Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Organization and operations
The Company
Genocea Biosciences, Inc. (the “Company”) is a biopharmaceutical company that was incorporated in Delaware on August 16, 2006 and has a principal place of business in Cambridge, Massachusetts. The Company seeks to discover and develop novel cancer immunotherapies using its ATLASTM proprietary discovery platform. The ATLAS platform profiles each patient's CD4+ and CD8+ T cell immune responses to every potential target or "antigen" in that patient's tumor. Genocea believes that this approach optimizes antigen selection for immunotherapies such as cancer vaccines and cellular therapies. Consequently, the Company believes that ATLAS could lead to more immunogenic and efficacious cancer immunotherapies.
The Company’s most advanced program is GEN-009, a personalized neoantigen cancer vaccine, for which it is conducting a Phase 1/2a clinical trial. The GEN-009 program uses ATLAS to identify neoantigens, or immunogenic tumor mutations unique to each patient, for inclusion in each patient's GEN-009 vaccine. The Company is also advancing GEN-011, a neoantigen-specific adoptive T cell therapy program that also relies on ATLAS, and is targeting an IND filing in the first half of 2020.
The Company is devoting substantially all of its efforts to product research and development, initial market development, and raising capital. The Company has not generated any product revenue related to its primary business purpose to date and is subject to a number of risks similar to those of other early clinical stage companies, including dependence on key individuals, competition from other companies, the need and related uncertainty associated to the development of commercially viable products, and the need to obtain adequate additional financing to fund the development of its product candidates. The Company is also subject to a number of risks similar to other companies in the life sciences industry, including the uncertainty of success of its preclinical and clinical trials, dependence on third parties, the need to obtain additional financing, dependence on key individuals, regulatory approval of products, uncertainty of market acceptance of products, competition from companies with greater financial, technological and other resources, compliance with government regulations, protection of proprietary technology, and product liability. The Company has historical losses from operations and anticipates that it will continue to incur significant operating losses for the foreseeable future as it continues to develop its product candidates.
Effective May 22, 2019, the Company effected a reverse stock split of its issued and outstanding common stock, par value $0.001, at a ratio of one-for-eight, and decreased the number of authorized shares of common stock from 250,000,000 shares to 85,000,000 shares. The share and per share information presented in these financial statements and related notes have been retroactively adjusted to reflect the one-for-eight reverse stock split.
Operating Capital Requirements
Under Accounting Standards Update ("ASU"), 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40), also referred to as Accounting Standards Codification ("ASC") 205-40 (“ASC 205-40”), the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations as they become due within one year after the date that the financial statements are issued. As required by ASC 205-40, this evaluation shall initially not take into consideration the potential mitigating effects of plans that have not been fully implemented as of the date the financial statements are issued. Management has assessed the Company’s ability to continue as a going concern in accordance with the requirement of ASC 205-40.
As reflected in the condensed consolidated financial statements, the Company had available cash and cash equivalents of $46.6 million at September 30, 2019. The Company believes that its cash, cash equivalents and investments will fund its operations into the first quarter of 2021.
In October 2019, the Company entered into a purchase agreement with Lincoln Park Capital ("LPC") pursuant to which LPC purchased $2.5 million of the Company's common stock at a purchase price of $2.587 per share. In addition, for a period of 30 months, the Company has the right, at its sole discretion, to sell up to an aggregate $27.5 million of the Company's common stock (subject to certain limitations) based on prevailing market prices of its common stock at the time of each sale. In consideration for entering into the purchase agreement, the Company issued 289,966 shares of its common stock to LPC as a commitment fee.
The Company plans to continue to fund its operations through public or private equity offerings, strategic transactions, proceeds from sales of its common stock under its at-the-market equity offering program, or by other means. However, adequate
additional financing may not be available to the Company on acceptable terms, or at all. If the Company is unable to raise capital when needed, or on attractive terms, it may be forced to implement cost reduction strategies, including ceasing development of GEN-009, GEN-011, and other corporate programs and activities.
2. Summary of significant accounting policies
Basis of presentation
In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals necessary for a fair presentation of the Company’s financial statements for interim periods in accordance with accounting principles generally accepted in the United States (U.S. GAAP).
We operate as one operating segment, which is discovering, researching and developing novel cancer immunotherapies.
