Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Nature of Business
Acceleron Pharma Inc. (Acceleron or the Company) is a Cambridge, Massachusetts-based clinical stage biopharmaceutical company focused on the discovery, development and commercialization of innovative therapeutics to treat serious and rare diseases. The Company’s research focuses on key natural regulators of cellular growth and repair, particularly the Transforming Growth Factor-Beta (TGF-beta) protein superfamily. By combining its discovery and development expertise, including its proprietary knowledge of the TGF-beta superfamily, and its internal protein engineering and manufacturing capabilities, the Company has built a highly productive discovery and development platform that has generated innovative therapeutic candidates with novel mechanisms of action. The Company has
four
internally discovered therapeutic candidates that are currently in clinical trials.
The Company is subject to risks common to companies in the biotechnology industry, including, but not limited to, risk that the Company never achieves profitability, the need for substantial additional financing, risk of relying on third parties, risks of clinical trial failures, dependence on key personnel, protection of proprietary technology and compliance with government regulations.
2. Basis of Presentation
The accompanying interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). Any reference in these notes to applicable guidance is meant to refer to the authoritative United States generally accepted accounting principles as found in the Accounting Standards Codification (ASC) and Accounting Standards Update (ASU) of the Financial Accounting Standards Board (FASB).
The accompanying interim condensed consolidated financial statements are unaudited. The unaudited interim financial statements have been prepared on the same basis as the audited annual financial statements as of and for the year ended
December 31, 2016
, and, in the opinion of management, reflect all adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of the Company’s financial position as of
March 31, 2017
, and the results of its operations and its cash flows for the
three
months ended
March 31, 2017
and
2016
.
The results for the
three
months ended
March 31, 2017
are not necessarily indicative of the results to be expected for the year ending
December 31, 2017
, any other interim periods, or any future year or period. These interim financial statements should be read in conjunction with the audited financial statements as of and for the year ended
December 31, 2016
, and the notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2016
.
The accompanying interim condensed consolidated financial statements reflect the application of certain significant accounting policies as described below and elsewhere in these notes to the financial statements. As of
March 31, 2017
, the Company’s significant accounting policies and estimates, which are detailed in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2016
, have not changed, except for the adoption of Accounting Standards Update (ASU) No. 2016-09,
Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting,
which is discussed further in Note 16
.
3. Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts expensed during the reporting period.
Management considers many factors in selecting appropriate financial accounting policies and controls, and in developing the estimates and assumptions that are used in the preparation of these consolidated financial statements. Management must apply significant judgment in this process. In addition, other factors may affect estimates, including: expected business and operational changes, sensitivity and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected to be representative of future trends. The estimation process often may yield a range of potentially reasonable estimates of the ultimate future outcomes and management must select an amount that falls within that range of reasonable estimates. This process may result in actual results differing materially from those estimated amounts used in the preparation of the consolidated financial statements if these results differ from historical experience, or other assumptions do
not turn out to be substantially accurate, even if such assumptions are reasonable when made. In preparing these consolidated financial statements, management used significant estimates in the following areas, among others: revenue recognition, stock-based compensation expense, the determination of the fair value of stock-based awards, the fair value of liability-classified warrants, accrued expenses, and the recoverability of the Company’s net deferred tax assets and related valuation allowance.
4. Segment Information
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, or decision making group, in making decisions on how to allocate resources and assess performance. The Company’s chief operating decision maker is the chief executive officer. The Company and the chief executive officer view the Company’s operations and manage its business as
one
operating segment, which is the discovery, development and commercialization of highly innovative therapeutics to treat serious and rare diseases. All material long-lived assets of the Company reside in the United States. The Company does use contract research organizations (CROs) and research institutions located outside the United States. Some of these expenses are subject to collaboration reimbursement which is presented as a component of cost sharing, net in the consolidated statements of operations and comprehensive (loss) income.
5. Cash Equivalents and Short-term and Long-term Investments
The Company considers all highly liquid investments purchased with original maturities of 90 days or less at acquisition to be cash equivalents. Cash and cash equivalents include cash held in banks and amounts held in interest-bearing money market accounts. Cash equivalents are carried at cost, which approximates their fair market value.
The Company determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designation at each balance sheet date. The Company has classified all of its marketable securities at
March 31, 2017
as “available-for-sale” pursuant to ASC 320,
Investments – Debt and Equity Securities.
The Company records available-for-sale securities at fair value, with the unrealized gains and losses included in accumulated other comprehensive income (loss) in stockholders’ equity. There were no realized gains or losses on marketable securities for the
three
months ended
March 31, 2017
and
2016
.
Investments not classified as cash equivalents are presented as either short-term or long-term investments based on both their maturities as well as the time period the Company intends to hold such securities.
The Company adjusts the cost of available-for-sale debt securities for amortization of premiums and accretion of discounts to maturity. The Company includes such amortization and accretion in interest income. The cost of securities sold is based on the specific identification method. The Company includes in interest income interest and dividends on securities classified as available-for-sale.
