NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017
(unaudited)
(in
thousands, except share and per share data)
1. Organization
Pulmatrix, Inc. and its subsidiaries (the Company) is a clinical stage biotechnology company focused on the discovery and development of a novel
class of inhaled therapeutic products. The Companys proprietary dry powder delivery platform, iSPERSE (inhaled Small Particles Easily Respirable and Emitted), is engineered to deliver small, dense particles with highly efficient
dispersibility and delivery to the airways, which can be used with an array of dry powder inhaler technologies and can be formulated with a variety of drug substances. The Company is developing a pipeline of iSPERSE-based therapeutic candidates
targeted at prevention and treatment of a range of respiratory diseases and infections with significant unmet medical needs.
Liquidity
At June 30, 2017, the Company had unrestricted cash and cash equivalents of $10,976, an accumulated deficit of $165,026 and working capital of $5,838. The
Company will be required to raise additional capital within the next year to continue the development and commercialization of current product candidates and to continue to fund operations at the current cash expenditure levels.
The Company cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that the Company raises additional funds
by issuing equity securities, the Companys stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact the Companys ability to conduct business. If unable to raise
additional capital when required or on acceptable terms, the Company may have to (i) delay, scale back or discontinue the development and/or commercialization of one or more product candidates; (ii) seek collaborators for product
candidates at an earlier stage than otherwise would be desirable and on terms that are less favorable than might otherwise be available; or (iii) relinquish or otherwise dispose of rights to technologies, product candidates or products that the
Company would otherwise seek to develop or commercialize on unfavorable terms.
On June 9, 2017, the Company entered into a License, Development and
Commercialization Agreement (the License Agreement) with RespiVert Ltd. (RespiVert), a wholly owned subsidiary of Janssen Biotech, Inc., pursuant to which RespiVert granted the Company an exclusive, royalty-bearing license in
its intellectual property portfolio of materials and technology related to narrow spectrum kinase inhibitor compounds (the Licensed IP), to develop and commercialize products worldwide that incorporate the Licensed IP. Under the terms of
the License Agreement, the Company will pay RespiVert an up-front, non-refundable license fee of $1,000,000 in partial consideration for the rights granted by RespiVert to the Company, and will pay RespiVert designated amounts when any licensed
product achieves certain developmental milestones (see Note 6).
During the six months ended June 30, 2017, the Company sold 5,130,273 shares of its
common stock for aggregate net proceeds of $14,467. (See Note 9).
The Companys ability to continue as a going concern is dependent upon its ability
to obtain additional equity or debt financing and, ultimately, to generate revenue. Those factors raise substantial doubt about the Companys ability to continue as a going concern. The Companys condensed consolidated financial statements
as of June 30, 2017 do not include any adjustments that might become necessary should the Company be unable to continue as a going concern.
2.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared on a going concern
basis in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial reporting and as required by Regulation S-X, Rule 10-01. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (including those which are normal and recurring) considered necessary for a fair presentation of the interim financial information have been
included. When preparing financial statements in conformity with GAAP, the Company must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the
financial statements. Actual results could differ from those estimates. Additionally, operating results for the three and six months ended June 30, 2017, are not necessarily indicative of the results that may be expected for any other interim
period or for the fiscal year ending December 31, 2017. For further information, refer to the financial statements and footnotes included in the Companys annual financial statements for the fiscal year ended December 31, 2016, which
are included in the Companys annual report on Form 10-K filed with the SEC on March 10, 2017.
6
3. Summary of Significant Accounting Policies
In the three and six month periods ended June 30, 2017, there were no changes to the Companys significant accounting policies identified in the
Companys most recent annual financial statements for the fiscal year ended December 31, 2016, which are included in the Companys current report on Form 10-K filed with the SEC on March 10, 2017, except as noted below.
Recent Accounting Standards
In May 2014, the
Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09,
Revenue from Contracts with Customers
(ASU 2014-09), which requires an entity to recognize revenue at
an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes
effective. The new standard is effective in the annual period ending December 31, 2017, including interim periods within that annual period. Early application is not permitted. The standard permits the use of either the retrospective or
cumulative effect transition method. The adoption of this standard is not expected to have a material impact on the Companys consolidated financial position and results of operations.
