Notes to Condensed Financial Statements
(unaudited)
1. Organization and
Description of Business
CymaBay Therapeutics, Inc. (the Company or CymaBay) is a biopharmaceutical company
focused on developing therapies for specialty and orphan diseases with high unmet medical need. The Companys two key clinical development candidates are seladelpar
(MBX-8025)
and arhalofenate. Seladelpar
is currently being developed primarily for the treatment of primary biliary cholangitis (PBC). Arhalofenate is being developed for the treatment of gout and rights to develop and commercialize arhalofenate in the U.S. (including all its possessions
and territories) have been licensed to Kowa Pharmaceuticals America, Inc. (Kowa). The Company was incorporated in Delaware in October 1988 as Transtech Corporation. The Companys headquarters and operations are located in Newark,
California and it operates in one segment.
Liquidity
The Company has incurred net operating losses and negative cash flows from operations since its inception. During the three months ended
March 31, 2017, the Company incurred a net loss of $5.4 million and used $2.2 million of cash in operations. At March 31, 2017, the Company had an accumulated deficit of $428.3 million. CymaBay expects to incur substantial
research and development expenses as it continues to study its product candidates in clinical trials. To date, none of the Companys product candidates have been approved for marketing and sale, and the Company has not recorded any revenue from
product sales. As a result, management expects operating losses to continue in future years. The Companys ability to achieve profitability is dependent primarily on its ability to successfully develop, acquire or
in-license
additional product candidates, continue clinical trials for product candidates currently in clinical development, obtain regulatory approvals, and support commercialization activities for partnered
product candidates. Products developed by the Company will require approval of the U.S. Food and Drug Administration (FDA) or a foreign regulatory authority prior to commercial sale. The regulatory approval process is expensive,
time-consuming, and uncertain, and any denial or delay of approval could have a material adverse effect on the Company. Even if approved, the Companys products may not achieve market acceptance and will face competition from both generic and
branded pharmaceutical products.
As of March 31, 2017, the Companys cash, cash equivalents and marketable securities totaled
$23.4 million. Management believes these funds are sufficient to fund the Companys liquidity requirements through at least the next 12 months. The Company expects to incur substantial expenditures in the future for the development and
potential commercialization of its product candidates. Because of this, the Company expects its future liquidity and capital resource needs will be impacted by numerous factors, including but not limited to, the repayment of the Companys
facility loan, the timing of initiation of planned clinical trials, including its ongoing phase 2 clinical trials to study the therapeutic benefits of seladelpar on patients with PBC. The Company has and expects to obtain additional funding to
develop its products and fund future operating losses through equity offerings; debt financing; its existing license and collaboration arrangement with Kowa; one or more possible licenses, collaborations or other similar arrangements with respect to
development and/or commercialization rights of its product candidates; or a combination of the above. It is unclear if or when any such transactions will occur, on satisfactory terms or at all. The Companys failure to raise capital as and when
needed could have a negative impact on its financial condition and its ability to pursue its business strategies. If adequate funds are not available, the Company may be required to reduce current development activities or limit or cease operations.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying
interim condensed financial statements are unaudited. These unaudited interim financial statements have been prepared in accordance with U.S. GAAP (GAAP) and following the requirements of the United States Securities and Exchange
Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted. In managements opinion, the unaudited interim
condensed financial statements have been prepared on the same basis as the audited financial statements and include normal recurring adjustments necessary for the fair presentation of the Companys financial position and its results of
operations and comprehensive loss and its cash flows for the periods presented. These statements do not include all disclosures required by GAAP and should be read in conjunction with the Companys financial statements and accompanying notes
for the fiscal year ended December 31, 2016, which is contained in the Companys Annual Report on Form
10-K
as filed with the SEC on March 23, 2017. The results for the three months ended
March 31, 2017, are not necessarily indicative of results to be expected for the year or for any other period.
Use of Estimates
The condensed financial statements have been prepared in accordance with GAAP, which requires management to make estimates and assumptions that
affect the amounts and disclosures reported in the condensed financial statements and accompanying notes. Management bases its estimates on historical experience and on assumptions believed to be reasonable under the circumstances.
6
The estimation process often may yield a range of potentially reasonable estimates of actual future outcomes, and management must select an amount that falls within that range of reasonable
estimates. Actual results could differ materially from those estimates. The Company believes significant judgment is involved in estimating revenue, stock-based compensation, accrued clinical expenses, and equity instrument valuations.
