UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM              TO             

Commission file number: 001-36003

 

CONATUS PHARMACEUTICALS INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

20-3183915

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

 

 

16745 W. Bernardo Dr., Suite 200

 

San Diego, CA

92127

(Address of Principal Executive Offices)

(Zip Code)

 

(858) 376-2600

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

CNAT

The Nasdaq Global Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

☐ 

Smaller reporting company

 

 

 

 

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes       No  

As of October 21, 2019, the registrant had 33,170,487 shares of common stock ($0.0001 par value) outstanding.

 

 

 

 

 


 

CONATUS PHARMACEUTICALS INC.

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

 

 

 

ITEM 1.

FINANCIAL STATEMENTS

3

 

 

 

 

Condensed Balance Sheets

3

 

 

 

 

Condensed Statements of Operations and Comprehensive Loss

4

 

 

 

 

Condensed Statements of Stockholders’ Equity

5

 

 

 

 

Condensed Statements of Cash Flows

6

 

 

 

 

Notes to Condensed Financial Statements

7

 

 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

18

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

24

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

25

 

 

PART II. OTHER INFORMATION

 

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

26

 

 

 

ITEM 1A.

RISK FACTORS

26

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

30

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

30

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

30

 

 

 

ITEM 5.

OTHER INFORMATION

30

 

 

 

ITEM 6.

EXHIBITS

30

 

 

EXHIBIT INDEX

31

 

 

SIGNATURES

32

 

 

 

 

 

2


 

PART I. FINANCIAL INFORMATION

 

 

ITEM 1.

FINANCIAL STATEMENTS

Conatus Pharmaceuticals Inc.

Condensed Balance Sheets

(In thousands, except par value data)

(Unaudited)

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

18,314

 

 

$

11,565

 

Marketable securities

 

 

4,368

 

 

 

29,127

 

Collaboration receivables

 

 

1,650

 

 

 

3,677

 

Prepaid and other current assets

 

 

1,179

 

 

 

3,057

 

Total current assets

 

 

25,511

 

 

 

47,426

 

Property and equipment, net

 

 

102

 

 

 

154

 

Other assets

 

 

550

 

 

 

1,223

 

Total assets

 

$

26,163

 

 

$

48,803

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

3,013

 

 

$

6,216

 

Accrued compensation

 

 

303

 

 

 

2,230

 

Current portion of deferred revenue

 

 

404

 

 

 

10,075

 

Current portion of lease liabilities

 

 

439

 

 

 

 

Total current liabilities

 

 

4,159

 

 

 

18,521

 

Deferred revenue, less current portion

 

 

 

 

 

2,815

 

Deferred rent, less current portion

 

 

 

 

 

68

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value; 10,000 shares authorized; no shares issued and

   outstanding

 

 

 

 

 

 

Common stock, $0.0001 par value; 200,000 shares authorized; 33,170 shares issued

   and outstanding at September 30, 2019; 33,165 shares issued and outstanding at

   December 31, 2018

 

 

3

 

 

 

3

 

Additional paid-in capital

 

 

217,285

 

 

 

214,042

 

Accumulated other comprehensive income (loss)

 

 

1

 

 

 

(17

)

Accumulated deficit

 

 

(195,285

)

 

 

(186,629

)

Total stockholders’ equity

 

 

22,004

 

 

 

27,399

 

Total liabilities and stockholders’ equity

 

$

26,163

 

 

$

48,803

 

 

See accompanying notes to condensed financial statements.

 

3


 

Conatus Pharmaceuticals Inc.

Condensed Statements of Operations and Comprehensive Loss

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collaboration revenue

 

$

3,376

 

 

$

7,666

 

 

$

21,191

 

 

$

26,177

 

Total revenues

 

 

3,376

 

 

 

7,666

 

 

 

21,191

 

 

 

26,177

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

4,746

 

 

 

9,664

 

 

 

22,694

 

 

 

32,482

 

General and administrative

 

 

2,013

 

 

 

2,660

 

 

 

7,658

 

 

 

7,967

 

Total operating expenses

 

 

6,759

 

 

 

12,324

 

 

 

30,352

 

 

 

40,449

 

Loss from operations

 

 

(3,383

)

 

 

(4,658

)

 

 

(9,161

)

 

 

(14,272

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

119

 