The Company reviews marketable securities for other-than-temporary impairment whenever the fair value of a marketable security is less than the amortized cost and evidence indicates that a marketable security’s carrying amount is not recoverable within a reasonable period of time. Other-than-temporary impairments of investments are recognized in the consolidated statements of operations if the Company has experienced a credit loss, has the intent to sell the marketable security, or if it is more likely than not that the Company will be required to sell the marketable security before recovery of the amortized cost basis. Evidence considered in this assessment includes reasons for the impairment, compliance with the Company’s investment policy, the severity and the duration of the impairment and changes in value subsequent to the end of the period.
The aggregate fair value of securities held by the Company in an unrealized loss position for less than twelve months as of
March 31, 2017
and
December 31, 2016
was
$159.2 million
and
$172.2 million
, respectively. The aggregate fair value of securities held by the Company in an unrealized loss position for more than twelve months as of
March 31, 2017
was
$2.5 million
. The aggregate unrealized loss for those securities in an unrealized loss position for more than twelve months is
$202
. As a result, the Company determined it did not hold any investments with any other-than-temporary impairment as of
March 31, 2017
and
December 31, 2016
.
The following is a summary of cash, cash equivalents and available-for-sale securities as of
March 31, 2017
and
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Estimated Fair Value
|
Cash and cash equivalents due in 90 days or less
|
$
|
33,157
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
33,157
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
Corporate obligations due in one year or less
|
44,328
|
|
|
—
|
|
|
(74
|
)
|
|
44,254
|
|
Corporate obligations due in more than one year
|
27,819
|
|
|
2
|
|
|
(113
|
)
|
|
27,708
|
|
U.S. Treasury securities due in one year or less
|
17,494
|
|
|
—
|
|
|
(14
|
)
|
|
17,480
|
|
U.S. Treasury securities due in more than one year
|
11,536
|
|
|
—
|
|
|
(52
|
)
|
|
11,484
|
|
Certificates of deposit due in one year or less
|
9,665
|
|
|
—
|
|
|
—
|
|
|
9,665
|
|
Certificates of deposit due in more than one year
|
6,665
|
|
|
—
|
|
|
—
|
|
|
6,665
|
|
Mortgage and other asset backed securities due in one year or less
|
36,860
|
|
|
—
|
|
|
(40
|
)
|
|
36,820
|
|
Mortgage and other asset backed securities due in more than one year
|
26,090
|
|
|
—
|
|
|
(109
|
)
|
|
25,981
|
|
Total available-for-sale securities
|
180,457
|
|
|
2
|
|
|
(402
|
)
|
|
180,057
|
|
Total cash, cash equivalents and available-for-sale securities
|
$
|
213,614
|
|
|
$
|
2
|
|
|
$
|
(402
|
)
|
|
$
|
213,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Estimated Fair Value
|
Cash and cash equivalents due in 90 days or less
|
$
|
20,950
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20,950
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
Corporate obligations due in one year or less
|
45,839
|
|
|
1
|
|
|
(58
|
)
|
|
$
|
45,782
|
|
Corporate obligations due in more than one year
|
42,895
|
|
|
—
|
|
|
(185
|
)
|
|
42,710
|
|
U.S. Treasury securities due in one year or less
|
22,490
|
|
|
—
|
|
|
(10
|
)
|
|
22,480
|
|
U.S. Treasury securities due in more than one year
|
11,541
|
|
|
—
|
|
|
(53
|
)
|
|
11,488
|
|
Certificates of deposit due in one year or less
|
13,562
|
|
|
—
|
|
|
—
|
|
|
13,562
|
|
Certificates of deposit due in more than one year
|
9,811
|
|
|
—
|
|
|
—
|
|
|
9,811
|
|
Mortgage and other asset backed securities due in one year or less
|
36,948
|
|
|
—
|
|
|
(32
|
)
|
|
36,916
|
|
Mortgage and other asset backed securities due in more than one year
|
30,771
|
|
|
—
|
|
|
(88
|
)
|
|
30,683
|
|
Total available-for-sale securities
|
213,857
|
|
|
1
|
|
|
(426
|
)
|
|
213,432
|
|
Total cash, cash equivalents and available-for-sale securities
|
$
|
234,807
|
|
|
$
|
1
|
|
|
$
|
(426
|
)
|
|
$
|
234,382
|
|
6. Restricted Cash
As of
March 31, 2017
and
December 31, 2016
, the Company maintained letters of credit totaling
$1.1 million
and
$0.9
million, respectively, held in the form of certificates of deposit and money market funds as collateral for the Company's facility lease obligation and its credit cards.
7. Concentrations of Credit Risk and Off-Balance Sheet Risk
The Company has no off-balance sheet risk, such as foreign exchange contracts, option contracts, or other foreign hedging arrangements. Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash, cash equivalents, restricted cash, short-term and long-term investments and collaboration receivables. The Company maintains its cash and cash equivalent balances and short-term and long-term investments with financial institutions that management believes are creditworthy. Short-term and long-term investments consist of investment grade corporate obligations, treasury notes, asset backed securities, and certificates of deposit. The Company’s investment policy includes
guidelines on the quality of the institutions and financial instruments and defines allowable investments that the Company believes minimizes the exposure to concentrations of credit risk.