Fair Value of Financial Instruments
The
Companys financial instruments during the periods reported consist of cash and cash equivalents, marketable securities, prepaid expenses, other current assets, other assets, accounts payable, accrued interest payable, accrued liabilities, the
facility loan, and warrant liabilities. Fair value estimates of these instruments are made at a specific point in time, based on relevant market information. These estimates may be subjective in nature and involve uncertainties and matters of
significant judgment. The carrying amounts of financial instruments such as cash and cash equivalents, prepaid expenses, other current assets, other assets, accounts payable, accrued liabilities, and accrued interest payable approximate the related
fair values due to the short maturities of these instruments. Based on prevailing borrowing rates available to the Company for loans with similar terms, the Company believes the fair value of the facility loan, considering level 2 inputs,
approximates its carrying value.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Assets and liabilities that are measured at fair value are reported
using a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy maximizes the use of observable and unobservable inputs and is as follows:
Level 1Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement
date.
Level 2Inputs other than quoted prices in active markets that are observable for the asset or liability, either directly or
indirectly.
Level 3Inputs that are significant to the fair value measurement and are unobservable (i.e. supported by little market
activity), which requires the reporting entity to develop its own valuation techniques and assumptions.
7
The following tables present the fair value of the Companys financial assets and
liabilities measured at fair value on a recurring basis using the above input categories (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2017
|
|
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
5,957
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,957
|
|
Commercial paper
|
|
|
|
|
|
|
3,798
|
|
|
|
|
|
|
|
3,798
|
|
Corporate debt securities
|
|
|
|
|
|
|
2,099
|
|
|
|
|
|
|
|
2,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash equivalents
|
|
|
5,957
|
|
|
|
5,897
|
|
|
|
|
|
|
|
11,854
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
|
|
|
|
|
5,386
|
|
|
|
|
|
|
|
5,386
|
|
Corporate debt securities
|
|
|
|
|
|
|
2,961
|
|
|
|
|
|
|
|
2,961
|
|
Asset-backed securities
|
|
|
|
|
|
|
1,376
|
|
|
|
|
|
|
|
1,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
|
|
|
|
|
9,723
|
|
|
|
|
|
|
|
9,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
|
$
|
5,957
|
|
|
$
|
15,620
|
|
|
$
|
|
|
|
$
|
21,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,279
|
|
|
$
|
3,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,279
|
|
|
$
|
3,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
9,456
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9,456
|
|
Commercial paper
|
|
|
|
|
|
|
599
|
|
|
|
|
|
|
|
599
|
|
Corporate debt securities
|
|
|
|
|
|
|
500
|
|
|
|
|
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash equivalents
|
|
|
9,456
|
|
|
|
1,099
|
|
|
|
|
|
|
|
10,555
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
|
|
|
|
|
4,295
|
|
|
|
|
|
|
|
4,295
|
|
Corporate debt securities
|
|
|
|
|
|
|
2,204
|
|
|
|
|
|
|
|
2,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
|
|
|
|
|
6,499
|
|
|
|
|
|
|
|
6,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
|
$
|
9,456
|
|
|
$
|
7,598
|
|
|
$
|
|
|
|
$
|
17,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,145
|
|
|
$
|
1,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,145
|
|
|
$
|
1,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company estimates the fair value of its corporate debt and asset backed securities by taking into
consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly
or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities, issuer credit spreads, benchmark securities, prepayment/default projections based on historical data, and
other observable inputs.
There were no transfers between Level 1 and Level 2 during the periods presented.
The Company holds a Level 3 liability associated with common stock warrants that were issued in connection with the Companys
financings completed in September and October 2013, January 2014, and August 2015. The warrants are considered liabilities and are valued using a binomial lattice option-pricing model, the inputs for which include the exercise price of the
warrants, market price of the underlying common shares, expected term, volatility, the risk-free rate, key strategic initiatives, probability of
8
success related to those initiatives, and the expected changes in stock price that follow announcements of the Companys strategic initiatives. Changes to any of the inputs to the
option-pricing model used by the Company can have a significant impact to the estimated fair value of the warrants.
The following table
sets forth an activity summary which includes the changes in the fair value of the Companys Level 3 financial instruments (in thousands):
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|
|
For the Three
|
|
|
|
Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Balance, beginning of period
|
|
$
|
1,145
|
|
|
$
|
1,220
|
|
Issuance of financial instrument
|
|
|
|
|
|
|
|
|
Change in fair value
|
|
|
2,134
|
|
|
|
(320
|
)
|
Settlement of financial instrument
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
3,279
|
|
|
$
|
900
|
|
|
|
|
|
|
|
|
|
|
Cash, Cash Equivalents, and Marketable Securities
The Company considers all highly liquid investments with a remaining maturity of 90 days or less at the time of purchase to be cash
equivalents. Cash and cash equivalents consist of deposits with commercial banks in checking, interest-bearing, demand money market accounts, and corporate debt securities.