 

 

253

 

 

 

491

 

 

 

730

 

Interest expense

 

 

 

 

 

(189

)

 

 

 

 

 

(561

)

Other income (expense)

 

 

11

 

 

 

5

 

 

 

14

 

 

 

(1

)

Total other income

 

 

130

 

 

 

69

 

 

 

505

 

 

 

168

 

Net loss

 

 

(3,253

)

 

 

(4,589

)

 

 

(8,656

)

 

 

(14,104

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gains (losses) on marketable securities

 

 

(4

)

 

 

29

 

 

 

18

 

 

 

65

 

Comprehensive loss

 

$

(3,257

)

 

$

(4,560

)

 

$

(8,638

)

 

$

(14,039

)

Net loss per share, basic and diluted

 

$

(0.10

)

 

$

(0.15

)

 

$

(0.26

)

 

$

(0.47

)

Weighted average shares outstanding used in computing

   net loss per share, basic and diluted

 

 

33,170

 

 

 

30,190

 

 

 

33,168

 

 

 

30,118

 

 

See accompanying notes to condensed financial statements.

 

4


 

Conatus Pharmaceuticals Inc.

Condensed Statements of Stockholders’ Equity

(In thousands)

(Unaudited)

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (Loss)

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2018

 

 

33,165

 

 

$

3

 

 

$

214,042

 

 

$

(17

)

 

$

(186,629

)

 

$

27,399

 

Share-based compensation

 

 

 

 

 

 

 

 

926

 

 

 

 

 

 

 

 

 

926

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,747

)

 

 

(4,747

)

Unrealized gain on marketable securities

 

 

 

 

 

 

 

 

 

 

 

20

 

 

 

 

 

 

20

 

Balance at March 31, 2019

 

 

33,165

 

 

$

3

 

 

$

214,968

 

 

$

3

 

 

$

(191,376

)

 

$

23,598

 

Issuance of common stock for employee stock

   purchase plan

 

 

5

 

 

 

 

 

 

4

 

 

 

 

 

 

 

 

 

4

 

Share-based compensation

 

 

 

 

 

 

 

 

1,161

 

 

 

 

 

 

 

 

 

1,161

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(656

)

 

 

(656

)

Unrealized gain on marketable securities

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

2

 

Balance at June 30, 2019

 

 

33,170

 

 

$

3

 

 

$

216,133

 

 

$

5

 

 

$

(192,032

)

 

$

24,109

 

Share-based compensation

 

 

 

 

 

 

 

 

1,152

 

 

 

 

 

 

 

 

 

1,152

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,253

)

 

 

(3,253

)

Unrealized loss on marketable securities

 

 

 

 

 

 

 

 

 

 

 

(4

)

 

 

 

 

 

(4

)

Balance at September 30, 2019

 

 

33,170

 

 

$

3

 

 

 

217,285

 

 

$

1

 

 

$

(195,285

)

 

$

22,004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

 

30,035

 

 

$

3

 

 

$

196,077

 

 

$

(77

)

 

$

(168,007

)

 

$

27,996

 

Issuance of common stock upon exercise of

   stock options

 

 

28

 

 

 

 

 

 

37

 

 

 

 

 

 

 

 

 

37

 

Share-based compensation

 

 

 

 

 

 

 

 

983

 

 

 

 

 

 

 

 

 

983

 

Cumulative effect of adoption of accounting

   standard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(612

)

 

 

(612

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,018

)

 

 

(5,018

)

Unrealized loss on marketable securities

 

 

 

 

 

 

 

 

 

 

 

(35

)

 

 

 

 

 

(35

)

Balance at March 31, 2018

 

 

30,063

 

 

$

3

 

 

$

197,097

 

 

$

(112

)

 

$

(173,637

)

 

$

23,351

 

Issuance of common stock upon exercise of

   stock options

 

 

66

 

 

 

 

 

 

66

 

 

 

 

 

 

 

 

 

66

 

Issuance of common stock for employee stock

   purchase plan

 

 

16

 

 

 

 

 

 

51

 

 

 

 

 

 

 

 

 

51

 

Share-based compensation

 

 

 

 

 

 

 

 

929

 

 

 

 

 

 

 

 

 

929

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,497

)

 

 

(4,497

)

Unrealized gain on marketable securities

 