The Company routinely assesses the creditworthiness of its customers and collaboration partners. The Company has not experienced any material losses related to receivables from individual customers and collaboration partners, or groups of customers. The Company does not require collateral. Due to these factors, no additional credit risk beyond amounts provided for collection losses is believed by management to be probable in the Company’s collaboration receivables.
8. Fair Value Measurements
The following tables set forth the Company’s financial instruments carried at fair value using the lowest level of input applicable to each financial instrument as of
March 31, 2017
and
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Quoted Prices
in Active Markets
for Identical Items
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
31,820
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
31,820
|
|
Corporate obligations
|
—
|
|
|
71,962
|
|
|
—
|
|
|
71,962
|
|
U.S. Treasury securities
|
—
|
|
|
28,963
|
|
|
—
|
|
|
28,963
|
|
Certificates of deposit
|
—
|
|
|
16,330
|
|
|
—
|
|
|
16,330
|
|
Mortgage and other asset backed securities
|
—
|
|
|
62,802
|
|
|
—
|
|
|
62,802
|
|
Restricted cash
|
1,132
|
|
|
—
|
|
|
—
|
|
|
1,132
|
|
Total assets
|
$
|
32,952
|
|
|
$
|
180,057
|
|
|
$
|
—
|
|
|
$
|
213,009
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Warrants to purchase common stock
|
|
|
|
|
|
|
$
|
1,289
|
|
|
$
|
1,289
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,289
|
|
|
1,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Quoted Prices
in Active Markets
for Identical Items
(Level 1)
|
|
Significant other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
19,818
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
19,818
|
|
Corporate obligations
|
—
|
|
|
88,492
|
|
|
—
|
|
|
88,492
|
|
U.S. Treasury securities
|
—
|
|
|
33,968
|
|
|
—
|
|
|
33,968
|
|
Certificates of deposit
|
—
|
|
|
23,373
|
|
|
—
|
|
|
23,373
|
|
Mortgage and other asset backed securities
|
—
|
|
|
67,599
|
|
|
—
|
|
|
67,599
|
|
Restricted cash
|
946
|
|
|
—
|
|
|
—
|
|
|
946
|
|
Total assets
|
$
|
20,764
|
|
|
$
|
213,432
|
|
|
$
|
—
|
|
|
$
|
234,196
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Warrants to purchase common stock
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,244
|
|
|
$
|
1,244
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,244
|
|
|
$
|
1,244
|
|
The money market funds noted above are included in cash and cash equivalents in the accompanying condensed consolidated balance sheets. The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers within the hierarchy during the
three
months ended
March 31, 2017
or the year ended
December 31, 2016
.
Items measured at fair value on a recurring basis include short-term and long-term investments (Note 5), and warrants to purchase common stock (Note 13). During the periods presented, the Company has not changed the manner in which it values assets and liabilities that are measured at fair value using Level 3 inputs.
The following table sets forth a summary of changes in the fair value of the Company’s common stock warrant liabilities, which represent a recurring measurement that is classified within Level 3 of the fair value hierarchy, wherein fair value is estimated using significant unobservable inputs (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Beginning balance
|
$
|
1,244
|
|
|
$
|
17,187
|
|
Change in fair value
|
45
|
|
|
(8,683
|
)
|
Ending balance
|
$
|
1,289
|
|
|
$
|
8,504
|
|
The fair value of the warrants to purchase common stock on the date of issuance and on each re-measurement date for those warrants classified as liabilities was estimated using either the Monte Carlo simulation framework, which incorporates future financing events over the remaining life of the warrants to purchase common stock, or for certain re-measurement dates, due to the warrants being deeply in the money, the Black-Scholes option pricing model. Due to the nature of these inputs, the valuation of the warrants is considered a Level 3 measurement. At each reporting period, the Company evaluates the best valuation methodology. At
March 31, 2017
, the Black-Scholes option pricing model was used.
The Company measures eligible assets and liabilities at fair value, with changes in value recognized in earnings. Fair value treatment may be elected either upon initial recognition of an eligible asset or liability or, for an existing asset or liability, if an event triggers a new basis of accounting. The Company did not elect to re-measure any of its existing financial assets or liabilities, and did not elect the fair value option for any financial assets and liabilities transacted in the
three
months ended
March 31, 2017
or the year ended
December 31, 2016
.