The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our audited consolidated financial statements and the accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 Form 10-K”). Our accounting policies are described in the “Notes to Consolidated Financial Statements” in our 2018 Form 10-K and updated, as necessary, in our Quarterly Reports on Form 10-Q. The December 31, 2018 condensed consolidated balance sheet data presented for comparative purposes was derived from our audited financial statements, but does not include all disclosures required by U.S. GAAP. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the operating results for the full year or for any other subsequent interim period.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, the Company’s management evaluates its estimates, which include, but are not limited to, estimates related to clinical trial accruals, estimates related to prepaid and accrued research and development expenses, stock-based compensation expense, and warrants to purchase redeemable securities. The Company bases its estimates on historical experience and other market-specific or other relevant assumptions that it believes to be reasonable under the circumstances. Actual results may differ from those estimates or assumptions.
Summary of Significant Accounting Policies
There were no changes to significant accounting policies during the nine months ended September 30, 2019, as compared to the those identified in the 2018 Form 10-K, except for the Company's adoption of ASC Topic 842, Leases on January 1, 2019. The following is the Company's new accounting policy for leases.
Leases
At the inception of the contract, the Company determines if an arrangement is a lease and has a lease term greater than 12 months. Leases that are concluded to be operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities in the consolidated balance sheets. Leases that are concluded to be finance leases are included in property and equipment and other current liabilities in the consolidated balance sheets.
ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As most of the Company's leases do not provide an implicit rate, the Company uses an estimate of its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. The Company uses the implicit rate when readily determinable. The operating lease ROU asset is reduced by deferred lease payments and unamortized lease incentives. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are generally accounted for separately. The non-lease components generally consist of common area maintenance that is expensed as incurred.
Recently adopted accounting standards
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Standard
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Description
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Effect on the financial statements
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ASU No. 2016-02,
Leases (Topic 842)
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In February 2016, the FASB established ASC Topic 842, Leases, (ASC 842) by issuing ASU No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model ("ROU") that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
The Company adopted ASC 842 effective January 1, 2019.
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The adoption of ASC 842 resulted in the Company recognizing ROU assets and related operating lease liabilities of $1.7 million and $1.8 million, respectively, in our condensed consolidated balance sheet as of January 1, 2019.
The Company used the modified retrospective method of adoption, with January 1, 2019 as the effective date of initial application. The Company elected the short-term lease recognition exemption for all leases that qualify. The Company elected the package of practical expedients for leases that commenced prior to January 1, 2019, allowing it not to reassess (i) whether any expired or existing contracts contain leases, (ii) the lease classification for any expired or existing leases and (iii) the initial indirect costs for any existing leases.
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ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
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In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The new standard largely aligns the accounting for share-based payment awards issued to employees and nonemployees by expanding the scope of ASC 718 to apply to nonemployee share-based transactions, as long as the transaction is not effectively a form of financing.
The Company adopted ASU No. 2018-07 effective January 1, 2019.
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The adoption of ASU No. 2018-07 did not have a material impact on the Company's condensed consolidated financial statements.
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Recently issued accounting standards
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Standard
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Description
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Effect on the financial statements
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ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
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In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables and available-for-sale debt securities.
The new guidance will be effective for the Company beginning in the first quarter of 2020, with early adoption permitted.
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Based on the composition of its investment portfolio and other financial assets, current market conditions and historical credit loss activity, the adoption of this standard is not expected to have a material impact on the consolidated financial position and results of operations and related disclosures of the Company.
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ASU 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement
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In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement which requires public entities to disclose certain new information and modifies some disclosure requirements.
The new guidance will be effective for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years.
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The Company does not expect that the adoption of this standard will have a material impact on its disclosures.
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ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.
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In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification 350-40 to determine which implementation costs to defer and recognize as an asset.
The new guidance will be effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019.
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The Company does not expect that the adoption of this standard will have a material impact on its consolidated financial position and results of operations and related disclosures.
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3. Fair value of financial instruments
The Company has certain financial assets and liabilities recorded at fair value which have been classified as Level 1, 2 or 3 within the fair value hierarchy as described in the accounting standards for fair value measurements.