The Company invests excess cash in marketable securities with high credit ratings, which are classified in Level 1 and Level 2 of
the fair value hierarchy. These securities consist primarily of corporate debt, commercial paper, and asset-backed securities and are classified as
available-for-sale.
Management may liquidate any of these investments in order to meet the Companys liquidity needs in the next year. Accordingly, any
investments with contractual maturities greater than one year from the balance sheet date are classified as short-term in the accompanying condensed balance sheets.
Realized gains and losses from the sale of marketable securities, if any, are calculated using the specific identification method. Realized
gains and losses and declines in value judged to be other-than-temporary are included in interest income or expense in the statements of operations and comprehensive loss. Unrealized holding gains and losses are reported in accumulated other
comprehensive loss, in the balance sheets. To date, the Company has not recorded any impairment charges on its marketable securities related to other-than-temporary declines in market value. In determining whether a decline in market value is
other-than-temporary, various factors are considered, including the cause, duration of time and severity of the impairment, any adverse changes in the
9
investees financial condition, and the Companys intent and ability to hold the security for a period of time sufficient to allow for an anticipated recovery in market value.
The following tables present the Companys marketable securities (in thousands):
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|
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|
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|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
As of March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
5,386
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,386
|
|
Corporate debt securities
|
|
|
2,962
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
2,961
|
|
Asset-backed securities
|
|
|
1,376
|
|
|
|
|
|
|
|
|
|
|
|
1,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,724
|
|
|
$
|
|
|
|
$
|
(1
|
)
|
|
$
|
9,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
As of December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
4,295
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,295
|
|
Corporate debt securities
|
|
|
2,205
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
2,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,500
|
|
|
$
|
|
|
|
$
|
(1
|
)
|
|
$
|
6,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concentration of Credit Risk
Cash, cash equivalents, and marketable securities consist of financial instruments that potentially subject the Company to a concentration of
credit risk to the extent of the fair value recorded in the balance sheets. The Company invests cash that is not required for immediate operating needs primarily in highly liquid instruments that bear minimal risk. The Company has established
guidelines relating to the quality, diversification, and maturities of securities to enable the Company to manage its credit risk. The Company is exposed to credit risk in the event of a default by the financial institutions holding its cash, cash
equivalents and investments and issuers of investments to the extent recorded on the balance sheets.
Certain materials and key components
that the Company utilizes in its operations are obtained through single suppliers. Since the suppliers of key components and materials must be named in a new drug application (NDA) filed with the U.S. Food and Drug Administration (FDA) for a
product, significant delays can occur if the qualification of a new supplier is required. If delivery of material from the Companys suppliers were interrupted for any reason, the Company may be unable to supply any of its product candidates
for clinical trials.
Revenue Recognition
The Company recognizes revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have
been rendered, (iii) the price is fixed or determinable, and (iv) collectability is reasonably assured. Payments received in advance of work performed are recorded as deferred revenue and recognized when earned.
Collaboration and license agreements may include
non-refundable
upfront license fees, contingent
consideration payments based on the achievement of defined collaboration objectives and royalties on sales of commercialized products. The Companys performance obligations under collaboration and license agreements may include the license
or transfer of intellectual property rights, obligations to provide research and development services and related materials and obligations to participate on certain development and/or commercialization committees with the collaborators.
If the Company determines that multiple deliverables in an arrangement exist, the consideration is allocated to one or more units of
accounting based upon the relative-selling-price of each element in an arrangement. The relative-selling-price used for each deliverable is based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific
objective evidence is not available, or estimated selling price if neither vendor-specific or third-party evidence is available. The Company identifies deliverables at the inception of the arrangement. Each deliverable is accounted for as a
separate unit of accounting if both of the following criteria are met: (1) the delivered item or items have value to the customer on a standalone basis and (2) for an arrangement
10
that includes a general right of return relative to the delivered items, delivery or performance of the undelivered items is considered probable and substantially in the Companys control.
Non-refundable
upfront payments received and allocated to separate units of accounting are recognized as revenue when the four basic revenue recognition criteria are met for each unit of accounting.