9. Net (Loss) Income Per Share
A reconciliation of the number of shares used in the calculation of basic and diluted net (loss) income per share is as follows (in thousands):
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2017
|
|
2016
|
Weighted-average number of common shares used in calculating basic net (loss) income per common share
|
38,404
|
|
|
36,911
|
|
Weighted-average number of common shares issuable upon exercise of outstanding stock options, based on treasury stock method
|
—
|
|
|
1,389
|
|
Weighted-average number of common shares issuable upon exercise of outstanding common stock warrants, based on treasury stock method
|
—
|
|
|
318
|
|
Weighted-average number of common shares issuable under the employee stock purchase plan, based on treasury stock method
|
—
|
|
|
3
|
|
Weighted-average number of common shares issuable upon vesting of outstanding restricted stock units
|
—
|
|
|
45
|
|
Weighted-average number of common shares used in computing diluted net (loss) income per common share
|
38,404
|
|
|
38,666
|
|
The following common stock equivalents were excluded from the calculation of diluted net (loss) income per share for the periods indicated because their inclusion would have had an anti-dilutive effect (in thousands):
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2017
|
|
2016
|
Outstanding stock options
|
3,583
|
|
|
1,458
|
|
Common stock warrants
|
63
|
|
|
—
|
|
Shares issuable under employee stock purchase plan
|
15
|
|
|
1
|
|
Restricted stock units
|
807
|
|
|
34
|
|
|
4,468
|
|
|
1,493
|
|
10. Comprehensive (Loss) Income
Comprehensive (loss) income is defined as the change in equity of a business enterprise during a period from transactions, other events, and circumstances from non-owner sources. Comprehensive loss consists of net loss and other comprehensive loss, which includes certain changes in equity that are excluded from net loss. Comprehensive loss has been disclosed in the accompanying consolidated statements of operations and comprehensive loss. Accumulated other comprehensive (loss) income is presented separately on the consolidated balance sheets and consists entirely of unrealized holding gains on investments as of
March 31, 2017
and
December 31, 2016
.
11.
Subsequent Events
The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. The Company has evaluated all subsequent events and determined that there are no material recognized or unrecognized subsequent events requiring disclosure.
12. Recently Adopted Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
, which supersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. The new standard will be effective for the Company on January 1, 2018. Topic 606 allows for either a full retrospective application, in which the standard is applied to all periods presented, or a modified retrospective application, in which the standard is applied to the most current period presented in the financial statements. As of
March 31, 2017
, revenue is generated exclusively from the Company's collaboration agreement with Celgene. The Company is currently evaluating the potential impact that Topic 606 may have on its financial position and results of operations as it relates to this single arrangement, and expects to elect the modified retrospective application as its transition method.
In February 2016 the FASB issued ASU 2016-02,
Leases (Topic 842), Amendments to the FASB Accounting Standards Codification,
which replaces the existing guidance for leases. ASU 2016-02 requires the identification of arrangements that should be accounted for as leases by lessees. In general, for lease arrangements exceeding a twelve month term, these arrangements must now be recognized as assets and liabilities on the balance sheet of the lessee. Under ASU 2016-02, a right-of-use asset and lease obligation will be recorded for all leases, whether operating or financing, while the income statement will reflect lease expense for operating leases and amortization/interest expense for financing leases. The balance sheet amount recorded for existing leases at the date of adoption of ASU 2016-02 must be calculated using the applicable incremental borrowing rate at the date of adoption. In addition, ASU 2016-02 requires the use of the modified retrospective method, which will require adjustment to all comparative periods presented in the consolidated financial statements. This guidance is effective for annual and interim periods beginning after December 15, 2018 and requires retrospective application. The Company is currently assessing the impact that adopting ASU 2016-02 will have on its consolidated financial statements and related disclosures.
In June 2016 the FASB issued ASU No. 2016-13,
Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments
. This new standard changes the impairment model for most financial assets and certain other instruments. Under the new standard, entities holding financial assets and net investment in leases that are not accounted for at fair value through net income to be presented at the net amount expected to be collected. An allowance for credit losses will be a valuation account that will be deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected on the financial asset. This guidance is effective for annual and interim reporting periods beginning after December 15, 2019, with early adoption permitted. The adoption of this standard is not expected to have a material impact on the Company's financial position or results of operations.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows - Restricted Cash (Topic 230)
. This new standard requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance is effective for annual and interim reporting periods beginning after December 15, 2017, and requires retrospective application. The Company is currently assessing the impact that adopting ASU 2016-18 will have on its consolidated financial statements and related disclosures.
In December 2016, the FASB issued ASU 2016-19,
Technical Corrections and Improvements
. This new standard is intended to clarify guidance or correct references in the Accounting Standards Codification that could potentially result in changes in current practice because of either misapplication or misunderstanding of current guidance. The amendments of the standard that require transition guidance are effective for annual and interim reporting periods beginning after December 15, 2016, and early adoption is permitted. All other amendments were effective immediately. The Company adopted the standard effective January 1, 2017, and it did not have a material impact on the Company's financial position or results of operations.
In March 2017, the FASB issued ASU 2017-08,
Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.
This new standard shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendment requires the premium to be amortized to the earliest call date. The amendment does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The guidance is effective for annual and interim periods beginning after December 15, 2018, and early adoption is permitted. The amendment should be applied on a modified retrospective basis, with the cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is currently assessing the impact that adopting ASU 2017-08 will have on its consolidated financial statements and related disclosures.
