments
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Balance January 1, 2017
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$
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35
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Change in fair value
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Balance March 31, 2017
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$
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35
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Gains and/or losses arising from changes in the estimated fair value of the warrants and embedded compound derivatives were
recorded within other income, net, on the condensed consolidated statement of operations.
12
12. Net Loss Per Share
The Company computes basic and diluted net loss per share using a methodology that gives effect to the impact of outstanding participating securities (the
two-class
method). As the three months ended March 31, 2017 and 2016 resulted in net losses attributable to common shareholders, there is no income allocation required under the
two-class
method or dilution attributed to weighted average shares outstanding in the calculation of diluted net loss per share.
The following potentially dilutive securities outstanding prior to the use of the treasury stock method have been excluded from the computation of diluted
weighted-average shares outstanding, as they would be anti-dilutive.
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As of March 31,
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2017
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2016
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Options to purchase common stock
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3,003,785
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3,061,119
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Warrants to purchase common stock
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3,284,440
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3,284,440
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Settlement of term loan
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85,251
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85,251
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13. Commitments
Future
minimum lease payments under the
non-cancelable
operating lease for office and lab space is as follows:
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Amount
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2017
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$
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474
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2018
|
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654
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2019
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|
676
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2020
|
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|
698
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Total
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$
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2,502
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14. Subsequent Events
Subsequent to March 31, 2017, the Company sold 645,271 shares of its common stock under the Sales Agreement with BTIG at an average selling price of
approximately $3.53 per share which resulted in gross proceeds of approximately $2,279.
13