The Company recognizes payments that are contingent upon achievement of a substantive milestone in their entirety in the period in which the
milestone is achieved. Milestones are defined as events that can only be achieved based on the Companys performance and there is substantive uncertainty about whether the event will be achieved at the inception of the
arrangement. Events that are contingent only on the passage of time or only on counterparty performance are not considered milestones subject to this guidance. Further, the amounts received must relate solely to prior performance, be
reasonable relative to all of the deliverables and payment terms within the agreement and commensurate with the Companys performance to achieve the milestone after commencement of the agreement. Any contingent payment that becomes payable upon
achievement of events that are not considered substantive milestones are allocated to the units of accounting previously identified at the inception of an arrangement when the contingent payment is received and revenue is recognized based on the
revenue recognition criteria for each unit of accounting.
Common Stock Warrant Liability
The Companys outstanding common stock warrants issued in connection with certain equity and debt financings that occurred in 2013 through
2015 are classified as liabilities in the accompanying condensed balance sheets because of certain contractual terms that preclude equity classification. The warrants are recorded at fair value using a binomial lattice option-pricing model. The
warrants are
re-measured
at each financial reporting period until the warrants are exercised or expire, with any changes in fair value being recognized as a component of other income (expense), net in the
accompanying condensed statements of operations and comprehensive loss.
Stock-Based Compensation
Employee and director stock-based compensation is measured at fair value on the grant date of the award. Compensation cost is recognized as
expense on a straight-line basis over the vesting period for options and on an accelerated basis for stock options with performance conditions. For stock options with performance conditions, the Company evaluates the probability of achieving
performance conditions at each reporting date. The Company begins to recognize the expense when it is deemed probable that the performance conditions will be met. The Company uses the Black-Scholes option pricing model to determine the fair value of
stock option awards. The determination of fair value for stock-based awards using an option-pricing model requires management to make certain assumptions regarding subjective input variables such as expected term, dividends, volatility and risk-free
interest rate. The Company is also required to make estimates as to the probability of achieving the specific performance criteria. If actual results are not consistent with the Companys assumptions and judgments used in making these
estimates, the Company may be required to increase or decrease compensation expense, which could be material to the Companys results of operations.
Equity awards granted to
non-employees
are valued using the Black-Scholes option pricing model.
Stock-based compensation expense for nonemployee services is subject to remeasurement as the underlying equity instruments vest and is recognized as an expense over the period during which services are received.
Net Loss Per Common Share
Basic net loss
per share of common stock is based on the weighted average number of shares of common stock outstanding equivalents during the period. Diluted net loss per share of common stock is calculated as the weighted average number of shares of common stock
outstanding adjusted to include the assumed exercises of stock options and common stock warrants, if dilutive.
The calculation of diluted
loss per share also requires that, to the extent the average market price of the underlying shares for the reporting period exceeds the exercise price of the common stock warrants and the presumed exercise of such securities are dilutive to net loss
per share for the period, adjustments to net loss used in the calculation are required to remove the change in fair value of the common stock warrant liability for the period. Likewise, adjustments to the denominator are required to reflect the
related dilutive shares.
11
In all periods presented, the Companys outstanding stock options and warrants were excluded
from the calculation of diluted net loss per share because their effects were antidilutive. The Companys computation of basic and diluted net loss per share is as follows (in thousands, except share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss allocated to common stock-basic
|
|
$
|
(5,351
|
)
|
|
$
|
(6,848
|
)
|
Adjustments for revaluation of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss allocated to common stock-diluted
|
|
$
|
(5,351
|
)
|
|
$
|
(6,848
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average number of common stock shares outstandingbasic
|
|
|
26,609,931
|
|
|
|
23,447,003
|
|
Weighted average number of common stock shares outstandingdiluted
|
|
|
26,609,931
|
|
|
|
23,447,003
|
|
Net loss per sharebasic:
|
|
$
|
(0.20
|
)
|
|
$
|
(0.29
|
)
|
Net loss per sharediluted:
|
|
$
|
(0.20
|
)
|
|
$
|
(0.29
|
)
|
The following table shows the total outstanding common stock equivalents considered anti-dilutive and
therefore excluded from the computation of diluted net loss per share (in thousands).
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Warrants for common stock
|
|
|
1,667
|
|
|
|
1,667
|
|
Common stock options
|
|
|
3,655
|
|
|
|
2,322
|
|
Incentive awards
|
|
|
239
|
|
|
|
245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,561
|
|
|
|
4,234
|
|
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements
Accounting Standards Update
2014-09
In May 2014, the FASB issued Accounting Standards Update
2014-09,
Revenue from Contracts with Customers
and related amendments. Subsequently, the Financial Accounting Standards Board (the FASB) issued the following standards related to ASU
2014-09:
ASU
No. 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations; ASU
No. 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and
Licensing; and ASU
No. 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. This guidance outlines a new, single comprehensive model for entities
to use in accounting for revenue arising from contracts with customers and supersedes nearly all of the existing revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in
determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange
for those goods or services.