13. Warrants
Below is a summary of the number of shares issuable upon exercise of outstanding warrants and the terms and accounting treatment for the outstanding warrants (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
Average
Exercise
|
|
|
|
Balance Sheet
Classification
|
|
March 31, 2017
|
|
December 31, 2016
|
|
Price Per
Share
|
|
Expiration
|
|
March 31, 2017
|
|
December 31, 2016
|
Warrants to purchase common stock
|
61
|
|
|
61
|
|
|
$
|
5.88
|
|
|
June 10, 2020 - July 9, 2020
|
|
Liability
|
|
Liability
|
Warrants to purchase common stock
|
3
|
|
|
4
|
|
|
7.40
|
|
|
December 31, 2017
|
|
Equity(1) (2)
|
|
Equity(1) (2)
|
All warrants
|
64
|
|
|
65
|
|
|
$
|
5.94
|
|
|
|
|
|
|
|
|
|
(1)
|
In March 2017, warrant holders exercised warrants to purchase
1,187
shares of Common Stock on a net basis, resulting in the issuance of
1,014
shares of Common Stock.
|
|
|
(2)
|
Warrants to purchase common stock were issued in connection with various debt financing transactions that were consummated in periods prior to December 31, 2012.
|
In connection with the Series E redeemable convertible preferred stock (Series E Preferred Stock) financing transactions that took place in June 2010 and July 2010, the Company issued warrants to purchase up to
871,580
shares of common stock. Each warrant was immediately exercisable and expires
ten
years from the original date of issuance. The warrants to purchase shares of the Company’s common stock have an exercise price equal to the estimated fair value of the underlying instrument as of the initial date such warrants were issued. Each warrant is exercisable on either a physical settlement or net share settlement basis from the date of issuance. The warrant agreement contains a provision requiring an adjustment to the number of shares in the event the Company issues common stock, or securities convertible into or exercisable for common stock, at a price per share lower than the warrant exercise price. The Company concluded the anti-dilution feature required the warrants to be classified as liabilities under ASC Topic 815,
Derivatives and Hedging—Contracts in Entity’s Own Equity
(ASC 815). The warrants are measured at fair value, with changes in fair value recognized as a gain or loss to other income (expense) in the statements of operations and comprehensive income (loss) for each reporting period thereafter. The fair value of the common stock warrants was recorded as a discount to the preferred stock issued, and the preferred stock was accreted to the redemption value. At the end of each reporting period, the Company re-measured the fair value of the outstanding warrants, using current assumptions, resulting in an increase in fair value of
$45 thousand
and a decrease of
$8.7 million
for the three months ended
March 31, 2017
and
2016
, respectively, which was recorded in other (expense) income in the accompanying consolidated statements of operations and comprehensive loss. The Company will continue to re-measure the fair value of the liability associated with the warrants to purchase common stock at the end of each reporting period until the earlier of the exercise or the expiration of the applicable warrants. All remaining outstanding warrants were fully vested and exercisable as of
March 31, 2017
and
December 31, 2016
.
14. Commitments and Contingencies
Legal Proceedings
The Company, from time to time, may be party to litigation arising in the ordinary course of its business. The Company was not subject to any material legal proceedings during the three months ended
March 31, 2017
, and, to the best of its knowledge, no material legal proceedings are currently pending or threatened.
Other
The Company is also party to various agreements, principally relating to licensed technology, that require future payments relating to milestones not met at
March 31, 2017
and
December 31, 2016
, or royalties on future sales of specified products. No milestones or royalty payments under these agreements are expected to be payable in the immediate future. See Note 15 for discussion of these arrangements.
The Company enters into standard indemnification agreements in the ordinary course of business. Pursuant to the agreements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Company’s business partners or customers, in connection with any U.S. patent or any copyright or other intellectual property infringement claim by any third party with respect to the Company’s products. The term of these indemnification agreements is generally perpetual any time after execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements.
15. Significant Agreements
Celgene
Overview
On February 20, 2008 the Company entered into a collaboration, license, and option agreement with Celgene Corporation (Celgene) relating to sotatercept (the Sotatercept Agreement). On August 2, 2011, the Company entered into a second collaboration, license and option agreement with Celgene for luspatercept (the Luspatercept Agreement), and also amended certain terms of the Sotatercept Agreement. These agreements provide Celgene exclusive licenses for sotatercept and luspatercept in all indications, as well as exclusive rights to obtain a license to certain future compounds. Celgene is is an integrated global biopharmaceutical company engaged primarily in the discovery, development and commercialization of innovative therapies for the treatment of cancer and inflammatory diseases through next-generation solutions in protein homeostasis, immuno-oncology, epigenetics, immunology and neuro-inflammation.
There have been no material changes to the key terms of the Sotatercept and Luspatercept Agreements since December 31,
2016
. For further information on the terms of the agreements as well as the historical accounting analysis, please see the notes to the consolidated financial statements included in the Company’s Form 10-K for the year ended December 31,
2016
.