 

 

 

 

 

 

 

 

 

 

71

 

 

 

 

 

 

71

 

Balance at June 30, 2018

 

 

30,145

 

 

$

3

 

 

$

198,143

 

 

$

(41

)

 

$

(178,134

)

 

$

19,971

 

Issuance of common stock upon exercise of

   stock options

 

 

117

 

 

 

 

 

 

259

 

 

 

 

 

 

 

 

 

259

 

Share-based compensation

 

 

 

 

 

 

 

 

948

 

 

 

 

 

 

 

 

 

948

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,589

)

 

 

(4,589

)

Unrealized gain on marketable securities

 

 

 

 

 

 

 

 

 

 

 

29

 

 

 

 

 

 

29

 

Balance at September 30, 2018

 

 

30,262

 

 

$

3

 

 

$

199,350

 

 

$

(12

)

 

$

(182,723

)

 

$

16,618

 

 

See accompanying notes to condensed financial statements.

 

5


 

Conatus Pharmaceuticals Inc.

Condensed Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(8,656

)

 

$

(14,104

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

62

 

 

 

72

 

Stock-based compensation expense

 

 

3,239

 

 

 

2,860

 

Amortization of premiums and discounts on marketable securities, net

 

 

(199

)

 

 

(230

)

Accrued interest included in convertible note payable

 

 

 

 

 

560

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Collaboration receivables

 

 

2,027

 

 

 

(742

)

Prepaid and other current assets

 

 

167

 

 

 

305

 

Other assets

 

 

 

 

 

(246

)

Accounts payable and accrued expenses

 

 

(405

)

 

 

(2,863

)

Accrued compensation

 

 

(1,927

)

 

 

(32

)

Deferred revenue

 

 

(12,486

)

 

 

(11,367

)

Lease liabilities, net

 

 

(42

)

 

 

 

Deferred rent

 

 

 

 

 

(32

)

Net cash used in operating activities

 

 

(18,220

)

 

 

(25,819

)

Investing activities

 

 

 

 

 

 

 

 

Maturities of marketable securities

 

 

40,470

 

 

 

56,435

 

Purchase of marketable securities

 

 

(15,494

)

 

 

(33,678

)

Capital expenditures

 

 

(11

)

 

 

(15

)

Net cash provided by investing activities

 

 

24,965

 

 

 

22,742

 

Financing activities

 

 

 

 

 

 

 

 

Deferred financing costs

 

 

 

 

 

(107

)

Proceeds from stock issuances related to exercise of stock options and

   employee stock purchase plan

 

 

4

 

 

 

413

 

Net cash provided by financing activities

 

 

4

 

 

 

306

 

Net increase (decrease) in cash and cash equivalents

 

 

6,749

 

 

 

(2,771

)

Cash and cash equivalents at beginning of period

 

 

11,565

 

 

 

16,079

 

Cash and cash equivalents at end of period

 

$

18,314

 

 

$

13,308

 

 

See accompanying notes to condensed financial statements.

 

6


 

Conatus Pharmaceuticals Inc.

Notes to Condensed Financial Statements

(Unaudited)

 

 

1.

Organization and Basis of Presentation

Conatus Pharmaceuticals Inc. (the Company) was incorporated in the state of Delaware on July 13, 2005. The Company is a biotechnology company that has been focused on the development and commercialization of novel medicines to treat chronic diseases with significant unmet need. The Company has been developing emricasan, a first-in-class, orally active pan-caspase inhibitor, for the treatment of patients with chronic liver disease. In December 2016, the Company entered into an Option, Collaboration and License Agreement (the Collaboration Agreement) with Novartis Pharma AG (Novartis) for the development and commercialization of emricasan. As of September 30, 2019, the Company has devoted substantially all of its efforts to product development and has not realized product sales revenues from its planned principal operations.

In June 2019, the Company announced that top-line results from its ENCORE-LF clinical trial of emricasan did not meet the primary endpoint, and the Company is discontinuing further treatment of patients enrolled in the ENCORE-LF clinical trial. In addition, results from the 24-week extension in the Company’s ENCORE-PH clinical trial of emricasan were consistent with results from the initial 24-week treatment period and did not meet predefined objectives. In March 2019, the Company announced that top-line results from the ENCORE-NF clinical trial of emricasan also did not meet the primary endpoint.