The new revenue standard permits two methods of adoption: retrospectively to each prior reporting period
presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). The Company plans to adopt the new revenue
standard in the first quarter of 2018 using the modified retrospective method.
While the Company has not completed an assessment of the
impact of adoption, the adoption of this guidance may have a material effect on the Companys financial statements. At the end of 2016, the Company entered into a license agreement. Before executing this agreement, the Company has had no
revenues for the last two years. The consideration the Company is eligible to receive under this agreement includes an upfront payment, milestone payments, and royalties. This license agreement is unique and will need to be assessed separately under
the five-step process under the new standard. The Company is currently analyzing this agreement to determine the differences in the accounting treatment under the new revenue standard compared to the current
12
accounting treatment. The new revenue standard differs from the current accounting standard in many respects, such as in the accounting for variable consideration, including milestone payments
and royalties. The Company expects that its evaluation of the accounting for this agreement under the new revenue standard could identify material changes from the current accounting treatment and also impact its condensed financial statement
disclosures.
Accounting Standards Update
2016-02
In February 2016, the FASB issued ASU
No. 2016-02,
Leases (Topic 842). The new standard requires
the recognition of assets and liabilities arising from lease transactions on the balance sheet and the disclosure of key information about leasing arrangements. Accordingly, a lessee will recognize a lease asset for its right to use the underlying
asset and a lease liability for the corresponding lease obligation. Both the asset and liability will initially be measured at the present value of the future minimum lease payments over the lease term. Subsequent measurement, including the
presentation of expenses and cash flows, will depend on the classification of the lease as either a finance or an operating lease. Initial costs directly attributable to negotiating and arranging the lease will be included in the asset. Lessees will
also be required to provide additional qualitative and quantitative disclosures regarding the amount, timing and uncertainty of cash flows arising from leases. The new standard is effective for fiscal years beginning after December 15, 2018,
and interim periods therein. Early adoption is permitted. The Company is currently evaluating the impact this guidance will have on its condensed financial statements.
Accounting Standards Update
2016-09
In March 2016, the FASB issued ASU
No. 2016-09, Improvements
to Employee Share-Based Payment
Accounting, which amends ASC Topic 718, Compensation Stock Compensation (ASU
2016-09).
This guidance simplifies the accounting for the taxes related to stock based compensation, requiring excess
tax benefits and deficiencies to be recognized as a component of income tax expense rather than equity. This guidance also requires excess tax benefits and deficiencies to be presented as an operating activity on the statement of cash flows and
allows an entity to make an accounting policy election to either estimate expected forfeitures or to account for them as they occur. The Company adopted ASU
2016-09
on January 1, 2017 following the
modified retrospective approach. Under this guidance, on a prospective basis, the Company will no longer record excess tax benefits and certain tax deficiencies in additional
paid-in
capital (APIC). Instead,
the Company will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement. In addition, the guidance eliminates the requirement that excess tax benefits be realized before companies can recognize
them. The ASU requires a cumulative-effect adjustment for previously unrecognized excess tax benefits in opening retained earnings in the annual period of adoption. As of January 1, 2107, the Company had no material excess tax benefits for
which a benefit could not be previously recognized. In addition and as provided for under this guidance, the Company made an accounting policy election to recognize forfeitures as they occur. This policy election did not have a material impact on
the condensed financial statements.
3. Certain Balance Sheet Items
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
|
|
|
Accrued compensation
|
|
$
|
1,480
|
|
|
$
|
1,839
|
|
Accrued
pre-clinical
and clinical trial expenses
|
|
|
1,428
|
|
|
|
1,623
|
|
Accrued professional fees
|
|
|
386
|
|
|
|
982
|
|
Deferred revenue
|
|
|
207
|
|
|
|
|
|
Other accruals
|
|
|
47
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
3,548
|
|
|
$
|
4,501
|
|
|
|
|
|
|
|
|
|
|
4. Collaboration and License Agreements
Kowa Pharmaceuticals America, Inc.
On December 30, 2016, the Company entered into a license agreement with Kowa Pharmaceuticals America, Inc. Pursuant to the license
agreement, the Company granted to Kowa an exclusive license, and right to sublicense, certain patent rights and technology related to arhalofenate. Kowa will have exclusive rights to, among other things, develop, use, manufacture, sell and otherwise
exploit the licensed technology in the United States (including all possessions and territories). At Kowas option, the Company may also facilitate the placement of arhalofenate product manufacturing orders under the terms of the Companys
existing
13
contract manufacturing agreements. In addition, the Company will complete specified
in-process
stability testing and
non-clinical
development services and will participate on a Joint Advisory Committee (JAC). Finally, the Company will transfer to Kowa certain arhalofenate product on hand.