There have been four new ASUs issued amending certain aspects of ASU 2014-09, ASU 2016-08,
Principal versus Agent Considerations (Reporting Revenue
Gross Versus Net),
was issued in March, 2016 to clarify certain aspects of the principal versus agent guidance in ASU 2014-09. In addition, ASU 2016-10,
Identifying Performance Obligations and Licensing,
issued in
April 2016, amends other sections of ASU 2014-09 including clarifying guidance related to identifying performance obligations and licensing implementation. ASU 2016-12,
Revenue from Contracts with Customers Narrow Scope
Improvements and Practical Expedients
provides amendments and practical expedients to the guidance in ASU 2014-09 in the areas of assessing collectability, presentation of sales taxes received from customers, noncash consideration,
contract modification and clarification of using the full retrospective approach to adopt ASU 2014-09. Finally, ASU 2016-20,
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,
was issued in
December 2016, and provides elections regarding the disclosures required for remaining performance obligations in certain cases and also makes other technical corrections and improvements to the standard. With its evaluation of the impact of
ASU 2014-09, the Company will also consider the impact on its financial statements related to the updated guidance provided by these four new ASUs.
In
January 2017, the Financial Accounting Standard Board (the FASB) issued Accounting Standards Update (ASU) 2017-04:
Intangibles Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
(ASU 2017-04), which removes Step 2 from the goodwill impairment test. It is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment
test performed with a measurement date after January 1, 2017. The Company has adopted this standard and its impact on its consolidated financial statements and related disclosures was immaterial.
In May 2017, the Financial Accounting Standard Board (the FASB) issued Accounting Standards Update (ASU) 2017-09:
Compensation Stock
Compensation (Topic 718): Scope of Modification Accounting
which clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The standard is effective beginning after
December 15, 2017; early adoption is permitted. The Company has adopted this standard and its impact on its consolidated financial statements and related disclosures was immaterial.
In July 2017, FASB issued ASU
No. 2017-11,
Earnings per Share (Topic 260), Distinguishing Liabilities from Equity
(Topic 480), Derivatives and Hedging (Topic 815). ASU
2017-11
consists of two parts. The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments
(or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether
the instrument is indexed to an entitys own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option)
no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share
(EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with
embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic
470-20,
DebtDebt with Conversion and Other
Options), including related EPS guidance (in Topic 260). The amendments in Part II of this Update
re-characterize
the indefinite deferral of certain provisions of Topic 480 that now are presented as pending
content in the Codification, to a scope exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2018. For all other entities, the amendments in Part I of this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after
December 15, 2020. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year
that includes that interim period. The amendments in Part II of this Update do not require any transition guidance because those amendments do not have an accounting effect. The Company is in the process of evaluating this ASU and adoption of this
ASU is not expected to have a material impact on the Companys consolidated financial position and results of operations.
Use of Estimates
In preparing consolidated financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of expenses during the reporting period. Due to inherent uncertainty involved in
making estimates, actual results may differ from these estimates. On an ongoing basis, the Company evaluates its estimates and assumptions. These estimates and assumptions include valuing equity securities in share-based payments, estimating fair
value of equity instruments recorded as derivative liabilities, estimating the fair value of net assets acquired in business combinations, estimating the useful lives of depreciable and amortizable assets, valuation allowance against deferred tax
assets, goodwill impairment, and estimating the fair value of long-lived assets to assess whether impairment charges may apply.
Revenue Recognition
The Companys principal sources of revenue during the reporting periods were reimbursement of clinical study costs. In all instances, revenue
is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, and collectability of the resulting receivable is reasonably assured.