Sotatercept Agreement
Under the terms of the Sotatercept Agreement, the Company and Celgene collaborate worldwide for the joint development and commercialization of sotatercept. The Company also granted Celgene an option to license
three
discovery stage compounds. Under the terms of the agreement, the Company and Celgene jointly develop, manufacture and commercialize sotatercept.
The Company retained responsibility for research and development through the end of Phase 2a clinical trials, as well as manufacturing the clinical supplies for these trials. These activities were substantially completed in 2011. Celgene will be responsible for any Phase 3 clinical trials, as well as additional Phase 2 clinical trials, and will be responsible for overseeing the manufacture of Phase 3 and commercial supplies by third party contract manufacturing organizations.
Through
March 31, 2017
, the Company has received
$43.9 million
in research and development funding and milestone payments for sotatercept under the original and modified agreements. The next likely clinical milestone payment would be
$10.0 million
and result from Celgene’s start of a Phase 3 study.
Luspatercept Agreement
Under the terms of the Luspatercept Agreement, the Company and Celgene collaborate worldwide for the joint development and commercialization of luspatercept. The Company also granted Celgene an option for future products for which the Company files an Investigational New Drug application for the treatment of anemia. The Company has not yet identified additional compounds for the treatment of anemia. Accordingly, there is no assurance that the Company will generate future value from additional programs.
The Company retains responsibility for research and development through the end of Phase 1 and initial Phase 2 clinical trials, as well as manufacturing the clinical supplies for these studies. Celgene will conduct subsequent Phase 2 and Phase 3 clinical studies. The Company will manufacture luspatercept for the Phase 1 and Phase 2 clinical trials and Celgene will be responsible for overseeing the manufacture of Phase 3 and commercial supplies by third party contract manufacturing organizations.
Through
March 31, 2017
, the Company has received
$90.3 million
in research and development funding and milestone payments for luspatercept. The next likely milestone payment would be
$25.0 million
and result from U.S. Food and Drug Administration or European Medical Association acceptance of a Biologics Licensing Application or equivalent for luspatercept in either myelodysplastic syndromes or beta-thalassemia.
Both Agreements
The Company and Celgene shared development costs under the Sotatercept and Luspatercept Agreements through December 31, 2012. Since January 1, 2013, Celgene has been responsible for paying
100%
of worldwide development costs under both agreements. Celgene will be responsible for all commercialization costs worldwide. The Company has the right to co-promote sotatercept, luspatercept and future products under both agreements in North America. Celgene’s option to buy down royalty rates for sotatercept and luspatercept expired unexercised and, therefore, the Company will receive tiered royalties in the low-to-mid
20%
range on net sales of sotatercept and luspatercept. The royalty schedules for sotatercept and luspatercept are the same.
Accounting Analysis
During the three months ended
March 31, 2017
and
2016
, the Company recognized
$0.1 million
and
$0.1 million
, respectively, of the total deferred revenue as license and milestone revenue in the accompanying consolidated statements of operations and comprehensive loss. During February 2016, the Company achieved a
$15.0 million
clinical milestone under its Luspatercept Agreement, related to the initiation of a Phase 3 clinical trial with Luspatercept. The Company evaluated the milestone and determined that it was substantive and consistent with the definition of a milestone included in ASU 2010-17 and, accordingly, recognized the
$15.0 million
payment in revenue during the quarter ended
March 31, 2016
. The remaining development milestones under the Luspatercept and Sotatercept Agreements were deemed to be substantive and consistent with the definition of a milestone included in ASU 2010-17 and, accordingly, the Company will recognize payments related to the achievement of such milestones, if any, when such milestone is achieved.
As noted above, under the terms of the Luspatercept Agreement the Company retained responsibility for certain research and development activities. In November 2013, the Company agreed to conduct additional activities for the benefit of the luspatercept program including certain clinical and non-clinical services. These activities are reimbursed under the same terms and rates of the existing Agreements and are account for as the services are delivered.
Pursuant to the terms of the agreement, Celgene and the Company shared development costs, with Celgene responsible for substantially more than half of the costs for sotatercept and luspatercept until December 31, 2012 and 100% of the costs from January 1, 2013 and thereafter. Payments from Celgene with respect to research and development costs incurred by the Company are recorded as cost-sharing revenue. The Company recorded net cost-sharing revenue of
$3.6 million
and
$3.1 million
during the three months ended
March 31, 2017
and
2016
, respectively.