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•
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Level 1 - Fair values are determined by utilizing quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access;
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•
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Level 2 - Fair values are determined by utilizing quoted prices for similar assets and liabilities in active markets or other market observable inputs such as interest rates, yield curves and foreign currency spot rates; and
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•
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Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
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The Company's financial assets consist of cash equivalents and the Company's financial liabilities consist of a warrant liability.
The fair value of the Company’s cash equivalents is determined using quoted prices in active markets. The Company's cash equivalents consist of money market funds that are classified as Level 1.
The fair value of the Company’s warrant liability is determined using a Monte Carlo simulation. See Note 7. Warrants. The assumptions used in calculating the estimated fair value of the warrants represent the Company’s best estimates and include probabilities of settlement scenarios, future changes in the Company’s stock price, risk-free interest rates, volatility and probability of the Company being acquired. The estimates are based, in part, on subjective assumptions and could differ materially in the future. The Company’s warrant liability has been classified as Level 3.
The following table sets forth the Company's assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018 (in thousands):
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Quoted prices in active markets
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Significant other observable inputs
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Significant unobservable inputs
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Total
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(Level 1)
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(Level 2)
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(Level 3)
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September 30, 2019
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Assets:
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Cash equivalents
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$
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46,391
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$
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46,391
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|
|
$
|
—
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|
|
$
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—
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Total assets
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$
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46,391
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$
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46,391
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$
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—
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$
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—
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Liabilities:
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Warrant liability
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$
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3,183
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$
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—
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|
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$
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—
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|
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$
|
3,183
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Total liabilities
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$
|
3,183
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|
|
$
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—
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|
|
$
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—
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|
|
$
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3,183
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December 31, 2018
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Assets:
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Cash equivalents
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$
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24,651
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$
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24,651
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$
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—
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|
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$
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—
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Total assets
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$
|
24,651
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|
$
|
24,651
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$
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—
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$
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—
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Liabilities:
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Warrant liability
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$
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3,472
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$
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—
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|
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$
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—
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|
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$
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3,472
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Total liabilities
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$
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3,472
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$
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—
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|
$
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—
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|
|
$
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3,472
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The following table reflects the change in the Company’s Level 3 warrant liability from December 31, 2018 through September 30, 2019 (in thousands):
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Warrant Liability
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Balance at December 31, 2018
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$
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3,472
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Change in fair value
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|
(289
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)
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Balance at September 30, 2019
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|
$
|
3,183
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4. Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
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September 30,
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December 31,
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2019
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2018
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Research and development
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$
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1,421
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$
|
759
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Payroll and employee-related
|
2,037
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|
|
2,147
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Other current liabilities
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653
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|
|
910
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Total
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$
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4,111
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|
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$
|
3,816
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5. Long-term debt
In the second quarter of 2018, the Company entered into an amended and restated loan and security agreement (the “2018 Term Loan”) with Hercules Capital, Inc. (“Hercules”), which provided a $14.0 million term loan. The 2018 Term Loan will mature on May 1, 2021 and accrues interest at a floating rate per annum equal to the greater of (i) 7.75% or (ii) the sum of 2.75% plus the prime rate. The 2018 Loan Agreement provided for interest-only payments until June 1, 2019. Since the Company met certain performance milestones, interest-only payments have been extended until June 1, 2020. Thereafter, payments will include equal installments of principal and interest through maturity. The 2018 Term Loan may be prepaid subject to a prepayment charge. The Company is obligated to pay an additional end of term charge of 6.7%.
The 2018 Term Loan is secured by a lien on substantially all assets of the Company, other than intellectual property. Hercules has a perfected first-priority security interest in certain cash, cash equivalents and investment accounts. The 2018 Term Loan contains non-financial covenants, representations and a (“Material Adverse Effect”) provision. There are no financial covenants. A Material Adverse Effect means a material adverse effect upon: (i) the business, operations, properties, assets or condition (financial or otherwise) of the Company; or (ii) the ability of the Company to perform the secured obligations in accordance with the terms of the loan documents, or the ability of agent or lender to enforce any of its rights or remedies with respect to the secured obligations; or (iii) the collateral or agent’s liens on the collateral or the priority of such liens. Any event that has a Material Adverse Effect or would reasonably be expected to have a Material Adverse Effect is an event of default under the Loan Agreement and repayment of amounts due under the Loan Agreement may be accelerated by Hercules under the same terms as an event of default. As of September 30, 2019, the Company was in compliance with all covenants of the 2018 Term Loan. The 2018 Term Loan is automatically redeemable upon a change in control. The Company believes acceleration of the repayment of amounts outstanding under the loan is remote, and therefore the debt balance is classified according to the contractual payment terms at September 30, 2019.