7
Goodwill
Goodwill represents the difference between the consideration transferred and the fair value of the net assets acquired and liabilities assumed under the
acquisition method of accounting for push-down accounting. Goodwill is not amortized but is evaluated for impairment within the Companys single reporting unit on an annual basis, during the fourth quarter, or more frequently if an event occurs
or circumstances change that would more likely than not reduce the fair value of the Companys reporting unit below its carrying amount. When performing the impairment assessment, the accounting standard for testing goodwill for impairment
permits a company to first assess the qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the goodwill is impaired. If the Company believes, as a result of the qualitative
assessment, that it is more likely than not that the fair value of goodwill is impaired, the Company must perform the first step of the goodwill impairment test. The Company completed a qualitative assessment and determined that there was no
impairment of goodwill as of June 30, 2017.
4. Goodwill
The Company recognized $10,914 of goodwill and as of June 30, 2017, there was no impairment. Goodwill has been assigned to the Companys single
reporting unit.
5. Prepaid Expenses and Other Current Assets
Prepaid expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2017
|
|
|
At December 31, 2016
|
|
Prepaid Insurance
|
|
$
|
355
|
|
|
$
|
197
|
|
Prepaid Clinical Trials
|
|
|
243
|
|
|
|
9
|
|
Prepaid Other
|
|
|
156
|
|
|
|
58
|
|
Stock Subscriptions
|
|
|
|
|
|
|
206
|
|
Deferred Clinical Costs
|
|
|
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
Total prepaid and other current assets
|
|
$
|
754
|
|
|
$
|
577
|
|
|
|
|
|
|
|
|
|
|
6. Significant Agreements
License, Development and Commercialization Agreement
On
June 9, 2017, the Company entered into a License Agreement with RespiVert, a wholly owned subsidiary of Janssen Biotech, Inc., pursuant to which RespiVert granted the Company an exclusive, royalty-bearing license to its Licensed IP, to develop
and commercialize products worldwide that incorporate the Licensed IP. The development, application, design and marketing of the Licensed IP and any licensed products will be managed exclusively by the Company.
Under the terms of the License Agreement, the Company will pay RespiVert an up-front, non-refundable license fee of $1,000,000 in partial consideration for
the rights granted by RespiVert to the Company, and will pay RespiVert designated amounts when any licensed product achieves certain developmental milestones. Following the commencement of commercial sales of the licensed products, the Company will
pay RespiVert designated amounts when certain milestone events occur. The development milestones and commercial milestones range from $1,000,000 to $80,000,000 depending upon the significance of the particular milestone. The Company is also required
to pay RespiVert royalties on all sales of licensed products, with such royalties ranging from 6%10% of sales.
The License Agreement terminates
upon the expiration of the Companys obligation to pay royalties for all licensed products, unless earlier terminated. In addition, the License Agreement may be terminated (i) by the Company for any reason upon 120 days advance
notice to RespiVert; (ii) by RespiVert upon receipt of notice from the Company of either voluntary or involuntary insolvency proceedings of the Company; and (iii) by either party for a material breach which remains uncured following the
applicable cure period.
The Company recorded $1,000,000 in research and development expense during the three and six month periods ended June 30,
2017. As of June 30, 2017, the Company had $1,000,000 in accrued clinical and consulting fees on its balance sheet for the upfront license fee, which was paid in July 2017. The next likely development milestone payment would be $1,000,000 and
result from first dosing of a patient in a Phase IIb Clinical Trial for a licensed product.
8
7. Debt
Loan and Security Agreement and Warrant Agreement
On
June 11, 2015, Pulmatrix Operating entered into a Loan and Security Agreement (LSA) with Hercules Technology Growth Capital, Inc. (Hercules), for a term loan in the original principal amount of $7,000 (Term
Loan). The term loan is secured by substantially all of the Companys assets, excluding intellectual property. As of June 30, 2017, the outstanding principal balance of the term loan was $4,639.
The term loan bears interest at a floating annual rate equal to the greater of (i) 9.50% and (ii) the sum of (a) the prime rate as reported by
The Wall Street Journal minus 3.25% plus (b) 8.50%. The Company is required to make interest payments in cash on the first business day of each month, beginning on July 1, 2015. Beginning on August 1, 2016, the Company began to make
monthly payments on the first business day of each month consisting of principal and interest based upon a 30-month amortization schedule, and any unpaid principal and interest is due on the maturity date of July 1, 2018. Upon repayment of the
term loan, the Company is also required to pay an end of term charge to the Lenders equal to $245. As of June 30, 2017, the Company has accrued $195 of the total $245 end of term charge, of which $40 and $51 accrued during the six months ended
June 30, 2017 and 2016, respectively.