Consequently, the Company and Novartis have no further development plans for emricasan, and the Company and Novartis entered into an amendment to the Collaboration Agreement, pursuant to which the Company and Novartis mutually agreed to terminate the Collaboration Agreement, effective September 30, 2019. In order to extend the Company’s resources, the Company commenced a restructuring plan in June 2019 that included reducing staff and suspending development of its inflammasome disease candidate, CTS-2090, and commenced a second restructuring plan in September 2019 that included reducing additional staff  to further extend the Company’s resources. The Company has engaged a financial advisor to assist in the exploration and evaluation of strategic alternatives to enhance shareholder value, including a merger, an acquisition or sale of assets or a dissolution and liquidation of the Company. There can be no assurance any transaction will result from the Company’s evaluation of strategic alternatives. As part of this process, the Company plans to evaluate future opportunities, if any, for emricasan and the Company’s inflammasome program.

The Company has a limited operating history, and the sales and income potential of the Company’s business and market are unproven. The Company has experienced net losses since its inception and, as of September 30, 2019, had an accumulated deficit of $195.3 million. The Company expects to continue to incur net losses for at least the next several years. Successful transition to attaining profitable operations is dependent upon achieving a level of revenues adequate to support the Company’s cost structure. If the Company is unable to generate revenues adequate to support its cost structure, the Company may need to raise additional equity or debt financing or seek to complete one of the strategic alternatives described above.

The accompanying unaudited interim condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and the rules and regulations of the Securities and Exchange Commission (SEC) related to a quarterly report on Form 10-Q. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations. The unaudited interim condensed financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results for the periods presented. All such adjustments are of a normal and recurring nature. The operating results presented in these unaudited interim condensed financial statements are not necessarily indicative of the results that may be expected for any future periods. These unaudited interim condensed financial statements should be read in conjunction with the audited financial statements and the notes thereto for the year ended December 31, 2018 included in the Company’s annual report on Form 10-K filed with the SEC on March 8, 2019.

 

 

 

2.

Summary of Significant Accounting Policies

Use of Estimates

The preparation of condensed financial statements in conformity with GAAP requires management 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 and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

7


 

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents and marketable securities. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to significant risk on its cash. Additionally, the Company established guidelines regarding approved investments and maturities of investments, which are designed to maintain safety and liquidity.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity from the date of purchase of three months or less to be cash equivalents. Cash and cash equivalents include cash in readily available checking and money market accounts.

Marketable Securities

The Company classifies its marketable securities as available-for-sale and records such assets at estimated fair value in the condensed balance sheets, with unrealized gains and losses, if any, reported as a component of other comprehensive income (loss) within the condensed statements of operations and comprehensive loss and as a separate component of stockholders’ equity. The Company classifies marketable securities with remaining maturities greater than one year as current assets because such marketable securities are available to fund the Company’s current operations. The Company invests its excess cash balances primarily in corporate debt securities and money market funds with strong credit ratings. Realized gains and losses are calculated on the specific identification method and recorded as interest income. There were no realized gains and losses for the nine-month periods ended September 30, 2019 and 2018.

At each balance sheet date, the Company assesses available-for-sale securities in an unrealized loss position to determine whether the unrealized loss is other-than-temporary. The Company considers factors including: the significance of the decline in value compared to the cost basis, underlying factors contributing to a decline in the prices of securities in a single asset class, the length of time the market value of the security has been less than its cost basis, the security’s relative performance versus its peers, sector or asset class, expected market volatility and the market and economy in general. When the Company determines that a decline in the fair value below its cost basis is other-than-temporary, the Company recognizes an impairment loss in the period in which the other-than-temporary decline occurred. There have been no other-than-temporary declines in the value of marketable securities, as it is more likely than not the Company will hold the securities until maturity or a recovery of the cost basis.

Fair Value of Financial Instruments

The carrying amounts of collaboration receivables, prepaid and other current assets, and accounts payable and accrued expenses are reasonable estimates of their fair value because of the short maturity of these items.