In connection with a previously issued term loan in 2014 and the 2018 Term Loan, the Company issued common stock warrants to Hercules (the “First Warrant and Second Warrant”, respectively). See Note 7. Warrants.
As of September 30, 2019 and December 31, 2018, the Company had outstanding borrowings of $13.3 million and $14.8 million, respectively. Interest expense was $0.4 million for each of the three months ended September 30, 2019 and 2018 and $1.3 million and $1.2 million for the nine months ended September 30, 2019 and 2018, respectively. At September 30, 2019, the 2018 Term Loan bears an effective interest rate of 10.9%.
Future principal payments, including the End of Term Charges, are as follows (in thousands):
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September 30, 2019
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2020
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$
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7,407
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2021
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6,453
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Total
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$
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13,860
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6. Stockholders' equity
As of September 30, 2019, the Company has authorized 85,000,000 shares of common stock at $0.001 par value per share and 25,000,000 shares of preferred stock at $0.001 par value per share. As of September 30, 2019, 26,149,689 shares of common stock and 1,635 shares of preferred stock were issued and outstanding. As of December 31, 2018, 10,846,397 shares of common stock were issued and outstanding and 1,635 shares of preferred stock were issued and outstanding.
In October 2019, the Company entered into a purchase agreement with LPC pursuant to which LPC purchased $2.5 million of the Company’s common stock at a purchase price of $2.587 per share. In addition, for a period of 30 months, the Company has the right, at its sole discretion, to sell up to an aggregate $27.5 million of the Company's common stock (subject to certain limitations) based on prevailing market prices of its common stock at the time of each sale. In consideration for entering into the purchase agreement, the Company issued 289,966 shares of its common stock to LPC as a commitment fee.
2019 Public Offering
On June 21, 2019, the Company entered into an underwriting agreement relating to the underwritten public offering of 10,500,000 shares of the Company’s common stock, par value $0.001 per share, at a price to the public of $3.50 per share, for gross proceeds of approximately $36.8 million (the “2019 Public Offering”). The Company also granted the underwriters an option to purchase up to an additional 1,575,000 shares of common stock (“Overallotment Option”). On June 26, 2019, the underwriters exercised this option in full. The Company received approximately $5.5 million in gross proceeds from the underwriter’s exercise of the Overallotment Option. In connection with the 2019 Public Offering, inclusive of the Overallotment Option, the Company incurred approximately $3.9 million of offering-related expenses, resulting in total net proceeds of $38.4 million.
Private Placement
In February 2019, the Company completed a private placement financing transaction (the “Private Placement”). The Company issued 3,199,998 shares (the “Shares”) of common stock, prefunded warrants (the “Pre-Funded Warrants”) to purchase 531,250 shares of common stock (the “Pre-Funded Warrant Shares”), and warrants (the “Private Placement Warrants”) to purchase up to 932,812 shares of common stock (the “Warrant Shares”). The Shares, Pre-Funded Warrants and Private Placement Warrants (collectively, the
“Units”) were sold at a purchase price of $4.02 per Unit. The Company received net cash proceeds of approximately $13.8 million for the purchase of the Shares, Pre-Funded Warrant Shares and Warrant Shares. See Note 7. Warrants.
The Company had the option to issue additional shares of common stock in a second closing (the “Second Closing”) for gross proceeds of up to $24.2 million. The Second Closing was conditioned on top-line results from Part A of our Phase 1/2a clinical trial for GEN-009 and a decision by our board of directors to proceed with the Second Closing. In June 2019, the Company announced top-line results from this trial but elected not to proceed with the Second Closing. In lieu of the Second Closing the Company proceeded with the 2019 Public Offering.