The Company may elect to prepay all, but not less than all, of the outstanding principal balance of the term
loan, subject to a prepayment fee of 1% 3%, depending on the date of repayment. Contingent on the occurrence of several events, including that the Companys closing stock price exceed $11.73 per share for the seven days preceding a
payment date, the Company may elect to pay, in whole or in part, any regularly scheduled installment of principal up to an aggregate maximum amount of $1,000 by converting a portion of the principal into shares of the Companys common stock at
a price of $11.73 per share. Hercules may elect to receive payments in the Company common stock by requiring the Company to effect a conversion option whereby Hercules can elect to receive a principal installment payment in shares of the Company
common stock based on a price of $11.73 per share, subject to an aggregate maximum principal amount of $1,000.
The Company determined that the
Companys provisions allowing conversion of all or a portion of the LSA contained a beneficial conversion feature (BCF). The BCF is contingent upon the occurrence of certain events and as such, the Company will not record the BCF
until the contingency is resolved. Through June 30, 2017 the contingency was not resolved.
The credit facility includes affirmative and negative
covenants. The affirmative covenants include, among others, covenants requiring the Company to maintain its legal existence and governmental approvals deliver certain financial reports and maintain insurance coverage. The negative covenants include,
among others, restrictions on transferring collateral, incurring additional indebtedness, engaging in mergers or acquisitions, paying dividends or making other distributions, making investments, creating liens, selling assets, and undergoing a
change in control, in each case subject to certain exceptions. In general, the Term Loan prohibits the Company from (i) repurchasing or redeeming any class of capital stock, including common stock or (ii) declaring or paying any cash
dividend or making cash distribution on any class of capital stock, including common stock.
The LSA includes provisions requiring the embedded interest
rate reset upon an event of default and the put option upon an event of default or qualified change of control each represent an embedded derivative instrument requiring bifurcation from the loan. The embedded derivatives were bundled and valued as
one compound derivative in accordance with the applicable accounting guidance for derivatives and hedging. The fair value of the compound derivative at issuance of $11 was recorded as a derivative liability and as a discount to the debt. The
derivative liability is remeasured at fair value at each reporting date, with changes in fair value being recorded as other income (expense) in the statements of operations (Note 12). At June 30, 2017 and December 31, 2016, the fair value
of the derivative liability was valued at $35. The net debt discounts resulting from the embedded compound derivative and lender fees are being amortized as interest expense from the date of issuance through the maturity date using the effective
interest method. The Company incurred interest expense of $172 and $359 during the three and six months ended June 30, 2017 and $34 and $34 during the three and six months ended June 30, 2016. Of the total interest expense, $126 and $265
was payable in cash during the three and six months ended June 30, 2017 and $27 and $27 was payable in cash during the three and six months ended June 30, 2016.