Other Agreements
Other
In 2004, the Company entered into a license agreement with a non-profit institution for an exclusive, sublicensable, worldwide, royalty-bearing license to certain patents developed by the institution (Primary Licensed Products). In addition, the Company was granted a non-exclusive, non-sub-licensable license for Secondary Licensed Products. As compensation for the licenses, the Company issued
62,500
shares of its common stock to the institution, the fair value of which was
$25,000
, and was expensed during 2004 to research and development expense. The Company also agreed to pay specified development milestone payments totaling up to
$2.0 million
for sotatercept and
$0.7 million
for luspatercept. In addition, the Company is obligated to pay milestone fees based on the Company’s research and development progress, and U.S. sublicensing revenue
ranging from
10%
-
25%
, as well as a royalty ranging from
1.0%
-
3.5%
of net sales on any products under the licenses. During the three months ended
March 31, 2017
and
2016
, the Company expensed
zero
and
$0.9 million
, respectively.
In 2006, the Company entered into another license agreement with certain individuals for an exclusive, sublicensable, worldwide, royalty-bearing license to certain patents developed by the individuals. The Company agreed to pay specified development and sales milestone payments aggregating up to
$1.0 million
relating to the development and commercialization of dalantercept. In addition, the Company is required to pay royalties in the low single-digits on worldwide net product sales of dalantercept, with royalty obligations continuing at a
50%
reduced rate for a period of time after patent expiration. If the Company sublicenses its patent rights, it will owe a percentage of sublicensing revenue, excluding payments based on the level of sales, profits or other levels of commercialization. During the
three
months ended
March 31, 2017
and
2016
, the Company did
no
t reach any milestones defined under the agreement and, therefore, no amounts have been paid or expensed.
During 2012, the Company executed a license agreement with a research institution for an exclusive, sublicensable, worldwide, royalty-bearing license. The Company is obligated to pay development milestones and commercial milestone fees relating to dalantercept totaling up to
$1.0 million
. The Company will also pay
$25,000
annually upon first commercial sale as well as royalties of
1.5%
of net sales on any products developed under the patents. During the
three
months ended
March 31, 2017
and
2016
, the Company did
no
t reach any milestones defined under the agreement and, therefore, no amounts have been paid or expensed.
In May 2014, the Company executed a collaboration agreement with a research technology company. The Company paid an upfront research fee of
$0.3 million
upon execution of the agreement. The Company also received an option to obtain a commercial license to the molecules developed during the collaboration. During the three months ended
March 31, 2017
and
2016
, the Company expensed
$0.1 million
and
$0.3 million
, respectively, which is recorded as research and development expense.
16. Stock-Based Compensation
The Company recognized stock-based compensation expense related to stock options, restricted stock units and the 2013 Employee Stock Purchase Plan totaling
$6.6 million
and
$4.2 million
during the three months ended
March 31, 2017
and
2016
, respectively.
Total compensation cost recognized for all stock-based compensation awards in the consolidated statements of operations and comprehensive (loss) income is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2017
|
|
2016
|
Research and development
|
$
|
3,662
|
|
|
$
|
1,824
|
|
General and administrative
|
2,921
|
|
|
2,424
|
|
|
$
|
6,583
|
|
|
$
|
4,248
|
|
On January 1, 2017, the Company adopted ASU 2016-09, which identifies areas for simplification involving several aspects of accounting for share-based payments, including income tax consequences, classification of awards as either equity or liabilities, an option to make a policy election to recognize gross share based compensation expense with actual forfeitures recognized as they occur as well as certain classification changes on the statement of cash flows. In connection with the adoption of this standard, the Company changed its accounting policy to record actual forfeitures as they occur, rather than estimating forfeitures by applying a forfeiture rate. The provisions of the standard related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements and forfeitures were adopted using a modified retrospective transition method. Accordingly, a cumulative adjustment of
$0.1 million
was booked to retained earnings for the impact of the forfeitures. The Company also recorded
$21.5 million
f
or the excess tax benefit related to equity awards, which was offset by a
$21.5 million
increase to the valuation allowance. The provisions of the standard related to the recognition of the excess tax benefits in the income statement and classification in the statement of cash flows were adopted prospectively and prior periods were not retrospectively adjusted.
In December 2016, the Company entered into a consulting agreement with the Company's former Chief Executive Officer. In accordance with the Company’s Plan and any vested stock options (options) remain outstanding and exercisable and unvested options and restricted stock units will continue to vest in accordance with their terms so long as he continues to provide services as a consultant. During the three months ended
March 31, 2017
and
2016
, the Company recognized
$1.1 million
and
zero
of stock-based compensation expense within research and development expense related to the agreement.