Stock-Based Compensation

Stock-based compensation expense for stock option grants and restricted stock units (RSUs) under the Company’s equity plans is recorded at the estimated fair value of the award as of the grant date and is recognized as expense on a straight-line basis over the requisite service period of the stock-based award, and forfeitures are recognized as they occur. Stock-based compensation expense for employee stock purchases under the Company’s 2013 Employee Stock Purchase Plan (the ESPP) is recorded at the estimated fair value of the purchase as of the plan enrollment date and is recognized as expense on a straight-line basis over the applicable six-month ESPP offering period. The estimation of fair value for stock-based compensation requires management to make estimates and judgments about, among other things, employee exercise behavior, forfeiture rates and volatility of the Company’s common stock. The judgments directly affect the amount of compensation expense that will be recognized.

Property and Equipment

Property and equipment, which consists of furniture and fixtures, computers and office equipment, scientific equipment and leasehold improvements, are stated at cost and depreciated over the estimated useful lives of the assets (three to five years) using the straight-line method. Leasehold improvements are amortized over the shorter of their estimated useful lives or the lease term.

Long-Lived Assets

The Company regularly reviews the carrying value and estimated lives of all of its long-lived assets, including property and equipment, to determine whether indicators of impairment may exist which warrant adjustments to carrying values or estimated useful lives. The determinants used for this evaluation include management’s estimate of the asset’s ability to generate positive income from operations and positive cash flow in future periods, as well as the strategic significance of the assets to the Company’s business objective. Should an impairment exist, the impairment loss would be measured based on the excess of the carrying amount of the asset’s fair value. The Company has not recognized any impairment losses through September 30, 2019.

 

8


 

Revenue Recognition

Under the relevant accounting literature, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. The Company performs the following five steps in order to determine revenue recognition for contracts: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when, or as, the entity satisfies a performance obligation.

At contract inception, the Company identifies the performance obligations in the contract by assessing whether the goods or services promised within each contract are distinct. Revenue is then recognized for the amount of the transaction price that is allocated to the respective performance obligation when, or as, the performance obligation is satisfied.

In a contract with multiple performance obligations, the Company must develop estimates and assumptions that require judgment to determine the underlying stand-alone selling price for each performance obligation, which determines how the transaction price is allocated among the performance obligations. The estimation of the stand-alone selling price(s) may include estimates regarding forecasted revenues or costs, development timelines, discount rates, and probabilities of technical and regulatory success. The Company evaluates each performance obligation to determine if it can be satisfied at a point in time or over time. Any change made to estimated progress towards completion of a performance obligation and, therefore, revenue recognized will be recorded as a change in estimate. In addition, variable consideration must be evaluated to determine if it is constrained and, therefore, excluded from the transaction price.

If a license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in a contract, the Company recognizes revenues from the transaction price allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from the allocated transaction price. The Company evaluates the measure of progress at each reporting period and, if necessary, adjusts the measure of performance and related revenue or expense recognition as a change in estimate.

At the inception of each arrangement that includes milestone payments, the Company evaluates whether the milestones are considered probable of being reached. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the Company’s or a collaboration partner’s control, such as regulatory approvals, are generally not considered probable of being achieved until those approvals are received. At the end of each reporting period, the Company re-evaluates the probability of achievement of milestones that are within its or a collaboration partner’s control, such as operational developmental milestones and any related constraint, and, if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which will affect collaboration revenues and earnings in the period of adjustment. Revisions to the Company’s estimate of the transaction price may also result in negative collaboration revenues and earnings in the period of adjustment.

For arrangements that include sales-based royalties, including commercial milestone payments based on the level of sales, and a license is deemed to be the predominant item to which the royalties relate, the Company will recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied, or partially satisfied. To date, the Company has not recognized any royalty revenue from collaborative arrangements.

In December 2016, the Company entered into the Collaboration Agreement and an Investment Agreement (the Investment Agreement) with Novartis. The Company concluded that there were two significant performance obligations under the Collaboration Agreement: the license and the research and development services, but that the license is not distinct from the research and development services as Novartis cannot obtain value from the license without the research and development services, which the Company is uniquely able to perform.