The carrying amounts of the Companys Term Loan as of June 30, 2017 and January 1, 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hercules Term
Loan
|
|
|
Debt
Discount
|
|
|
Issuance
Costs
|
|
|
Total
|
|
Balance January 1, 2017
|
|
$
|
5,954
|
|
|
$
|
(136
|
)
|
|
$
|
(15
|
)
|
|
$
|
5,803
|
|
Accretion of debt discount
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
|
54
|
|
Accretion of issuance costs
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
7
|
|
Principal payments
|
|
|
(1,315
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,315
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2017
|
|
$
|
4,639
|
|
|
$
|
(82
|
)
|
|
$
|
(8
|
)
|
|
|
4,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of debt, net of debt discount and issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term portion of debt, net of current portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
Future principal payments in connection with the Term Loan are as follows:
|
|
|
|
|
Remainder of 2017
|
|
$
|
1,380
|
|
2018
|
|
|
3,259
|
|
|
|
|
|
|
|
|
$
|
4,639
|
|
|
|
|
|
|
8. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2017
|
|
|
At December 31, 2016
|
|
Accrued vacation
|
|
$
|
95
|
|
|
$
|
54
|
|
Accrued wages and incentive
|
|
|
517
|
|
|
|
796
|
|
Accrued clinical & consulting
|
|
|
1,505
|
|
|
|
202
|
|
Accrued legal & patent
|
|
|
151
|
|
|
|
51
|
|
Accrued end of term fee
|
|
|
195
|
|
|
|
155
|
|
Deferred Rent
|
|
|
57
|
|
|
|
46
|
|
Accrued other expenses
|
|
|
63
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses and other current liabilities
|
|
$
|
2,583
|
|
|
$
|
1,317
|
|
|
|
|
|
|
|
|
|
|
9. Common Stock
Registered Direct Offering
On January 27, 2017,
Pulmatrix, Inc. (the Company) entered into a Securities Purchase Agreement (the Purchase Agreement) with certain investors for the sale by the Company of 2,000,000 shares (the Shares) of the Companys common
stock, par value $0.0001 per share, at a purchase price of $2.50 per share in a registered direct offering. The closing of the sale of the Shares under the Purchase Agreement occurred on February 2, 2017.
On February 3, 2017, Pulmatrix, Inc. entered into a Securities Purchase Agreement (the Second Purchase Agreement) with certain investors for
the sale by the Company of 950,000 shares of the Companys common stock, par value $0.0001 per share, at a purchase price of $3.50 per share in a registered direct offering. The closing of the sale of the Shares under the Second Purchase
Agreement occurred on February 8, 2017.
Net of issuance costs totaling $26, aggregate net proceeds of the two noted registered direct offerings were
$7,598. The Shares were offered and sold by the Company pursuant to an effective shelf registration statement on Form S-3, which was filed with the Securities and Exchange Commission on July 15, 2016, and subsequently declared effective on
August 3, 2016 (File No. 333-212546), and a related prospectus.
At-the-Market Offering
On March 17, 2017, the Company entered into an At-The-Market Sales Agreement (the Sales Agreement) with BTIG, LLC (BTIG) to act as
the Companys sales agent with respect to the issuance and sale of up to $11,000,000 of the Companys shares of common stock, from time to time in an at-the-market public offering (the Offering). Sales of common stock under the
Sales Agreement are made pursuant to an effective shelf registration statement on Form S-3, which was filed with the Securities and Exchange Commission on July 15, 2016, and subsequently declared effective on August 3, 2016 (File
No. 333-212546), and a related prospectus. BTIG acts as the Companys sales agent on a commercially reasonable efforts basis, consistent with its normal trading and sales practices and applicable state and federal laws, rules and
regulations and the rules of The NASDAQ Global Market. If expressly authorized by the Company, BTIG may also sell the Companys common stock in privately negotiated transactions. There is no specific date on which the Offering will end, there
are no minimum sale requirements and there are no arrangements to place any of the proceeds of this offering in an escrow, trust or similar account.
10
BTIG is entitled to compensation at a fixed commission rate of 3.0% of the gross proceeds from the sale of the
Companys common stock pursuant to the Sales Agreement.
During the six month period ended June 30, 2017 the Company sold 2,180,273 shares of its
common stock under the Sales Agreement at an average selling price of approximately $3.3001 per share which resulted in gross proceeds of approximately $ 7,195 and net proceeds of approximately $6,869 after payment of 3% commission to BTIG and other
issuance costs.
10. Warrants
There were 3,284,440
common stock warrants outstanding at June 30, 2017. The warrants had a weighted-average exercise price of $7.79 with no intrinsic value and a remaining contractual life of 2.9 years.
11. Stock-Based Compensation
The Company sponsors the
Pulmatrix, Inc. 2013 Employee, Director and Consultant Equity Incentive Plan (the 2013 Plan). As of June 30, 2017, the 2013 Plan provides for the grant of up to 4,193,075 shares of Company Common Stock, of which 824,585 shares remained
available for future grant.