Under the license agreement, Kowa agreed to pay the Company a
non-refundable
up-front
payment of $5 million upon contract execution which was subsequently received in
mid-January
2017. The Company is also eligible to receive up to
$200 million in contingent payments based upon either the initiation or achievement of specified development and sales milestones. Finally, the Company will receive tiered, double digit royalties on any product sales and a percentage of any
revenue earned by Kowa from sublicensing.
The Company identified the following three performance deliverables under the license
agreement: 1) transfer of intellectual property rights, inclusive of the related technology
know-how
conveyance and contract manufacturing rights and privileges (license and
know-how),
2) the obligation to perform specific ongoing research and
non-clinical
development services, and 3) the delivery of arhalofenate product on hand. The
Companys participation on the JAC was not determined to be a deliverable because of the Companys ability to elect to terminate its participation. The Company concluded that the license, the
know-how
and contract manufacturing rights and privileges together represent a single deliverable, and therefore together should be accounted for as a single unit of accounting. The research and development
services and delivery of arhalofenate product each also represent separate deliverables, and therefore each should be accounted for as separate units of accounting. There was no separate consideration identified in the agreement for the deliverables
and there was no right of return under the agreement.
The Company considered the provisions of the multiple-element arrangement guidance
in determining whether the deliverables outlined above have standalone value. The transfer of license and
know-how
has standalone value separate from the research and development services and delivery of
arhalofenate product, as the agreement allows Kowa to sublicense its rights to the acquired license to a third party. Further, the Company believes that Kowa has research and development expertise with compounds similar to those licensed under
the agreement, and the Company has also granted Kowa the rights to either order arhalofenate product from the Companys existing contract manufacturers, or to enter into arrangements with other third parties to develop and manufacture
arhalofenate product, thereby allowing Kowa to realize the value of the license and
know-how.
The license and
know-how
revenue will be recognized upon the substantial
completion of the transfer of
know-how.
The research and development services will be recognized as revenue over the estimated period services are delivered. The arhalofenate product will be recognized as
revenue upon delivery.
The Company also determined the relative selling prices of the identified units of accounting in accordance with
the multi-element arrangement guidance. The Company considered but did not use Vendor Specific Objective Evidence (VSOE) of fair value or third-party evidence (TPE) but instead selected managements best estimate of selling price (BESP) due to
the uniqueness of the Kowa license arrangement and its lack of comparability to other licensing arrangements in the biopharmaceutical industry. The $5 million upfront consideration paid was then allocated to the identified units of accounting
using the relative selling price method, with revenue to be recognized based on the satisfaction of all revenue recognition criteria for each unit of accounting.
The Company completed all activities necessary to satisfy delivery of the license and knowhow deliverable and recognized $4.8 million of
upfront consideration associated with this deliverable as collaboration revenue during the three months ended March 31, 2017.
The
Company determined the future contingent payments related to the development activities do not meet the definition of a milestone because the achievement of these events solely depends on Kowas performance. Under current revenue recognition
rules, these amounts will be allocated to the Kowa arrangements three identified units of accounting when received and recognized as revenue based on the revenue recognition policy for those respective units of accounting. The future
contingent payments related to the U.S. sales milestones are recognized upon achievement of the specific milestones. As of March 31, 2017, none of these contingent amounts had been received or recognized as revenue.
Janssen Pharmaceutical NV and Janssen Pharmaceuticals, Inc.
In June 2006, the Company entered into an exclusive worldwide, royalty-bearing license to seladelpar and certain other PPAR
d
compounds (the PPAR
d
Products) with Janssen Pharmaceutical NV (Janssen NV), with the right to grant sublicenses to third parties to make, use and sell
such PPAR
d
Products. Under the terms of the agreement, the Company has full control and responsibility over the research, development and registration of any
PPAR
d
Products and is required to use diligent efforts to conduct all such activities. Janssen NV has the sole responsibility for the preparation, filing, prosecution, maintenance of, and defense of the
patents with respect to, the PPAR
d
Products. Janssen NV has a right of first negotiation under the agreement to license a particular PPAR
d
Product from the
Company in the event that the Company elects to seek a third party corporate partner for the research, development, promotion, and/or commercialization of such PPAR
d
Products. Under the terms of the
agreement Janssen NV is entitled to receive up to an 8% royalty on net sales of PPAR
d
Products. No royalties have been paid to date under the agreement.