The Company concluded that progress towards completion of the performance obligations related to the Collaboration Agreement is best measured in an amount proportional to the collaboration expenses incurred and the total estimated collaboration expenses. The Company periodically reviews and updates the estimated collaboration expenses, when appropriate, which adjusts the percentage of revenue that is recognized for the period. While such changes to the Company’s estimates have no impact on the Company’s reported cash flows, the amount of revenue recorded in the period could be materially impacted. The transaction price to be recognized as revenue under the Collaboration Agreement consists of the upfront payment, option exercise fee, deemed revenue from the premium paid by Novartis under the Investment Agreement and estimated reimbursable research and development costs. Certain expenses directly related to execution of the Collaboration Agreement were capitalized as assets on the balance sheet and are being expensed in a manner consistent with the methodology used for recognizing revenue.

9


 

The Collaboration Agreement was terminated, effective September 30, 2019, and the Company will not receive any future milestone, royalty or profit and loss sharing payments under the Collaboration Agreement.

See Note 8 – Collaboration and License Agreements for further information.

Research and Development Expenses

All research and development costs are expensed as incurred.

Income Taxes

The Company’s policy related to accounting for uncertainty in income taxes prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. As of December 31, 2018, there are no unrecognized tax benefits included in the condensed balance sheet that would, if recognized, affect the Company’s effective tax rate, and the Company has noted no material changes through September 30, 2019. The Company has not recognized interest and penalties in the condensed balance sheets or condensed statements of operations and comprehensive loss. The Company is subject to U.S. and California taxation. As of December 31, 2018, the Company’s tax years beginning 2005 to date are subject to examination by taxing authorities.

Comprehensive Loss

The Company is required to report all components of comprehensive loss, including net loss, in the condensed financial statements in the period in which they are recognized. Comprehensive loss is defined as the change in equity during a period from transactions and other events and circumstances from nonowner sources, including unrealized gains and losses on marketable securities. Comprehensive gains (losses) have been reflected in the condensed statements of operations and comprehensive loss for all periods presented.

Segment Reporting

Operating segments are identified as components of an enterprise about which separate discrete financial information is used in making decisions regarding resource allocation and assessing performance. To date, the Company has viewed its operations and managed its business as one segment operating primarily in the United States.

Net Loss Per Share

Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss by the weighted average number of common shares and common share equivalents outstanding for the period. Common stock equivalents are only included when their effect is dilutive. The Company’s potentially dilutive securities have been excluded from the computation of diluted net loss per share in the periods in which they would be anti-dilutive. For all periods presented, there is no difference in the number of shares used to compute basic and diluted shares outstanding due to the Company’s net loss position.

The following table sets forth the outstanding potentially dilutive securities that have been excluded in the calculation of diluted net loss per share because to do so would be anti-dilutive (in thousands):

 

 

 

September 30,

 

 

 

2019

 

 

2018

 

Warrants to purchase common stock

 

 

13

 

 

 

13

 

Common stock options issued and outstanding

 

 

2,094

 

 

 

5,370

 

RSUs outstanding

 

 

1,540

 

 

 

 

Shares issuable upon conversion of convertible note payable

 

 

 

 

 

2,658

 

ESPP shares pending issuance

 

 

 

 

 

18

 

Total

 

 

3,647

 

 

 

8,059

 

 

 

10


 

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). This guidance requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. ASU 2016-02 establishes a right-of-use model (ROU) that requires a lessee to recognize an ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. The Company adopted this standard effective January 1, 2019, as required, retrospectively through a cumulative effect adjustment. The new standard provides a number of optional practical expedients in transition. The Company elected the “package of practical expedients,” which permits the Company not to reassess, under ASU 2016-02, prior conclusions about lease identification, lease classification and initial direct costs. The new standard also provides practical expedients for an entity’s ongoing accounting. The Company elected to utilize the short-term lease recognition exemption for all leases that qualify. This means, for those short-term leases that qualify, the Company will not recognize ROU assets or lease liabilities. The Company also elected not to separate lease and non-lease components for facility leases. Adoption of this guidance resulted in the recognition of lease liabilities of $0.7 million, based on the present value of the remaining minimum rental payments under current leasing standards for the Company’s applicable existing office space operating lease, with corresponding ROU assets of $0.6 million.

See Note 9 – Commitments for further information.

 

 

 

3.

Fair Value Measurements

The accounting guidance defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

Level 1:

Includes financial instruments for which quoted market prices for identical instruments are available in active markets.

 

 

Level 2:

Includes financial instruments for which there are inputs other than quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets with insufficient volume or infrequent transaction (less active markets) or model-driven valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

 

 

Level 3:

Includes financial instruments for which fair value is derived from valuation techniques in which one or more significant inputs are unobservable, including management’s own assumptions.