In addition, the Company has two legacy plans: The Pulmatrix Operatings 2013 Employee, Director and Consultant Equity
Incentive Plan (the Original 2013 Plan) and Pulmatrix Operatings 2003 Employee, Director, and Consultant Stock Plan (the 2003 Plan). As of June 30, 2017, a total of 500,474 shares of Company Common Stock may be
delivered under options outstanding under the Original 2013 Plan and the 2003 Plan, however no additional awards may be granted under the Original 2013 Plan or the 2003 Plan.
Options
During the first six months of 2017, the Company
granted options to purchase 675,555, 30,800 and 10,000 shares of Company Common Stock to employees, directors and consultants, respectively. At the date of grant the weighted average fair value of those options aggregated to $1,257, $57 and $19
respectively. The stock options granted to employees and directors vest over 48 months (the Time Based Options). Subject to the grantees continuous service with the Company, Time Based Options vest 25% on the first anniversary of
the option grant date and the remainder in 36 equal monthly installments beginning in the month after the vesting start date. Stock options generally expire ten years after the date of grant. The stock options granted to consultants vest over 24
months (the Consultant Time Based Options). Subject to the grantees continuous service with the Company, Consultant Time Based Options vest 50% on the first anniversary of the option grant date and the remainder in 12 equal monthly
installments beginning in the month after the vesting start date. Stock options generally expire ten years after the date of grant.
The following table
summarizes stock option activity for the six months ended June 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term
( Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding January 1, 2017
|
|
|
2,829,301
|
|
|
$
|
6.89
|
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
716,355
|
|
|
$
|
2.73
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(138,425
|
)
|
|
$
|
2.19
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(81,425
|
)
|
|
$
|
8.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2017
|
|
|
3,325,806
|
|
|
$
|
6.16
|
|
|
|
8.04
|
|
|
$
|
173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable June 30, 2017
|
|
|
1,543,214
|
|
|
$
|
7.05
|
|
|
|
7.07
|
|
|
$
|
158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest June 30, 2017
|
|
|
3,276,373
|
|
|
$
|
6.14
|
|
|
|
8.04
|
|
|
$
|
173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
The estimated weighted average fair values of employee stock options granted during the three and six months
ended June 30, 2017 and 2016, were determined on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Expected option life (years)
|
|
|
6.19
|
|
|
|
6.22
|
|
|
|
6.13
|
|
|
|
6.22
|
|
Risk-free interest rate
|
|
|
1.99
|
%
|
|
|
1.81
|
%
|
|
|
2.07
|
%
|
|
|
1.78
|
%
|
Expected volatility
|
|
|
75.5
|
%
|
|
|
71.0
|
%
|
|
|
77.2
|
%
|
|
|
70.5
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
The risk-free interest rate was obtained from U.S. Treasury rates for the applicable periods. The Companys expected
volatility was based upon the historical volatility for industry peers and used an average of those volatilities. The expected life of the Companys options was determined using the simplified method as a result of limited historical data
regarding the Companys activity. The dividend yield considers that the Company has not historically paid dividends, and does not expect to pay dividends in the foreseeable future. As of June 30, 2017 there was $5,489 of unrecognized
stock-based compensation expense related to unvested stock options granted under the Companys stock award plans. This expense is expected to be recognized over a weighted-average period of approximately 2.2 years.
The following table presents total stock-based compensation expense for the three and six months ended June 30, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Research and development
|
|
$
|
177
|
|
|
$
|
226
|
|
|
$
|
330
|
|
|
$
|
439
|
|
General and administrative
|
|
|
532
|
|
|
|
943
|
|
|
|
994
|
|
|
|
1,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock based compensation expense
|
|
$
|
709
|
|
|
$
|
1,169
|
|
|
$
|
1,324
|
|
|
$
|
2,402
|
|
Restricted Stock Units (RSU)
In August 2015, the Company granted 10,374 RSUs to employees that vested over a two year period. The Company recorded stock-based compensation expense of $6
and $13 for the RSUs during the three and six months ended June 30, 2017. At June 30, 2017, 0 RSUs were outstanding.