2018 Public Offering
In January 2018, the Company entered into two underwriting agreements, the first relating to the underwritten public offering of 6,670,625 shares of the Company’s common stock, par value $0.001 per share, and accompanying warrants to purchase up to 3,335,313 shares of common stock (“2018 Public Offering Warrants”), at a combined price of $8.00 per share, for gross proceeds of approximately $53.4 million (the “2018 Common Stock Offering”) and the second relating to the underwritten public offering of 1,635 shares of the Company’s Series A convertible preferred stock, par value $0.001 per share, which are convertible into 204,375 shares of common stock, and accompanying warrants to purchase up to 102,188 shares of common stock for gross proceeds of approximately $1.6 million (the “Preferred Stock Offering,” and together with the 2018 Common Stock Offering, the “January 2018 Financing”). The Company received approximately $1.0 million in gross proceeds and issued 119,718 shares of common stock and warrants to purchase up to 179,757 shares of common stock from the underwriters' exercise of their overallotment option.
Preferred Stock
Each share of preferred stock is convertible at any time at the option of the holder, provided that the holder will be prohibited from converting the preferred stock into shares of common stock if, as a result of such conversion, the holder, together with its affiliates, would own more than 9.99% of the total number of shares of common stock then issued and outstanding. Each share of preferred stock is convertible into 125 shares of common stock, subject to certain adjustments upon stock dividends and stock splits.
The preferred stock ranks pari passu on an as-converted to common stock basis with the common stock as to distributions of assets upon the Company’s liquidation, dissolution or winding up, whether voluntarily or involuntarily, or a “Fundamental Transaction,” as defined in the Certificate of Designation. Shares of preferred stock have no voting rights, except as required by law and except that the consent of the holders of a majority of the outstanding preferred stock is required to amend the terms of the preferred stock. The holders of preferred stock shall be entitled to receive dividends in the same form as dividends actually paid on shares of common stock when, as and if such dividends are declared and paid on shares of the common stock, on an as-if-converted-to-common stock basis.
The Company determined that the preferred stock should be equity classified in accordance with ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) for the periods ended September 30, 2019 and December 31, 2018, respectively. For the nine months ended September 30, 2018, the Company recorded $0.3 million in additional paid-in capital as a result of the preferred stock’s beneficial conversion feature.
Issuance Costs
In connection with the January 2018 Financing, the Company incurred approximately $4.0 million of issuance costs. The Company allocated approximately $2.6 million of the issuance costs to the common and preferred stock, and recorded these amounts within additional paid-in capital, and approximately $1.4 million of the issuance costs to the 2018 Public Offering Warrants. As the 2018 Public Offering Warrants were classified as liabilities, the Company immediately expensed the issuance costs allocated to the 2018 Public Offering Warrants in the three months ended March 31, 2018.
Warrants
See Note 7. Warrants.
Hercules
In connection with the 2018 Loan Agreement with Hercules, see Note 5. Long-term debt, the Company also entered into an amendment to the November 2014 equity rights letter agreement (the “Amended Equity Rights Letter Agreement”). Hercules has the right to participate in any one or more subsequent private placement equity financings of up to $2.0 million on the same terms and conditions as purchases by the other investors in each subsequent equity financing. The Amended Equity Rights Letter Agreement
will terminate upon the earlier of (1) such time when Hercules has purchased $2.0 million of subsequent equity financing securities in the aggregate, and (2) the later of (a) the repayment of all indebtedness under the Loan Agreement, or (b) the expiration or termination of the exercise period for the Second Warrant. See Note 7. Warrants.
At-the-market equity offering program
In 2015, the Company entered into an agreement, as amended, with Cowen and Company, LLC to establish an at-the-market equity offering program (“ATM”) pursuant to which it was able to offer and sell shares of its common stock at prevailing market prices from time to time. Through September 30, 2019, the Company has sold an aggregate of approximately 0.5 million shares under the ATM and received approximately $4.0 million in net proceeds after deducting commissions.
7. Warrants
As of September 30, 2019, the Company had the following potentially issuable shares of common stock related to unexercised warrants outstanding:
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Shares
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Exercise price
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Expiration date
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Classification
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First Warrant
|
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9,216
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$
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65.92
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Q4 2019
|
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Equity
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Second Warrant
|
|
41,177
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|
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$
|
6.80
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Q2 2023
|
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Equity
|
2018 Public Offering Warrants
|
|
3,616,944
|
|
|
$
|
9.60
|
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Q1 2023
|
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Liability
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Private Placement Warrants
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|
932,812
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|
|
$
|
4.52
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Q1 2024
|
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Equity
|
Pre-Funded Warrants
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|
531,250
|
|
|
$
|
0.08
|
|
|
Q1 2039
|
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Equity
|
|
|
5,131,399
|
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First and Second Warrant
The exercise price and the number of shares are subject to adjustment upon a merger event, reclassification of the shares of common stock, subdivision or combination of the shares of common stock or certain dividends payments. The Company determined that the First and Second Warrant should be equity classified in accordance with ASC 480 for all periods presented.