Stock Options
The fair value of each stock option issued to employees was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2017
|
|
2016
|
Expected volatility
|
65.9
|
%
|
|
64.4
|
%
|
Expected term (in years)
|
6.0
|
|
|
5.9
|
|
Risk-free interest rate
|
2.2
|
%
|
|
1.4
|
%
|
Expected dividend yield
|
—
|
%
|
|
—
|
%
|
The following table summarizes the stock option activity under the Company’s 2003 Stock Option and Restricted Stock Plan and 2013 Equity Incentive Plan during the
three
months ended
March 31, 2017
(in thousands, except per share amounts and years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Grants
|
|
Weighted-
Average
Exercise
Price
Per Share
|
|
Weighted-
Average
Contractual
Life (in years)
|
|
Aggregate
Intrinsic
Value(1)
|
Outstanding at December 31, 2016
|
3,316
|
|
|
$
|
25.96
|
|
|
7.03
|
|
|
|
Granted
|
567
|
|
|
$
|
30.00
|
|
|
|
|
|
|
Exercised
|
(293
|
)
|
|
$
|
3.93
|
|
|
|
|
|
|
Canceled or forfeited
|
(7
|
)
|
|
$
|
35.98
|
|
|
|
|
|
|
Outstanding at March 31, 2017
|
3,583
|
|
|
$
|
28.38
|
|
|
7.63
|
|
$
|
13,224,792
|
|
Exercisable at March 31, 2017
|
1,675
|
|
|
$
|
23.39
|
|
|
6.01
|
|
$
|
13,030,298
|
|
|
|
(1)
|
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and the estimated fair value of the common stock for the options that were in the money at
March 31, 2017
.
|
During the
three
months ended
March 31, 2017
, the Company granted stock options to purchase an aggregate of
566,709
shares of its common stock, with a weighted-average grant date fair value of options granted of
$18.16
.
During the
three
months ended
March 31, 2017
, current and former employees of the Company exercised a total of
292,537
options, resulting in total proceeds of
$1.2 million
.
The aggregate intrinsic value of options exercised during the
three
months ended
March 31, 2017
was
$6.8 million
.
As of
March 31, 2017
, there was
$33.3 million
of unrecognized compensation expense related to unvested stock options that is expected to be recognized over a weighted-average period of
2.87
years.
Restricted Stock Units
The following table summarizes the restricted stock unit (RSU) activity under the 2013 Equity Incentive Plan during the
three
months ended
March 31, 2017
(in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
Number
of Grants
|
|
Weighted-
Average
Grant Date Fair Value
|
Unvested balance at December 31, 2016
|
732
|
|
|
$
|
31.55
|
|
Granted
|
112
|
|
|
$
|
29.48
|
|
Vested
|
(35
|
)
|
|
$
|
30.84
|
|
Forfeited
|
(2
|
)
|
|
$
|
36.87
|
|
Unvested balance at March 31, 2017
|
807
|
|
|
$
|
31.28
|
|
During the
three
months ended
March 31, 2017
, the Company issued
100,692
RSUs to employees. These RSUs are subject to time-based vesting. As of
March 31, 2017
, there was approximately
$6.6 million
of unrecognized compensation cost
related to the time-based RSUs, which the Company expects to recognize over a remaining weighted-average period of
2.12 years
.
245,029
restricted stock units subject to time-based vesting remained unvested and outstanding at
March 31, 2017
.
During the
three
months ended
March 31, 2017
, the Company issued
11,526
performance-based RSUs in addition to the
550,777
issued in 2015 and 2016. The vesting of these performance-based RSUs is accelerated upon the occurrence of certain milestone events, but otherwise these RSUs vest in September 2019. As a result, when a milestone becomes probable, compensation cost is recognized over the estimated period of achievement. If achievement is not considered probable, the expense is recognized over the vesting period. At
March 31, 2017
, there was approximately
$8.7 million
of unrecognized compensation cost related to the performance-based RSUs, which the Company expects to recognize over a remaining weighted-average period of
1.57 years
. All
562,303
of these performance-based RSUs remained outstanding at
March 31, 2017
.
Employee Stock Purchase Plan
During the three months ended
March 31, 2017
and
2016
, the Company recorded
$0.1 million
and
$0.1 million
, respectively, of stock-based compensation expense related to the 2013 Employee Stock Purchase Plan (ESPP).
17. Income Taxes
For the
three
months ended
March 31, 2017
, the Company recorded current income tax expense of
$6 thousand
related to state income taxes on its interest income. For the
three
months ended
March 31, 2016
, the Company did not record a current or deferred income tax provision or benefit.
The Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. Based on the Company’s history of operating losses, the Company has concluded that it is more likely than not that the benefit of its deferred tax assets will not be realized. Accordingly, the Company has provided a full valuation allowance for deferred tax assets as of
March 31, 2017
and
December 31, 2016
.
The Company files income tax returns in the United States, and various state jurisdictions. The federal and state income tax returns are generally subject to tax examinations for the tax years ended December 31, 2013 through
December 31, 2016
. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service or state taxing authorities to the extent utilized in a future period.
The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. As of
March 31, 2017
and
December 31, 2016
, the Company did not have any significant uncertain tax positions.
18. Related Party Transactions
Celgene Corporation
In connection with prior arrangements, Celgene owned
12.6%
and
12.8%
of the Company’s fully diluted equity as of
March 31, 2017
and
December 31, 2016
, respectively. Refer to Note 15 for additional information regarding this collaboration arrangement.
During the
three
months ended
March 31, 2017
and
2016
, all revenue recognized by the Company was recognized under the Celgene collaboration arrangement and, as of
March 31, 2017
, the Company had
$4.1 million
of deferred revenue related to the Celgene collaboration arrangement.