 

Below is a summary of assets, including cash, cash equivalents and marketable securities, measured at fair value as of September 30, 2019 and December 31, 2018 (in thousands):

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

 

September 30, 2019

 

 

Quoted Prices in

Active Markets

for Identical

Assets (Level 1)

 

 

Significant

Other

Observable

Inputs (Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

2,446

 

 

$

2,446

 

 

$

 

 

$

 

Money market funds

 

 

9,725

 

 

 

9,725

 

 

 

 

 

 

 

Corporate debt securities

 

 

10,511

 

 

 

 

 

 

 

10,511

 

 

 

 

Total

 

$

22,682

 

 

$

12,171

 

 

$

10,511

 

 

$

 

11


 

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

 

December 31, 2018

 

 

Quoted Prices in

Active Markets

for Identical

Assets (Level 1)

 

 

Significant

Other

Observable

Inputs (Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

2,072

 

 

$

2,072

 

 

$

 

 

$

 

Money market funds

 

 

8,000

 

 

 

8,000

 

 

 

 

 

 

 

Corporate debt securities

 

 

30,620

 

 

 

 

 

 

30,620

 

 

 

 

Total

 

$

40,692

 

 

$

10,072

 

 

$

30,620

 

 

$

 

 

The Company’s marketable securities, consisting principally of debt securities, are classified as available-for-sale, are stated at fair value, and consist of Level 2 financial instruments in the fair value hierarchy. The Company determines the fair value of its debt security holdings based on pricing from a service provider. The service provider values the securities based on using market prices from a variety of industry-standard independent data providers. Such market prices may be quoted prices in active markets for identical assets (Level 1 inputs) or pricing determined using inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs), such as yield curve, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments or debt, broker and dealer quotes, as well as other relevant economic measures.

 

 

 

4.

Marketable Securities

The Company invests its excess cash in money market funds and debt instruments of financial institutions, corporations, government sponsored entities and municipalities. The following tables summarize the Company’s marketable securities (in thousands):

 

As of September 30, 2019

 

Maturity

(in years)

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Estimated

Fair Value

 

Corporate debt securities

 

1 or less

 

$

4,367

 

 

$

1

 

 

$

 

 

$

4,368

 

Total

 

 

 

$

4,367

 

 

$

1

 

 

$

 

 

$

4,368

 

 

As of December 31, 2018

 

Maturity

(in years)

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Estimated

Fair Value

 

Corporate debt securities

 

1 or less

 

$

29,144

 

 

$

 

 

$

(17

)

 

$

29,127

 

Total

 

 

 

$

29,144

 

 

$

 

 

$

(17

)

 

$

29,127

 

 

 

 

5.

Property and Equipment

Property and equipment consist of the following (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Furniture and fixtures

 

$

334

 

 

$

334

 

Equipment

 

 

166

 

 

 

208

 

Leasehold improvements

 

 

147

 

 

 

147

 

 

 

 

647

 

 

 

689

 

Less accumulated depreciation and amortization

 

 

(545

)

 

 

(535

)

Total

 

$

102

 

 

$

154

 

 

 

12


 

 

6.

Note Payable

On February 15, 2017, the Company issued a convertible promissory note (the Novartis Note) in the principal amount of $15.0 million, pursuant to the Investment Agreement. The Novartis Note bore interest on the unpaid principal balance at a rate of 6% per annum and had a scheduled maturity date of December 31, 2019. The terms of the Novartis Note allowed the Company to convert the principal and accrued interest into the Company’s common stock at a conversion price equal to 120% of the 20-day trailing average closing price per share of the common stock immediately prior to the conversion date. The ability to borrow and repay the debt at a discount using shares of the Company’s common stock was deemed to be additional, foregone revenue attributable to the Collaboration Agreement, which the Company imputed and recorded as both a receivable from Novartis and a liability (deferred revenue) of $2.5 million at the inception of the Collaboration Agreement and the Investment Agreement. On February 15, 2017, the Company recorded the $15.0 million proceeds from the issuance of the Novartis Note as a convertible note payable in the amount of $12.5 million and a reduction of the outstanding receivable from Novartis of $2.5 million. On December 5, 2018, the Company, at its option, converted the entire outstanding principal of $15.0 million and accrued and unpaid interest of the Novartis Note into 2,882,519 shares of the Company’s common stock at a conversion price of $5.77 per share.