2018 Public Offering Warrants
The exercise price and the number of shares are subject to adjustment upon a merger event, reclassification of the shares of common stock, subdivision or combination of the shares of common stock or certain dividends payments. In the event of an “Acquisition,” defined generally to include a merger or consolidation resulting in the sale of 50% or more of the voting securities of the Company, the sale of all, or substantially all, of the assets or voting securities of the Company, or other change of control transaction, as defined in the 2018 Public Offering Warrants, the Company will be obligated to use its best efforts to ensure that the holders of the 2018 Public Offering Warrants receive new warrants from the surviving or acquiring entity (the “Acquirer”). The new warrants to purchase shares in the Acquirer shall have the same expiration date as the 2018 Public Offering Warrants and a strike price that is based on the proportion of the value of the Acquirer’s stock to the Company’s common stock. If the Company is unable, despite its best efforts, to cause the Acquirer to issue new warrants in the Acquisition as described above, then, if the Company’s stockholders are to receive cash in the Acquisition, the Company will settle the 2018 Public Offering Warrants in cash and if the Company’s stockholders are to receive stock in the Acquisition, the Company will issue shares of its common stock to each Warrant holder.
The Company determined that the 2018 Public Offering Warrants should be liability classified in accordance with ASC 480. As the 2018 Public Offering Warrants are liability-classified, the Company remeasures the fair value of the Warrants at each reporting date. The Company initially recorded the 2018 Public Offering Warrants at their estimated fair value of approximately $18.2 million. In connection with the Company's remeasurement of the 2018 Public Offering Warrants to fair value, the Company recorded income of approximately $2.2 million and $2.9 million for the three months ended September 30, 2019 and 2018, respectively, and expense of $0.3 million and income of $5.2 million for the nine months ended September 30, 2019 and 2018, respectively. The fair value of the warrant liability is approximately $3.2 million and $3.5 million as of September 30, 2019 and December 31, 2018, respectively. See Note 3. Fair Value Measurements.
The following table details the assumptions used in the Monte Carlo simulation models used to estimate the fair value of the Warrant Liability as of September 30, 2019 and December 31, 2018, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
Stock price
|
|
$
|
2.90
|
|
|
$
|
2.32
|
|
Volatility
|
|
114.7
|
%
|
|
111.3
|
%
|
Remaining term (years)
|
|
3.3
|
|
|
4.1
|
|
Expected dividend yield
|
|
—
|
|
|
—
|
|
Risk-free rate
|
|
1.6
|
%
|
|
2.4%-2.5%
|
|
Range of annual acquisition event probability
|
|
20%
|
|
|
0.0%-30.0%
|
|
Private Placement and Prefunded Warrants
The exercise price of the warrants is subject to appropriate adjustment in the event of stock dividends, subdivisions, stock splits, stock combinations, reclassifications, reorganizations or a change of control affecting our common stock. The Company determined that the Private Placement Warrants and the Pre-Funded Warrants should be equity classified in accordance with ASC 480 for the period ended September 30, 2019. The Company also determined that the Pre-Funded Warrants should be included in the determination of basic earnings per share in accordance with ASC 260, Earnings per Share.