12. Fair Value
Measurements
Information about the liabilities measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016, and
the input categories associated with those liabilities, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
|
Fair Value Measurements Using
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded compound derivative
|
|
$
|
|
|
|
$
|
|
|
|
$
|
35
|
|
|
$
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Fair Value Measurements Using
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded compound derivative
|
|
$
|
|
|
|
$
|
|
|
|
$
|
35
|
|
|
$
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded Compound Derivatives LSA with Hercules
As described in Note 7, the LSA contains an interest rate reset upon an event of default and a put option upon an event of default or qualified change of
control. Each of these features represents an embedded derivative instrument requiring bifurcation from the Term Loan. The embedded derivatives were bundled and valued as one compound derivative in accordance with the applicable accounting guidance
for derivatives and hedging. The proceeds from the issuance of the Term Loan were allocated first to the warrant and compound derivative at their respective fair values, with the residual going to the carrying amount of the loan resulting in a
discount to the face value of the debt. The fair value of the compound derivative upon issuance of $11 was recognized as a derivative liability and will be adjusted to fair value at each reporting date. At December 31, 2016, the fair value of
the derivative liability was remeasured and valued at $35. The fair value of the derivative instruments is based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The
Company used an income approach to estimate the fair value of the derivative liability and estimated the probability of an event of default occurring at various dates and then estimates the present value of the amount the holders would receive upon
an event of default.
12
The significant assumption used in the model is the probability of the following scenarios occurring:
|
|
|
|
|
|
|
At Issuance Date
|
|
At June 30, 2017
|
Probability of an event of default
|
|
10%
|
|
50%
|
Prepayment penalties
|
|
1.0% - 3.0%
|
|
1.0% - 3.0%
|
End of term payment
|
|
$245,000
|
|
$245,000
|
Risk-free interest rate
|
|
1.01%
|
|
1.03%
|
The risk-free interest rate was obtained from U.S. Treasury rates for the applicable periods. The Companys expected
volatility was based upon the historical volatility for industry peers and used an average of those volatilities. The expected life of the Companys options was determined using the simplified method as a result of limited historical data
regarding the Companys activity. The dividend yield considers that the Company has not historically paid dividends, and does not expect to pay dividends in the foreseeable future.
A roll-forward of the preferred stock warrant liability and derivative liability categorized with Level 3 inputs is as follows:
|
|
|
|
|
|
|
Derivative Instruments
|
|
Balance January 1, 2017
|
|
$
|
35
|
|
Change in fair value
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2017
|
|
$
|
35
|
|
|
|
|
|
|
Gains and/or losses arising from changes in the estimated fair value of the warrants and embedded compound derivatives are
recorded within other income, net, on the condensed consolidated statement of operations.
13. Net Loss Per Share
The Company computes basic and diluted net loss per share using a methodology that gives effect to the impact of outstanding participating securities (the
two-class method). As the three and six months ended June 30, 2017 and 2016 resulted in net losses attributable to common shareholders, there is no income allocation required under the two-class method or dilution attributed to
weighted average shares outstanding in the calculation of diluted net loss per share.
The following potentially dilutive securities outstanding prior to
the use of the treasury stock method have been excluded from the computation of diluted weighted-average shares outstanding, as they would be anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Options to purchase common stock
|
|
|
3,325,806
|
|
|
|
3,017,543
|
|
Warrants to purchase common stock
|
|
|
3,284,440
|
|
|
|
3,284,440
|
|
Restricted Stock Units
|
|
|
|
|
|
|
5,187
|
|
Settlement of term loan
|
|
|
85,251
|
|
|
|
85,251
|
|
14. Commitments
Future
minimum lease payments under the non-cancelable operating lease for office and lab space is as follows:
|
|
|
|
|
|
|
Amount
|
|
2017
|
|
$
|
316
|
|
2018
|
|
|
654
|
|
2019
|
|
|
676
|
|
2020
|
|
|
698
|
|
|
|
|
|
|
Total
|
|
$
|
2,344
|
|
|
|
|
|
|
13