The Company elected to account for the Novartis Note under the fair value option. Prior to conversion of the Novartis Note, the Company concluded that the fair value of the Novartis Note remained at $12.5 million, plus the related accrued interest, due to its conversion features. The fair value measurement was categorized within Level 2 of the fair value hierarchy.

 

 

 

7.

Stockholders’ Equity

Common Stock

On August 2, 2018, the Company entered into an At Market Issuance Sales Agreement (the Sales Agreement) with Stifel, Nicolaus & Company, Incorporated (Stifel), pursuant to which the Company may sell from time to time, at its option, up to an aggregate of $35.0 million of shares of its common stock through Stifel, as sales agent. Sales of the Company’s common stock made pursuant to the Sales Agreement, if any, will be made on The Nasdaq Global Market (Nasdaq), under the Company’s Registration Statement on Form S-3 filed on August 17, 2017 and declared effective by the SEC on November 9, 2017, by means of ordinary brokers’ transactions at market prices. Additionally, under the terms of the Sales Agreement, the Company may also sell shares of its common stock through Stifel, on Nasdaq or otherwise, at negotiated prices or at prices related to the prevailing market price. The Company will pay a commission rate equal to up to 3.0% of the gross sales price per share sold. As of September 30, 2019, the Company has incurred legal and accounting costs of $0.1 million related to the Sales Agreement, which are recorded in other assets on the balance sheet until such time as the Company issues shares pursuant to the Sales Agreement. As of September 30, 2019, no shares were issued pursuant to the Sales Agreement.

Warrants

In 2013, the Company issued warrants exercisable for 111,112 shares of Series B preferred stock, at an exercise price of $0.90 per share, to Oxford Finance LLC and Silicon Valley Bank in conjunction with the Company’s entry into a loan and security agreement (the Lender Warrants). Upon completion of the Company’s initial public offering, the Lender Warrants became exercisable for 13,468 shares of common stock at an exercise price of $7.43 per share. The Lender Warrants will expire on July 3, 2023.

Stock Options

The following table summarizes the Company’s stock option activity under all stock option plans for the nine months ended September 30, 2019 (options in thousands):

 

 

 

Total

Options

 

 

Weighted-

Average

Exercise

Price

 

Balance at December 31, 2018

 

 

5,385

 

 

$

5.20

 

Granted

 

 

1,694

 

 

 

1.87

 

Exercised

 

 

 

 

 

 

Forfeited/cancelled/expired

 

 

(4,985

)

 

 

4.61

 

Balance at September 30, 2019

 

 

2,094

 

 

$

3.90

 

 

13


 

Restricted Stock Units

In August 2019, the Company effected a one-time option exchange, wherein certain employees were offered the opportunity to exchange eligible outstanding stock options, whether vested or unvested, with exercise prices that are significantly higher than the current fair market value of the Company’s common stock for the grant of a lesser number of RSUs. The participants received one new RSU for every two stock options tendered for exchange. As a result, 3,200,375 stock options were exchanged for 1,600,186 RSUs. The RSUs have a one-year vesting schedule or vest upon a Change of Control, an employee’s termination without Cause, or resignation for Good Reason as defined in the 2013 Incentive Award Plan. The one-time option exchange was accounted for as a modification of the original award, and the difference in the fair value of the cancelled options immediately prior to the cancellation and the fair value of the modified options resulted in incremental value of approximately $0.1 million, which was calculated using the Black-Scholes-Merton option pricing model.  Total stock-based compensation expense to be recognized over the requisite service period is equal to remaining unrecognized expense for the exchanged option, as of the exchange date, plus the incremental value of the modification to the award and is expected to be recorded over the one-year service term commencing August 1, 2019.

The following table summarizes the Company’s RSU activity under all equity plans for the nine months ended September 30, 2019 (RSUs in thousands):

 

 

 

Total

RSUs

 

 

Weighted-Average

Grant Date Fair

Value per Share

 

Balance at December 31, 2018

 

 

 

 

$

 

Granted

 

 

1,600

 

 

 

0.31

 

Vested