14
In June 2010, the Company entered into two development and license agreements with Janssen
Pharmaceuticals, Inc. (Janssen), a subsidiary of Johnson and Johnson, to further develop and discover undisclosed metabolic disease target agonists for the treatment of T2DM and other disorders and received a
one-time
nonrefundable technology access fee related to the agreements. The Company received a termination notice from Janssen, effectively ending these development and licensing agreements in early April
2015. In December 2015, the Company exercised an option pursuant to the terms of one of the original agreements to continue work to research, develop and commercialize compounds with activity against an undisclosed metabolic disease target. Janssen
granted the Company an exclusive, worldwide license (with rights to sublicense) under the Janssen
know-how
and patents to research, develop, make, have made, use, offer for sale and sell such compounds. The
Company has full control and responsibility over the research, development and registration of any products developed and/or discovered from the metabolic disease target and is required to use diligent efforts to conduct all such activities.
Dia Tex, Inc.
In June 1998,
the Company entered into a license agreement with DiaTex, Inc. (DiaTex) relating to products containing arhalofenate, its enantiomers, derivatives, and analogs (the licensed products). The license agreement provides that DiaTex and the Company are
joint owners of all of the patents and patent applications covering the licensed products and methods of producing or using such compounds, as well as certain other
know-how
(the covered IP). As part of the
license agreement, the Company received an exclusive worldwide license, including as to DiaTex, to use the covered IP to develop and commercialize the licensed products. The Company also retained the right to
sub-license
the covered IP. The license agreement contains a $2,000 per month license fee as well as a requirement to make additional payments for development achievements and royalty payments on any sales of
licensed products. DiaTex is entitled to up to $0.8 million for the future development of arhalofenate, as well as royalty payments on commercial sales of products containing arhalofenate. No development payments were made in the three months
ended March 31, 2017 and 2016 and no royalties have been paid to date. In December 2016, the agreement was amended by the parties to change the timing of a specified development milestone.
5. Facility Loans
2013 Term Loan Facility
On September 30, 2013, the Company entered into a facility loan agreement with Silicon Valley Bank and Oxford Finance LLC (referred to
herein as the lenders) for a total loan amount of $10.0 million of which the first tranche of $5.0 million was drawn as part of the Companys September 2013 financing, referred to herein as the 2013 Term Loan Facility. The
loan had a fixed interest rate of 8.75% payable as interest only for twelve months and a
thirty-six
month loan amortization period thereafter, with a final interest payment of $0.3 million at the end
of the loan period. The second tranche of $5.0 million became available to the Company upon its February 24, 2015 announcement of the achievement of positive Phase 2b data for the Companys product candidate arhalofenate and
remained available to the Company until June 30, 2015. Loans under the second tranche would have incurred interest at a rate fixed at the time of borrowing equal to the greater of (i) 8.75% per annum and (ii) the sum of the
Wall Street Journal prime rate plus 4.25% per annum. On June 30, 2015, the second tranche portion of the loan facility expired unused by the Company.
At the time the first $5 million tranche of the facility loan was drawn down, the Company issued warrants exercisable for a
total of 121,739 shares of the Companys common stock to the lenders at an exercise price of $5.00 per share with a term of seven years. Upon issuance, the fair value of a warrant liability was recorded and is being revalued at each balance
sheet date until the warrants are exercised or expire.
2015 Term Loan Facility
On August 7, 2015, the Company entered into a Loan and Security Agreement pursuant to which it refinanced its existing 2013 Term Loan
Facility with Oxford Finance LLC and Silicon Valley Bank, for an aggregate amount of up to $15 million, referred to herein as the 2015 Term Loan Facility. The first $10 million tranche of this new loan facility was made available to the
Company immediately upon the closing and was used in part to retire all $4.1 million of the Companys existing debt outstanding under the 2013 Term Loan Facility, and to settle accrued interest and closing costs with the lenders. The
remaining $5 million, referred to as the second tranche, was made available to the Company until March 31, 2016, for draw down upon the announcement of a qualified
out-license
or
co-development
arrangement for arhalofenate, the Companys gout therapy drug candidate, which includes an upfront payment of not less than $35.0 million (the second draw milestone). Because the
present value of the future cash flows under the modified loan terms did not exceed the present value of the future cash flows under the previous loan terms by more than 10%, the Company treated this refinancing as a modification. The remaining debt
discount costs will be amortized over the remaining term of the Loan and Security Agreement using the effective interest rate method. As of March 31, 2016, the $5 million second tranche expired unused as the second draw milestone was not
achieved.