8. Stock and employee benefit plans
Stock-based compensation expense
Total stock-based compensation expense is recognized for stock options and restricted stock awards granted to employees and non-employees and has been reported in the Company’s condensed consolidated statements of operations as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Research and development
|
$
|
182
|
|
|
$
|
156
|
|
|
$
|
534
|
|
|
$
|
456
|
|
General and administrative
|
308
|
|
|
310
|
|
|
858
|
|
|
1,246
|
|
Total
|
$
|
490
|
|
|
$
|
466
|
|
|
$
|
1,392
|
|
|
$
|
1,702
|
|
Stock options
The following table summarizes stock option activity for employees and non-employees (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term (years)
|
|
Aggregate
Intrinsic
Value
|
Outstanding at December 31, 2018
|
893
|
|
|
$
|
18.79
|
|
|
|
|
$
|
—
|
|
Granted
|
673
|
|
|
$
|
4.38
|
|
|
|
|
|
|
Exercised
|
(5
|
)
|
|
$
|
4.32
|
|
|
|
|
|
|
Cancelled
|
(163
|
)
|
|
$
|
20.32
|
|
|
|
|
|
|
Outstanding at September 30, 2019
|
1,398
|
|
|
$
|
11.72
|
|
|
8.16
|
|
$
|
—
|
|
Exercisable at September 30, 2019
|
461
|
|
|
$
|
22.90
|
|
|
6.20
|
|
$
|
—
|
|
Performance-based awards
The Company granted stock awards to certain employees, executive officers and consultants, which contain performance-based vesting criteria. Milestone events are specific to the Company’s corporate goals, which include, but are not limited to, certain clinical development milestones, business development agreements, and capital fundraising events. Stock-based compensation expense associated with these performance-based stock options is recognized if the performance conditions are considered probable of being achieved, using management’s best estimates. The Company determined that none of the performance-based milestones were probable
of achievement during the three and nine months ended September 30, 2019, and did not recognize stock-based compensation expense for this period. As of September 30, 2019, there were 7,042 performance-based common stock awards outstanding for which the probability of achievement was not deemed probable.
Employee stock purchase plan
On February 10, 2014, the Company’s board of directors adopted the 2014 Employee Stock Purchase Plan (the “2014 ESPP”). The 2014 ESPP, as amended, authorizes the issuance of up to 337,597 shares of common stock to participating eligible employees. The 2014 ESPP provides for six-month option periods commencing on January 1 and ending June 30, and commencing July 1 and ending December 31 of each calendar year.
9. Commitments and contingencies
Lease commitments
In May 2019, the Company entered into a lease extension for office and laboratory space through February 2025. In July 2019, the Company exercised an option for additional office and laboratory space from March 2020 through February 2025. The Company’s lease obligations associated with the additional lab and office space is $7.2 million and will be reflected as a lease liability upon it’s right to use the space in March 2020. The Company also has a lease for office space through February 2020. The right to use asset and lease liability were calculated using incremental borrowing rates of 8.25% for the lab and office space and 10% for the office space. For the three months ended September 30, 2019 and 2018 lease expense was $0.4 million and $0.4 million, respectively. For the nine months ended September 30, 2019 and 2018 lease expense was $1.1 million and $1.2 million, respectively.
In March 2019, the Company entered into a sublease agreement for a portion of the office space lease through February 2020. Since the Company retained its obligations under the sublease, it did not adjust the lease liability, however the sublease is being reflected as a reduction of lease expense.
Maturities of lease liabilities are as follows (in thousands):
|
|
|
|
|
|
September 30, 2019
|
2019
|
$
|
410,433
|
|
2020
|
1,476,644
|
|
2021
|
1,473,800
|
|
2022
|
1,510,601
|
|
2023 and thereafter
|
3,400,844
|
|
Total lease payments
|
8,272,322
|
|
Less imputed interest
|
(1,635,192
|
)
|
Total
|
$
|
6,637,130
|
|
At September 30, 2019 and December 31, 2018, the Company has an outstanding letter of credit of $0.6 million and $0.3 million, respectively, with a financial institution related to a security deposit for the office and lab space lease, which is secured by cash on deposit and expires on February 28, 2025.
10. Net loss per share
The Company computes basic and diluted loss per share using a methodology that gives effect to the impact of outstanding participating securities (the “two-class method”). For both the three and nine-month periods ended September 30, 2019 and 2018, respectively, there is no income allocation required under the two-class method or dilution attributed to weighted average shares outstanding in the calculation of diluted loss per share.
The following common stock equivalents, presented on an as converted basis, were excluded from the calculation of net loss per share for the periods presented, due to their anti-dilutive effect (in thousands):
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2019
|
|
2018
|
Stock options
|
1,398
|
|
|
712
|
|
Warrants
|
4,600
|
|
|
3,668
|
|
Total
|
5,998
|
|
|
4,380
|
|