The first loan tranche bears interest at 8.77%, a rate which was determined on the advance date as being the greater of
(i) 8.75% and (ii) the sum of 8.47% and the 90 day U.S. LIBOR rate reported in the Wall Street Journal three business days prior to the funding date of the first tranche. Under the first tranche, the Company is required to make 12 monthly
interest only payments after the funding date followed by a repayment schedule equal to 36 equal monthly payments of interest and principal. Upon maturity, the remaining balance of the first tranche and a final payment equal to 6.50% of the original
principal amount advanced of the applicable tranche are payable.
15
At the closing, the Company also agreed to pay a facility fee of 1.00% of the 2015 Term Loan
Facility commitment. In addition, the Company issued warrants exercisable for a total of 114,436 shares of its common stock to the lenders at an exercise price of $2.84 per share, and with a term of ten years. Upon issuance, the fair value of a
warrant liability of $0.3 million was recorded in the accompanying condensed balance sheets.
The 2015 Term Loan Facility contains
customary representations and warranties and customary affirmative and negative covenants applicable to the Company, and also includes defined customary events of default which include but are not limited to a material adverse change in the
Companys business, operations or condition (financial or otherwise), a material impairment of the prospect of repayment of any portion of the term loan, or a material impairment in the perfection or priority of the collateral agents lien
in the collateral or in the value of such collateral. As of March 31, 2017, the Company was in compliance with the term loan covenants and there were no events of default.
6. Commitments and Contingencies
The
Company leases 8,894 square feet of office space in Newark, California pursuant to a lease which commenced January 16, 2014 and expires on December 31, 2018. Rent expense was $0.1 million and $0.1 million for the three months
ended March 31, 2017 and 2016, respectively.
Future minimum lease payments are as follows (in thousands):
|
|
|
|
|
|
|
Lease
|
|
|
|
Payments
|
|
Year ending December 31:
|
|
|
|
|
2017 (from April to December)
|
|
$
|
167
|
|
2018
|
|
|
228
|
|
|
|
|
|
|
Total future minimum payments
|
|
$
|
395
|
|
|
|
|
|
|
7. Stockholders Equity
The Company is authorized to issue 10,000,000 shares of preferred stock with a par value of $0.0001 per share as of March 31, 2017. The
Company is authorized to issue 100,000,000 shares of common stock with a par value of $0.0001 per share as of March 31, 2017.
As of
March 31, 2017 and December 31, 2016, the Company had reserved shares of authorized but unissued common stock as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
|
|
|
Common stock warrants
|
|
|
1,667,398
|
|
|
|
1,667,398
|
|
Equity incentive plans
|
|
|
4,629,121
|
|
|
|
3,456,771
|
|
|
|
|
|
|
|
|
|
|
Total reserved shares of common stock
|
|
|
6,296,519
|
|
|
|
5,124,169
|
|
|
|
|
|
|
|
|
|
|
On February 2, 2017, pursuant to its shelf registration statement on Form
S-3,
the Company completed the issuance of 5.2 million shares of its common stock at $1.93 per share (referred to as the 2017 public offering). Net proceeds to the Company in connection with the 2017
public offering were approximately $9.2 million after deducting underwriting discounts, commissions and other offering expenses.
16
8. Stock Plans and Stock-Based Compensation
Stock Plans
On January 1, 2017, the
share reserve of the Companys 2013 Equity Incentive Plan (2013 Plan), automatically increased by 1,172,350 shares. Additionally, in January 2017 the Company issued options to purchase 1,016,301 of it is common stock to its
employees, directors and a consultant. As of March 31, 2017, there were 735,265 shares available for issuance under the 2013 Plan.
Stock-Based
Compensation Expense
Stock-based compensation expense recorded was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
Research and development
|
|
$
|
361
|
|
|
$
|
222
|
|
General and administrative
|
|
|
917
|
|
|
|
337
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,278
|
|
|
$
|
559
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2017, in connection with the announced retirement of the
Companys President and Chief Executive Officer, the Company recognized $0.4 million in stock-based compensation expense associated with a partial acceleration of vesting of his stock options.
9. Related-Party Transactions
Scientific and Advisory
Consulting Arrangement
The Company paid a former member of its Board of Directors, who is also a member of its Scientific and Clinical
Advisory Boards, a total of $60,000 in the year ended December 31, 2016 and $15,000 for the three months ended March 31, 2017, in monthly cash retainers. The Company has also issued options to purchase shares of common stock and incentive
awards to this individual in his capacity as a member of its Scientific Advisory Board.
17